Deck 4: Ethics and Professional Judgment in Accounting

Question 1

The statement made by Lynn Turner, former SEC chief accountant, "Are the auditors going to serve management, or are they going to serve the best interests of the investing public?", refers to concerns about:

A) Opinion shopping
B) Low-balling audit bids
C) Conflict between professionalism and commercialism
D) Fraud in financial statements

Answer 1

C

Question 2

The House Subcommittee on Oversight and Investigations made its recommendations after looking into failures at each of the following companies except:

A) ESM Government Securities
B) Continental Illinois National Bank and Trust
C) Penn Square Bank
D) Enron

Answer 2

D

Question 3

Common judgment traps include:

A) Group think, judgment triggers, and reacting to pressures
B) Group think, judgment triggers, and a rush to solve problems
C) Reacting to pressures, a rush to solve problems, and Systems 1 thinking
D) Systems 1 thinking, cognitive dissonance, a rush to solve problems

Answer 3

B

Question 4

Professional skepticism can best be defined as having:

A) An inquiring mind and deliberate decision making
B) Deliberate decision making and suspension of belief
C) An inquiring mind and suspension of belief
D) Careful observation and virtue-based decision making

Question 5

Which of the following is NOT a component of the KPMG Professional Judgment Framework?

A) Clarify issues and conclusions
B) Clarify issues and objectives
C) Gather and evaluate information
D) Articulate and document rationale

Question 6

Professional skepticism links to professional judgment through the ethical standards of:

A) Independent thought, objectivity, and intelligence
B) Objectivity, intelligence, and reflective thought
C) Independent thought, objectivity, and due care
D) Honesty, integrity, and due care

Question 7

Which of the following is NOT a common judgment tendency?

A) Availability tendency
B) Confirmation tendency
C) Overconfidence tendency
D) Decision making tendency

Question 8

In its investigation of ZZZZ Best, the House Subcommittee on Oversight and Investigations looked into:

A) Why the board of directors failed to uncover the fraud at ZZZZ Best
B) How the company was able to create 80% or more fictitious revenue
C) How the company was able to create cookie jar reserves
D) All of the above

Question 9

The global code of ethics for the accounting profession is called:

A) AICPA Code of Professional Conduct
B) IMA Ethical and Professional Standards
C) Handbook of the Code of Ethics for Professional Accountants
D) Public Interest Framework for the Accountancy Profession

Question 10

Jacob just joined the firm of Gordon & Towns LLC. Prior to beginning his first group audit assignment, Jacob asks to meet with his mentor, Isaac. He asks Isaac how making judgments in an audit team setting differs from running an audit oneself. What is the best advice for Isaac to give to Jacob?

A) They are not the same
B) Groups are not prone to judgment traps and biases
C) Groups are prone to making quick decisions in order to avoid conflict
D) Good judgment principles apply only in group settings since other are involved

Question 11

The International Federation of Accountants (IFAC) Policy Position Paper #4, entitled A Public Interest Framework for the Accountancy Profession was designed to accomplish which of the following?

A) To create an international CPA certificate.
B) To better evaluate whether the public interest is being served through actions of the profession.
C) Establish global corporate disclosure standards from an international perspective.
D) Develop guidelines for auditors to express professional judgment.

Question 12

The committee that was formed in 1985 to study and report on the factors that can lead to fraudulent financial reporting is the:

A) Treadway committee
B) Cohen committee
C) House Subcommittee on Oversight and Investigations
D) Mintz and Morris committee

Question 13

Personal values link to:

A) Ethical judgment and motivation
B) Ethical motivation and action
C) Ethical sensitivity and action
D) Ethical sensitivity and judgment

Question 14

Professional judgment is influenced by:

A) Organizational values
B) Personal code of ethics
C) Cognitive biases
D) Organizational dissonance

Question 15

The KPMG Professional Judgment Framework defines judgment as:

A) The process of reaching a decision or drawing a conclusion where there are a number of possible alternative solutions
B) The process of making a judgment where there are a number of possible virtues
C) The process of acting in accordance with the AICPA Code
D) The process of deciding when giving voice to one's values

Question 16

The tendency for decision-makers to put more weight on information that is consistent with their initial beliefs or preferences is called the:

A) Availability tendency
B) Confirmation tendency
C) Overconfidence tendency
D) Decision making tendency

Question 17

During the investigations by the House Subcommittee on Oversight and Investigations, a question that was raised was:

A) Why was fraud allowed to occur at some many companies?
B) Where was the board of directors in all these frauds?
C) Where were the auditors?
D) Why did the internal controls fail in so many frauds?

Question 18

The anchoring tendency relates to:

A) Starting from an initial numerical value and then adjusting insufficiently away from it in forming a final judgment
B) Starting from management's estimate and then adjusting sufficiently away from it in forming a final judgment
C) Developing a system to give voice to one's values
D) Developing a decision making framework

Question 19

Madison is in the process of gathering evidence to support the audit opinion on Jefferson & Adams, Inc. She's a new staff accountant and wants to make sure she exercises the appropriate level of professional skepticism. Madison asks for your advice as the senior on the audit. How best might you guide her as to the skepticism issues?

A) Accept management's representation unless they fail to provide adequate supporting documentation
B) Always review the evidence you gather to assess persuasiveness
C) Approach the audit assuming fraud does exist
D) Keep an open mind and rely on your team in making professional judgments

Question 20

Each of the following were themes of Congressional investigations of the accounting profession during the 1970s and 1980s except:

A) Whether low-balling to obtain audits impairs independence
B) Whether nonaudit services impair auditor independence
C) The need for a report on internal controls
D) The importance of developing techniques to prevent and detect fraud

Question 21

An example of a self-review threat is:

A) Establishing and maintaining the internal controls for the client
B) Preparing source documents used to generate the client's financial statements
C) Promoting the client's securities through investment banking activities
D) Borrowing money from the client

Question 22

Safeguards implemented by the attest client include each of the following except:

A) Proper oversight by client management
B) Management participation in the client by the attest firm
C) Policies and procedures to address ethical conduct
D) The tone at the top set by executive management

Question 23

The growth in consulting services raises questions about which professional obligation?

A) Objectivity
B) Confidentiality
C) Competence
D) Conflicts of interest

Question 24

An unacceptable threat to independence occurs when a CPA performs nonaudit services for an audit client unless the CPA:

A) Assumes all management responsibilities
B) Accepts management's responsibility for the services
C) Evaluates the adequacy of the services
D) Evaluates the results of the services

Question 25

Independence may be impaired when a partner leaves an audit firm and is subsequently employed by the client if:

A) That partner is in a position to influence the management's decisions with respect to the audit
B) That partner is in a position to influence the accounting firm's operations
C) That partner serves on the board of directors of the client
D) Amounts due the former partner are not material to the firm

Question 26

An example of a management participation threat is:

A) Establishing and maintaining the budget for audit completion
B) Establishing and maintaining internal controls for the client
C) Initiating litigation against the client
D) Preparing source documents used to generate the client's financial statements

Question 27

The SEC approach to independence emphasizes independence in fact and appearance in all of the following ways except:

A) Proscribing certain financial interests in an audit client.
B) Whether a conceptual framework approach is used for evaluating ethics violations
C) Restricting certain nonauditing services to audit clients.
D) Subjecting all auditor conduct to a standard of independence.

Question 28

Section 201 of SOX provides that all of the following services may not be performed for attest clients except:

A) Financial information systems design
B) Appraisal or valuation services
C) Internal audit outsourcing services
D) Legal services related to the audit.

Question 29

An alternative practice structure can best be described as:

A) A form of ownership where a CPA firm owns a public company and audits that company
B) A form of structure where a public company provides nonattest services for a client that is also provided with attest services by an affiliate of the public company
C) A form of structure where a CPA firm provides nonattest services for a client that is also provided with attest services by a public company
D) A form of structure other than LLP and LLC

Question 30

Which of the following is NOT a safeguard that can help to mitigate threats to independence?

A) Safeguards created by the Sarbanes-Oxley Act
B) Safeguards created by the corporate governance system of the attest client
C) Quality control safeguards created by the audit firm
D) Safeguards performed by the audit firm that are the responsibility of management.

Question 31

The PCAOB was formed and instituted a mandatory quality inspection program. What has been the average audit deficiency rate range since the program started?

A) 5 to 9%
B) 10% to 19%
C) 20 to 29%
D) 30 to 40%

Question 32

The principle of ethical behavior in the AICPA Code that asks questions directly related to ethical courage is:

A) Independence
B) Objectivity
C) Integrity
D) Due care

Question 33

The conceptual framework in the AICPA Code establishes a:

A) Threats and safeguards approach to assess whether ethics rules have been violated
B) Rules to assess independence violations apart from those affecting other services
C) New rule on when to follow the Dodd-Frank whistle-blower's act
D) Legal liability of auditors

Question 34

One of the contributions of the Treadway Commission Report and the work of the Committee of Sponsoring Organizations (COSO) was:

A) To establish a voluntary process for peer review
B) To identify red flags that might lead to fraud
C) To identify the tone at the top for management to create an ethical culture
D) To establish peer review requirements for CPAs

Question 35

One reason independence in appearance is used to evaluate threats to independence is:

A) Factual independence is based on unobservable matters
B) Independence in appearance links to other rules of conduct
C) Threats to independence can only be measured using a safeguards approach
D) Threats to independence always exist when perceptions indicate a conflict of interests may exist between the auditor and client

Question 36

In the PeopleSoft case, the auditors violated what aspect of independence?

A) The auditor borrowed money from the client
B) The auditor was exposed to an intimidation threat by the client
C) The auditor was involved in a business relationship with the client
D) The auditor served in a management decision making position with the client

Question 37

The SEC's position on independence can best be characterized as:

A) Permitting certain financial interests with the client
B) Prohibiting auditors from providing tax advice to audit clients
C) Proscribing certain business relationships with the client
D) Banning the provision of all nonaudit services to audit clients

Question 38

During the period of 1986-1995 the failures at savings and loan institutions were caused by:

A) Stealing $300 million from shareholders
B) questionable home mortgage loans and risky investments
C) Creating cookie jar reserves
D) Engaging in a Ponzi scheme

Question 39

Impairments of independence can occur when:

A) A CPA owns a direct financial interest in a client
B) A CPA owns a material indirect financial interest in a client
C) Immediate family members of the CPA are in violation of the independence rules
D) All of the above

Question 40

The most significant change in the Revised AICPA Code of Professional Conduct is:

A) A conceptual framework approach for evaluating ethics violations
B) The creation of three sections: one for members in public practice, members in business, and one for other members
C) Eliminating Code coverage for members in business
D) Clarifying that all CPAs must follow the Independence rule regardless of professional services

Question 41

Which rule of professional conduct in the AICPA Code does not apply both to internal and external accountants who are CPAs and members of the Institute?

A) Independence
B) Integrity
C) Objectivity
D) Due care

Question 42

The due care principle in the AICPA code:

A) Addresses the quality of the individual who performs professional services
B) Addresses the quality of services performed by the CPA
C) Addresses whether the independence standards have been met
D) Addresses whether integrity and objectivity have been compromised

Question 43

Under the Sarbanes-Oxley Act, the auditor's responsibility with respect to internal controls can best be stated as:

A) Develop a system of internal controls that help to prevent and detect fraud
B) Assess whether the internal controls help to prevent and detect fraud
C) Assess management's report on internal controls
D) Prepare a report on internal controls to be provided to management

Question 44

Which of the following is NOT an outright restriction on providing nonattest services for an attest client?

A) Tax services
B) Financial information systems design and implementation
C) Appraisal or valuation services
D) Internal audit outsourcing services

Question 45

To prevent subordination of judgment, a CPA should evaluate threats to:

A) Independence and Due Care
B) Objectivity and Integrity
C) Integrity and Due care
D) Independence and Scope of Services

Question 46

CPAs in business face threats to independence just as CPAs in public practice. Which of the following threats do not exist for CPAs in business?

A) Adverse interest threat
B) Advocacy threat
C) Self-interest threat
D) Management participation threat

Question 47

On July 1, 2015, the SEC charged Deloitte & Touche with violating auditor independence because:

A) It provided certain nonaudit services to an audit client
B) It provided audit services to a client when engaged in a business relationship with management
C) Its consulting affiliate kept a business relationship with a trustee serving on the board of three funds Deloitte audited
D) Its consulting affiliate owned stock of a firm Deloitte audited

Question 48

Which of the following is NOT an example of a conflict of interest?

A) Advising two clients at the same time who are competing to acquire the same company when the advice might be relevant to the parties' competitive positions
B) Advising a client to invest in a business in which, for example, the immediate family member of the CPA has a financial interest in the business
C) Providing tax or personal financial planning services for several members of a family whom the CPA knows to have opposing interests
D) Accepting commissions in a financial planning engagement for a nonaudit client

Question 49

Which of the following is NOT an example of a conflict situation for CPAs in business that may lead to subordination of judgment?

A) Making or permitting or directing another party to make, materially false and misleading entries in an entity's financial statements or records
B) Failing to correct the entity's financial statements or records that are materially false and misleading when the CPA has the authority to record the entries
C) Signing, or permitting or directing another to sign, a document containing materially false and misleading information.
D) Preparing the financial statements and auditing the same work

Question 50

An example of a self-review threat for CPAs in business is:

A) Serving as both the CFO of a company and member of its audit committee
B) Owning stock in the company the CPA works for
C) Internal auditor accepts work she previously performed in a different position
D) Serving as both the CFO of a company and member of the board of directors

Question 51

Michael has been approached by the CEO of an audit client and offered two tickets to the FIFA tournament at the Olympic Games. The CEO knows that Michael has always wanted to attend the Olympic Games and thought this was a nice way to thank him for twenty-years of excellent professional services. From an ethical perspective in deciding whether to accept the gift Michael should consider whether:

A) He has the time and money to travel to the games
B) Threats created by the gifts are at an acceptable level
C) The audit has been completed for the current year
D) Nonaudit services are also provided for the client

Question 52

Which of the following is NOT a safeguard to mitigate threats to compliance with the rules for CPAs in business or reduce them to an acceptable level?

A) Independent external audit
B) Tone at the top
C) Independent audit committee
D) Whistleblower hot line

Question 53

Ethical conflicts for CPAs in business can occur when:

A) Obstacles exist to complying with professional and legal standards
B) Relationships exist with vendors
C) Threats from higher levels of management create constraints to providing accurate and reliable financial statements
D) All of the above

Question 54

The insider trading case against Thomas Flanagan focused on:

A) Providing confidential information about audit clients to a friend
B) Personally trading in securities of audit clients after receiving confidential information
C) Providing confidential information about audit clients to his business partner
D) Accepting a position with an audit client after receiving positive confidential information

Question 55

On January 24, 2014, KPMG agreed to pay $8.2 million to settle charges by the SEC that the firm violated auditor independence rules because it:

A) Provided certain nonaudit services to affiliate companies whose books KPMG was auditing
B) Provided audit services to affiliate companies while owning stock in those companies
C) Had a management decision-making position in affiliate companies that KPMG audited
D) Had a business relationship with management of an affiliate company it was auditing

Question 56

A conflict of interest exists when:

A) A professional service or relationship creates a situation that might impair completion of the audit
B) A professional service or relationship creates a situation that might impair objective judgment
C) Professional skepticism fails to meet objective standards
D) All of the above

Question 57

The insider trading case against Scott London focused on:

A) Providing confidential information about audit clients to a friend
B) Personally buying stock of audit clients after receiving confidential information
C) Providing confidential information about audit clients to his son
D) Personally selling stock of audit clients after receiving confidential information

Question 58

A CPA can accept a gift from a client as long as:

A) Adequate safeguards exist to prevent any threats to compliance with the Integrity and Objectivity rule
B) Adequate internal controls exist in the client entity to ensure gifts are made without any pre-conditions
C) The amount is below what is considered to be a material payment
D) Audit services are not provided to the client

Question 59

What is "Operation Broken Gate?"

A) An SEC initiative to identify audit firms that violate independence standards
B) A PCAOB initiative to identify audit firms with deficiencies in audits through its inspection program
C) An SEC initiative to identify auditors who neglect their duties and the required auditing standards
D) An AICPA program to implement its conceptual framework standards

Question 60

The confidentiality standard in the AICPA code provides a blanket exception to the rule in each of the following situations except:

A) In response to a validly issued court summons
B) To provide information to the PCAOB in its inspection process
C) To defend oneself in an ethics investigation
D) In response to a successor auditor's request

Question 61

The requirement that there should be reasonable support for a tax return position before a CPA recommends it to a client most directly aligns with which tax standard?

A) The tax return should not be based on a frivolous position
B) There is a realistic possibility of success if the tax position is challenged
C) It is more likely than not that the tax position will be upheld if challenged
D) Contingent fees cannot be accepted when providing tax services for an audit client

Question 62

Statement on Standards for Tax Services No. 1 establishes as a basic principle of providing tax services that the CPA:

A) Must have a good faith belief that the tax return position will be accepted by the IRS
B) Must have a good faith belief that the tax return position has a realistic possibility of success if challenged by the IRS
C) Can never recommend a tax position to the client when it is more likely than not to be challenged by the IRS
D) Can never recommend a tax position to the client without disclosing it to the SEC

Question 63

A threat to replace a CPA or CPA firm because of a disagreement with the client over the application of an accounting principle is:

A) Management Participation Threat
B) Advocacy Threat
C) Self-Review Threat
D) Undue Influence Threat

Question 64

George has been asked by his audit client to provide income tax services including tax planning. Prior to providing such services, George should be certain that:

A) He first completes the audit
B) He assesses threats to independence
C) The CEO pre-approves the performance of such services
D) The board of directors is informed about such services

Question 65

Which of the following statements best reflect the ethical obligation of CPAs with respect to working with outside advertising agencies to market professional services for the CPA?

A) Make sure that advertising is done professionally
B) Prohibit advertising on social media
C) Make sure the agency does not do anything that would put you in violation of the ethics rules
D) Prohibit statements about the scope of professional services

Question 66

To whom does the CPA owe ultimate allegiance in carrying out professional obligations?

A) Stockholders
B) Public interest
C) Client
D) Stakeholders

Question 67

Objectivity may be impaired when a CPA prepares a tax return for a client because:

A) The CPA violates the independence rule
B) The CPA violates the integrity rule
C) The CPA serves in a tax advocacy position for the client
D) The CPA must prepare the tax return solely based on the information provided by the client

Question 68

CPAs can advertise and solicit clients as long as such practices are:

A) Conducted in a professional manner
B) Informative about the CPA's services
C) Not conducted in a misleading or deceptive manner
D) Paid for by outside parties

Question 69

Tax avoidance transactions are often called:

A) Earnings management
B) Tax shelters
C) Employee fraud
D) Attest services

Question 70

A CPA can accept a contingent fee in providing tax services for an attest client if:

A) The CPA discloses this fact to the tax client
B) The CPA receives the permission of the client to accept such a form of payment
C) The CPA's tax services will be reviewed by a taxing authority
D) All of the above

Question 71

Which of the following is NOT something the CPA should do in tax planning?

A) Uncritically accept the client's explanations for assumptions and representations
B) Establish the relevant background facts
C) Consider the reasonableness of the assumptions and representations
D) Consider the business purpose and economic substance of the transaction, if relevant to the tax consequences of the transaction

Question 72

The KBC Solutions case deals with:

A) Whether the controller should give in to the pressure and go along with false financial statements
B) Whether the senior in charge of an audit can provide adequate explanations for the accounting for transactions being questioned by the review partner
C) Whether the senior in charge of an audit pressures staff accountants to not increase the workload at year-end because of audit budget considerations
D) Whether an audit firm should go along with the client's demands for accelerating the recording of revenue

Question 73

Why don't auditors prepare financial statements, as well as audit them?

A) It would take away a job from the controller of the company
B) It would not eliminate errors in the financial statements
C) It would be a conflict of interest and violate ethical standards
D) It would not streamline the process and be effective

Question 74

Diane is a CFO at We Do What We Want, Inc. She was just instructed by her boss, the CEO, to accelerate the recording of revenue into an earlier year to meet financial analysts' earnings projections. In order to meet the ethical standards of the accounting profession, Diane must be certain that she:

A) Blows the whistle on the financial wrongdoing
B) Reports the matter to the SEC
C) Informs the external auditors
D) Works through the chain of command within the company to avoid subordinating judgment

Question 75

Ethics rules in the AICPA Code apply to:

A) Individual CPAs who are licensed by state boards of accountancy only
B) Individual CPAs who are licensed by state boards of accountancy and accounting firms
C) Licensed accounting firms and certain members of alternative practice structures
D) Individual CPAs who are licensed by state boards of accountancy, licensed accounting firms, and certain members of alternative practice structures

Question 76

The PCAOB rules prohibit auditors from:

A) Providing certain aggressive tax shelters to their public company audit clients
B) Providing tax services to members of the audit client's management who serve in financial reporting oversight roles
C) Providing tax preparation and planning services for public company executives
D) All of the above

Question 77

Which statement is correct with respect to a CPA's ethical obligation to return client books and records and CPA workpapers?

A) Client-provided records in the custody or control of the CPA should be returned to the client at the client's request
B) CPA workpapers should be given to the client at the end of each audit
C) CPA work product never has to be turned over to the client
D) Client-provided records should be destroyed after the audit

Question 78

The CPA firm that became involved in tax shelter controversies with the IRS and settled the case for $456 million to prevent the firm's criminal prosecution is:

A) Ernst & Young
B) Deloitte & Touche
C) PricewaterhouseCoopers
D) KPMG

Question 79

One of the differences between the ethical obligations of CPAs and lawyers is:

A) Lawyers are obligated first and foremost to the public interest while CPAs are obligated to their clients' interests
B) Lawyers are obligated first and foremost to the client's interest while CPAs are obligated to the public interest
C) Lawyers and CPAs both must be independent of their clients
D) Lawyers and CPAs must exercise objective judgment

Question 80

A common requirement/effect of the commissions and contingent fees rule is:

A) A CPA who accepts such a payment always violates independence
B) The CPA must disclose the acceptance of such a payment to the firm
C) A CPA is prohibited from accepting such a form of payment when engaged in attest services for a client
D) The CPA must not turn over any working papers that might constitute client books and records