Deck 3: Professional Ethics

Question 1

Which of the following family relationships is most likely to impair a CPA's independence with respect to a particular audit client on which the CPA works as a "covered member"?

A) A close relative has a material investment in that client of which the CPA is not aware.
B) A cousin has an immaterial investment in the client of which the CPA is aware.
C) The CPA's father is president of the audit client.
D) The CPA's spouse participates in a savings plan sponsored by the client.

Answer 1

C

Question 2

AICPA independence requirements suggest that a CPA should evaluate whether a particular threat to independence would lead a reasonable person, aware of all the relevant facts, to conclude that:

A) A questioning mind reveals doubt as to independence.
B) An unacceptable risk of non-independence exists.
C) The accountant is definitely not independent.
D) There is substantial cause for a legal finding of non-independence.

Answer 2

B

Question 3

A small CPA firm provides audit services to a large local company. Almost eighty percent of the CPA firm's revenues come from this client. Which statement is most likely to be true?

A) Appearance of independence may be lacking.
B) The small CPA firm does not have the proficiency to perform a larger audit.
C) The situation is satisfactory if the auditor exercises due skeptical negative assurance care in the audit.
D) The auditor should provide an "emphasis of a matter paragraph" to his/her audit report adequately disclosing this information and then it may issue an unqualified opinion.

Answer 3

A

Question 4

The AICPA Code of Professional Conduct derives its authority from the Bylaws of the AICPA.

Question 5

The Rules portion of the AICPA Code of Professional Conduct must be followed by only those members in private practice.

Question 6

The communications between CPAs and their clients are privileged under federal law.

Question 7

ABC Company is audited by the Phoenix office of Willingham CPAs. Which of the following individuals would be least likely to be considered a "covered member" by the independence standard?

A) Staff assistant on the audit.
B) An audit partner in the Eloi office.
C) A tax partner in Phoenix who performs no attest services for ABC Company or for any other clients.
D) The partner in charge of Willingham CPAs (she does no work on the ABC Company Audit).

Question 8

Financial interests of a CPA's nondependent children are attributed directly to the CPA.

Question 9

An immaterial loan from the CPA to an officer of a client impairs the independence of the CPA.

Question 10

The American Institute of Certified Public Accountants has been the primary source for ethical rules for internal auditors.

Question 11

A CPA may receive a commission for recommending a particular computer system to an audit client.

Question 12

Which of the following is least likely to impair a CPA firm's independence with respect to a nonpublic 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 7% of the client's stock.
C) A partner in the Oklahoma City office, who does not work on the audit, previously served as controller for the audit client.
D) A partner in the Chicago office is also the vice president of finance for the audit client.

Question 13

Statements on Accounting and Review Services are enforceable under the AICPA Code of Professional Conduct.

Question 14

CPAs may not advertise as to any special expertise other than in accounting, auditing, and tax.

Question 15

Which of the following is not a broad category of threat to auditor independence?

A) Familiarity.
B) Safeguards implemented by the client.
C) Financial self interest.
D) Undue Influence.

Question 16

Auditors are periodically punished for holding an investment in a client. This violates which ethical rule?

A) Integrity.
B) Independence.
C) Non compliance with GAAP.
D) Confidentiality.

Question 17

Which of the following statements is true with respect to the PCAOB and SEC's concept of independence when an auditor both prepares financial statements and audits those financial statements for a client?

A) The auditor is not independent.
B) The auditor is independent if he or she is able to maintain a level of professional detachment.
C) The auditor can audit the financial statements only if the audit process does not culminate in the expression of an opinion on the financial statements.
D) The auditor cannot audit the financial statements since a lack of integrity exists.

Question 18

The AICPA Conceptual Framework for Independence requires that CPAs evaluate whether a particular threat would lead which type of person to conclude that an unacceptable risk of non-independence exists?

A) AICPA ethics examiner.
B) Peer.
C) PCAOB inspector.
D) Reasonably informed third party.

Question 19

CPAs can advertise the fees only for their nonattest services.

Question 20

Contingency fee based pricing of accounting services is:

A) Always strictly prohibited in public accounting practice.
B) Never restricted in public accounting practice.
C) Prohibited for clients for whom attestation services are provided.
D) Considered an act discreditable to the profession.

Question 21

Under the AICPA Code of Professional Conduct, which of the following rules is not applicable to CPAs in business?

A) Integrity and objectivity.
B) General standards.
C) Independence.
D) Acts discreditable.

Question 22

Which of the following types of employees must be independent of an audit client?

A) Staff assistants assigned to the engagement.
B) Senior auditors assigned to the office that performs the audit.
C) Managers assigned to an office that does not participate in the engagement.
D) All firm professionals, regardless of their position.

Question 23

If a CPA violates the AICPA Code of Professional Conduct, the AICPA Trial Board may do all of the following, except:

A) Admonish the offending member.
B) Suspend the offending member.
C) Expel the offending member.
D) Revoke the offending member's CPA certificate.

Question 24

Which of the following attributes is more closely associated with attestation services performed by a CPA firm than with other lines of professional work?

A) Integrity.
B) Competence.
C) Independence.
D) Keeping informed on current professional developments.

Question 25

In which of the following circumstances would a covered member be considered independent when performing the audit of the financial statements of a new client for the year ended December 31, 20X3?

A) The covered member resigned on January 17, 20X3 from the board of directors of the client, prior to accepting the new audit engagement.
B) The covered member continues to hold an immaterial indirect financial interest in the client.
C) The covered member continues to serve as a trustee for the client's pension plan and has the authority to make investment decisions.
D) The covered member's spouse owns an immaterial amount of shares of common stock in the client.

Question 26

Which of the following forms of organization is most likely to protect the personal assets of any partner or shareholder who has not been involved on an engagement resulting in litigation?

A) Professional corporation.
B) Limited liability partnership.
C) Partnership.
D) Subchapter M Incorporation.

Question 27

Which of the following acts by a CPA would most likely be considered a violation of the AICPA Code of Professional Conduct?

A) Assisting a client in preparing a financial forecast.
B) Forming a professional corporation to practice as a CPA.
C) Accepting a fee in a tax matter relating to an administrative proceeding.
D) A "covered member" owns an immaterial amount of stock in an audit client.

Question 28

In determining the scope and nature of services to be performed in public practice, a CPA firm should:

A) Require independence for all services performed.
B) Determine that the performance of all services is consistent with the firm's members' role as professionals.
C) Have in place internal control procedures.
D) Only perform accounting related services.

Question 29

When a threat to independence arises, an auditor should consider:

A) Alternative threats to a lack of independence.
B) Available safeguards to independence.
C) Global independence rules.
D) Required lack of independence approaches.

Question 30

Independence of a CPA with respect to a client is not impaired if:

A) The CPA has a loan to an officer of the client.
B) The CPA has an immaterial direct interest in the client.
C) The CPA is trustee for the client's pension plan.
D) The CPA has an immaterial joint, closely held business investment with the client.

Question 31

If the AICPA Code of Professional Conduct does not specifically address a threat to auditor independence, the auditor should:

A) Conclude that the threat is not significant unless proven so.
B) Conclude that the threat results in a lack of independence unless it can be shown that no impairment of independence occurs.
C) Consider the threat from the perspective of a reasonable and informed third party who has knowledge of all the relevant information.
D) Consult the Statements on Auditing Standards for guidance.

Question 32

Which of the following is not a broad category of safeguards that mitigate or eliminate threats to independence?

A) Safeguards created by the profession, legislation, or regulation.
B) Safeguards created to assure proper training within both the client and attest environment.
C) Safeguards implemented by the attest client.
D) Safeguards implemented by the firm, including policies and procedures to implement professional and regulatory requirements.

Question 33

Which of the following statements is correct?

A) Client prepared records (e.g., the general ledger) may be retained by the CPA until fees due to the CPA are received.
B) CPA working papers are the joint property of the CPA and the client.
C) Supporting records not reflected in the client's records (e.g., proposed adjusting entries) may be withheld by the CPA if fees for the engagement remain unpaid.
D) CPA working papers that include copies of client's records are not available to third parties under any circumstances.

Question 34

Which of the following acts by a CPA would not necessarily be considered an act discreditable to the profession under the AICPA Code of Professional Conduct?

A) Prohibiting a client's new CPA firm from reviewing the audit working papers after the client has requested the CPA to do so.
B) Engaging in discriminatory employment practices.
C) Robbing a convenience store.
D) Knowingly signing a false tax return.

Question 35

Jones & Company CPAs has one office. Which of the following is least likely to impair independence with respect to an audit client?

A) The client owes the firm for two prior years' audit fees.
B) A partner in the CPA firm is the son of the president of the client.
C) The wife of a partner in the firm has a small direct financial interest in the client.
D) A partner in the firm has an investment in a mutual fund that has a direct interest in the client.

Question 36

Bill Pan, CPA, has posted the general ledger and has maintained the financial records of Zorko Corporation. As a part of his responsibilities he has recorded journal entries and made closing entries. Which of the following best summarize the AICPA and SEC views as to the following question: Is audit independence impaired? $$\begin{array} { | l | c | c | } \hline \text { Item } & \text { AICPA } & \text { SEC } \\\hline \text { A. } & \text { Yes } & \text { Yes } \\\hline \text { B. } & \text { Yes } & \text { No } \\\hline \text { C. } & \text { No } & \text { Yes } \\\hline \text { D. } & \text { No } & \text { No } \\\hline\end{array}$$

A) Option A
B) Option B
C) Option C
D) Option D

Question 37

The AICPA allows an auditor to perform which of the following services for an audit client?

A) Performance of bookkeeping services for the client.
B) Authorization of transactions for the client.
C) Preparation of client source documents.
D) Preparation and posting of journal entries without the client's approval.

Question 38

A CPA should maintain objectivity and be free of conflicts of interest when performing:

A) Audits, but not any other professional services.
B) All attestation services, but not other professional services.
C) All attestation and tax services, but not other professional services.
D) All professional services.

Question 39

Independence is required of a CPA performing:

A) Audits, but not any other professional services.
B) Attestation services, but not other professional services.
C) Attestation and tax services, but not other professional services.
D) All professional services.

Question 40

Which of the following forms of advertising would most likely be considered a violation of the AICPA Code of Professional Conduct?

A) Advertising including the types of services offered and the standard fees for the services.
B) Advertising including the experience of the firm's professional staff.
C) Advertising including an indication that the firm has a close relationship with several tax court judges.
D) Advertising including the percentage of the firm's staff that have CPA certificates.

Question 41

As compared to the AICPA Code of Professional Conduct, IFAC's International Code of Ethics for Professional Accountants:

A) Applies to more types of services.
B) Has more specific restrictions.
C) Has less specific restrictions.
D) Is less conceptual.

Question 42

The AICPA Code of Professional Conduct would be violated if a CPA accepted a fee for services and the fee was:

A) Fixed by a public authority.
B) Based on a price quotation submitted in competitive bidding.
C) Based on performing work relating to judicial proceedings.
D) Payable if the audit of the financial statements led to a loan.

Question 43

A CPA's retention of client records as a means of enforcing payment of an overdue audit fee is an action that is:

A) Considered acceptable by the AICPA Code of Professional Conduct.
B) Ill advised since it would impair the CPA's independence with respect to the client.
C) Considered discreditable to the profession.
D) A violation of generally accepted auditing standards.

Question 44

Which of the following is not a safeguard that is ordinarily considered in evaluating threats to auditor independence?

A) Safeguards created by the Audit Committee Reference Group.
B) Safeguards created by the profession, legislation, or regulation.
C) Safeguards implemented by the attest client.
D) Safeguards implemented by the CPA firm.

Question 45

Which of the following is considered a type of threat to compliance with the Rules of the Code of Professional Conduct?

A) Undue influence.
B) Illegitimate skepticism.
C) Lack of management participation.
D) Irrevocability.

Question 46

A primary purpose for establishing a code of conduct within a professional organization is to:

A) Reduce the likelihood that members of the profession will be sued for substandard work.
B) Ensure that all members of the profession perform at approximately the same level of competence.
C) Demonstrate acceptance of responsibility to the interests of those served by the profession.
D) Require members of the profession to exhibit loyalty in all matters pertaining to the affairs of their organization.

Question 47

The following is a list of circumstances that might be faced by a public accounting firm. Select the rule violated of the AICPA Code of Professional Conduct in the second column. If no rule is violated select 10-no violation (this may be used once, more than once, or not at all). Rules 1 through 9 may be used either once, or not at all.

Question 48

Which of the following organizations issue international ethics standards for auditors?

A) The AICPA.
B) The IFAC.
C) The SEC.
D) The FASB.

Question 49

When an accountant is not independent, the accountant is precluded from issuing a:

A) Compilation report.
B) Review report.
C) Management advisory report.
D) Tax planning report.

Question 50

An audit independence issue might be raised by the auditor's participation in consulting services engagements. Which of the following statements is most consistent with the profession's attitude toward this issue?

A) Information obtained as a result of a consulting services engagement is confidential to that specific engagement and should not influence performance of the attest function.
B) The decision as to loss of independence must be made by the client based on the facts of the particular case.
C) The auditor should not make management decisions for an audit client.
D) The auditor who is asked to review management decisions, is also competent to make these decisions and can do so without loss of independence.

Question 51

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 would be considered a direct financial interest and, consequently, materiality is not a factor.
B) Yes, because the stock would be considered an indirect financial interest that is material to the CPA's child.
C) No, because the CPA would not be considered to have a direct financial interest in the client.
D) No, because the CPA would not be considered to have a material indirect financial interest in the client.

Question 52

Competence as a certified public accountant includes all of the following except:

A) Having the technical qualifications to perform an engagement.
B) Possessing the ability to supervise and to evaluate the quality of staff work.
C) Warranting the infallibility of the work performed.
D) Consulting others if additional technical information is needed.

Question 53

An accounting association established a code of ethics for all members. The most likely primary purpose for establishing the code of ethics was to:

A) Outline criteria for professional behavior to maintain standards of competence, morality, honesty, and dignity within the association.
B) Establish standards to follow for effective accounting practice.
C) Provide a framework within which accounting policies could be effectively developed and executed.
D) Outline criteria that can be utilized in conducting interviews of potential new accountants.

Question 54

The AICPA Code of Professional Conduct states that a CPA shall not disclose any confidential information obtained in the course of a professional engagement except with the consent of the client. This rule should be understood to preclude a CPA from responding to an inquiry made by:

A) The trial board of the AICPA.
B) An investigative body of a state CPA society.
C) A CPA-shareholder of the client corporation.
D) An AICPA voluntary quality review body.

Question 55

CPAs are allowed to advertise under the Rules of the AICPA Code of Professional Conduct.
a. List the general guidelines regarding the nature of acceptable advertising.
b. Describe two specific forms of unacceptable advertising.

Question 56

The concept of materiality would be least important to an auditor when considering the:

A) Decision whether to use positive or negative confirmations of accounts receivable.
B) Adequacy of disclosure of a client's illegal act.
C) Discovery of weaknesses in a client's internal control.
D) Effects of a direct financial interest in the client upon the CPA's independence.

Question 57

A client company has not paid its 20X3 audit fees. According to the AICPA Code of Professional Conduct, in order for the auditor to be considered independent with respect to the 20X4 audit, the 20X3 audit fees must be paid before the:

A) 20X3 report is issued.
B) 20X4 fieldwork is started.
C) 20X4 report is issued.
D) 20X5 fieldwork is started.

Question 58

While performing an audit of a public company, the auditors discovered material illegal acts and resigned due to the client's refusal to disclose them. The auditors' reason for resignation should be disclosed through: $$\begin{array} { | l | c | c | } \hline \text { Item } & \begin{array} { c } \text { CPA Direct Communication } \\\text { With Shareholders }\end{array} & \begin{array} { c } \text { The Process of Filing } \\\text { a Fom 8-K }\end{array} \\\hline \text { A. } & \text { Yes } & \text { Yes } \\\hline \text { B. } & \text { Yes } & \text { No } \\\hline \text { C. } & \text { No } & \text { Yes } \\\hline \text { D. } & \text { No } & \text { No } \\\hline\end{array}$$

A) Option A
B) Option B
C) Option C
D) Option D

Question 59

The AICPA Code of Professional Conduct will ordinarily be considered to have been violated when the CPA represents that specific consulting services will be performed for a stated fee and it is apparent at the time of the representation that the:

A) Actual fee would be substantially higher.
B) Actual fee would be substantially lower than the fees charged by other CPAs for comparable services.
C) Fee was a competitive bid.
D) CPA would not be independent.

Question 60

Pickens and Perkins, CPAs, decide to incorporate their practice of accountancy. According to the AICPA Code of Professional Conduct, shares in the corporation can be issued:

A) Only to persons qualified to practice public accounting.
B) Only to employees and officers of the firm.
C) Only to persons qualified to practice as CPAs and members of their immediate families.
D) To the general public.

Question 61

The AICPA's Code of Professional Conduct includes principles, rules and interpretations.
a. Describe the purpose of each of the three parts.
b. Describe the disciplinary action that may be taken against a member who violates the Code.
c. Must the Rules be followed by members of the AICPA that are not in public practice? Explain your answer.

Question 62

The Sarbanes-Oxley Act of 2002 placed significant restrictions on the types of consulting that may be performed by auditors for their public company audit clients.
a. List four types of services that are prohibited by the Act.
b. List three types of general consulting activities that would impair the auditors' independence based on the AICPA Code of Professional Conduct.