Auditing Chapter 19 Multiple Choice
Which of the following would impair the independence of a CPA participating in an engagement?
- The individual has a sister employed in a key position at an audit entity. - A close relative has a material financial interest in the entity and the CPA is aware of the interest.
A professional staff member of the CPA firm must be independent of the attest entity if he or she ______.
- becomes a partner in the same office where the attest engagement's lead partner works - performs work directly for the entity - is in a position to influence the engagement
Nonaudit services that are considered by the SEC to impair independence if provided to a public company audit entity include ______.
- bookkeeping - legal services - actuarial services
Permissible loans for a CPA to obtain from a financial institution which he or she audits include a(n) ______.
- car loan collateralized by the car - loans secured against the cash surrender value of a life insurance policy
The ownership shares in a mutual fund is considered to be a(n) ____________ financial interest in the mutual fund and the securities that the mutual funds invest are considered to be _____________ financial interests to the covered member.
- direct - indirect
Auditors are prohibited from any _______________ or _______________ _____________ financial interest in an audited client.
- direct - material - indirect
Prohibited relationships with an audited client include ______ financial interests.
- direct material - direct immaterial - indirect material
According to the PCAOB, the provision of tax services impairs an auditor's independence to an entity when the tax service ______.
- involves aggression interpretation of applicable tax laws - is provided to immediate family members of management who serve in financial reporting oversight roles at the entity
The audit committee of a public company ______.
- must be independent of management - is responsible for auditor compensation - serves as a point of contact for the auditor
A former employee of an attest entity can become a member of the attest engagement team when the ______.
- period of the attest engagement does not cover any period of his or her employment with the audited entity
To ensure compliance with independence standards CPA firms use ______.
- quality control systems - firm-specific rules
Threats to a CPA's independence include ______.
- self-review - undue influence
Which of the following legal situations would ne considered to impair the auditor's independence?
Actual litigation by the auditor against the present management, alleging management fraud or deceit.
True or false: The Code of Professional Conduct places responsibility for ethical behavior squarely on the professional.
T
True or false: Indirect financial interests are generally permissible if the amount involved is immaterial with respect to the covered member's income and wealth.
T: If the amount is material to wealth and income, the investment must be evaluated for materiality.
When an individual or entity is not the recorded owner of a financial interest but has a right to some or all of the underlying benefits of ownership, the interest is said to be _________________ owned
beneficially
With regard to an a covered member, the underlying investments in a blind trust are considered a(n) ______ financial interest.
direct
In performing nonattest services for an attest entity, a CPA should ______
ensure that the entity assumes all management responsibilities
If a threat to independence exists, a CPA must ______.
evaluate the threat and determine if it can be mitigated or eliminated
To perform an audit of an entity's financial statements a CPA ______ be independent.
must
Which of the following parties can have financial interests in an audited entity and not impair the independence of the CPA?
- Parent - Brother
When determining independence for an attest engagement, a "covered member" under the AICPA's approach includes ______.
- a CPA firm manager who provides 20 hours of nonattest services to the client during the year - the firm's employee benefits plan - an individual on the attest engagement team
Threats to a CPA's independence include ______.
- advocacy - management participation - adverse interest
The auditor of a public company must report to the company's audit committee ______.
- all alternative treatments within GAAP for polices related to material items discussed with management - material written communication between the auditor and the company's management - all critical accounting policies used by the company
Proxy statements and annual reports issued by public companies must contain disclosures regarding ______.
- audit fees - preapproval policies of the company's audit committee - tax fees
Auditor independence would be impaired by the ______.
- commencement of litigation by present management alleging deficiencies in audit work for the entity - commencement of litigation by the CPA against the present management alleging management fraud or deceit
Subject to certain conditions, CPAs may provide ______ to nonpublic attest entities
- computer software implementation services - bookkeeping - internal audit outsourcing
Nonaudit services that are considered by the SEC to impair independence if provided to a public company audit entity include ______.
- contribution in kind reports - expert services - financial information system design - investment broker services
A firm's independence will likely not be impaired with respect to an entity if a partner or professional employee leaves the firm and is subsequently employed by the entity if the ______.
- engagement team exercises sufficient professional skepticism - former employee is not in a key position
A financial interest is an ownership interest in a(n) ____________ or ___________ security issued by an entity.
- equity - debt
Management responsibilities that would impair a CPA's independence include ______.
- having custody of entity assets - setting policy for the attest client - preparing source documents for a transaction
With regard to an a covered member, a blind trust and the underlying investments in the blind trust are considered a direct financial interest because the ______.
- investments ultimately revert to the covered member - covered member retains the right to amend or revoke the trust
The SEC's rules with respect to services provided by auditors are based on the principles that an auditor should ______.
- not function in the role of management - have no conflicting interest with an audit client - not audit his or her work
Prior to performing nonattest services for an attest client, the CPA should establish in writing the ______.
- objectives of the engagement - services to be performed
The SEC's rules with respect to services provided by auditors are based on the principles of auditor ______________ and _____________
- objectivity - independence
If a member of the attest engagement team ______ with an attest entity, independence may be impaired with respect to the entity.
- receives a job offer - discusses potential employment
An indirect financial interest arises when ______.
- the auditor does not control or supervise the intermediary - the financial interest is beneficially owned through an estate - a covered member has a financial interest in an entity that is associated with an attest entity
Covered member's immediate family subject to the Independence Rule include ______.
- unrelated dependent - related dependent - spouse
In which of the following situations would a CPA's independence be considered impaired according to the Code of Professional Conduct?
-The CPA has direct financial interest in an audit entity, but the investment is maintained in a blind trust. - The CPA owns a commercial building and leases it to an audit entity. The rental is material to the CPA.
A loan to or from an audited entity is permissible if it's a credit card with an outstanding balance of $____________ or less by the payment due date.
10,000
One of a CPA firm's basic objectives is to provide professional services that conform with professional standards. Reasonable assurance of achieving this basic objective is provided through
A system of quality control.
management participation threat
CPA becomes involved in decision-making for the client and loses objectivity
Without the consent of the entity, a CPA should not disclose confidential entity information contained in working papers to a(n)
CPA firm that has been engaged to audit a former audit entity. The successor CPA firm must have permission from the audit client to discuss confidential information with the predecessor auditor.
familiarity threat
CPA has close, long-standing relationship with client and it becomes difficult to remain objective
self-review threat
CPA is in a position to be evaluating his or her own judgments
undue influence threats
CPA is pressured due to another party's aggressiveness or dominant personality
Which of the following statement best explains why public accounting, as a profession, promulgates ethical standards and establishes means for ensuring their observance?
Ethical standards are established so that users of accounting services know what to expect and accounting professionals know what behaviors are acceptable, and so that discipline can be applied when necessary.
True or false: Unpaid audit fees pertaining to services provided more than one year prior to the date of the audit report that relate to an audited entity that is in bankruptcy impairs the auditor's independence.
F: Independence is impaired if the entity is not in bankruptcy.
True or false: AICPA professional standards require a public accounting firm and all of the accounting firm's partners, professional and administrative employees to be independent whenever the firm performs an attest service.
F: The firm, partners and professional employees must be independent.
True or false: Under the engagement team approach, all professional staff members of the CPA firm must be independent of an attest entity, whether or not the CPA performs work directly for the entity.
F: This would only be true if the CPA became a partner in the office.
Under the SEC's rules regarding independence, which of the following must an entity disclose?
Fees for the external audit, audit-related feels, tax fees, and fees for other nonaudit services performed by the audit firm.
The Code of Professional Conduct's _________ Rule is a very general statement that relates only to attestation-related services, including audits.
Independence
Rick, an independent CPA, must make an ethical judgment related to the audit of an entity. If he primarily focuses on whether his decision might yield unfair advantages for some at the expense of others, he is using:
Justice based approach
The SEC delegates its authority to set standards for audits of public companies to the ______.
PCAOB
In connection with the element of engagement performance, a CPA firm's system of quality control should ordinarily include procedures covering all of the following except
Performance evaluation. "Performance evaluations" are not listed as part of th AICPA's SQCS #8. This term more typically is used to describe judging the performance of individuals within the firm and not for quality control of overall engagement performance.
A violation of the profession's ethical standards is least likely to occur when a CPA
Purchases another CPA's accounting practices and bases the price on a percentage of the fees accruing from clients over the three-year period. Anticipated future fees are a legitimate way to value a service company and this arrangement does not violate any rules under the AICPA Code of Professional Conduct.
During the audit of Moon Co., the auditor disagrees with management's estimation of collectible accounts receivable. The possible misstatement amount is material. Which of the statements below should weigh more heavily for the auditor in this instance?
Requiring an adjustment to the allowance for doubtful accounts would give stockholders access to fair and adequate information. The auditor's duty is to assess whether the financial statements present fairly. Thus, the auditor must recommend an adjustment and, if the proposed adjustment is not made, indicate a material misstatement of accounts receivable in her/his qualified audit opinion. Yes, it really is that simple.
Ultimate authority to set standards for audits of public companies belongs to the ______.
SEC
The AICPA Code of Professional Conduct contains both general ethical principles that are aspirational in character and a
Set of specific, mandatory rules describing minimum levels of conduct a CPA must maintain.
All of the following nonaudit services are identified by the SEC as generally impairing an auditor's independence with respect to an audited entity except...
Some specific tax services
Those who are bound by the independence requirements of the AICPA's engagement team approach ______.
are considered covered members
If a member of the attest engagement team discusses potential employment or receives a job offer with an attest entity, independence may be impaired with respect to the entity unless the ______.
auditor removes himself or herself from the engagement
A financial interest that is under the control of an individual or entity is considered a(n) ______ financial interest.
direct
When performing nonattest services for an attest entity, having the CPA supervise the entity's employees in the performance of their normal recurring activities ______ impair the CPA's independence.
does
The PCAOB independence rules state that auditor independence is impaired when the auditor ______.
enters into contingent fee arrangements with the entity
When a CPA has such a close, long-standing relationship with a client that it has become difficult to maintain objectivity it is called a(n) ______ threat.
familiarity
A(n) ownership interest in an equity or a debt security issued by an entity is the definition of a(n) _____________ interest.
financial
When an auditor has a financial interest in an entity that is associated with the attest entity, it is considered a(n) ______________ financial interest.
indirect
The bedrock of the profession of public accountancy are ______.
integrity and objectivity
The first section in Part 1 of the AICPA Code of Profession Conduct includes the Code's ______ rule.
integrity and objectivity
The requirement that audit and other fees be disclosed in proxy statements and annual reports issued by public companies is to ______.
make companies more sensitive to public perceptions of independence and objectivity
A CPA firm's firm-specific independence rules are typically ______ the AICPA's standards.
more stringent than
Unpaid audit fees pertaining to services provided ______ will impair the auditor's independence.
more than one year prior to the date of the audit report
To perform a compilation of an entity's financial statements a CPA ______ be independent.
need not
The Code permits CPAs to provide bookkeeping and other services to ______ attest entities.
nonpublic
A covered member's spouse is employed by an audited entity. Based on this, the covered member's independence is ______.
only impaired if the spouse is employed in a key position
When a CPA lacks independence with an entity and is asked to perform a financial statement compilation, the CPA may ______.
perform the compilation but must indicate the lack of independence in the report
The Code of Professional Conduct places responsibility for ethical behavior squarely on the ______.
professional
If an entity is unable or unwilling to oversee nonattest services provided by the CPA auditor, ______.
providing these services impairs the CPA's independence with respect to attest services provided to the entity
The Code of Professional Conduct's Independence Rule ______.
relates only to attestation-related services
A firm's independence is impaired with respect to an entity if a partner or professional employee leaves the firm and is ______.
subsequently employed by the entity in a key position
An audited company has not paid its 2018 audit fees. According to the AICPA Code of Professional Conduct, for the auditor to be considered independent with respect to the 2019 audit, the 2018 audit fees must be paid before ________________
the 2019 audit report is issued
An auditor's independence is impaired when ______.
the auditor performs a managerial role for the entity during the period covered by the audit
The commencement of litigation by the CPA against the present management alleging management fraud or deceit _____ be considered to impair independence.
would
