Deck 10: Independence and Moral Seduction

Question 1

The advocacy threat to independence exists when:

A) A member of an auditing firm publicly speaks out on behalf of his client
B) A member of an auditing firm makes a clear recommendation to the client
C) A member of an auditing firm makes a recommendation to a client that is skewed in favor of a particular position or outcome
D) A member of an auditing firm confronts an audit client and expresses an opinion that results in a significant disagreement with the client

Answer 1

A

Question 2

According to the AICPA's Code of Professional Conduct,if a CPA renders more than ten hours of nonaudit services to an audit client,the CPA :

A) Automatically is a covered member on the audit
B) Automatically prevents the CPA firm from satisfying the independence requirement under all circumstances
C) Automatically prevents the CPA firm from satisfying the independence requirement if the CPA is a partner in the CPA firm performing the audit
D) Automatically prevents the CPA firm from satisfying the independence requirement if the CPA has a friend who works in the compilation, processing, or presentation of the audit client's financial statements

Answer 2

A

Question 3

Can a tax partner in a CPA firm with multiple offices be a "covered member" on an audit?

A) Yes, but only if the partner renders more than 10 hours of tax services to an audit client
B) Yes, if the tax partner works out of the same office as the audit partner in charge, even if she does not render any services to the audit client
C) Yes, all partners in a CPA firm automatically are "covered members," even if they do not work out of the same office as the audit partner or render any services to the audit client
D) No, tax partners are not subject to the independence rules

Answer 3

B

Question 4

A CPA has multiple office locations.In evaluating whether a CPA firm satisfies the independence rules with regard to an audit client,the concept of a "covered member" includes:

A) An administrative assistant who assists the principal partner in charge of the audit
B) A second audit partner who provides a concurring opinion on an audit and is located in a different office from the partner in charge of the audit
C) An audit partner who works in a different office from the partner in charge of the audit and does not influence a particular audit
D) An information systems partner who spent four hours on a consulting project for an audit client

Question 5

If a CPA prepares a few sales invoices on behalf of an audit client without charge because the client does not want to have to pay overtime to the workers who normally perform this task,the CPA's independence is:

A) Impaired due to the management participation threat
B) Impaired due to the self-review threat
C) Impaired due to the self-interest threat
D) Not impaired because the threat, if any, is immaterial

Question 6

A paid tax return preparer is allowed to have:

A) An indirect financial interest in a client, but not a direct financial interest
B) A direct financial interest in a client, but not an indirect financial interest
C) Both direct and indirect financial interests in a client, as long as the interests are not material
D) Both direct and indirect financial interests in a client, even if these interests are material

Question 7

The adverse interest threat exists when:

A) A client sues its auditor for incompetence
B) A CPA testifies in court, in response to a valid court subpoena, that it observed illegal activity taking place at the client's place of business
C) A CPA voluntarily testifies in court that its client incorrectly recorded cash proceeds as nontaxable loan proceeds rather than as a taxable sale
D) A CPA, in response to a formal SEC inquiry, states that it has serious concerns about the trustworthiness and candor of an audit client's CFO

Question 8

In applying independence rules,the concept of a "covered member" on an audit applies to:

A) Only the principal audit partner on an audit
B) Only the principal audit partner and the concurring partner, if any, on an audit
C) Only the principal audit partner, the concurring audit partner, and senior staff exercising managerial responsibilities on an audit
D) All accounting professionals who provide audit services to an audit client

Question 9

The undue influence threat exists when:

A) A client threatens to terminate a CPA firm during the course of performing an audit of the client's books
B) An auditor provides a 10% fee reduction to a client who complained about the auditor's staff being inadequately trained
C) An auditor pays the entire restaurant bill for a client business lunch at which interpersonal conflicts between one audit staff member and a client employee were addressed
D) An auditor sends an exceedingly generous gift to the CEO of a client to celebrate her fifth-year anniversary as the CEO

Question 10

The undue influence threat is most likely to be present when:

A) A client and a CPA disagree over whether a change in accounting principle has a material effect on the client's reported results
B) A client and a CPA disagree over whether the valuation model selected by the client for expensing compensation costs associated with employee grants of stock options adequately reflects the economic costs associated with this expense
C) A CPA firm generates 19% of its total revenues from services provided to a corporation and its seven subsidiaries
D) A CPA gives its client a "one-time only" 20% discount on fees so the CPA firm can acquire a new audit client

Question 11

A CPA firm has multiple locations throughout the Midwest of the United States.This firm has an audit client that is headquartered in Milwaukee,Wisconsin and the partner in charge of this audit is also located in the Milwaukee office of the firm.The audit client is a beverage manufacturer and the partner in charge of this audit is the Chairman of the firm's Food and Beverage Industry Audit Committee.To preserve the CPA firm's independence,which of the following individuals definitely must not own any direct interests in this beverage manufacturer?

A) The aunt of the partner in charge
B) A partner in the Oklahoma City office of this CPA firm who does not participate in rendering services to this client
C) A partner in the Chicago office who also serves on the firm's Food and Beverage Industry Audit Committee
D) A junior staff member in the Milwaukee office who spent 6 hours preparing a tax research memorandum relating to beverage sales taxes imposed on this manufacturer 's products

Question 12

For many years,a partner in a CPA firm worked on the audit of Grossnomics,Inc.This partner now has retired from the CPA firm and serves as a consultant to Grossnomic's Audit Committee.This partner's former CPA firm:

A) No longer maintains the independence to audit Grossnomics, unless the CPA firm demonstrates to the AICPA that it remains independent in fact and in attitude
B) No longer maintains the independence to audit Grossnomics under any circumstance
C) Maintains the independence to audit Grossnomics as long as this former partner no longer has any actual or apparent financial ties to his former CPA firm
D) Maintains the independence to audit Grossnomics as long as the former partner does not participate in the preparation of Grossnomics' financial statements

Question 13

Status as a "covered member" is important in determining independence because CPAs who are classified as a "covered member" lack the independence to conduct an audit if:

A) They have an indirect ownership interest in even a single share of stock outstanding in an audit client
B) They refuse to subordinate their best judgment to the wishes of their client
C) Their college-age, dependent child works in the client's warehouse during the summer as a shipping clerk
D) Their sister is an attorney who works as the company's General Counsel

Question 14

A CPA's mother-in-law owns stock in one of the CPA's audit clients.The CPA just learned this fact.In all likelihood,the CPA's independence is:

A) Not impaired
B) Impaired if the mother-in-law's stock holdings are material to her net worth
C) Impaired if the mother-in-law owns sufficient stock to be able to significantly influence the governance of the audit client
D) Automatically impaired, unless the mother-in-law immediately disposes of her share holdings

Question 15

A CPA firm has an office in New York and an office in San Francisco.The CPA firm's New York office has been retained to audit the financial statements of a new bank client based in New York.The bank is a very large provider of consumer loans.As a result,numerous professionals who work at the CPA firm have outstanding loan and credit card balances owed to this bank.Which of the following loans potentially will impair the CPA firm's independence to audit this bank?

A) A New York tax partner, who will not work on the audit, has a large mortgage loan owing to the bank
B) A New York tax partner who will work on the audit has a standard automobile loan owing to the bank
C) A San Francisco audit partner who only audits governmental entities has a large credit card balance owing to the bank
D) A New York audit partner who will serve as the concurring partner on this bank audit engagement uses a credit card issued by this bank but routinely pays off the full outstanding balance monthly

Question 16

A CPA firm billed for audit services performed for a client more than one year ago.The client has paid a portion of the fees outstanding,but it has not been able to pay the remaining balance due to cash flow problems.The CPA firm has verified that the cash flow problems are authentic and expects the client to be able to pay the remainder of the bill,but the CPA firm cannot reasonably estimate the timing of such payments.As a result,the CPA firm:

A) Remains independent if the amounts that remain owing are immaterial to the CPA firm
B) Remains independent if the client has paid over 50% of the total invoice outstanding
C) Can preserve its independence if the client willingly signs a Note Payable for these services and the note bears a reasonable market rate of interest
D) Lacks the independence to perform further attestation services

Question 17

An auditor is allowed to have:

A) An indirect financial interest in a client as long as the interest constitutes an immaterial stake in the client
B) An indirect financial interest in a client as long as the interest is immaterial to the auditor's net worth
C) Any financial stake in a client as long as the interest is immaterial
D) A direct interest in a client as long as safeguards on independence are satisfactory to the client

Question 18

A CPA recently was presented with the opportunity to bid to become the auditor for a corporation.This CPA's husband owns stock in that company.Does this CPA satisfy the independence requirement to audit this company?

A) No, if the stock is held in a joint brokerage account
B) No, even if the stock is held in an individual brokerage account and was purchased solely with funds earned by her husband
C) Yes, if her husband owns a small number of shares and the corporation is publicly-traded
D) Yes, as long as she maintains objectivity and professional skepticism in performing the audit

Question 19

In accordance with the Independence Rule,an ownership interest in an audit client is considered to be an indirect interest if:

A) An auditor benefits from it, but cannot meaningfully influence or control it
B) A partnership of which the auditor is a member owns the interest
C) The benefits from the interest have accrued in the form of price appreciation but realization of this appreciation has not occurred
D) An immediate family member owns the interest and shares the financial benefits of the interest with the auditor

Question 20

A CPA firm has multiple locations in Europe,Asia,and North America.The principal partner overseeing the audit is located in Dallas,Texas.Are all partners who commute to offices in Dallas,Texas considered to be covered members?

A) Yes, if they are audit partners
B) Yes, even if they are not audit partners
C) No, as long as they are not in a position to influence the audit
D) No, as long as they are not in a position to supervise, manage, or evaluate the performance of any of the audit partners or audit team members who participated in the audit engagement

Question 21

A CPA firm is comprised of 100 audit partners.Three of these partners own stock in one of the CPA firm's audit clients,with each such partner owning 2% of the outstanding shares in this client.Does this CPA firm retain the independence to audit this client?

A) Yes, as long as none participate in the audit as the primary or concurring partner
B) Yes, as long as none render non-audit services to this client
C) Yes, as long as none is a "covered member' with respect to this client
D) No

Question 22

A CPA does not own any stock in an audit client.However,the CPA's great-uncle,who lives in Finland,does own stock in this client.
a. Does the uncle's stock holding impair the CPA's independence?
b. The CPA knows that he is the sole beneficiary of this uncle's will and the uncle is 97-years-old. Is the CPA's independence impaired?
c. The CPA just learned that his uncle died. Is the CPA's independence impaired?

Question 23

A junior CPA at Horwatharama,CPAs currently is working as an audit team member on the audit of General Molecular.This CPA is about to search for a different position of employment.
a. If this individual is thinking about applying for employment at General Molecular, what are his professional duties and when do they commence?
b. You are a friend of this junior CPA and you know that he is about to apply for employment at General Molecular. You also know that he does not intend to inform Horwatharama, CPAs until "the last minute, if at all." What duties do you have under the AICPA's Code of Professional Conduct? What actions, if any, would you take?
c. Once a CPA firm learns that an audit team member is pursuing employment with an audit client, what duties, if any, does it have?
d. If a junior CPA decides to pursue work at an audit client during the course of an audit, what kinds of costs will his decision impose on his CPA firm? Should he reimburse the firm for those costs?

Question 24

In the business world,sellers often sell goods on credit.In the auditing world,due to the independence requirement,CPAs:

A) Are required to collect payment in full for an audit no later than the submission date of the CPA's audit report
B) May not give their clients more than 60 days in which to pay the full outstanding invoice owing for audit services
C) Remain independent as long as audit fees do not remain unpaid for more than one year
D) Never may require clients to pay interest on unpaid fee balances

Question 25

Cyndi's husband Larry works as a cashier at Starstrucks,a chain of coffee shops.Cyndi,a CPA,may:

A) Not serve as the main partner in charge of the audit of Starstrucks
B) Not serve as a senior staff member on the audit of Starstrucks
C) Not serve in any capacity as a member of the audit team engaged to audit Starstrucks
D) Definitely may serve in any capacity as a member of the audit team engaged to audit Starstrucks

Question 26

What are some of the safeguards that CPAs firm utilize to minimize threats to their auditor independence?

Question 27

An auditor may not perform an audit unless threats to independence are:

A) Agreed to by the audit client
B) Reduced to an acceptable level
C) Nonexistent
D) Eliminated entirely by the client prior to commencement of the audit

Question 28

The term "safeguard," as it used in determining auditor independence,refers to:

A) Actions or other preventative measures that reduce threats to auditor independence to an acceptable level
B) Actions or other preventative measures that eliminate all known threats to auditor independence
C) Actions or other preventative measures that eliminate all threats, known and unknown, to auditor independence
D) Actions taken by a client to protect confidential information from subsequent disclosure by an audit team

Question 29

A CPA was raised by his grandmother.Can his grandmother's stock ownership in one of the CPA's audit clients impair his independence?

Question 30

To preserve their independence regarding audit clients,CPAs should not:

A) Prepare suggested year-end adjusting entries
B) Prepare suggested year-end closing entries
C) Negotiate office leases on behalf of these clients
D) Prepare financial projections that are based on management's assumptions

Question 31

The IFAC Code of Conduct classifies a certain challenge to independence as the intimidation threat.What name does the AICPA's Independence Rule use to refer to this threat?

Question 32

A CPA firm audits Zaxstation,Inc.To avoid impairing the CPA firm's independence,members of this CPA firm may never:

A) Authorize capital expenditures for the company, even if the projects are worthwhile
B) Authorize junior staff members who have not yet passed the CPA exam to perform required audit procedures
C) Evaluate whether the company's internal controls have weaknesses or deficiencies
D) Suggest changes to the company's selection of accounting policies

Question 33

What are the seven threats to independence identified in the AICPA's Code of Professional Conduct? Give examples of each.

Question 34

A "covered member" of a CPA firm owns 4% of the bonds outstanding in an audit client.In accordance with the Independence Rule,does this CPA firm have the independence to audit this client?

A) Yes, as long as the CPA's immediately family does not have any additional financial interests in this client
B) Yes, as long as the bonds are not convertible into common stock
C) No, unless the CPA agrees to not directly participate in the audit
D) No, because of the self-interest threat

Question 35

A hearing of the State Commission on Workplace Administration was convened to determine if the CFO of a corporation had engaged in "quid pro quo" sexual harassment.A part of that hearing,an external auditor who observed various incidents while auditing this corporation testified voluntary about his observations.This testimony created:

A) A self-review threat to independence
B) A management participation threat to independence
C) An adverse interest threat to independence
D) No threat to independence

Question 36

Under ordinary circumstances,both the CFO and CEO of a particular company authorize and sign check disbursements exceeding $10,000.However,when the CEO of this audit client is unavailable for an extended period due to her travel schedule,the client's CPA co-signs checks that exceed $10,000 only after these checks first have been authorized and signed by the client's CFO.The CPA:

A) Has created a management participation threat that impairs his independence
B) Has created an undue influence threat that impairs his independence
C) Has created an advocacy threat that impairs independence, unless appropriate safeguards are put into place
D) Should be commended for assisting the client and has not affected his independence