Auditing Chapter 3
Utilizing outside computer services to process tax returns would be a violation of the ethics rule concerning confidential information. T/F
False
In which of the following circumstances is it most likely that a CPA has violated the Code of Professional Conduct? He has placed an ad in a newspaper in which he compares his audit firm personnel's experience with that of the personnel of several competing firms. He has started an audit of a nonissuer (nonpublic company) for which last year's fees have not yet been received. He audits a company in which he previously owned stock. He serves as trustee of an audit client's profit-sharing trust.
He serves as trustee of an audit client's profit-sharing trust.
Current auditing standards do not allow which of the following types of loans from a financial institution audit client? Credit card loans up to a specified limit. Borrowings collateralized by cash deposits. Home mortgage loans. Loans of surrender value of an insurance policy.
Home mortgage loans.
Under the AICPA Code of Professional Conduct, which of the following rules is not applicable to CPAs in business? Integrity and objectivity. General standards. Independence. Acts discreditable.
Independence.
If a CPA violates the AICPA Code of Professional Conduct, the AICPA Trial Board may do all of the following, except: Admonish the offending member. Suspend the offending member. Expel the offending member. Revoke the offending member's CPA certificate.
Revoke the offending member's CPA certificate.
Which of the following acts by a CPA would most likely be considered a violation of the AICPA Code of Professional Conduct? Assisting a client in preparing a financial forecast. Forming a professional corporation to practice as a CPA. Accepting a fee in a tax matter relating to an administrative proceeding. A "covered member" owns an immaterial amount of stock in an audit client.
A "covered member" owns an immaterial amount of stock in an audit client.
The AICPA Code of Professional Conduct states that a CPA shall not disclose any confidential information obtained in the course of a professional engagement except with the consent of the client. This rule may preclude a CPA from responding to an inquiry made by: An investigative body of a state CPA society. The trial board of the AICPA. A CPA-shareholder of the client corporation. An AICPA quality review body.
A CPA-shareholder of the client corporation.
In which of the following situations would a public accounting firm have violated the AICPA Code of Professional Conduct in determining its fee? A fee is based on whether or not the public accounting firm's audit report leads to the approval of the client's application for bank financing. A fee is to be established at a later date by the Bankruptcy Court. A fee is based upon the nature of the engagement rather than upon the actual time spent on the engagement. A fee is based on the fee charged by the client's former auditors.
A fee is based on whether or not the public accounting firm's audit report leads to the approval of the client's application for bank financing.
Which of the following fee arrangements for an audit would constitute a violation of the AICPA Code of Professional Conduct? A fixed fee. A fee that is based on the number of hours spent on the engagement. A fee that is computed as a percentage of audited net income. A fee that is based on the difficulty of the engagement.
A fee that is computed as a percentage of audited net income.
In which of the following circumstances would a CPA be bound by ethics to refrain from disclosing any confidential information obtained during the course of a professional engagement? The CPA is issued a summons enforceable by a court order that orders the CPA to present confidential information. A major stockholder of a client company seeks accounting information from the CPA after management declined to disclose the requested information. Confidential client information is made available as part of a quality review of the CPA's practice by a review team authorized by the AICPA. An inquiry by a disciplinary body of a state CPA society requests confidential client information.
A major stockholder of a client company seeks accounting information from the CPA after management declined to disclose the requested information.
Which of the following is not a covered member for an attest engagement under the Independence Rule of the AICPA Code of Professional Conduct? An individual assigned to the attest engagement. A partner in the office of the partner in charge of the attest engagement. A manager who is in charge of providing tax services to the attest client. A partner in the national office of the firm that performs marketing services.
A partner in the national office of the firm that performs marketing services.
For a CPA firm with one office, which of the following individuals is most likely to impair the firm's independence with respect to an audit client? A partner owns 50 shares of stock in the client (the total value is immaterial to both the partner and to the audit client). A manager on the audit has a cousin who has a summer internship with the audit client. The partner in charge of the firm does not work on the audit client, but does provide input into remuneration decisions for all partners and professionals involved with the audit. A friend of a staff member who does not work on the audit owns approximately 10 percent of the client's outstanding stock.
A partner owns 50 shares of stock in the client (the total value is immaterial to both the partner and to the audit client).
A public accounting firm would least likely be considered in violation of the AICPA Independence Rule in which of the following instances? A partner's checking account, which is fully insured by the Federal Deposit Insurance Corporation, is held at a financial institution for which the public accounting firm performs attest services. A manager of the firm donates services as vice president of a charitable organization that is an audit client of the firm. An attest client owes the firm fees for this and last year's annual engagements. A covered member's dependent son owns stock in an attest client.
A partner's checking account, which is fully insured by the Federal Deposit Insurance Corporation, is held at a financial institution for which the public accounting firm performs attest services.
Wilson Company is audited by the Denver office of Anderson CPAs. Which of the following individuals would be least likely to be considered a "covered member" by the independence standard? Staff assistant on the audit. A staff assistant who prepares Wilson Company's tax returns. A tax partner in Denver who performs no attest services for Wilson Company or for any other clients. The partner in charge of Anderson CPAs (she does no work on the Wilson Company Audit).
A staff assistant who prepares Wilson Company's tax returns.
Which of the following is not prohibited by the AICPA Code of Professional Conduct? Advertising in newspapers. Payment of commission to obtain an audit client. Acceptance of a contingent fee for a review of financial statements. Engaging in discriminatory employment practices.
Advertising in newspapers.
A CPA who holds an investment in a mutual fund is not independent of any of the companies that the mutual fund invests in. T/F
False
A CPA who previously was employed by a client may never be involved in an audit of the financial statements of that client. T/F
False
A covered member may have only an immaterial direct financial interest in an audit client. T/F
False
Auditors may not allow their working papers to be reviewed in conjunction with a peer review unless their clients agree to the review. T/F
False
CPAs are prohibited from practicing in the form of a limited liability corporation. T/F
False
High moral conduct in support of one's country is a basic ethical rule explicitly set forth in the AICPA Code of Professional Conduct. T/F
False
The AICPA Code of Professional Conduct prohibits direct solicitation of clients by CPAs. T/F
False
The Code of Ethics of the Institute of Internal Auditors, Inc., requires that members report to the audit committee of the board of directors. T/F
False
The Code of Professional Conduct prohibits CPAs from establishing fixed fees for an engagement. T/F
False
Which of the following is most likely to be a violation of the AICPA rules of conduct by Bill Jones, a sole practitioner with no other employees? Jones performs consulting services for a percentage of the client's savings; these are the only services provided for the client. Jones names his firm Jones and Smith, CPAs. Jones advertises the services he provides in an Internet set of telephone "yellow pages." Jones, without client consent, makes available working papers for purposes of a peer review of his practice.
Jones names his firm Jones and Smith, CPAs.
Which of the following individuals is least likely to be considered a covered member by the independence standard? Staff assistant who works on the audit. Manager who does not work on the audit. Tax partner whose only connection to the audit is assistance with the deferred tax liability. Partner in charge of the office.
Manager who does not work on the audit.
Which of the following is (are) required when a CPA is performing only consulting services for a client? Independence Objectivity (1) Yes Yes (2) Yes No (3) No Yes (4) No No Option (1) Option (2) Option (3) Option (4)
Option (3)
Jennifer Nelson, CPA, has posted the general ledger and has maintained the financial records of Quinn Corporation. As a part of his responsibilities he has recorded journal entries and made closing entries without consulting Quinn's management. Which of the following best summarize the AICPA and SEC views as to the following question: Is audit independence impaired? Item AICPA SEC A. Yes Yes B. Yes No C. No Yes D. No No Option A Option B Option C Option D
Option A
Which of the following nonattest services may be performed by the auditors of a public company? Internal audit outsourcing. Tax planning for all company officers. Bookkeeping services. Preparation of the company's tax return.
Preparation of the company's tax return.
Contingency fee based pricing of accounting services is: Always strictly prohibited in public accounting practice. Never restricted in public accounting practice. Prohibited for clients for whom attestation services are provided. Considered an act discreditable to the profession.
Prohibited for clients for whom attestation services are provided.
Mary Troutt, CPA, has been asked by an audit client to prepare income tax returns and serve as a tax advisor. She is obliged to maintain the same standards of objectivity and freedom from bias in tax work as in auditing. She may accept a fee for her tax services in the form of shares of common stock in the client company without impairing her independence as an auditor. She could properly agree to a combined fee for her audit and tax work based on a percentage of the client's after tax income. She would be free to resolve questionable issues in favor of the client in preparing the tax return.
She would be free to resolve questionable issues in favor of the client in preparing the tax return.
The Compliance with Standards Rule requires CPAs to adhere to all of the following applicable standards, except: Statements on Standards for Consulting Services. Statements on Auditing Standards. Statements on Standards for Attestation Engagements. Statements on Responsibilities for Assurance Services.
Statements on Responsibilities for Assurance Services.
Bill Adams, CPA, accepted the audit engagement of Kelly Company. During the audit, Adams became aware of his lack of competence required for the engagement. What should Adams do? Disclaim an opinion. Issue an adverse opinion. Suggest that Kelly Company engage another CPA to perform the audit. Rely on the competence of client personnel.
Suggest that Kelly Company engage another CPA to perform the audit.
Independence of a CPA with respect to a client is not impaired if: The CPA has a loan to an officer of the client. The CPA has an immaterial direct interest in the client. The CPA is trustee for the client's pension plan. The CPA has an immaterial joint, closely held business investment with the client.
The CPA has an immaterial joint, closely held business investment with the client.
Which of the following family relationships is most likely to impair a CPA's independence with respect to a particular audit client on which the CPA works as a "covered member"? A close relative has a material investment in that client of which the CPA is not aware. A cousin has an immaterial investment in the client of which the CPA is aware. The CPA's sister is controller of the audit client. The CPA's spouse participates in a savings plan sponsored by the client.
The CPA's sister is controller of the audit client.
Which of the following statements is true with respect to the PCAOB and SEC's concept of independence when an auditor both prepares financial statements and audits those financial statements for a client? The auditor is not independent. The auditor is independent if he or she is able to maintain a level of professional detachment. The auditor can audit the financial statements only if the audit process does not culminate in the expression of an opinion on the financial statements. The auditor cannot audit the financial statements since a lack of integrity exists.
The auditor is not independent.
Which of the following is implied when a CPA signs the preparer's declaration on a federal income tax return? The return is not misleading based on all information of which the CPA has knowledge. The return is prepared in accordance with generally accepted accounting principles. The CPA has audited the return. The CPA maintained an impartial mental attitude while preparing the return.
The return is not misleading based on all information of which the CPA has knowledge.
In providing nonattest services to an attest client, a CPA is allowed to perform which of the following functions? Maintaining custody of the client's securities. Training client employees. Supervising client employees. Acting as the third approver of large client expenditures.
Training client employees.
Accounting Standards Updates issued by the FASB are enforceable under the AICPA Code of Professional Conduct. T/F
True
Advertising fees for services is an acceptable form of advertising under the AICPA Code of Professional Conduct. T/F
True
Engaging in discriminatory employment practices is considered to be an act discreditable to the profession. T/F
True
In certain circumstances, a member of the AICPA may be held responsible for compliance with the ethics rules by persons under his or her supervision. T/F
True
In most states, violation of Rules of the AICPA Code of Professional Conduct may result in suspension or revocation of a CPA's license to practice. T/F
True
In some cases threats to independence may be adequately mitigated through safeguards. T/F
True
Not all parts of the AICPA Code of Professional Conduct are binding on all CPAs. T/F
True
Statements on Auditing Standards are enforceable under the AICPA Code of Professional Conduct. T/F
True
The Principles section of the Code consists of six principles that provide the overall ethical framework. T/F
True
Training a client's employees in the operation of a computer system is a consulting service that would not necessarily impair the auditor's independence with respect to the client. T/F
True
Which of the following provisions is not included in The Institute of Internal Auditors Code of Ethics? Performance of work with honesty, diligence, and responsibility. Prudence in the use and protection of information acquired in the course of their duties. Use of appropriate sampling methods to select areas for audit. Continual improvement in proficiency and effectiveness and the quality of services provided.
Use of appropriate sampling methods to select areas for audit.
Which of the following statements is correct? Client prepared records (e.g., the general ledger) may be retained by the CPA until fees due to the CPA are received. CPA working papers are the joint property of the CPA and the client. Working papers prepared by the auditor solely for the engagement need not be returned to the client. CPA working papers that include copies of client's records are not available to third parties under any circumstances.
Working papers prepared by the auditor solely for the engagement need not be returned to the client.
The AICPA Code of Professional Conduct: does not apply to CPAs who function as tax advisors only. does not apply to CPAs whose work is limited to consulting services. does not apply to CPAs who hold positions below the rank of partner, manager, or senior in a national CPA firm. applies to all of the above categories.
applies to all of the above categories.
The Code of Professional Conduct requires independence for all: audit and other accounting engagements. financial statement audits. services performed. services performed except tax engagements.
financial statement audits.
Mavis, CPA, has audited the financial statements of South Bay Sales Incorporated for several years and had always been paid promptly for services rendered. Last year's audit invoices have not been paid because South Bay is experiencing cash flow difficulties, and the current year's audit is scheduled to commence in one week. With respect to the past-due audit fees, Mavis should: perform the scheduled audit and allow South Bay to pay when the cash flow difficulties are alleviated. perform the scheduled audit only after arranging a definite payment schedule and securing notes signed by South Bay. inform South Bay's management that the past-due audit fees are considered an impairment of auditor independence; therefore, it must be paid prior to the issuance of the auditors' report. inform South Bay's management that the past-due audit fees may be considered a loan on which interest must be imputed for financial statement purposes.
inform South Bay's management that the past-due audit fees are considered an impairment of auditor independence; therefore, it must be paid prior to the issuance of the auditors' report.
Advertising by CPAs: is presently prohibited by the Code of Professional Conduct. is permissible as long as it is not false, misleading, or deceptive. may include statements that the CPA is able to influence decisions by tax courts and other official bodies as long as names of officials are not used. must not mention fees for services.
is permissible as long as it is not false, misleading, or deceptive.
A professional corporation form of organization: may ultimately decrease liability of all partners of a CPA firm. offers certain tax advantages as compared to partnerships. eliminates personal liability for selected partners. has similar liability requirements to that of a limited liability company form.
offers certain tax advantages as compared to partnerships.
A CPA ethically could: perform an audit of Tombstone, Arizona for less than 1/2 of normal audit billing rates. base her audit fee on the proceeds of her client's stock issue. own preferred stock in a corporation that is an audit client. perform a review on a contingent fee basis.
perform an audit of Tombstone, Arizona for less than 1/2 of normal audit billing rates.
