Chapter 4 MC
12) A direct financial interest violates independence in which of the following circumstances? A) when close relatives such as nondependent children, brothers, and sisters have a significant financial interest in the client B) when close relatives such as nondependent children, brothers, and sisters have any financial interest in the client C) when the CPA owns shares in a mutual fund that has an ownership interest in the client D) when close relatives such as a brother, sister, or in-laws are employed by the client in their engineering department
Answer: A
12) Due to a shortage of personnel, the client asks a member firm to assist with the authorization of accounting transactions. This is an example of which type of threat to compliance with the rules under the AICPA Code of Professional Conduct? A) management participation B) self-interest C) self-review D) undue influence
Answer: A
13) A CPA sole practitioner purchased stock in a client corporation and placed it in a trust as an educational fund for the CPA's minor child. The trust securities were not material to the CPA but were material to the child's personal net worth. Would the independence of the CPA be considered to be impaired with respect to the client? A) Yes, because the stock is a direct financial interest. B) Yes, because the stock is an indirect financial interest that is material to the CPA's child. C) No, because the CPA does not have a direct financial interest in the client. D) No, because the CPA does not have a material indirect financial interest in the client.
Answer: A
14) Julie and Lisa are sisters. Julie is a CPA auditing the company where Lisa works. Julie's independence is impaired if A) Lisa is the controller. B) Lisa owns 2% of the company. C) Lisa is the marketing manager. D) all of the above.
Answer: A
15) Oehlers, CPA, is a staff auditor participating in the engagement of Capital Trust, Inc. Which of the following circumstances impairs Oehlers' independence? A) Oehlers' sister is an internal auditor employed by Capital Trust. B) Oehlers' friend, an employee of another local accounting firm, prepares the tax return of Capital Trust's CEO. C) Oehlers' and Capital Trust's 401K plans own stock with the same corporation. D) During the period of professional engagement, Capital Trust and Oehlers discussed business over lunch at a first-class restaurant.
Answer: A
15) Which of the following fee arrangements is not a violation of the AICPA's Code of Professional Conduct? A) basing fees as an expert witness on the amount awarded to the plaintiff, even though the CPA performs a compilation for client use B) basing consulting fees on a percentage of a bond issue, even though the CPA performs a review of the client's financial statements C) basing fees for a tax service on the amount of the refund that the client will receive D) basing consulting fees on a percentage of a bond issue, even though the CPA performs an audit of the client's financial statements
Answer: A
17) According to the profession's ethical standards, an auditor would be considered independent in which of the following instances? A) The auditor's checking account, which is fully insured by a federal agency, is held at a client financial institution. B) The auditor is also an attorney who advises the client as its general counsel. C) An employee of the auditor serves as treasurer of a charitable organization that is a client. D) The client owes the auditor fees for two consecutive annual audits.
Answer: A
19) Which of the following activities is allowed for a CPA firm's attestation clients? A) contingent fees fixed by a court B) commissions for referring a review client to an insurance agency for insurance coverage C) preparation of tax returns for which fees are based upon client refunds D) each of the above is allowed
Answer: A
2) Which of the following is a true statement regarding the enforcement mechanism for CPA conduct? A) The PCAOB has the authority to investigate and discipline registered public accounting firms. B) All disciplinary action by the AICPA must go through the Joint Trial Board. C) Disciplinary actions taken by the AICPA are not disclosed to the public. D) Only a few states have adopted the AICPA rules of conduct.
Answer: A
24) A CPA's financial interests in nonclients may have an effect on independence if the nonclients are investors in or investees of the client. Which situation would not impair a CPA's independence? A) The client has an immaterial investment in a nonclient investee in which the CPA has an immaterial investment. B) The CPA has a material indirect financial interest in a nonclient in which the client has a material investment. C) The client investor has a nonmaterial investment in the nonclient investee in which the CPA has a material investment. D) The CPA has a joint closely held investment with the client in a nonclient that is material to the client as well as the CPA.
Answer: A
25) The CPA firm will lose its independence if A) a staff auditor providing audit services to the client acquires stock in that client. B) a staff tax preparer who provides 15 hours of non-audit services to the client acquires stock in that client. C) an audit manager in an office different than the office providing audit services has a direct, immaterial financial interest in the audit client. D) a covered member has an indirect, immaterial financial interest in an audit client.
Answer: A
29) Interpretations of the AICPA Code of Professional Conduct are dominated by the concept of A) independence. B) compliance with standards. C) accounting. D) acts discreditable to the profession.
Answer: A
8) The AICPA's Code of Professional Conduct requires independence for all A) attestation engagements. B) services performed by accountants in public practice. C) accounting and auditing services performed. D) professional work performed by CPAs.
Answer: A
8) The Sarbanes-Oxley Act requires a cooling off period of ________ before a member of an audit team can work for a client in a key management position? A) one year B) eighteen months C) three years D) five years
Answer: A
9) When a member observes the profession's technical and ethical standards and strives to continually improve her competence and quality of services, she is exercising A) due care. B) integrity. C) independence. D) objectivity.
Answer: A
9) Which of the following would be considered a violation of the AICPA Code of Conduct? A) The CPA makes the audit files available to the client's bank without the permission of the client. B) The CPA firm charges a contingent fee for nonattestation services to a client for whom he does not perform any attestation services. C) The CPA firm takes a prospective client to lunch to discuss auditing services. D) A CPA firm uses the name San Diego Tax Specialists.
Answer: A
1) For which of the following professional services must CPAs be independent? A) management advisory services B) audits of financial statements C) preparation of tax returns D) all of the above
Answer: B
1) If the board of accountancy in the state in which a CPA firm is licensed has rules that are different than the AICPA's rules, the CPA firm must follow A) whichever rules are less restrictive. B) whichever rules are more restrictive. C) the rules of the AICPA. D) the rules of the state's board of accountancy.
Answer: B
10) Companies are required to disclose in their proxy statement or annual filings with the SEC the total amount of audit and non-audit fees paid to the audit firm for the two most recent years. Which of the following is not one of the categories of fees that must be disclosed? A) tax fees B) consulting fees C) audit-related fees D) all other fees
Answer: B
14) In which of the following circumstances would a CPA be ethically bound to refrain from disclosing any confidential client information? A) The CPA is issued a summons enforceable by a court order which orders the CPA to present confidential information. B) A major stockholder of a client company seeks accounting information from the CPA after management declined to disclose the requested information. C) The confidential client information is made available as part of a quality review of the CPA's practice by a peer review team authorized by the AICPA. D) An inquiry by a disciplinary body of a state CPA society requests confidential client information.
Answer: B
2) Which of the following statements is true when the CPA has been engaged to perform an audit of financial statements? A) The CPA firm is engaged and paid by the client; therefore, the firm has primary responsibility to be an advocate for the client. B) The CPA firm is engaged and paid by the client, but the primary beneficiaries of the audit are those who rely on the financial statements. C) Should a situation arise where there is no convincing authoritative standard available, and there is a choice of actions which could impact a client's financial statements, the CPA is free to endorse the choice which is in the investors' interests. D) The CPA firm has primary responsibility to the FASB.
Answer: B
26) Interpretations to the Rules of Conduct permit a CPA firm to do both bookkeeping and auditing for the same private company client if three criteria are met. Which of the following is not one of those criteria? A) The client must accept full responsibility for the financial statements. B) The client is required to file an annual report, including audited financial statements, with the Securities and Exchange Commission. C) The CPA must not assume the role of employee or of manager. D) The CPA must follow applicable auditing standards.
Answer: B
27) Which of the following circumstances impairs an auditor's independence? I. Litigation by a client against an audit firm claiming a deficiency in the previous audit II. Litigation by a client against an audit firm related to tax services III. Litigation by an audit firm against a client claiming management fraud or deceit A) I and II B) I and III C) II and III D) I, II, and III
Answer: B
4) A CPA firm may charge a contingent fee for A) an audit. B) consulting services for a client for which they do not perform any attestation services. C) the preparation of an original tax return for a client for which they do not perform any attestation services. D) the preparation of an amended tax return.
Answer: B
6) Which of the following services is not prohibited by the SEC whenever a CPA also audits the company? A) actuarial services B) assisting the company in preparing certain SEC registration statements (e.g., 10-Q, 10-K) C) investment banker services D) bookkeeping services
Answer: B
6) Which part of the AICPA's Code of Professional Conduct is enforceable? A) ethical rulings B) rules of conduct C) principles D) interpretations
Answer: B
7) The members of a client's "audit committee" should be A) members of management. B) directors who are not a part of company management. C) non-directors and non-managers. D) directors and managers.
Answer: B
7) Which of the following is required for a firm to designate itself "Member of the American Institute of Certified Public Accountants" on its letterhead? A) At least one of the owners must be a member of the AICPA. B) All CPA owners must be members of the AICPA. C) The CPA owners whose names appear in the firm name must be members of the AICPA. D) A majority of the owners must be members of the AICPA.
Answer: B
8) Independence is required of a CPA when performing A) management advisory services. B) all attestation services. C) all attestation and tax services. D) all professional services.
Answer: B
9) CPAs may provide bookkeeping services to their private company audit clients, but there are a number of conditions that must be met if the auditor is to maintain independence. Which of the following conditions is not necessary? A) The CPA must not assume a management role or function. B) The client must hire an external CPA to approve all of the journal entries prepared by the auditor. C) The auditor must comply with GAAS when auditing work prepared by his/her firm. D) The client must accept responsibility for the financial statements.
Answer: B
1) Under Sarbanes-Oxley, the audit committee of a public company A) must meet on a monthly basis. B) must be comprised entirely of financial experts. C) is responsible for the oversight of the work of the independent auditor. D) should have at least one independent member.
Answer: C
1) Which of the following is(are) true concerning the Ethical Principles of the Code of Professional Conduct? I. They identify ideal conduct. II. They are general ideals and are not enforceable. A) I only B) II only C) I and II D) Neither I nor II
Answer: C
10) An example of an "indirect financial interest in a client" would be A) ownership of less than 10% of the client's stock by the covered members spouse. B) an ownership of less than 10% of the client's stock by a staff member who is not involved in the audit. C) the covered member's ownership of a mutual fund that has an investment in the client. D) All of the above are examples of an indirect financial interest in a client.
Answer: C
11) When determining whether independence is impaired because of an ownership interest in a client company, materiality will affect ownership A) in all circumstances. B) only for direct ownership. C) only for indirect ownership. D) under no circumstances.
Answer: C
13) Which of the following represents all of the ways a CPA firm can be organized? A) proprietorships and partnerships B) proprietorships, partnerships, and professional corporations C) proprietorships, general partnerships, general corporations, professional corporations, limited liability companies, and limited liability partnerships if permitted by state law D) single proprietorships, partnerships, professional corporations if permitted by state law, or regular corporations
Answer: C
18) Which of the following loans would be prohibited between a CPA firm or its members and an audit client? A) automobile loans B) loans fully collateralized by cash deposits at the same financial institution C) new home mortgage loans D) unpaid credit card balances not exceeding $10,000 in total
Answer: C
2) "Independence" in auditing means A) maintaining an indirect financial interest. B) not being financially dependent on a client. C) taking an unbiased viewpoint. D) being an advocate for a client.
Answer: C
2) Under the rules and interpretations of the AICPA Code, A) a CPA can be a client advocate during an audit, but not while performing tax or management services. B) staff auditors should always defer to the judgment of their immediate supervisor. C) a conflict of interest is a relationship that might interfere with objectivity or integrity. D) even if a conflict of interest is disclosed to the member's client or employer, it is still considered a violation of the rules of conduct.
Answer: C
28) A CPA firm should decline an offer to perform consulting services engagement if A) the proposed engagement is not accounting related. B) recommendations made by the CPA firm are to be subject to review by the client. C) acceptance would require the CPA firm to make management decisions for an audit client. D) any of the above is true.
Answer: C
3) When CPAs are able to maintain their actual independence, it is referred to as independence in A) conduct. B) appearance. C) fact. D) total.
Answer: C
3) Which of the following statements is true with respect to audit committees? A) Audit committee members should consist of members of the company's management. B) All members of the audit committee must be financial experts. C) The audit committee of a public company is responsible for hiring the auditor. D) Audit committees must have a minimum of ten members.
Answer: C
4) A CPA performs bookkeeping services for a client and then performs an audit of those financial statements. This is an example of a ________ threat. A) familiarity B) self-interest C) self-review D) management participation
Answer: C
7) Interpretations of the rules of conduct A) are enforceable. B) are finalized after being approved by the FASB. C) are issued as exposure drafts to the profession and others for comments. D) do not apply to members in business.
Answer: C
10) The AICPA's Code of Professional Conduct requires CPAs to maintain the confidentiality of client information. This rule would be violated if a CPA disclosed information without a client's consent as a result of a A) subpoena or summons. B) peer review. C) complaint filed with the trial board of the Institute. D) request by a client's largest stockholder.
Answer: D
11) The Code of Professional Conduct is established by the membership of the AICPA, and the Interpretations of the Rules of Conduct are prepared by the A) Financial Accounting Standards Board. B) Securities and Exchange Commission. C) CPA licensing agencies within each state. D) Professional Ethics Executive Committee of the AICPA.
Answer: D
12) A CPA firm A) can sell securities to a client for whom they perform an attestation service. B) can receive a commission for a client that they are engaged to perform an attestation service for. C) cannot receive a referral fee for recommending the services of another CPA. D) can receive a commission from a nonattestation client as long as the situation is disclosed.
Answer: D
16) An auditor's independence is considered impaired if the auditor has A) an immaterial, indirect financial interest in a client. B) an outstanding $8,000 balance on a credit card issued by a client. C) an automobile loan from a client bank, collateralized by the automobile. D) a joint, closely held business investment with the client that is material to the auditor's net worth.
Answer: D
16) Which of the following is not defined as an act discreditable in either the Rules or the Interpretations of the AICPA's Code of Professional Conduct? A) The CPA firm's partner in charge failed to file his tax return for the past year. B) The CPA firm discriminates in its hiring practices based on the age of the applicant. C) The CPA retains the client's books and records to enforce past-due payment of the CPA's bill, even after the client has demanded they be returned. D) The CPA firm's partner-in-charge was a passenger in a car driven by his wife. On the way home from the firm's Christmas party, she was charged with "driving while intoxicated."
Answer: D
17) Freedom from ________ means the absence of relationships that might interfere with objectivity or integrity. A) independence B) acts discreditable C) impartiality D) conflicts of interest
Answer: D
18) Membership in the AICPA can be terminated without a hearing for A) a crime punishable by imprisonment for more than one year. B) the filing of a fraudulent income tax return on a client's behalf. C) the willful failure of a CPA to file their own personal tax return. D) all of the above.
Answer: D
19) Under the AICPA independence rules, the auditor A) is prohibited from performing a company's audit and installing and designing the client's new information system. B) does not need to document the understanding and willingness of the client to perform all management functions associated with the nonaudit service. C) is prohibited from doing any bookkeeping services for the client if performing the audit. D) must follow the more restrictive SEC independence rules when dealing with a public company.
Answer: D
2) Which of the following is not one of the major parts of the AICPA's Code of Professional Conduct? A) principles B) rules C) interpretations D) definitions
Answer: D
21) Which of the following instances would impair a CPA's independence when they have been retained as the auditor? I. A charitable organization where the CPA serves as treasurer II. A municipality where the CPA owns $250,000 of the $25 million outstanding bonds of the municipality III. A company that the CPA's investment club owns a 10% investment interest A) I and II B) I and III C) II and III D) I, II, and III
Answer: D
22) Under the AICPA independence rules, independence can be considered impaired when A) billed fees remain unpaid for professional services for more than ninety days. B) a client in bankruptcy has unpaid fees for more than one year. C) there is litigation by the client related to the auditor's tax or other nonaudit services for an immaterial amount. D) there is a lawsuit by the client claiming deficiencies in the previous year's audit.
Answer: D
23) Which of the following is least likely to impair a CPA firm's independence with respect to an audit client in the Oklahoma City office of a national CPA firm? A) A partner in the Oklahoma City office owns an immaterial amount of stock in the client. B) A partner in the Jersey City office owns 25% of the client's stock. C) A partner in the Oklahoma City office, who does not work on the audit engagement, previously served as controller for the audit client. D) A partner in the Chicago office previously served as vice president of finance for the audit client.
Answer: D
3) Several months after an unqualified audit report was issued, the auditor discovers the financial statements were materially misstated. The client's CEO agrees that there are misstatements, but refuses to correct them. She claims that "confidentiality" prevents the CPA from informing anyone. Which of the following statements is correct? A) The CEO is correct and the auditor must maintain confidentiality. B) The CEO is incorrect, but since the audit report has been issued, it is too late to correct the report. C) The CEO is correct, but to be ethically correct, the auditor should violate the confidentiality rule and disclose the error. D) The CEO is incorrect, and the auditor has an obligation to issue a revised audit report, even if the CEO will not correct the financial statements.
Answer: D
3) The ________ is a standard of conduct for all members of the AICPA. A) IESBA Code of Conduct B) SEC Code of Conduct C) PCAOB Code of Professional Conduct D) AICPA Code of Professional Conduct
Answer: D
4) The provisions of the Sarbanes-Oxley Act are most likely to allow which of the following non-audit services for audit clients? A) appraisal or valuation services (e.g., pension, post-employment benefit liabilities) B) financial information systems design and implementation C) internal audit outsourcing D) tax consulting
Answer: D
5) Since the rules cannot address all circumstances, the Code includes a conceptual framework approach for members to use to evaluate threats to compliance. Using this framework, A) the first step is to discuss the threat with the client's management team. B) all threats must be completely eliminated. C) safeguards can be used to eliminate any threat. D) more than one safeguard may be necessary.
Answer: D
5) Which of the following services are allowed by the SEC whenever a CPA also audits the company? A) internal audit outsourcing B) legal services unrelated to the audit C) appraisal or valuation services D) services related to assessing the effectiveness of internal control over financial reporting
Answer: D
8) CPAs are prohibited from which of the following forms of advertising? A) self-laudatory advertising B) celebrity endorsement advertising C) use of trade names, such as "Awesome Auditors" D) use of phrases, such as "Guaranteed largest tax refunds in town!"
Answer: D
9) Which of the following is an accurate statement? A) Auditing standards detail the requirements that a CPA firm must follow when it is requested to provide an opinion on the application of accounting principles for a client of another CPA firm. B) SEC rules prohibit ownership in audit clients by those persons who can influence the audit. C) PCAOB rules require a CPA firm, before its selection as the company's auditor to document all relationships between the firm and the company. D) All of the above are accurate statements.
Answer: D
5) A member in public practice shall neither receive from, nor pay to, a client a commission when the member or member's firm also performs certain services for that client. Are commissions allowed if the CPA performs A compilation that will be used by a third party An audit of prospective financial information
neither
20) The Code of Conduct rule on independence indicates that materiality must be considered when -Evaluating direct investments made by the CPA -Evaluating indirect ownership investments
-Evaluating indirect ownership investments
4) The Sarbanes-Oxley Act ________ a CPA firm from doing both bookkeeping and auditing services for the same public company client. A) encourages B) prohibits C) allows D) allows on a case-by-case basis
Answer: B
1) The CPA must not subordinate his or her professional judgment to that of others in any A) engagement. B) audit engagement. C) engagement excluding tax services. D) engagement where the opinion of a specialist is used.
Answer: A
1) The underlying reason for a code of professional conduct for any profession is A) the need for public confidence in the quality of service of the profession. B) it provides a safeguard to keep unscrupulous people out. C) it is required by federal legislation. D) it allows licensing agencies to have a yardstick to measure deficient behavior.
Answer: A
10) Four of the six Ethical Principles in the AICPA's Code of Professional Conduct are equally applicable to all members of the AICPA. Which of the following principles applies only to members in public practice? A) Scope and Nature of Services B) Integrity C) Due Care D) The Public Interest
Answer: A
11) Which one of the following statements is false? A) Confidentiality is broken when an auditor is presented with a subpoena concerning an audit client. B) Information that a CPA obtains from a client is generally not privileged. C) When a CPA firm conducts an AICPA-authorized peer review of the quality controls of another CPA firm, permission of the client is not needed to examine audit documentation. D) A CPA firm which observes substandard audit documentation of another firm during a peer review can initiate a complaint to the AICPA.
Answer: A
6) The AICPA's Code of Professional Conduct states that a CPA should maintain integrity and objectivity. The term "objectivity" in the Code refers to a CPA's ability to A) choose independently between alternate accounting principles and auditing standards. B) distinguish between accounting practices that are acceptable and those that are not. C) be unyielding in all matters dealing with auditing procedures. D) maintain an impartial attitude on matters that come under the CPA's review.
Answer: D
6) The financial interests of a CPA's family members can affect the CPA's independence. Which of the following parties would not be included as a "direct financial interest" of the CPA? A) spouse B) dependent child C) relative supported by the CPA D) sibling living in the same city as the CPA
Answer: D
7) Interpretations of the rules regarding independence allow an auditor to serve as A) a director or officer of an audit client. B) an underwriter for the sale of a client's securities. C) a trustee of a client's pension fund. D) an honorary director for a not-for-profit charitable or religious organization.
Answer: D
3) One of the AICPA's Ethical Principles deals with the public interest. It states that members should accept the obligation to act in a way that will
Honor the public trust
2) The Sarbanes-Oxley Act requires which employees of an accounting firm to rotate off the engagement every five years? In-Charge Auditor Lead audit partner
Lead audit partner
5) Interpretations of the independence rule of the AICPA Code prohibit covered members from owning any stock or other direct investment in audit clients. Covered members would include which of the following? All partners in the engagement office even if they have no engagement responsibility Individuals on the attest engagement The firm and its employee benefit plans
Yes to all three
