Deck 4: Professional Ethics

Question 1

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

Answer 1

True

Question 2

Which of the following statements best describes the enforceability of the Interpretations of the Rules of Conduct?

A) The Interpretations are not enforceable.
B) The Interpretations are enforceable.
C) The Interpretations may be enforceable if they have been reviewed and approved by the AICPA's Division of Professional Ethics.
D) The Interpretations are not enforceable, but a practitioner must justify departure from them.

Answer 2

D

Question 3

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.

Answer 3

An ethical dilemma is a situation a person faces in which a decision must be made about an appropriate behavior. Although students' answers will vary depending on the dilemma, their answer should list the following six steps, along with a discussion of how each step relates to their particular dilemma:
1. Obtain the relevant facts. Students should list the key facts from their dilemma.
2. Identify the ethical issues from the facts. Students should identify the key ethical issue(s) in their dilemma.
3. Determine who is affected by the outcome of the dilemma and how each person or group is affected. Students should identify who is involved and how each person is affected by the dilemma.
4. Identify the alternatives available to the person who must resolve the dilemma. Students should list the alternatives available to the auditor or accountant.
5. Identify the likely consequence of each alternative. Students should identify both the short- and long-term effects of each alternative.
6. Decide the appropriate action.

Question 4

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 5

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 6

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) that it provides a safeguard to keep unscrupulous people out.
C) that it is required by federal legislation.
D) that it allows licensing agencies to have a yardstick to measure deficient behavior.

Question 7

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 8

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 9

Which of the following is not one of the four parts of the AICPA's Code of Professional Conduct?

A) Principles
B) Rules of Conduct
C) Interpretations
D) Definitions

Question 10

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

Question 11

Ethical Rulings are:
I) Explanations relating to broad hypothetical circumstances.
II) Not enforceable, but one must justify departure.
III) Explanations relating to specific factual circumstances.

A) I and II
B) I and III
C) II and III
D) I, II, and III

Question 12

Of the four parts of the AICPA's Code of Professional Conduct, which part is enforceable?

A) Ethical Rulings
B) Rules of Conduct
C) Principles
D) Interpretations

Question 13

A member firm of the AICPA is not only responsible for its compliance with the Rules of Conduct, but it is also responsible for compliance by its:

A)
B)
C)
D)

Question 14

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 15

Briefly describe the advantages and disadvantages of a code of conduct based on general statements of ideal conduct as opposed to specific rules that define unacceptable behavior.

Question 16

According to the Principles section of the Code of Professional Conduct, all members:

A) should be independent in fact and in appearance at all times.
B) in public practice should be independent in fact and in appearance at all times.
C) in public practice should be independent in fact and in appearance when providing auditing and other attestations services.
D) in public practice should be independent in fact and in appearance when providing auditing, tax, and other attestation services.

Question 17

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 difficult to enforce.

A) I only
B) II only
C) I and II
D) Neither I nor II

Question 18

Identify and describe each of the four parts to the AICPA's Code of Professional Conduct. Also discuss which parts are officially enforceable and which are not.

Question 19

The Sarbanes-Oxley Act permits the auditor to perform a wide variety of non-audit services for audit clients.

Question 20

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

Question 21

The members of a client's "audit committee" should be:

A) members of management.
B) directors who are not a part of company management.
C) non-directors and non-managers.
D) directors and managers.

Question 22

"Independence" in auditing means:

A) maintaining an indirect financial interest.
B) not being financially dependent on a client.
C) taking an unbiased and objective viewpoint.
D) being an advocate for a client.

Question 23

In the AICPA Code of Professional Conduct, ethical rulings are less specific than rules of conduct.

Question 24

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

Question 25

In the AICPA Code of Professional Conduct, interpretations of rules are more specific than ethical rulings.

Question 26

The provisions of the Sarbanes-Oxley Act of 2002 are most likely to allow which of the following non-audit services for audit clients?

A) appraisal or valuation services (e.g., pension, post-employment benefit liabilities).
B) financial information systems design and implementation
C) internal audit outsourcing.
D) tax consulting.

Question 27

Which of the following services is not prohibited by the SEC whenever a CPA also audits the company?

A) actuarial services
B) assisting the company in preparing certain SEC registration statements (e.g., 10-Q, 10-K)
C) investment banker services
D) bookkeeping services

Question 28

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 29

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 30

Which of the following services are allowed by the SEC whenever a CPA also audits the company?

A) Internal audit outsourcing.
B) Legal services unrelated to the audit.
C) Appraisal or valuation services.
D) Services related to assessing the effectiveness of internal control over financial reporting.

Question 31

The Independence Standards Board was formed to provide a conceptual framework for independence issues related to audits of public companies.

Question 32

Which of the following statements are true with respect to audit committees?
I) One member has to be a financial expert.
II) Audit committees are required for all companies.
III) Outside member of the board of directors should comprise the audit committee.

A) I and II
B) I and III
C) II and III
D) I, II, and III

Question 33

In the AICPA 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 34

Which of the following statements is true? 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 35

Interpretations to the Rules of Conduct permit a CPA firm to do both bookkeeping and auditing for the same 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 36

In the AICPA 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 37

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 three of the above.

Question 38

Non-CPA members of a firm with AICPA membership are not eligible for membership within the AICPA and therefore do not have to follow the AIPCA Code of Professional Conduct.

Question 39

The Sarbanes-Oxley Act requires which employees of an accounting firm to rotate off the engagement every five years?

A)
B)
C)
D)

Question 40

The AICPA's Code of Professional Conduct ________ 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 41

Which of the following activities is allowed for a CPA firm's attestation clients?

A) Contingent fees based on savings due to implementation of an information system.
B) Commissions for referring a review client to an insurance agency for insurance coverage.
C) Preparation of tax returns for which fees are based upon client refunds.
D) Each of the above is allowed.

Question 42

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 43

The Sarbanes-Oxley Act does not require audit committee approval of all non-audit services prior to their performance by the company's external auditor.

Question 44

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 45

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 46

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 47

Independence is required of a CPA when performing:

A) external audits.
B) all attestation services.
C) all attestation and tax services.
D) all professional services.

Question 48

Companies are required to disclose in their proxy statement or annual filings with the SEC the total amount of audit and non-audit fees paid to the audit firm for the two most recent years. Which of the following is not one of the categories of fees that must be disclosed?

A) tax fees
B) consulting fees
C) audit-related fees
D) all other fees

Question 49

An example of an "indirect ownership interest in a client" would be ownership of a client's stock by a member's:

A) dependent child.
B) spouse.
C) non-dependent grandfather.
D) All of the above are examples of indirect ownership.

Question 50

In determining independence with respect to any audit engagement, the ultimate decision as to whether or not the auditor is independent must be made by the:

A) auditor.
B) client.
C) audit committee.
D) public.

Question 51

Each of the following situations involves a possible violation of the rule on independence. For each situation, (1) decide whether the Code of Professional Conduct has been violated, and (2) briefly explain how the situation violates (or does not violate) the Code of Professional Conduct.

A) Harry Brown is a partner in the Topeka office of Hedley & Co., CPAs. Harry's brother is employed in an audit-sensitive position by Jensen Appliances, a publicly held company in Kansas. Jensen Appliances is one of Hedley & Co.'s audit clients. Neither Harry nor personnel from the Topeka office is involved in the audit of Jensen.
Violation? Yes No

Question 52

Interpretations of the AICPA Code of Professional Conduct are dominated by the concept of:

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

Question 53

Interpretations of Independence Rule 101 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 54

A public company may purchase internal audit services from their financial statement auditor if they are approved by the company's audit committee.

Question 55

The Sarbanes-Oxley Act requires a cooling off period of ________ before a member of an audit team can work for a client in a key management position?

A) one year
B) eighteen months
C) three years
D) five years

Question 56

In some situations, the interpretations of the Rules of Conduct permit former partners to have relationships with a client of the firm without affecting the firm's independence. Which of the following situations would cause a loss of independence?
I) The former partner uses the CPA firm's office space and has significant influence over a client.
II) The former partner severs relations with the firm and accepts employment with the firm's client after having been retired for 18 months.
III) The former partner is held out as an associate of the firm and takes part in the firm's business activities.

A) I and II
B) I and III
C) II and III
D) I, II and III

Question 57

CPAs may provide bookkeeping services to their non-public 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 58

The audit committee of a private company need not approve all non-audit services provided by the company's financial statement auditor.

Question 59

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 brother, sister, or in-laws are employed by the client.

Question 60

Financial interests family members of a CPA 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 61

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 25% of the company.
C) Lisa is the marketing manager.
D) All of the above.

Question 62

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 part-time by Capital Trust.
B) Oehlers friend, and employee of another local accounting firm, prepares the tax return of Capital Trust's CEO.
C) Oehlers and Capital Trust's 401K plan own stock with the same corporation.
D) During the period of professional engagement, Capital Trust gave Oehlers tickets to a football game worth $75.

Question 63

Don Crosby, a partner in a national CPA firm, has just learned that his self sufficient daughter has accepted a position as the CFO of Sunglasses, Inc., a current client within the office with which he is employed. Explain the independence ramifications on 1) Don's independence, 2) his office, and 3) the firm's independence.

Question 64

Generally, loans between a CPA firm or its members and an audit client are prohibited because it is a financial relationship. Which of the following, made under normal lending procedures, is not an exception to this rule?

A) immaterial loans
B) home mortgages
C) material loans
D) secured loans

Question 65

Which of the following statements is correct regarding non-audit services that are not prohibited by Sarbanes-Oxley or SEC?

A) They must be approved by management of the client.
B) They must be approved by staff of the PCAOB.
C) They must be approved by staff of the PCAOB and the SEC.
D) They must be approved by the company's audit committee.

Question 66

In 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 has a one-tenth investment interest.

A) I and II
B) I and III
C) II and III
D) I, II, and III

Question 67

The scenarios below all involve a possible violation of the AICPA's Code of Professional Conduct. For each scenario select:
1. Which rule of the Code the scenario falls under and
2. If the scenario is a violation of the Code for the CPA Firm.

Scenario
1. Margaret Henry is a partner in the Tupelo office of Jenkins & Thorn, CPAs. Margaret's father is the controller at Markrich Sporting Supplies, Inc., a publicly held company in Tupelo. Markrich is one of Jenkins & Thorn's audit clients. Margaret is not involved in the audit of Markrich.
2. Jason Alexander is an audit manager with Reese & Co., CPAs. Jason owns 100 shares of common stock in one of the firm's audit clients, but he does not provide any audit or non-audit services to the company.
3. The accounting firm of Fine & Herman, CPAs, provides bookkeeping and tax services for Henderson Corporation, a privately held company. Mr. Herman also performs the annual audit of Henderson Corporation.
4. Elaine Cooper CPA, is the auditor of Paula's Pizza. Towards the end of the audit, Paula gave Elaine her estimate of receivable collectability and Elaine accepted it without further cooperation.
5. Charley Ray, CPA, is a member of the engagement team that performs the audit of Desiree Corporation. Charley's five-year-old daughter, Becky, received ten shares of Desiree common stock for her fifth birthday in a trust fund established by Becky's grandmother.
6. Freeman and Johnson formed a successful CPA practice ten years ago. In 20x4, they approached Adam Sawtooth, a surgeon and medical expert, and asked him to assist them with their growing medical consulting practice. Sawtooth agreed, but only after he was given an ownership interest in the firm. Sawtooth does intend to reduce his private practice hours and spend 40% of his working hours devoted to the Freeman & Johnson practice.
7. Salley Preen has a successful computer network consulting business. Sally has recommended one of her clients to Sam Walton, CPA. To show gratitude for the referral, Sam has agreed to pay Sally a token gift of $50. Sam has not disclosed the payment arrangement to his new clients.
8. The accounting firm of Swift & Taylor, CPAs, is negotiating a fee with a new audit client where the client will pay $50,000 if the client obtains the line of credit needed for working capital purposes otherwise, the fee will be $40,000.
9. Brad Long, CPA, was traveling from Orlando to Miami, Florida when he was pulled over by a police officer on suspicion of driving under the influence. He was convicted in court of driving while under the influence of alcohol and received six months probation.
10. Sammy Bryant, CPA, is a senior in a one-office CPA firm that audits Childress, Inc., a closely held corporation. Sammy's sister was recently appointed as the assistant controller for Childress, Inc.

Question 68

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

A)
B)
C)
D)

Question 69

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 70

Under Rule 101, Independence, independence is considered to be impaired if fees remain unpaid for professional services provided more than six months before the date of the current year's report.

Question 71

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 72

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 73

Rule 101, Independence, prohibits a CPA from performing both audit services and bookkeeping services for the same public company in the same year.

Question 74

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 75

Rule 101, Independence, applies to covered members in a position to influence an attest engagement.

Question 76

Auditors are allowed to have an indirect financial interest in an audit client, such as ownership of stock in a client's company by the auditor's brother, as long as the amount of the financial interest is immaterial to the brother.

Question 77

Generally, loans between a CPA firm or its members and an audit client are prohibited because they create a financial relationship. However, there are exceptions. Which of the following loans is not an exception to this rule?

A) automobile loans
B) loans fully collateralized by cash deposits at the same financial institution
C) home mortgages
D) unpaid credit card balances not exceeding $15,000

Question 78

Rule 101, Independence, applies to members of the AICPA when performing any professional service.

Question 79

The following situations involve a possible violation of the AICPA's Code of Professional Conduct. For each situation, (1) determine the applicable rule from the Code, (2) decide whether or not the Code has been violated, and (3) briefly explain how the situation violates (or does not violate) the Code.

A) Howard Cunningham & Co., CPAs, designates its firm as "Members of the American Institute of Certified Public Accountants." All of the partners of the firm are CPAs. However, one of the partners has recently chosen to allow her membership to lapse because of personal reasons.
Rule: ________ Violation? Yes No

Question 80

The following situations involve a possible violation of the AICPA's Code of Professional Conduct. For each situation, (1) determine the applicable rule from the Code, (2) decide whether or not the Code has been violated, and (3) briefly explain how the situation violates (or does not violate) the Code.

A) In 20x4, Freeman and Johnson, both CPAs, decided to form a CPA practice. In 20x7, Freeman and Johnson approached Bill Delaney, a physician and medical expert, and asked him to assist them with their growing medical consulting practice. Delaney agreed, but only after he was given an ownership interest in the firm. Delaney does not intend to quit his private medical practice.
Rule: ________ Violation? Yes No