audit chapter 2
There was public concern about professional auditing in the late 1990s and the 21st century when about _______ of all public companies had to restate their earnings. A. 8 percent B. 2 percent C. 15 percent D. 30 percent
A. 8 percent
The structure of the AICPA _______________ includes four major sections: preface, rules for members in public practice, rules for members in business, and rules for other members. A. Code of Professional Conduct B. Conceptual Framework C. Independence Rules D. Rules of Conduct
A. Code of Professional Conduct
Which of the following provides guidance to all members of the AICPA with respect to performance of their professional responsibilities? A. Code of Professional Conduct B. Rules of Conduct C. Principles D. Interpretations
A. Code of Professional Conduct
Which of the following issues arises when taxes are not properly distributed to the parties involved in a divorce case? A. Conflict of interest B. Misrepresentation of fact C. Legal liability D. Gross negligence
A. Conflict of interest
What are the two common issues that arise and are related to integrity and objectivity? A. Conflicts of interest and subordination of judgment. B. Ethical judgment and subjectivity. C. Independence and compliance D. Efficiency and effectiveness.
A. Conflicts of interest and subordination of judgment.
If a CPA is unable to implement effective safeguards, what should the CPA do? A. Decline the engagement. B. Proceed with the professional service. C. Document the identified threats. D. Evaluate the significance of the threat.
A. Decline the engagement.
If after discussing a potential subordination of judgment threat with a supervisor, a CPA does not feel that the matter is resolved, what should he or she do? A. Discuss his or her concerns with the appropriate higher level(s) of management within the CPA's firm. B. Contact the AICPA about the problem. C. Immediately ask HR to reassign him or her. D. Start looking for a new position at another firm.
A. Discuss his or her concerns with the appropriate higher level(s) of management within the CPA's firm.
At step 5 when a CPA confronts threats to ethical decision-making and the safeguards applied to reduce the threat, what is the suggested best practice? A. Document the identified threats, document the safeguards applied, and document the CPA's evaluation of the effectiveness of the safeguards. B. Immediately decline the engagement, terminate the contract, and contact the AICPA. C. Contact the FBI, tape all conversations with the client, then offer the engagement to a competitor. D. Increase the fee charged to absorb any risk, immediately conclude that the threats are at an acceptable level and proceed with an internal control audit.
A. Document the identified threats, document the safeguards applied, and document the CPA's evaluation of the effectiveness of the safeguards.
Which of the following is the threat that, due to a long or close relationship with a client, a CPA will become too sympathetic to the client's interests or too accepting of the client's work or product? A. Familiarity threat B. Adverse interest threat C. Advocacy threat D. Self-review threat
A. Familiarity threat
Which of the following standards is used for preparing financial statements with other accounting principles? A. GAAP B. GAAS C. Rule 1.320 on Accounting Principles D. Principles of the Code of Professional Conduct
A. GAAP
If a public practice CPA firm is concerned about the ethical nature of the firm's advertising, which section of the AICPA's Code of Professional Ethics would provide guidance? A. Part I B. Part II C. Part III D. Some other section
A. Part I
Which section of the AICPA Code of Professional Conduct includes ethical rules for members in public practice? A. Part I B. Part II C. Part III D. Some other section
A. Part I
Which of the following general standards refers to adequately preparing for the engagement and providing the appropriate management oversight to the performance of professional services? A. Planning and Supervision B. Sufficient Relevant Data C. Due Care D. Audit Planning
A. Planning and Supervision
Which component of the AICPA's Code of Professional Conduct expresses the basic tenets of ethical conduct and provides the framework for the rules that govern the performance of a member's professional responsibilities? A. Principles B. Rules of Conduct C. Interpretations D. General standards
A. Principles
Which of the following standards refers to undertaking professional services that can be completed with the appropriate level of professional skill? A. Professional Competence B. Due Professional Care C. Sufficient Relevant Data D. Planning and Supervision
A. Professional Competence
How does a small firm resolve the conflict of interest issue in a divorce case? A. Provide tax services to only one of the two parties. B. Using separate engagement teams in providing tax services to both parties. C. Resign from the engagement. D. They do not need to resolve the conflict of interest in the case of a divorce.
A. Provide tax services to only one of the two parties.
In a small CPA firm, if the firm provides tax services to both parties who subsequently begin divorce proceedings, it is customary to do what? A. Resign providing tax services to one of the two parties in a divorce to remain free of any conflict of interest. B. Use separate engagement teams in providing tax services to the husband and to the wife, who are provided clear policies and procedures on maintaining confidentiality. C. Engage in a background check on both parties. D. Provide only consulting services to both parties.
A. Resign providing tax services to one of the two parties in a divorce to remain free of any conflict of interest.
Which of the following components of the AICPA are enforceable? A. Rules of conduct B. Principles C. Interpretations D. None of the options is correct
A. Rules of conduct
Identify two possible threats that occur when a CPA and his or her supervisor have a difference of opinion related to the application of accounting principles, auditing standards, or other relevant professional standards? A. Self-interest B. Advocacy C. Familiarity D. Self-review
A. Self-interest and C. Familiarity
What safeguards do most CPA firms have against conflicts of interest and subordination of judgment? A. Specific policies to prevent the firm from violating professional standards and to protect the CPA. B. Monetary settlements for severance pay to the CPA involved. C. Whistleblower rules and regulations. D. Human resource counseling and tip hotlines.
A. Specific policies to prevent the firm from violating professional standards and to protect the CPA.
What should CPAs clarify while preparing financial statements for small businesses? A. The financial reporting framework B. The conceptual framework C. Their role in nonattest services D. Their part in an engagement
A. The financial reporting framework
When might self-interest, familiarity, and undue influence most likely threaten a CPA's compliance with integrity and objectivity? A. When a CPA and his or her supervisor, or another person within the CPA firm, have a difference of opinion related to the application of accounting principles B. When a CPA mistakenly applies the wrong auditing standard C. When a CPA pads his or her expense account D. When a CPA takes concerns about an engagement to another partner
A. When a CPA and his or her supervisor, or another person within the CPA firm, have a difference of opinion related to the application of accounting principles
To be meaningful, a code of ethics must strike a balance between being _______. A. above the law but below the ideal B. below the law but above the ideal C. above the law but below practical D. below the law but above practical
A. above the law but below the ideal
Being independent in appearance is best defined as _______. A. addressing potential conflicts of interest that can be observed or factually determined by others B. acting with integrity and objectivity C. acting with independence and integrity D. disclosing some of the common threats that he or she faces to acting independently
A. addressing potential conflicts of interest that can be observed or factually determined by others
The rule on integrity and objectivity applies to _______. A. all services performed by CPAs B. some services performed by CPAs C. only audit, services performed by CPAs D. only non-audit services performed by CPAs
A. all services performed by CPAs
A committee of the board of directors responsible for oversight of internal controls, financial reporting and disclosure in the financial statements, regulatory compliance, and the company's independent auditors is/are called (a/an) ________. A. audit committee B. covered members C. executors D. dependents
A. audit committee
As a general rule, professional employees in a CPA firm who are not covered members and their immediate family members cannot ______. A. be a trustee, director, or officer of an attest client or of the client's pension or profit-sharing trust B. have a direct investment of more than 1% in an attest client C. hold a non-key position with an attest client D. have an indirect investment of more than 5% in an attest client
A. be a trustee, director, or officer of an attest client or of the client's pension or profit-sharing trust
In defining a profession or professional, one common characteristic is _______. A. concern for the public interest B. self-promotion C. effective marketing skills D. effective communication skills
A. concern for the public interest
The last step in the process to assist the CPA in making an ethical judgment is _______. A. document the threats and safeguards B. evaluate the significance of the threat C. identify and apply safeguards D. evaluate the effectiveness of the safeguards
A. document the threats and safeguards
A threat that is due to a long or close relationship is a(n) _______. A. familiarity threat B. management participation threat C. self-interest threat D. self-review threat
A. familiarity threat
The first step in the process to assist the CPA in making an ethical judgment is _______. A. identify threats to compliance with rules B. evaluate the significance of the threat C. identify and apply safeguards D. evaluate the effectiveness of the safeguards
A. identify threats to compliance with rules
A ___________ is someone who prepares or supervises others involved in preparing the financial statements or material accounting records or someone who is involved in accounting decision making. A. key person B. covered member C. trustee D. immediate family member
A. key person
According to the integrity and objectivity rule, in the performance of any professional service, a member shall not knowingly _______. A. misrepresent facts B. decentralize work to subordinates C. omit a material fact D. none of the above is correct
A. misrepresent facts
According to the due professional care standard, CPAs should exercise professional care expected of _______ in the performance of professional services. A. other CPAs B. covered members C. CPAs involved in consulting services D. a reasonable person
A. other CPAs
A covered member, under the independence rules in the AICPA Code of Professional Conduct, is best defined as a person in a position to _______. A. potentially influence attest decisions or the outcome of an attest engagement B. potentially influence decisions or outcomes in non-audit services C. take on or influence a third-party position D. perform tax services that is both independent in fact and appearance
A. potentially influence attest decisions or the outcome of an attest engagement
Although codes of ethics may be designed in part to encourage ideal behavior, they must also be _______. A. practical and enforceable B. idealistic and above the law C. easy to remember and basic D. balanced and confidential
A. practical and enforceable
An advocacy threat is the threat that a CPA will ______. A. promote a client's interests B. take on the role of client management C. become too sympathetic to a client's interests D. not act with objectivity
A. promote a client's interests
A CPA should judge his or her ethical conduct from the perspective of a _______. A. reasonable and informed third party B. circuit court judge C. high school graduate D. IRS agent
A. reasonable and informed third party
Interpretations provide additional guidance regarding the scope and applicability of the _______. A. rules of conduct B. standards C. conceptual framework D. principles
A. rules of conduct
A/an ________ threat exists if a CPA performs bookkeeping services for a private company client and that work needs to be evaluated by the same firm in the course of an attest engagement. A. self-review B. undue influence C. adverse interest D. advocacy
A. self-review
The subordination of judgment threat is at an acceptable level when _______. A. the CPA concludes the position taken by the firm does not result in a material misrepresentation of fact or a violation of applicable standards, laws, or regulations B. the CPA does not have a difference of opinion related to the application of accounting principles, auditing standards, or other relevant professional standards C. the CPA safeguards the position by also providing tax services D. the CPA agrees to maintain confidentiality about the matter
A. the CPA concludes the position taken by the firm does not result in a material misrepresentation of fact or a violation of applicable standards, laws, or regulations
Section 1.200 of the AICPA Code of Professional Conduct specifies a number of circumstances that can impair _______. A. the appearance of independence to guide CPAs in observable aspects of ethical conduct B. the appearance of integrity regarding ethical conduct C. safeguards that prevent a lack of independence D. how to evaluate threats as an independent third-party
A. the appearance of independence to guide CPAs in observable aspects of ethical conduct
The definition for professional competence is _______. A. undertake only those professional services that the member or the member's firm can reasonably expect to be completed with professional competence B. exercise due professional care in the performance of professional services C. adequately plan and supervise the performance of professional services D. obtain sufficient relevant data to afford a reasonable basis for conclusions or recommendations in relation to any professional services performed
A. undertake only those professional services that the member or the member's firm can reasonably expect to be completed with professional competence
The rule on fees and other types of remuneration address how many circumstances that are extremely important? A. 1 B. 2 C. 3 D. 4
B. 2
What is a key element that best separates recognized professions from other occupations? A. Large application fees B. A commitment to ethical behavior C. Certifications D. Specific schooling requirements
B. A commitment to ethical behavior
In the online version of the AICPA Code of Professional Conduct, what are used to make it easy to find related topics? A. Summaries B. A series of hyperlinks C. Outlines D. Interpretations
B. A series of hyperlinks
Rules of Professional Conduct and related interpretations are specifically written for _______. A. FASB members B. Accountants in public practice C. Accountants in private practice D. SEC personnel
B. Accountants in public practice
A CPA works at a firm and also maintains a private practice as an expert witness for intellectual property cases. While at an audit client's office, he overhears a telephone conversation about a patent dispute and offers his services. When he takes the expert witness job, this position creates what type of threat to his professional ethics? A. Familiarity threat B. Advocacy threat C. Self-interest threat D. Self-review threat
B. Advocacy threat
What should a CPA do if he/she concludes a difference of opinion with an audit supervisor regarding an on-going audit engagement may result in a material misrepresentation of fact or a violation of professional standards? A. Quit the job. B. Discuss his or her concerns with the supervisor. C. Obtain more training. D. Search for a certification that focuses on material misrepresentations.
B. Discuss his or her concerns with the supervisor.
If a CFO of a company is dealing with an ethical situation, which section of the AICPA's Code of Professional Ethics might he/she refer? A. Part I B. Part II C. Part III D. Some other section
B. Part II
Which section of the AICPA Code of Professional Conduct includes ethical rules for members in business? A. Part I B. Part II C. Part III D. Some other section
B. Part II
The AICPA Code of Professional Conduct can be found online and is organized in four sections. Which section is first? A. Part I on ethical rules. B. Preface applicable to all members. C. Introduction to the History of the Code of Conduct. D. Foreword about AICPA membership.
B. Preface applicable to all members.
What must CPAs complete to achieve licensure? A. An application, required education, and pass the CPA Exam. B. Required education, pass the CPA Exam, and requisite experience requirement. C. An application, finger prints, and pass the CPA Exam. D. A background check, drug test, and pass the CPA Exam.
B. Required education, pass the CPA Exam, and requisite experience requirement.
Which component of the AICPA's Code of Professional Conduct establishes minimum standards of acceptable conduct in the performance of professional services? A. Principles B. Rules of Conduct C. Interpretations D. General standards
B. Rules of Conduct
Which component of the AICPA's Code of Professional Conduct is enforceable wherein members must be prepared to justify departures? A. Principles B. Rules of Conduct C. Commitments D. Standards
B. Rules of Conduct
In the absence of a rule or an interpretation, a CPA could use which of the following to apply to the accounting for a certain situation? A. The SEC rulings B. The Conceptual Framework C. An auditing textbook D. The IRS Code
B. The Conceptual Framework
"Independent in fact" is best defined as _______. A. addressing potential conflicts of interest that can be observed or factually determined by others B. acting with integrity and objectivity C. acting in a way that is observable under the Rules of Conduct D. acting with independence and integrity
B. acting with integrity and objectivity
A threat that a CPA will promote a client's interests or position to the point that his or her objectivity is compromised is a(n) _______. A. familiarity threat B. advocacy threat C. self-interest threat D. self-review threat
B. advocacy threat
According to Chapter 2 regarding professionalism and professional responsibilities, CPI stands for _______. A. commitment to professional integrity B. concern for public interest C. continuing professional interest D. classified professional intelligence
B. concern for public interest
If the CPA is unable to implement effective safeguard to a threat of compliance with the accounting profession's ethical rules, he/she should _______. A. proceed with the professional service B. decline or terminate the engagement C. limit the engagement to all non-audit areas D. limit the engagement to only Federal taxation
B. decline or terminate the engagement
The second step in the process to assist the CPA in making an ethical judgment is _______. A. identify threats to compliance with rules B. evaluate the significance of the threat C. identify and apply safeguards D. evaluate the effectiveness of the safeguards
B. evaluate the significance of the threat
A threat that a CPA will take on the role of client decision making or assume associated responsibilities is a(n) _______. A. familiarity threat B. management participation threat C. self-interest threat D. self-review threat
B. management participation threat
A conflict of interest occurs when a CPA _______. A. performs both tax and bookkeeping services for the same client B. performs a professional service related to a particular matter involving two or more clients whose interests, with respect to that matter, are in conflict C. represents a client in a divorce tax matter D. represents a client in any legal dispute
B. performs a professional service related to a particular matter involving two or more clients whose interests, with respect to that matter, are in conflict
The AICPA is an accounting organization representing the profession and membership is _______. A. non-voluntary B. voluntary C. free D. required
B. voluntary
When can a spouse that works for an attestation client still participate in an employee benefit plan that includes employee stock ownership plans or employee stock option plans? A. There are no restrictions. B. when the benefits are offered equitably to all similar employees C. When the benefits are offered equitably to a majority of similar employees As long as the CPA firm approves every stock-related plan
B. when the benefits are offered equitably to all similar employees
State Boards of Accountancy typically _______. A. work separately from the AICPA on many professional issues B. work together with the AICPA on many professional issues C. have separate codes of conduct from the AICPA D. leave the task of licensure to the AICPA
B. work together with the AICPA on many professional issues
Which of the following statements is true? A. It is possible for a CPA firm to rely solely on safeguards implemented by the client to eliminate or reduce significant threats to an acceptable level. B. There are five basic safeguards to assist CPAs with threats to compliance with the accounting profession's ethical rules. C. If a CPA concludes that threats are at an acceptable level after applying the identified safeguards, then the CPA may proceed with the professional service. D. To evaluate the significance of a threat, CPAs should evaluate identified threats in aggregate.
C. If a CPA concludes that threats are at an acceptable level after applying the identified safeguards, then the CPA may proceed with the professional service.
Which component of the AICPA's Code of Professional Conduct provides additional guidance regarding the scope and applicability of the rules of conduct? A. Principles B. Rules of Conduct C. Interpretations D. General standards
C. Interpretations
Which section of the AICPA Code of Professional Conduct includes ethical rules for other members, like non-CPA members of the AICPA? A. Part I B. Part II C. Part III D. Some other section
C. Part III
What are the three types of safeguards against threats to a CPA's compliance with the ethical rules of the profession? A. Independence, legal liability, and accounting standards B. Self-control, internal compass, and future goals C. Safeguard of regulation, client implemented controls, and CPA firm policies D. Safeguard of standards, Acts of Congress, certification
C. Safeguard of regulation, client implemented controls, and CPA firm policies
The third step in the process to assist the CPA in making an ethical judgment is _______. A. identify threats to compliance with rules B. evaluate the significance of the threat C. identify and apply safeguards D. evaluate the effectiveness of the safeguards
C. identify and apply safeguards
The general standards in the AICPA Code of Professional Conduct do NOT include _______. A. professional competence B. due professional care C. planning for materiality D. sufficient relevant data
C. planning for materiality
A threat that a CPA could benefit, financially or otherwise, from an interest in, or relationship with, a client or persons associated with the client is a(n) _______. A. familiarity threat B. management participation threat C. self-interest threat D. self-review threat
C. self-interest threat
Which of the following statements is true? A. A covered member can own one share of an attest client because it is immaterial. B. A covered member cannot own a mutual fund which contains attest client shares, as long as the investment in the mutual fund is not material to the covered member. C. A covered member can be an executor of an estate, which invests in an attest client, as long as the investment is not material. D. A CPA firm as an entity is prohibited from the same activities as a covered member of the firm.
D. A CPA firm as an entity is prohibited from the same activities as a covered member of the firm.
Which of the following should auditors know in regard to potential lawsuits against them? A. People who can sue them B. Allegations made in lawsuits C. Defenses they can use in court D. All the options are correct.
D. All the options are correct.
Which of the following activities is not a prohibited activity that impairs independence? A. A direct investment in the attest client B. A joint, closely held investment with an attest client that is material to the covered member C. A material indirect investment in the attest client D. Having a home mortgage from a bank who is an attest client
D. Having a home mortgage from a bank who is an attest client
SEC rules prohibit an audit firm from providing which of the following nonattest services to an audit client? A. Actuarial services, only B. Internal audit outsourcing and bookkeeping services, only C. Bookkeeping and actuarial services, only D. Internal audit outsourcing, bookkeeping, and actuarial services
D. Internal audit outsourcing, bookkeeping, and actuarial services
Which component of the AICPA's Code of Professional Conduct requires that a member who departs from it shall have the burden of justifying the departure in a disciplinary hearing? A. Principles B. Standards C. Commitments D. Interpretations
D. Interpretations
In which section of the AICPA Code of Professional Conduct could you find the definitions to concepts mentioned in the Code? A. Part I B. Part II C. Part III D. Preface applicable to all members
D. Preface applicable to all members
Which group licenses CPAs? A. The FASB B. The SEC C. The AICPA D. The State Boards of Accountancy
D. The State Boards of Accountancy
A threat that a CPA will not act with objectivity because the CPA's interests are opposed to the client's interests is a(n) _______. A. familiarity threat B. advocacy threat C. self-interest threat D. adverse Interest Threat
D. adverse Interest Threat
Attest services do not include _______. A. audits B. reviews under SSARs C. examinations, reviews and agreed-upon procedures under SSAE D. compilation reports of financial statements
D. compilation reports of financial statements
The fourth step in the process to assist the CPA in making an ethical judgment is _______. A. identify threats to compliance with rules B. evaluate the significance of the threat C. identify and apply safeguards D. evaluate the effectiveness of the safeguards
D. evaluate the effectiveness of the safeguards
A threat that a CPA will not appropriately evaluate the results of a previous judgment made by, or service performed by, an individual in the CPA's firm is a(n) _______. A. familiarity threat B. advocacy threat C. self-interest threat D. self-review threat
D. self-review threat
Interpretation 1.295 indicates that before performing nonattest services, the CPA should establish and document in writing an understanding with the client regarding ______. A. any limitations of the engagement, only B. the objectives of the engagement and the services to be performed, only C. the services to be performed, only D. the objectives of the engagement, the services to be performed, and any limitations of the engagement
D. the objectives of the engagement, the services to be performed, and any limitations of the engagement
A threat that a CPA will allow a third party to coerce his/her judgment about a client is known as a(n): A. familiarity threat B. advocacy threat C. self-interest threat D. undue influence threat
D. undue influence threat
When you pass the CPA exam and then seek licensure, you would apply to _______. A. AICPA B. your university C. NASBA D. your State Board of Accountancy
D. your State Board of Accountancy
