Deck 4: Professional Liability, Auditor Judgment Frameworks, and Professional Responsibilities

Question 1

Class action lawsuits are designed to encourage multiple lawsuits arising from the same claim.

Answer 1

False

Question 2

Under Common Law, liability concepts are developed through court decisions based on negligence, gross negligence, or fraud.

Answer 2

True

Question 3

Negligence is the failure to exercise minimal care.

Answer 3

False

Question 4

Contingent fees are prohibited for any client for which the auditor performs audit services, but are otherwise permitted.

Question 5

Commissions and referral fees are allowed to audit firms as long as the audit client is informed of the fees.

Question 6

In federal lawsuits, Congress has limited the extent of joint and several liability damages to the actual percentage of responsibility if auditors are found liable for less than 75% of damages.

Question 7

The confidentiality between auditor and client is legally equivalent as the confidentiality shared between attorney and client.

Question 8

The Rules of Conduct govern the performance of CPAs in carrying out their public responsibilities.

Question 9

A covered member's investment in a mutual fund which owns stock in a firm being audited by the covered member is a direct financial interest resulting in the impairment of independence.

Question 10

The Principles of the AICPA Code of Professional Conduct provide a very detailed set of rules that represent a low level of actions.

Question 11

The AICPA's Code of Professional Conduct defines an indirect financial interest as an investment of one percent or less of a client's organization, and because the amount is so small it is considered immaterial

Question 12

The expectations gap related to shareholders' beliefs about recovery of losses on investments serves as a deterrent to lawsuits filed against audit firms.

Question 13

Public confidence is mostly maintained by the public accounting profession through integrity based on personal moral standards and it is reinforced by codes of conduct.

Question 14

Gross negligence is a failure to use even minimal care or evidence of activities that show a recklessness or careless disregard for the truth.

Question 15

Confidentiality is the cornerstone of the auditing profession.

Question 16

According to the framework for professional decision making, the first step in decision-making is to structure the audit problem

Question 17

Contingent fees are prohibited for tax professionals when preparing tax returns for clients

Question 18

Auditors are permitted to perform for a contingent fee an audit of the financial statements if the audit committee approves the agreement in advance of the services being provided.

Question 19

Liability concepts developed through court decisions are referred to as statutory law.

Question 20

An individual does not need to agree to uphold the code of professional conduct in order to become licensed as a CPA.

Question 21

Utilitarian theory is an approach for addressing ethical problems by identifying a hierarchy of rights that should be considered in solving ethical dilemmas.

Question 22

The expectations gap represents a misunderstanding whereby shareholders mistakenly believe that they are entitled to recover losses on investments for which the auditor provided an unqualified opinion on the financial statements.

Question 23

According to Rights Theory, the highest-order rights include rights granted by the government, such as civil rights, legal rights, rights to own property, and license privileges.

Question 24

Loans between the auditor and the client are permitted in some circumstances.

Question 25

Rights theory focuses on evaluating actions in terms of the fundamental rights of the parties involved.

Question 26

The deep pocket theory represents a misunderstanding whereby shareholders mistakenly believe that they are entitled to recover losses on investments for which the auditor provided an unqualified opinion on the financial statements.

Question 27

A CPA firm may include the name of only one past owner in the firm name.

Question 28

A contingency fee is a situation in which no fee will be charged unless a specified finding or result is attained.

Question 29

A covered member under the AICPA's rules includes individuals on the engagement team, any individual in a position to influence the engagement team, and all professional staff in the office of the engagement.

Question 30

The Principles of the AICPA Code of Professional Conduct express the accounting profession's recognition of its responsibilities to client management.

Question 31

A new staff member on an audit engagement may own stock in that client until the audit report is issued.

Question 32

On an audit, only CPAs are required to comply with the AICPA's independence rules.

Question 33

Rule 102, Integrity and Objectivity,of the AICPA Professional Code of Conduct, does not apply to a CPA who is a corporate CFO.

Question 34

An ethical dilemma occurs an ethically correct action may conflict with an individual's immediate self-interest.

Question 35

The auditor is permitted to violate the confidentiality rule in providing relevant information to an inquiry by a major shareholder of the client.

Question 36

Communication between an auditor and an audit client is deemed to be privileged communication in most states.

Question 37

The AICPA may revoke a member's CPA license for violations of its Code of Professional Conduct.

Question 38

An ethical dilemma occurs in a situation in which moral duties or obligations conflict.

Question 39

There is a hierarchy of rights to consider when applying rights theory.

Question 40

Rule 102 on integrity and objectivity only applies to covered members as defined by the AICPA.

Question 41

Which term best describes a situation in which an individual is morally or ethically required to do something that conflicts with his or her immediate self-interest?

A) An ethical dilemma.
B) An ethical problem.
C) An ethical theory.
D) None of the above.

Question 42

Which of the following would be the first form filed with the SEC describing a major change in corporate governance?

A) 8-K
B) 8-Q
C) 10-K
D) 10-Q

Question 43

What is information about a client that cannot be subpoenaed by a court of law called?

A) Confidential information.
B) Privileged communication.
C) Contingent information.
D) Audit communication.

Question 44

A member of the AICPA must safeguard the confidentiality of client information. Which of the following is not a valid reason to disclose information to non-clients?

A) To discuss information relating to inadequate disclosure in an audit report.
B) To comply with a validly issued and enforceable subpoena or summons.
C) To accommodate the review of client audit work papers under AICPA, PCAOB, or State Board of Accountancy authority.
D) To explain to members of the press whether a client is likely to miss payroll in the forthcoming periods.

Question 45

Compliance with GAAP was an unsuccessful defense in which of the following court cases?

A) Credit Alliance v. Arthur Andersen & Co..
B) Ultramares Corp. v. Touche.
C) Ernst and Ernst v. Hochfelder.
D) Herzfeld v. Laventhol, Krekstein, Horwath & Horwath

Question 46

Liability based on federal securities law is known as which type of law?

A) Common Law
B) Contract Law
C) Commercial Law
D) Statutory Law

Question 47

Mark Pulley is an auditor at Pulley and Hurst, LLC. If Pulley's five-year-old daughter owns shares of stock in McBurgers Corporation, then what is Pulley considered to have?

A) An immaterial indirect financial interest in McBurgers Corporation.
B) A material indirect financial interest in the McBurgers Corporation.
C) A loophole for claiming independence from McBurgers Corporation.
D) An direct financial interest in McBurgers Corporation.

Question 48

Under common law, which standard may a client sue an auditor for failure to demonstrate due care?

A) Negligence
B) Gross Negligence
C) Fraud
D) All of the above.

Question 49

Which of the following is a principle of the Code of Ethics of the International Ethics Standards Board for Accountants but not a principle found in the AICPA Professional Code of Conduct?

A) Integrity
B) Professional Behavior
C) Confidentiality
D) Objectivity

Question 50

An auditor who is professionally skeptical will do which of the following?

A) Critically question contradictory audit evidence..\
B) Carefully evaluate the reliability of audit evidence, especially in situations in which fraud risk is high.
C) Reasonably question the authenticity of documentation, while accepting that documents are to be considered genuine unless there is reason to believe the contrary.
D) All of the above.

Question 51

Which of the following represents a situation in which an auditor is independent of its client?

A) The audit fee paid by the client represents 10% of the auditor's annual gross revenue.
B) The auditor takes a personal loan from the president of the company.
C) The auditor's dependent son holds 25 shares of the client's common stock.
D) The auditor has not received payment for the previous audit services.

Question 52

Julie Webb, CPA takes out an automobile loan with First National Bank of Wellville (FNBW) while attending the University of Wellville. Julie graduates one year later and is hired as an auditor by Best and Driftwood, LLP. Her first assigned audit engagement is with First National Bank of Wellville, a client of Best and Driftwood. As a new audit assistant, Julie continues to pay her automobile loan payments each month. Which of the following best describes Julie's independence status?

A) Impaired because Julie has a direct financial interest in FNBW.
B) Impaired because Julie has a material indirect financial interest in FNBW.
C) Not impaired because Julie has an immaterial indirect financial interest in FNBW.
D) Not impaired because Julie is permitted to take normal loans from FNBW.

Question 53

The concept of the Third-Party Beneficiary Test was established by which court case?

A) Credit Alliance Corp. v. Arthur Andersen & Co.
B) Ultramares Corp. v. Touche.
C) Citizens State Bank v. Timm, Schmidt, & Co.
D) Rosenblum v. Adler.

Question 54

Which of the following is not an aspect of Rule 201 of the General Standards of the Code of Professional Conduct?

A) A member must not take on an engagement that is beyond the member's professional competence.
B) A member must exercise duties prudently and professionally.
C) A member must adequately plan and supervise the performance of professional services.
D) A member firm must not advertise services to competing clients.

Question 55

Which of the following may an auditor use as a defense under the Securities Act of 1933?

A) Contributory Negligence
B) Scienter
C) Due Care
D) Immaterial loss

Question 56

Which of the following employment positions could an auditor's spouse hold in a client without violating the independence requirements?

A) Controller.
B) Treasurer.
C) Order entry staff.
D) Internal audit director.

Question 57

Julie Webb, CPA takes out an automobile loan with First national Bank of Wellville (FNBW) while attending the University of Wellville. Julie graduates one year later and is hired as an auditor by Best and Driftwood, LLP. Her first assigned audit engagement is with First national Bank of Wellville, a client of Best and Driftwood. As a new audit assistant, Julie continues to pay her automobile loan payments each month. According to the AICPA, why is Julie is considered a covered member for FNBW independence purposes?

A) She will be working on the engagement.
B) She has a direct financial interest in FNBW.
C) She graduated in the same area as the client is operating.
D) She has an immaterial direct financial interest in FNBW.

Question 58

From whom should a CPA not accept a commission for recommending a product or service?

A) A tax client.
B) An audit client.
C) A financial-planning client.
D) A management-services client.
E) Any of the above.

Question 59

Which of the following is not one of the reasons for increased litigation related to audits?

A) Class action lawsuit.
B) Increased complexity of accounting standards.
C) Contingent-fee-based compensation for law firms.
D) Joint and several liability doctrines.

Question 60

For which of the following engagements are members of the AICPA required to act with integrity and objectivity?

A) Tax preparation.
B) Financial statement review services.
C) Financial statement audits.
D) All engagements.

Question 61

Among immediate family members, whose ownership of client's stock is not considered the same as the covered member's ownership?

A) Spouse.
B) 14 year-old daughter living at home.
C) 19 year-old son away at college.
D) Grandfather.

Question 62

What is the purpose of an ethical framework?

A) To provide a defined methodology to solve the ethical problem.
B) To provide a defined methodology to aid the user in making complex ethical decisions.
C) To provide a defined program to solve ethical dilemmas.
D) To provide all of the above.

Question 63

Which of the following is a cause of action against the auditor for breach of contract?

A) Violating client confidentiality.
B) Providing the audit report on time.
C) Failing to discover an immaterial error or employee fraud.
D) Withdrawing from an audit engagement with justification.

Question 64

Which of the following concepts represents the most expansive aspect of liability for auditors?

A) Third-Party Beneficiary.
B) Identified User.
C) Foreseen Party.
D) Foreseeable Party.

Question 65

What does utilitarian theory hold?

A) There is a decision that exists that is optimal for all people.
B) What is ethical is the action that achieves the least bad for the greatest number of people.
C) What is ethical is the action that achieves the greatest good for the greatest number of people.
D) What is ethical is the action that achieves the greatest good for all people.

Question 66

Under Rule 201, what best describes how an AIPCA member should act?

A) With professional competence.
B) With due professional care.
C) After adequate planning and with appropriate supervision.
D) All of the above

Question 67

In which of the following situations would a CPA be considered independent?

A) A CPA has obtained an auto loan from a banking client.
B) A CPA has obtained a 90-day signature loan from a client.
C) A CPA has obtained a loan for investment purposes from a client.
D) A CPA has obtained an interest-free loan from a banking client.

Question 68

The auditor is normally not permitted to divulge confidential information obtained from a client. Which of the following situations would be a violation of this standard?

A) To respond to the information request of a shareholder.
B) To respond to a quality review request of the state board of accountancy.
C) To initiate a complaint with the AICPA's ethics division.
D) To ensure adequate disclosure in accordance with GAAP.

Question 69

According to the framework for ethical decision making, which of the following should the decision maker consider?

A) All possible alternative courses of action.
B) The consequences associated with possible actions.
C) Whether the rights framework would cause any course of action to be added.
D) All of the above.

Question 70

Which of the following represents a situation in which auditors may disclose client information to outside parties?

A) Bringing working papers to a professional CPA workshop as an example of quality work.
B) Complying with a validly issued and enforceable subpoena or summons.
C) Showing the client's bank statement to a neighbor who is a shareholder to emphasize its cash position.
D) Explaining to the local television news station why the client is likely to miss payroll in the forthcoming periods.

Question 71

Commissions and referral fees are not permitted for which types of services?

A) Tax.
B) Reviews.
C) Audits.
D) Both B and C.

Question 72

According to the Sarbanes-Oxley Act, which of the following services may an auditor perform without impairing their independence?

A) Actuarial services.
B) Appraisal services.
C) Internal audit services.
D) Tax Services

Question 73

Which of following is not part of the ethical framework derived from utilitarianism and rights theories?

A) Identification of the legal issues.
B) Determination of affected parties and their rights.
C) Determination of the most important rights.
D) Development of alternative courses of action.

Question 74

Which of following is not an action required by Utilitarian Theory?

A) Identify the potential problem.
B) Identify the potential impact of actions on each affected party.
C) Identify the rights of the affected parties.
D) Identify the desirability of each action.

Question 75

Rule 201 - General Standards, of the AICPA Code of Professional Conduct does not include which of the following factors?

A) Due professional care.
B) Integrity and objectivity.
C) Planning and supervision.
D) Sufficient relevant data.

Question 76

Independence is required for which of the following types of services?

A) Audit work.
B) Tax work.
C) Consulting.
D) Independence is always required of the CPA.

Question 77

In which of the following situations would a CPA be considered independent?

A) A CPA's brother is the Vice-President of Sales at the CPA's audit client.
B) A CPA's father was a salesman at the CPA's audit client and now a major portion of the father's pension fund is invested in the audit client.
C) A CPA's cousin works as a web-site designer at the audit client.
D) A CPA's son works summers at the audit client and has earned 10 shares of stock in the audit client.

Question 78

Independence in mental attitude is required of auditor on all audit engagements. Which statement best describes the highest goal for independence?

A) To comply with the AICPA Professional Code of Conduct.
B) To be independent in fact and appearance.
C) To be an advocate for shareholders.
D) To be in compliance with SEC regulations.

Question 79

Under the AICPA definition, who among the following would not be considered a covered member?

A) An individual on the attest engagement team.
B) An individual in a position to influence the attest engagement.
C) A partner in the office of the lead engagement partner.
D) All would be considered covered members.

Question 80

Which is the best definition of scienter?

A) Fraudulent conduct in the purchase of a security.
B) A causal connection between a misstatement and a material loss.
C) A material omission of facts.
D) A wrongful state of mind when making a misrepresentation.