Deck 4: Professional Ethics

Question 1

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 1

D

Question 2

A six-step approach is often used to resolve an ethical dilemma. The first step in this process is to

A) identify the alternative actions available.
B) identify the ethical issues from the facts.
C) determine who will be affected by the outcome of the dilemma.
D) obtain the relevant facts.

Answer 2

D

Question 3

Ethical frameworks help identify the ethical issues and will always lead to the appropriate course of action.

Answer 3

False

Question 4

Ethical values such as caring have been incorporated into the laws, as caring now been defined enough to be legally enforceable.

Question 5

The likelihood of discovery and the consequences of unethical conduct can easily result in unethical conduct.

Question 6

Most people define unethical behavior as conduct that differs from what they believe is appropriate given the circumstances.

Question 7

CPA firms have a similar relationship with the users of financial statements which they audit compared to the relationship other professionals have with their customers.

Question 8

________ means that a person acts according to conscience, regardless of the situation.

A) Caring
B) Fairness
C) Integrity
D) Respect

Question 9

Auditors and accountants do not face many ethical dilemmas during their respective business careers.

Question 10

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.

Question 11

One of the main reasons people act unethically is that they choose to act selfishly.

Question 12

A rationalization method that can easily result in unethical behavior is the argument that "everybody does it."

Question 13

Professionals are expected to conduct themselves at a higher level than most other members of society.

Question 14

PCAOB inspections, especially information related to future inspections which will be made by the PCAOB staff and personnel of public company audits, is publicly available information.

Question 15

Users of financial statements believe that CPA firms reduce the information risk associated with financial statements.

Question 16

Ethics are

A) needed in the professions, but is not needed for society in general.
B) a set of moral principles or values.
C) not formed by life experiences.
D) always incorporated in laws.

Question 17

Which of the following is a prescribed set of moral principles or values?

A) codes of business ethics for professional groups
B) laws and regulations
C) codes of conduct within an organization
D) all of the above

Question 18

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.

Question 19

Describe an ethical dilemma that an auditor or an accountant might face in his or her business career, then illustrate how the auditor or accountant might use the six-step approach presented in the text to resolve that dilemma. Be specific.

Question 20

If an action is considered legal, it must also be considered ethical.

Question 21

It becomes obvious that a member of a CPA firm has developed a close relationship with an attest client. This is an example of which type of threat to compliance with which of the rules under the AICPA's Code of Professional Conduct?

A) management participation
B) familiarity
C) self-review
D) undue influence

Question 22

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

Question 23

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

A)
B)
C)
D)

Question 24

An officer participates in litigation against the CPA firm. This is an example of which type of threat to compliance with which of the rules under the AICPA's Code of Professional Conduct?

A) adverse interest
B) self-interest
C) self-review
D) undue influence

Question 25

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.

Question 26

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

Question 27

It is a violation of the rules of conduct if someone does something on behalf of a member that is a violation if the member does it.

Question 28

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.

Question 29

Users of financial statements have the time and the ability to evaluate the audit performance of a CPA firm.

Question 30

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.

Question 31

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

Question 32

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

Question 33

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 which of the rules under the AICPA's Code of Professional Conduct?

A) management participation
B) self-interest
C) self-review
D) undue influence

Question 34

An attest client threatens the member with not awarding future additional engagements to the firm if the firm does not agree with the client on a particular accounting matter. This is an example of which type of threat to compliance with which of the rules under the AICPA's Code of Professional Conduct?

A) management participation
B) self-interest
C) self-review
D) undue influence

Question 35

An advantage of specific rules in the Code of Professional Conduct is the enforceability of minimum behavior and performance standards.

Question 36

Which part of the AICPA's Code of Professional Conduct is enforceable?

A) ethical rulings
B) rules of conduct
C) principles
D) interpretations

Question 37

A member actively endorses an attest client's products or services. This is an example of which type of threat to compliance with which of the rules under the AICPA's Code of Professional Conduct?

A) management participation
B) self-interest
C) advocacy
D) undue influence

Question 38

Explain why there is a special need for ethical conduct in the auditing profession.

Question 39

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.

Question 40

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.

Question 41

An advantage of the principles of professional conduct in the Code of Professional Conduct is that they are more easily enforced than are the specific rules of conduct.

Question 42

The AICPA Code of Conduct includes a conceptual framework approach for the member to evaluate threats to compliance with the Code. List the three steps necessary to evaluate the threats.

Question 43

Threats to compliance with the AICPA's Code of Professional Conduct fall into seven broad categories. List and explain three of these categories.

Question 44

In the AICPA's Code of Professional Conduct, the sixth principle of professional conduct, entitled "Scope and Nature of Services," applies to members of the AICPA who work in public practice, business, government, or education.

Question 45

Adverse interest is the threat that a member will not act with objectivity because their interests are opposed to the client's interests.

Question 46

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

Question 47

Each state also has rules of conduct that are required for licensing by the state.

Question 48

Safeguards can always reduce the threat to an acceptable level.

Question 49

Interpretations of rules of conduct in the Code of Professional Conduct are not officially enforceable and practitioners need not justify departure from them.

Question 50

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.

Question 51

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.

Question 52

What are the six Ethical Principles stated in the Code of Professional Conduct?
Briefly discuss each principle. Are these principles enforceable?

Question 53

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

Question 54

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?

A)
B)
C)
D)

Question 55

When CPAs are able to maintain their actual independence, it is referred to as independence in

A) conduct.
B) appearance.
C) fact.
D) total.

Question 56

"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.

Question 57

The Conceptual Framework for AICPA Independence Standards can be used when making decisions on ethical matters not explicitly addressed in the Code.

Question 58

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.

Question 59

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

Question 60

In the AICPA's Code of Professional Conduct, the second principle of professional conduct, entitled "The Public Interest," applies only to members of the AICPA in public practice and not to members who work as accountants in business, government, or education.

Question 61

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.

Question 62

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.

Question 63

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.

Question 64

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.

Question 65

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.

Question 66

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.

Question 67

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.

Question 68

The Code of Conduct rule on independence indicates that materiality must be considered when

A)
B)
C)
D)

Question 69

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.

Question 70

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.

Question 71

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.

Question 72

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.

Question 73

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

Question 74

Interpretations of the AICPA's Code of Professional Conduct are dominated by the concept of

A) independence.
B) compliance with standards.
C) accounting.
D) acts discreditable to the profession.

Question 75

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.

Question 76

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

Question 77

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 for a material amount 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

Question 78

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.

Question 79

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

Question 80

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.