Chapter 19 Professional Conduct, Independence, and Quality Control

Chapter 19 - Professional Conduct, Independence, and Quality Control

Chapter 19

Professional Conduct, Independence, and Quality Control

True / False Questions

1.The term "ethics" refers to a person's propensity to follow the laws of the land.TrueFalse

2.Professionalism refers to the conduct, aims, or qualities that characterize or mark a given profession.TrueFalse

3.When auditing a public company, a CPA must follow the auditing standards and Code of Professional Conduct of the PCAOB.TrueFalse

4.The AICPA Code of Professional Conduct deals mainly with behavior and actions of individual auditors.TrueFalse

5.The Principles of Professional Conduct set forth the minimum standards.TrueFalse

6.Rules of Conduct are enforceable.TrueFalse

7.Ethical rulings are enforceable.TrueFalse

8.Principles are stated at a conceptual level, not a detailed level.TrueFalse

9.The rules contained in Section 100 cover issues relating to independence, integrity, and auditing standards.TrueFalse

10.If an auditor is not independent of the client, it is unlikely that a user of financial statements will place much reliance on the CPA's work.TrueFalse

11.As per the Conceptual Framework for AICPA Independence Standards made effective in 2006, a CPA is required to identify and assess the extent to which a threat to independence exists.TrueFalse

12.An indirect financial interest is defined as a financial interest that is owned or is under the control of an individual or entity.TrueFalse

13.A financial interest is "beneficially owned" when an individual or entity is NOT the recorded owner of the interest but has a right to some or all of the underlying benefits of ownership.TrueFalse

14.If a CPA owns an insurance policy issued by an attest client, independence would be considered impaired, even if the policy was purchased under the insurance company's normal terms and procedures and does not offer an investment option.TrueFalse

15.The independence standards issued by the PCAOB do not prohibit the provision of tax services to an attest client.TrueFalse

16.PCAOB rules require tax services provided by a public company auditor to be considered and approved by the company's audit committee.TrueFalse

Multiple Choice Questions

17.With respect to ethics, the rights-based approachA.Suggests that auditors should always verify ownership of a client's material tangible assets.B.Is primarily concerned with equity and impartiality.C.Suggests that an individual's actions should not violate the rights of any individual.D.Recognizes that decisions involve trade-offs between costs and benefits.

18.With respect to ethics, the utilitarian theoryA.Suggests that auditors should always verify ownership of a client's material tangible assets.B.Is primarily concerned with equity and impartiality.C.Suggests that an individual's actions should not violate the rights of any individual.D.Recognizes that decisions involve trade-offs between costs and benefits.

19.With respect to ethics, the justice-based approachA.Suggests that auditors should always verify ownership of a client's material tangible assets.B.Is primarily concerned with equity and impartiality.C.Suggests that an individual's actions should not violate the rights of any individual.D.Recognizes that decisions involve trade-offs between costs and benefits.

20.In auditing a privately held entity, an auditor must follow the professional standards established by all of the following except:A.The AICPA's Auditing Standards Board.B.The Professional Code of Conduct.C.The Independence Standards Board.D.The PCAOB.

21.Which of the following is not a Principle of Professional Conduct as defined by the Code of Professional Conduct?A.Integrity.B.Due care.C.Reporting.D.Scope and nature of services.

22.What is meant by the Code of Professional Conduct's definition of "holding out"?A.Informing a client about one's status as a CPA.B.Withholding an audit report until the fee is paid.C.Not sharing audit documentation with a successor auditor.D.Not suggesting that management make an adjusting entry that is deemed immaterial.

23.For private companies, accounting firms are prohibited from providingA.Outsourced internal audit services.B.Audit services.C.Review services.D.None of the above.

24.A violation of the profession's ethical standards would most likely have occurred when a CPAA.Purchased a bookkeeping firm's practice of monthly write-ups for a percentage of fees received over a three-year period.B.Made arrangements with a bank to collect notes issued by a client in payment of fees due.C.Named Smith formed a partnership with two other CPAs and used "Smith & Co." as the firm name.D.Issued an unqualified opinion on the 2011 financial statements when fees for the 2010 audit were unpaid.

25.Which of the following is required for a firm to designate itself as a "Member of the American Institute of Certified Public Accountants" on its letterhead?A.At least one of the partners must be a member.B.The partners whose names appear in the firm name must be members.C.All partners must be members.D.The firm must be a dues-paying member.

26.A violation of the profession's ethical standards would least likely have occurred when a CPA in public practiceA.Used a records-retention agency to store the CPA's working papers and client records.B.Served as an expert witness in a damage suit and received compensation based on the amount awarded to the plaintiff.C.Referred life insurance assignments to the CPA's spouse, who is a life insurance agent.D.Failed to file his personal tax return.

27.According to the Code of Professional Conduct, which of the following individuals is not in a position to influence an attest engagement (i.e., not a covered member)?A.The office's managing partner who determines the compensation of the attest engagement partner.B.The office's IT expert, who consulted with the engagement partner regarding the client's IT system.C.The partner in another office in a nearby city who regularly plays golf with the engagement partner.D.The office's partner who monitors quality control over the attest engagement.

28.A CPA, while performing an audit, strives to achieve independence in appearance in order toA.Reduce risk and liability.B.Comply with the generally accepted standards of fieldwork.C.Become independent in fact.D.Maintain public confidence in the profession.

29.In which of the following instances would the independence of the CPA not be considered to be impaired? The CPA has been retained as the auditor of a brokerage firmA.Which owes the CPA audit fees for more than one year.B.In which the CPA has a large active margin account.C.In which the CPA's brother is the controller.D.Which owes the CPA audit fees for current year services and has just filed a petition for bankruptcy.

30.The SEC has issued independence rules that differ from the AICPA's in all of the following areas except:A.Working paper documentation.B.Provision of other professional services.C.Human resource and compensation-related issues.D.Required communication.

31.Which of the following is not an element of quality control as defined by Statement of Quality Control Standards No. 8?A.Monitoring.B.Independence.C.Human resources.D.Relevant ethical requirements.

32.A basic objective of a CPA firm is to provide professional services that conform to professional standards. Reasonable assurance of achieving this basic objective is provided throughA.Compliance with generally accepted reporting standards.B.A system of quality control.C.A system of peer review.D.Continuing professional education.

33.The quality control standards are concerned primarily withA.Actions of individual auditors.B.A firm's monitoring of its practice.C.Disciplinary actions against individual auditors.D.Preventing legal action.

34.Which of the following bodies ordinarily would have the authority to suspend or revoke a CPA's license to practice public accounting?A.The SEC.B.The AICPA.C.A state CPA society.D.A state board of accountancy.

35.Which of the following statements best describes why the profession of certified public accountants has deemed it essential to promulgate a code of conduct and to establish a mechanism for enforcing observance of the code?A.Ethical standards are established so that users of accounting services know what to expect, the professionals know what behaviors are acceptable, and overseers can take disciplinary action when appropriate.B.A prerequisite to success is the establishment of an ethical code that stresses primarily the professional's responsibility to clients and colleagues.C.A requirement of most state laws calls for the profession to establish a code of conduct.D.An essential means of self-protection for the profession is the establishment of flexible ethical standards by the profession.

36.A CPA's license to practice will ordinarily be suspended or revoked automatically forA.Controlling the bookkeeping for a compilation client.B.Conviction of willful failure to file personal income tax return.C.Refusing to respond to an inquiry by the AICPA practice review committee.D.Accepting compensation while honoring a subpoena to appear as an expert witness.

37.A CPA's retention of client records as a means of enforcing payment of an overdue audit fee is an action that isA.Considered acceptable by the AICPA Code of Professional Conduct.B.Ill-advised because 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.

38.Which of the following is allowable for a CPA?A.A used car loan from a banking client where the client has a lien on the car.B.An uncollateralized signature loan from a client.C.Owning more than five percent of the outstanding shares of client stock in a retirement account.D.The audit engagement partner serves on the client's audit committee.

39.In performing an audit, Jackson, CPA, discovers that the professional competence necessary for the engagement is lacking. Jackson informs management of the situation and recommends another local CPA firm and management engages this other firm. Under these circumstancesA.Jackson may request compensation from the other CPA firm for any professional services rendered to it in connection with the engagement.B.Jackson may accept a referral fee from the other CPA firm.C.Jackson has violated the AICPA Code of Professional Conduct because of non-fulfillment of the duty of performance.D.Jackson's lack of competence should be construed to be a violation of generally accepted auditing standards.

40.In which one of the following situations would a CPA be in violation of the AICPA Code of Professional Conduct in determining a fee?A.A fee based on whether the CPA's report on the client's financial statements results in the approval of a bank loan.B.A fee based on an estimate of the number of hours needed to complete the engagement by auditors of various levels of experience.C.A fee based on the nature of the service rendered and the CPA's particular expertise instead of the actual time spent on the engagement.D.A fee based on the fee charged by the prior auditor.

41.In connection with a lawsuit, a third party attempts to gain access to the auditor's working papers. The client's defense of privileged communication will be successful only to the extent it is protected by theA.Auditor's acquiescence in use of this defense.B.Common law.C.AICPA Code of Professional Conduct.D.State law.

42.The profession's ethical standards would most likely 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 theA.CPA would not be independent.B.Fee was a competitive bid.C.Actual fee would be substantially higher.D.Actual fee would be substantially lower than the fees charged by other CPAs for comparable services.

43.According to the ethical standards of the profession, which of the following acts is generally prohibited?A.Issuing a modified report explaining a failure to follow a governmental regulatory agency's standards when conducting an attest service for a client.B.Revealing confidential client information during a quality review of a professional practice by a team from the state CPA society.C.Accepting a contingent fee for representing a client in an examination of the client's federal tax return by an IRS agent.D.Retaining client records after an engagement is terminated prior to completion and the client has demanded its return.

44.According to the ethical standards of the profession, which of the following acts is generally prohibited?A.Purchasing a product from a third party and reselling it to a client.B.Writing a financial management newsletter promoted and sold by a publishing company.C.Accepting a commission for recommending a product to an audit client.D.Accepting engagements obtained through the efforts of third parties.

45.In which of the following circumstances would a CPA who audits XM Corporation lack independence?A.The CPA and XM's president are both on the board of directors of COD Corporation.B.The CPA and XM's president each owns 25 percent of FOB Corporation, a closely-held company.C.The CPA has an automobile loan from XM, which is a savings and loan organization and the loan is collateralized by the automobile.D.The CPA reduced XM's usual audit fee by 40 percent because XM's financial condition was unfavorable.

46.Mavis, CPA, has audited the financial statements of South Bay Sales Incorporated for several years and had always been paid promptly for services rendered. Last year's audit invoices have not been paid because South Bay is experiencing cash flow difficulties and the current year's audit is scheduled to commence in one week. With respect to the past due audit fees, Mavis shouldA.Perform the scheduled audit and allow South Bay to pay when the cash flow difficulties are alleviated.B.Perform the scheduled audit only after arranging a definite payment schedule and securing notes signed by South Bay.C.Inform South Bay's management that the past due audit fees are considered an impairment of auditor independence.D.Inform South Bay's management that the past due audit fees may be considered a loan on which interest must be imputed for financial statement purposes.

47.In which of the following instances would the independence of the CPA not be considered to be impaired? The CPA has been retained as the auditor of aA.Charitable organization in which an employee of the CPA serves as treasurer.B.Municipality in which the CPA owns $25,000 of the $2,500,000 indebtedness of the municipality.C.Restaurant where the CPA dines frequently.D.Company in which the CPA's private investment club owns a one-tenth interest.

48.A CPA firm's personnel partner periodically studies the CPA firm's personnel advancement experience to ascertain whether the individuals who were assigned increased degrees of responsibility met predetermined criteria. This is evidence of the CPA firm's adherence to prescribed standards ofA.Quality control.B.Due professional care.C.Supervision and review.D.Fieldwork.

49.A CPA firm would be reasonably assured of meeting its overall responsibility to provide services that conform with professional standards byA.Adhering to generally accepted accounting principles.B.Implementing an appropriate system of quality control.C.Joining professional societies that enforce ethical conduct.D.Maintaining an attitude of independence in its engagements.

50.Which of the following is an element of a CPA firm's quality control system that should be considered in establishing its quality control policies and procedures?A.Using the audit risk model.B.Using statistical sampling techniques.C.Assigning personnel to engagements.D.Considering audit risk and materiality.

51.What is the primary purpose of the acceptance and continuance of client relationships and specific engagements element of quality control?A.Guarantee that firms do not associate with clients whose management lacks integrity.B.Provide reasonable assurance that firms do not associate with clients whose management lacks integrity.C.Guarantee that firms will not be sued as a result of association with a client.D.Provide reasonable assurance that firms will not be sued as a result of association with a client.

52.In order to achieve effective quality control, a firm of independent auditors should establish policies and procedures forA.Determining the minimum procedures necessary for unaudited financial statements.B.Setting the scope of audit work.C.Deciding whether to accept or continue a client.D.Setting the scope of internal control study and evaluation.

53.Within the context of quality control, the primary purpose of continuing professional education and training activities is to enable a CPA firm to provide personnel within the firm withA.Technical training that ensures proficiency as an auditor.B.Opportunities for career advancement outside the accounting firm.C.Knowledge required to fulfill assigned responsibilities.D.Knowledge required to perform a peer review.

54.A CPA firm evaluates its personnel advancement experience to ascertain whether individuals assigned to increased degrees of responsibility meet predetermined criteria. This policy is evidence of the firm's adherence to which of the following prescribed standards?A.Professional ethics.B.Supervision and review.C.Accounting and review services.D.Quality control.

55.The primary purpose of establishing quality control policies and procedures for deciding whether to accept a new client is toA.Enable the CPA firm to attest to the reliability of the client.B.Satisfy the CPA firm's duty to the public concerning the acceptance of new clients.C.Minimize the likelihood of association with clients whose management lacks integrity.D.Anticipate before performing any fieldwork whether an unqualified opinion can be expressed.

56.Following the issuance of a PCAOB draft report, how many days does the CPA firm have to respond to accusations?A.10 days.B.30 days.C.50 days.D.90 days.

57.A violation of the profession's ethical standards would most likely occur when a CPA whoA.Is also admitted to the Bar represents on letterhead to be both an attorney and a CPA.B.Writes a newsletter on financial management also permits a publishing company to solicit subscriptions by direct mail.C.Is controller of a bank permits the bank to use the controller's CPA title in the listing of officers in its publications.D.Refused to hire a new employee does so because the CPA deemed the candidate to be "too old."

58.In determining estimates of fees, an auditor may take into account each of the following, except the:A.Value of the service to the client.B.Degree of responsibility assumed by undertaking the engagement.C.Skills required to perform the service.D.Attainment of specific findings.

59.An auditor is about to commence a recurring annual audit engagement. The continuing auditor's independence would ordinarily be considered to be impaired if the prior year's audit feeA.Was unusually large.B.Has not been paid and will not be paid for at least twelve months.C.Has not been paid and the client has filed a voluntary petition for bankruptcy.D.Was renegotiated during the prior year audit based on the need for expanded testing.

60.In which of the following circumstances would a CPA be bound by ethics to refrain from disclosing any confidential information obtained during the course of a professional engagement?A.The CPA is issued a summons enforceable by a court order that orders the CPA to present confidential information.B.A major stockholder of a client company seeks accounting information from the CPA after management declined to disclose the requested information.C.Confidential client information is requested as part of a quality review of the CPA's practice by a review team authorized by the AICPA.D.An inquiry by a disciplinary body of a state CPA society requests confidential client information.

61.Under which of the following circumstances would the independence of a CPA be considered impaired if the CPA, who also is an attorney, serves as auditor and provides legal services to the same client?A.When the CPA, as legal agent, consummates a business acquisition for the client.B.When the CPA's audit fees and legal fees are not billed separately.C.When the CPA uses legal expertise to research a question of income tax law.D.When the legal services consist of an analysis of the terms of an existing lease agreement.

62.According to the profession's ethical standards, a CPA would be considered independent in which of the following instances?A.A client leases part of an office building from the CPA, resulting in a material indirect financial interest to the CPA.B.The CPA has a material direct financial interest in a client, but transfers the interest into a blind trust.C.The CPA owns an office building and the mortgage on the building is guaranteed by a client.D.The CPA belongs to a country club client in which membership requires an annual fee.

63.When auditing a public company, which of the following impairs an auditor's independence?A.Offering audit services as well as preparing the tax return for the same client.B.The auditor's spouse works in the assembly line of an audit client.C.Lack of fee disclosure in the client's annual report.D.The auditor has been a partner on the engagement for ten years.

Short Answer Questions

64.Why do professions establish codes of conduct that define ethical behaviors for members of the profession?

65.Distinguish between the following theories of ethical behavior: utilitarianism, a rights-based approach, and a justice-based approach.

66.Which professional and regulatory bodies establish the ethical and professional rules for auditors of: (1) public companies and (2) private companies?

67.Listed below are definitions of the six Principles of Professional Conduct. For each, identify the principle being defined.

a. A member should observe the profession's technical and ethical standards, strive continually to improve competence and the quality of services, and discharge professional responsibility to the best of the member's ability.b. Members should exercise sensitive professional and moral judgments in all their activities.c. A member should be free of conflicts of interest in discharging professional responsibilities.d. A member in public practice should observe the Principles of the Code of Professional Conduct in determining the type and extent of services to be provided.e. Members should accept the obligation to act in a way that will honor the public trust and demonstrate commitment to professionalism.f. To maintain and broaden public confidence, members should perform all professional responsibilities with the highest sense of ______________.

68.Ms. Lembke is a partner for DTS, a CPA firm. She is the lead partner for the firm's largest client, The Grey Elephant. Ms. Zadina, who works in the same office as Ms. Lembke, has a sister who is the controller for The Grey Elephant. Because of potential independence issues, Ms. Zadina does no work for The Grey Elephant. Ms. Zadina is being considered for promotion to partner. What independence issues should Ms. Lembke consider before promoting Ms. Zadina?

69.The SEC's rules with respect to services provided by auditors are predicated on three basic principles of auditor objectivity and independence. What are the three basic principles?

70.Identify the primary purposes of Rules 201-203 of the Rules of Conduct.

71.When can a CPA disclose confidential information without the client's consent?

Matching Questions

72.Match each term below with its definition as provided by the AICPA Rules of Conduct.

1.PartnerExamples include financial statement audits, reviews, and examinations of prospective financial information____

2.Professional servicesAny person or entity, other than the member's employer, that engages a member or a member's firm to perform professional services____

3.Practice of public accountingAny action initiated by a member that informs others of his or her status as a CPA or AICPA-accredited specialist____

4.ClientA proprietor, part owner, or any individual who assumes the risks and benefits of firm ownership or who is otherwise held out by the firm to be the equivalent of any of the aforementioned____

5.Attest engagementThe performance for a client by a member or a member's firm while holding out as CPA(s) of the professional services of accounting, tax, personal financial planning, litigation support services, and those professional services for which standards are promulgated by bodies designated by Council____

6.Holding outAll services performed by member while holding out as a CPA____

Chapter 19 Professional Conduct, Independence, and Quality Control Answer Key

True / False Questions

1.The term "ethics" refers to a person's propensity to follow the laws of the land.FALSE

AACSB: EthicsAICPA BB: Critical ThinkingAICPA FN: Decision MakingBlooms: RememberDifficulty: 1 EasyLearning Objective: 19-01 Know the definitions and general importance of ethics and professionalism.Topic: Ethics and Professional Conduct2.Professionalism refers to the conduct, aims, or qualities that characterize or mark a given profession.TRUE

AACSB: EthicsAICPA BB: Critical ThinkingAICPA FN: Decision MakingBlooms: RememberDifficulty: 1 EasyLearning Objective: 19-01 Know the definitions and general importance of ethics and professionalism.Topic: Ethics and Professional Conduct3.When auditing a public company, a CPA must follow the auditing standards and Code of Professional Conduct of the PCAOB.TRUE

AACSB: EthicsAICPA BB: Critical ThinkingAICPA FN: Decision MakingBlooms: RememberDifficulty: 1 EasyLearning Objective: 19-04 Know how professional ethics standards for auditors have developed over time and the entities involved.Topic: Standards for Auditor Professionalism4.The AICPA Code of Professional Conduct deals mainly with behavior and actions of individual auditors.TRUE

AACSB: EthicsAICPA BB: Critical ThinkingAICPA FN: Decision MakingBlooms: RememberDifficulty: 1 EasyLearning Objective: 19-05 Understand the framework for the Code of Professional Conduct.Topic: The AICPA Code of Professional Conduct: A Comprehensive Framework for Auditors5.The Principles of Professional Conduct set forth the minimum standards.FALSE

AACSB: EthicsAICPA BB: Critical ThinkingAICPA FN: Decision MakingBlooms: RememberDifficulty: 1 EasyLearning Objective: 19-05 Understand the framework for the Code of Professional Conduct.Topic: The AICPA Code of Professional Conduct: A Comprehensive Framework for Auditors6.Rules of Conduct are enforceable.TRUE

AACSB: EthicsAICPA BB: Critical ThinkingAICPA FN: Decision MakingBlooms: RememberDifficulty: 1 EasyLearning Objective: 19-05 Understand the framework for the Code of Professional Conduct.Topic: The AICPA Code of Professional Conduct: A Comprehensive Framework for Auditors7.Ethical rulings are enforceable.FALSE

AACSB: EthicsAICPA BB: Critical ThinkingAICPA FN: Decision MakingBlooms: RememberDifficulty: 1 EasyLearning Objective: 19-05 Understand the framework for the Code of Professional Conduct.Topic: The AICPA Code of Professional Conduct: A Comprehensive Framework for Auditors8.Principles are stated at a conceptual level, not a detailed level.TRUE

AACSB: EthicsAICPA BB: Critical ThinkingAICPA FN: Decision MakingBlooms: RememberDifficulty: 1 EasyLearning Objective: 19-06 Know the principles of professional conduct.Topic: Principles of Professional Conduct9.The rules contained in Section 100 cover issues relating to independence, integrity, and auditing standards.FALSE

AACSB: EthicsAICPA BB: Critical ThinkingAICPA FN: Decision MakingBlooms: RememberDifficulty: 1 EasyLearning Objective: 19-07 Understand the framework for the Rules of Conduct.Topic: Rules of Conduct10.If an auditor is not independent of the client, it is unlikely that a user of financial statements will place much reliance on the CPA's work.TRUE

AACSB: EthicsAICPA BB: Critical ThinkingAICPA FN: Decision MakingBlooms: UnderstandDifficulty: 1 EasyLearning Objective: 19-08 Have a working knowledge of the rules of conduct that apply to independence; integrity; and objectivity.Topic: Independence, Integrity, and Objectivity11.As per the Conceptual Framework for AICPA Independence Standards made effective in 2006, a CPA is required to identify and assess the extent to which a threat to independence exists.TRUE

AACSB: EthicsAICPA BB: LegalAICPA FN: Decision MakingBlooms: RememberDifficulty: 1 EasyLearning Objective: 19-08 Have a working knowledge of the rules of conduct that apply to independence; integrity; and objectivity.Topic: Independence, Integrity, and Objectivity12.An indirect financial interest is defined as a financial interest that is owned or is under the control of an individual or entity.FALSE

AACSB: EthicsAICPA BB: LegalAICPA FN: Decision MakingBlooms: RememberDifficulty: 1 EasyLearning Objective: 19-08 Have a working knowledge of the rules of conduct that apply to independence; integrity; and objectivity.Topic: Independence, Integrity, and Objectivity13.A financial interest is "beneficially owned" when an individual or entity is NOT the recorded owner of the interest but has a right to some or all of the underlying benefits of ownership.TRUE

AACSB: EthicsAICPA BB: LegalAICPA FN: Decision MakingBlooms: UnderstandDifficulty: 1 EasyLearning Objective: 19-08 Have a working knowledge of the rules of conduct that apply to independence; integrity; and objectivity.Topic: Independence, Integrity, and Objectivity14.If a CPA owns an insurance policy issued by an attest client, independence would be considered impaired, even if the policy was purchased under the insurance company's normal terms and procedures and does not offer an investment option.FALSE

AACSB: EthicsAICPA BB: LegalAICPA FN: Decision MakingBlooms: ApplyDifficulty: 2 MediumLearning Objective: 19-08 Have a working knowledge of the rules of conduct that apply to independence; integrity; and objectivity.Topic: Independence, Integrity, and Objectivity15.The independence standards issued by the PCAOB do not prohibit the provision of tax services to an attest client.TRUE

AACSB: EthicsAICPA BB: LegalAICPA FN: Decision MakingBlooms: RememberDifficulty: 1 EasyLearning Objective: 19-09 Know the basic differences between the SEC's independence rules for public company auditors and AICPA standards for audits of nonpublic entities.Topic: SEC and PCAOB Independence Requirements for Audits of Public Companies16.PCAOB rules require tax services provided by a public company auditor to be considered and approved by the company's audit committee.TRUE

AACSB: EthicsAICPA BB: LegalAICPA FN: Decision MakingBlooms: ApplyDifficulty: 3 HardLearning Objective: 19-09 Know the basic differences between the SEC's independence rules for public company auditors and AICPA standards for audits of nonpublic entities.Topic: SEC and PCAOB Independence Requirements for Audits of Public Companies

Multiple Choice Questions

17.With respect to ethics, the rights-based approachA.Suggests that auditors should always verify ownership of a client's material tangible assets.B.Is primarily concerned with equity and impartiality.C.Suggests that an individual's actions should not violate the rights of any individual.D.Recognizes that decisions involve trade-offs between costs and benefits.

AACSB: EthicsAICPA BB: Critical ThinkingAICPA FN: Decision MakingBlooms: RememberDifficulty: 1 EasyLearning Objective: 19-02 Be able to explain three basic theories of ethical behavior.Topic: Theories of Ethical Behavior18.With respect to ethics, the utilitarian theoryA.Suggests that auditors should always verify ownership of a client's material tangible assets.B.Is primarily concerned with equity and impartiality.C.Suggests that an individual's actions should not violate the rights of any individual.D.Recognizes that decisions involve trade-offs between costs and benefits.

AACSB: EthicsAICPA BB: Critical ThinkingAICPA FN: Decision MakingBlooms: RememberDifficulty: 1 EasyLearning Objective: 19-02 Be able to explain three basic theories of ethical behavior.Topic: Theories of Ethical Behavior19.With respect to ethics, the justice-based approachA.Suggests that auditors should always verify ownership of a client's material tangible assets.B.Is primarily concerned with equity and impartiality.C.Suggests that an individual's actions should not violate the rights of any individual.D.Recognizes that decisions involve trade-offs between costs and benefits.

AACSB: EthicsAICPA BB: Critical ThinkingAICPA FN: Decision MakingBlooms: RememberDifficulty: 1 EasyLearning Objective: 19-02 Be able to explain three basic theories of ethical behavior.Topic: Theories of Ethical Behavior20.In auditing a privately held entity, an auditor must follow the professional standards established by all of the following except:A.The AICPA's Auditing Standards Board.B.The Professional Code of Conduct.C.The Independence Standards Board.D.The PCAOB.

AACSB: EthicsAICPA BB: LegalAICPA FN: Decision MakingBlooms: RememberDifficulty: 1 EasyLearning Objective: 19-04 Know how professional ethics standards for auditors have developed over time and the entities involved.Topic: Standards for Auditor Professionalism21.Which of the following is not a Principle of Professional Conduct as defined by the Code of Professional Conduct?A.Integrity.B.Due care.C.Reporting.D.Scope and nature of services.

AACSB: EthicsAICPA BB: LegalAICPA FN: Decision MakingBlooms: RememberDifficulty: 1 EasyLearning Objective: 19-06 Know the principles of professional conduct.Topic: Principles of Professional Conduct22.What is meant by the Code of Professional Conduct's definition of "holding out"?A.Informing a client about one's status as a CPA.B.Withholding an audit report until the fee is paid.C.Not sharing audit documentation with a successor auditor.D.Not suggesting that management make an adjusting entry that is deemed immaterial.

AACSB: EthicsAICPA BB: LegalAICPA FN: Decision MakingBlooms: RememberDifficulty: 1 EasyLearning Objective: 19-05 Understand the framework for the Code of Professional Conduct.Learning Objective: 19-07 Understand the framework for the Rules of Conduct.Topic: Rules of ConductTopic: The AICPA Code of Professional Conduct: A Comprehensive Framework for Auditors23.For private companies, accounting firms are prohibited from providingA.Outsourced internal audit services.B.Audit services.C.Review services.D.None of the above.

AACSB: EthicsAICPA BB: LegalAICPA FN: Decision MakingBlooms: ApplyDifficulty: 1 EasyLearning Objective: 19-08 Have a working knowledge of the rules of conduct that apply to independence; integrity; and objectivity.Topic: Independence, Integrity, and Objectivity24.A violation of the profession's ethical standards would most likely have occurred when a CPAA.Purchased a bookkeeping firm's practice of monthly write-ups for a percentage of fees received over a three-year period.B.Made arrangements with a bank to collect notes issued by a client in payment of fees due.C.Named Smith formed a partnership with two other CPAs and used "Smith & Co." as the firm name.D.Issued an unqualified opinion on the 2011 financial statements when fees for the 2010 audit were unpaid.

AACSB: EthicsAICPA BB: LegalAICPA FN: Decision MakingBlooms: ApplyDifficulty: 1 EasyLearning Objective: 19-08 Have a working knowledge of the rules of conduct that apply to independence; integrity; and objectivity.Learning Objective: 19-11 Know the rules of conduct that apply to responsibilities to clients.Topic: Independence, Integrity, and ObjectivityTopic: Responsibilities to Clients25.Which of the following is required for a firm to designate itself as a "Member of the American Institute of Certified Public Accountants" on its letterhead?A.At least one of the partners must be a member.B.The partners whose names appear in the firm name must be members.C.All partners must be members.D.The firm must be a dues-paying member.

AACSB: EthicsAICPA BB: LegalAICPA FN: Decision MakingBlooms: RememberDifficulty: 1 EasyLearning Objective: 19-06 Know the principles of professional conduct.Learning Objective: 19-12 Know the rules of conduct that apply to other responsibilities and practices.Topic: Other Responsibilities and PracticesTopic: Principles of Professional Conduct26.A violation of the profession's ethical standards would least likely have occurred when a CPA in public practiceA.Used a records-retention agency to store the CPA's working papers and client records.B.Served as an expert witness in a damage suit and received compensation based on the amount awarded to the plaintiff.C.Referred life insurance assignments to the CPA's spouse, who is a life insurance agent.D.Failed to file his personal tax return.

AACSB: EthicsAICPA BB: LegalAICPA FN: Decision MakingBlooms: UnderstandDifficulty: 1 EasyLearning Objective: 19-06 Know the principles of professional conduct.Learning Objective: 19-12 Know the rules of conduct that apply to other responsibilities and practices.Topic: Other Responsibilities and PracticesTopic: Principles of Professional Conduct27.According to the Code of Professional Conduct, which of the following individuals is not in a position to influence an attest engagement (i.e., not a covered member)?A.The office's managing partner who determines the compensation of the attest engagement partner.B.The office's IT expert, who consulted with the engagement partner regarding the client's IT system.C.The partner in another office in a nearby city who regularly plays golf with the engagement partner.D.The office's partner who monitors quality control over the attest engagement.

AACSB: EthicsAICPA BB: LegalAICPA FN: Decision MakingBlooms: ApplyDifficulty: 2 MediumLearning Objective: 19-05 Understand the framework for the Code of Professional Conduct.Topic: The AICPA Code of Professional Conduct: A Comprehensive Framework for Auditors28.A CPA, while performing an audit, strives to achieve independence in appearance in order toA.Reduce risk and liability.B.Comply with the generally accepted standards of fieldwork.C.Become independent in fact.D.Maintain public confidence in the profession.

AACSB: EthicsAICPA BB: Critical ThinkingAICPA FN: Decision MakingBlooms: UnderstandDifficulty: 1 EasyLearning Objective: 19-08 Have a working knowledge of the rules of conduct that apply to independence; integrity; and objectivity.Topic: Independence, Integrity, and Objectivity29.In which of the following instances would the independence of the CPA not be considered to be impaired? The CPA has been retained as the auditor of a brokerage firmA.Which owes the CPA audit fees for more than one year.B.In which the CPA has a large active margin account.C.In which the CPA's brother is the controller.D.Which owes the CPA audit fees for current year services and has just filed a petition for bankruptcy.

AACSB: EthicsAICPA BB: LegalAICPA FN: Decision MakingBlooms: ApplyDifficulty: 1 EasyLearning Objective: 19-08 Have a working knowledge of the rules of conduct that apply to independence; integrity; and objectivity.Topic: Independence, Integrity, and Objectivity30.The SEC has issued independence rules that differ from the AICPA's in all of the following areas except:A.Working paper documentation.B.Provision of other professional services.C.Human resource and compensation-related issues.D.Required communication.

AACSB: EthicsAICPA BB: LegalAICPA FN: Decision MakingBlooms: RememberDifficulty: 1 EasyLearning Objective: 19-09 Know the basic differences between the SEC's independence rules for public company auditors and AICPA standards for audits of nonpublic entities.Topic: SEC and PCAOB Independence Requirements for Audits of Public Companies31.Which of the following is not an element of quality control as defined by Statement of Quality Control Standards No. 8?A.Monitoring.B.Independence.C.Human resources.D.Relevant ethical requirements.

AACSB: EthicsAICPA BB: LegalAICPA FN: Decision MakingBlooms: RememberDifficulty: 1 EasyLearning Objective: 19-14 Be able to describe the elements of quality control and how a firm monitors its quality control system.Topic: Elements of Quality Control32.A basic objective of a CPA firm is to provide professional services that conform to professional standards. Reasonable assurance of achieving this basic objective is provided throughA.Compliance with generally accepted reporting standards.B.A system of quality control.C.A system of peer review.D.Continuing professional education.

AACSB: EthicsAICPA BB: LegalAICPA FN: Decision MakingBlooms: RememberDifficulty: 1 EasyLearning Objective: 19-13 Be able to explain the definition of a system of quality control and the AICPA's peer review program.Topic: Quality Control Standards33.The quality control standards are concerned primarily withA.Actions of individual auditors.B.A firm's monitoring of its practice.C.Disciplinary actions against individual auditors.D.Preventing legal action.

AACSB: EthicsAICPA BB: LegalAICPA FN: Decision MakingBlooms: RememberDifficulty: 1 EasyLearning Objective: 19-13 Be able to explain the definition of a system of quality control and the AICPA's peer review program.Learning Objective: 19-14 Be able to describe the elements of quality control and how a firm monitors its quality control system.Topic: Elements of Quality ControlTopic: Quality Control Standards34.Which of the following bodies ordinarily would have the authority to suspend or revoke a CPA's license to practice public accounting?A.The SEC.B.The AICPA.C.A state CPA society.D.A state board of accountancy.

AACSB: EthicsAICPA BB: LegalAICPA FN: Decision MakingBlooms: RememberDifficulty: 3 HardLearning Objective: 19-12 Know the rules of conduct that apply to other responsibilities and practices.Topic: Other Responsibilities and Practices35.Which of the following statements best describes why the profession of certified public accountants has deemed it essential to promulgate a code of conduct and to establish a mechanism for enforcing observance of the code?A.Ethical standards are established so that users of accounting services know what to expect, the professionals know what behaviors are acceptable, and overseers can take disciplinary action when appropriate.B.A prerequisite to success is the establishment of an ethical code that stresses primarily the professional's responsibility to clients and colleagues.C.A requirement of most state laws calls for the profession to establish a code of conduct.D.An essential means of self-protection for the profession is the establishment of flexible ethical standards by the profession.

AACSB: EthicsAICPA BB: Critical ThinkingAICPA FN: Decision MakingBlooms: UnderstandDifficulty: 2 MediumLearning Objective: 19-01 Know the definitions and general importance of ethics and professionalism.Topic: Ethics and Professional Conduct36.A CPA's license to practice will ordinarily be suspended or revoked automatically forA.Controlling the bookkeeping for a compilation client.B.Conviction of willful failure to file personal income tax return.C.Refusing to respond to an inquiry by the AICPA practice review committee.D.Accepting compensation while honoring a subpoena to appear as an expert witness.

AACSB: EthicsAICPA BB: LegalAICPA FN: Decision MakingBlooms: ApplyDifficulty: 2 MediumLearning Objective: 19-06 Know the principles of professional conduct.Learning Objective: 19-07 Understand the framework for the Rules of Conduct.Learning Objective: 19-12 Know the rules of conduct that apply to other responsibilities and practices.Topic: Other Responsibilities and PracticesTopic: Principles of Professional ConductTopic: Rules of Conduct37.A CPA's retention of client records as a means of enforcing payment of an overdue audit fee is an action that isA.Considered acceptable by the AICPA Code of Professional Conduct.B.Ill-advised because 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.

AACSB: EthicsAICPA BB: LegalAICPA FN: Decision MakingBlooms: ApplyDifficulty: 2 MediumLearning Objective: 19-12 Know the rules of conduct that apply to other responsibilities and practices.Topic: Other Responsibilities and Practices38.Which of the following is allowable for a CPA?A.A used car loan from a banking client where the client has a lien on the car.B.An uncollateralized signature loan from a client.C.Owning more than five percent of the outstanding shares of client stock in a retirement account.D.The audit engagement partner serves on the client's audit committee.

AACSB: EthicsAICPA BB: LegalAICPA FN: Decision MakingBlooms: ApplyDifficulty: 2 MediumLearning Objective: 19-06 Know the principles of professional conduct.Learning Objective: 19-08 Have a working knowledge of the rules of conduct that apply to independence; integrity; and objectivity.Topic: Independence, Integrity, and ObjectivityTopic: Principles of Professional Conduct39.In performing an audit, Jackson, CPA, discovers that the professional competence necessary for the engagement is lacking. Jackson informs management of the situation and recommends another local CPA firm and management engages this other firm. Under these circumstancesA.Jackson may request compensation from the other CPA firm for any professional services rendered to it in connection with the engagement.B.Jackson may accept a referral fee from the other CPA firm.C.Jackson has violated the AICPA Code of Professional Conduct because of non-fulfillment of the duty of performance.D.Jackson's lack of competence should be construed to be a violation of generally accepted auditing standards.

AACSB: EthicsAICPA BB: LegalAICPA FN: Decision MakingBlooms: AnalyzeDifficulty: 2 MediumLearning Objective: 19-06 Know the principles of professional conduct.Learning Objective: 19-10 Know the rules of conduct that apply to general standards and accounting principles.Topic: General Standards and Accounting PrinciplesTopic: Principles of Professional Conduct40.In which one of the following situations would a CPA be in violation of the AICPA Code of Professional Conduct in determining a fee?A.A fee based on whether the CPA's report on the client's financial statements results in the approval of a bank loan.B.A fee based on an estimate of the number of hours needed to complete the engagement by auditors of various levels of experience.C.A fee based on the nature of the service rendered and the CPA's particular expertise instead of the actual time spent on the engagement.D.A fee based on the fee charged by the prior auditor.

AACSB: EthicsAICPA BB: LegalAICPA FN: Decision MakingBlooms: AnalyzeDifficulty: 2 MediumLearning Objective: 19-11 Know the rules of conduct that apply to responsibilities to clients.Topic: Responsibilities to Clients41.In connection with a lawsuit, a third party attempts to gain access to the auditor's working papers. The client's defense of privileged communication will be successful only to the extent it is protected by theA.Auditor's acquiescence in use of this defense.B.Common law.C.AICPA Code of Professional Conduct.D.State law.

AACSB: EthicsAICPA BB: LegalAICPA FN: Decision MakingBlooms: ApplyDifficulty: 3 HardLearning Objective: 19-06 Know the principles of professional conduct.Learning Objective: 19-11 Know the rules of conduct that apply to responsibilities to clients.Topic: Principles of Professional ConductTopic: Responsibilities to Clients42.The profession's ethical standards would most likely 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 theA.CPA would not be independent.B.Fee was a competitive bid.C.Actual fee would be substantially higher.D.Actual fee would be substantially lower than the fees charged by other CPAs for comparable services.

AACSB: EthicsAICPA BB: LegalAICPA FN: Decision MakingBlooms: RememberDifficulty: 2 MediumLearning Objective: 19-06 Know the principles of professional conduct.Learning Objective: 19-11 Know the rules of conduct that apply to responsibilities to clients.Topic: Principles of Professional ConductTopic: Responsibilities to Clients43.According to the ethical standards of the profession, which of the following acts is generally prohibited?A.Issuing a modified report explaining a failure to follow a governmental regulatory agency's standards when conducting an attest service for a client.B.Revealing confidential client information during a quality review of a professional practice by a team from the state CPA society.C.Accepting a contingent fee for representing a client in an examination of the client's federal tax return by an IRS agent.D.Retaining client records after an engagement is terminated prior to completion and the client has demanded its return.

AACSB: EthicsAICPA BB: LegalAICPA FN: Decision MakingBlooms: ApplyDifficulty: 2 MediumLearning Objective: 19-06 Know the principles of professional conduct.Learning Objective: 19-11 Know the rules of conduct that apply to responsibilities to clients.Learning Objective: 19-12 Know the rules of conduct that apply to other responsibilities and practices.Topic: Other Responsibilities and PracticesTopic: Principles of Professional ConductTopic: Responsibilities to Clients44.According to the ethical standards of the profession, which of the following acts is generally prohibited?A.Purchasing a product from a third party and reselling it to a client.B.Writing a financial management newsletter promoted and sold by a publishing company.C.Accepting a commission for recommending a product to an audit client.D.Accepting engagements obtained through the efforts of third parties.

AACSB: EthicsAICPA BB: LegalAICPA FN: Decision MakingBlooms: ApplyDifficulty: 2 MediumLearning Objective: 19-06 Know the principles of professional conduct.Learning Objective: 19-12 Know the rules of conduct that apply to other responsibilities and practices.Topic: Other Responsibilities and PracticesTopic: Principles of Professional Conduct45.In which of the following circumstances would a CPA who audits XM Corporation lack independence?A.The CPA and XM's president are both on the board of directors of COD Corporation.B.The CPA and XM's president each owns 25 percent of FOB Corporation, a closely-held company.C.The CPA has an automobile loan from XM, which is a savings and loan organization and the loan is collateralized by the automobile.D.The CPA reduced XM's usual audit fee by 40 percent because XM's financial condition was unfavorable.

AACSB: EthicsAICPA BB: LegalAICPA FN: Decision MakingBlooms: AnalyzeDifficulty: 2 MediumLearning Objective: 19-08 Have a working knowledge of the rules of conduct that apply to independence; integrity; and objectivity.Topic: Independence, Integrity, and Objectivity46.Mavis, CPA, has audited the financial statements of South Bay Sales Incorporated for several years and had always been paid promptly for services rendered. Last year's audit invoices have not been paid because South Bay is experiencing cash flow difficulties and the current year's audit is scheduled to commence in one week. With respect to the past due audit fees, Mavis shouldA.Perform the scheduled audit and allow South Bay to pay when the cash flow difficulties are alleviated.B.Perform the scheduled audit only after arranging a definite payment schedule and securing notes signed by South Bay.C.Inform South Bay's management that the past due audit fees are considered an impairment of auditor independence.D.Inform South Bay's management that the past due audit fees may be considered a loan on which interest must be imputed for financial statement purposes.

AACSB: EthicsAICPA BB: LegalAICPA FN: Decision MakingBlooms: ApplyDifficulty: 2 MediumLearning Objective: 19-08 Have a working knowledge of the rules of conduct that apply to independence; integrity; and objectivity.Topic: Independence, Integrity, and Objectivity47.In which of the following instances would the independence of the CPA not be considered to be impaired? The CPA has been retained as the auditor of aA.Charitable organization in which an employee of the CPA serves as treasurer.B.Municipality in which the CPA owns $25,000 of the $2,500,000 indebtedness of the municipality.C.Restaurant where the CPA dines frequently.D.Company in which the CPA's private investment club owns a one-tenth interest.

AACSB: EthicsAICPA BB: LegalAICPA FN: Decision MakingBlooms: ApplyDifficulty: 2 MediumLearning Objective: 19-08 Have a working knowledge of the rules of conduct that apply to independence; integrity; and objectivity.Topic: Independence, Integrity, and Objectivity48.A CPA firm's personnel partner periodically studies the CPA firm's personnel advancement experience to ascertain whether the individuals who were assigned increased degrees of responsibility met predetermined criteria. This is evidence of the CPA firm's adherence to prescribed standards ofA.Quality control.B.Due professional care.C.Supervision and review.D.Fieldwork.

AACSB: EthicsAICPA BB: LegalAICPA FN: Decision MakingBlooms: ApplyDifficulty: 2 MediumLearning Objective: 19-14 Be able to describe the elements of quality control and how a firm monitors its quality control system.Topic: Elements of Quality Control49.A CPA firm would be reasonably assured of meeting its overall responsibility to provide services that conform with professional standards byA.Adhering to generally accepted accounting principles.B.Implementing an appropriate system of quality control.C.Joining professional societies that enforce ethical conduct.D.Maintaining an attitude of independence in its engagements.

AACSB: EthicsAICPA BB: LegalAICPA FN: Decision MakingBlooms: ApplyDifficulty: 2 MediumLearning Objective: 19-14 Be able to describe the elements of quality control and how a firm monitors its quality control system.Topic: Elements of Quality Control50.Which of the following is an element of a CPA firm's quality control system that should be considered in establishing its quality control policies and procedures?A.Using the audit risk model.B.Using statistical sampling techniques.C.Assigning personnel to engagements.D.Considering audit risk and materiality.

AACSB: EthicsAICPA BB: Critical ThinkingAICPA FN: Decision MakingBlooms: ApplyDifficulty: 2 MediumLearning Objective: 19-14 Be able to describe the elements of quality control and how a firm monitors its quality control system.Topic: Elements of Quality Control51.What is the primary purpose of the acceptance and continuance of client relationships and specific engagements element of quality control?A.Guarantee that firms do not associate with clients whose management lacks integrity.B.Provide reasonable assurance that firms do not associate with clients whose management lacks integrity.C.Guarantee that firms will not be sued as a result of association with a client.D.Provide reasonable assurance that firms will not be sued as a result of association with a client.

AACSB: EthicsAICPA BB: IndustryAICPA FN: Risk AnalysisBlooms: ApplyDifficulty: 2 MediumLearning Objective: 19-14 Be able to describe the elements of quality control and how a firm monitors its quality control system.Topic: Elements of Quality Control52.In order to achieve effective quality control, a firm of independent auditors should establish policies and procedures forA.Determining the minimum procedures necessary for unaudited financial statements.B.Setting the scope of audit work.C.Deciding whether to accept or continue a client.D.Setting the scope of internal control study and evaluation.

AACSB: EthicsAICPA BB: IndustryAICPA FN: Risk AnalysisBlooms: ApplyDifficulty: 2 MediumLearning Objective: 19-14 Be able to describe the elements of quality control and how a firm monitors its quality control system.Topic: Elements of Quality Control53.Within the context of quality control, the primary purpose of continuing professional education and training activities is to enable a CPA firm to provide personnel within the firm withA.Technical training that ensures proficiency as an auditor.B.Opportunities for career advancement outside the accounting firm.C.Knowledge required to fulfill assigned responsibilities.D.Knowledge required to perform a peer review.

AACSB: EthicsAICPA BB: IndustryAICPA FN: Decision MakingBlooms: AnalyzeDifficulty: 2 MediumLearning Objective: 19-14 Be able to describe the elements of quality control and how a firm monitors its quality control system.Topic: Elements of Quality Control54.A CPA firm evaluates its personnel advancement experience to ascertain whether individuals assigned to increased degrees of responsibility meet predetermined criteria. This policy is evidence of the firm's adherence to which of the following prescribed standards?A.Professional ethics.B.Supervision and review.C.Accounting and review services.D.Quality control.

AACSB: EthicsAICPA BB: LegalAICPA FN: Decision MakingBlooms: UnderstandDifficulty: 2 MediumLearning Objective: 19-14 Be able to describe the elements of quality control and how a firm monitors its quality control system.Topic: Elements of Quality Control55.The primary purpose of establishing quality control policies and procedures for deciding whether to accept a new client is toA.Enable the CPA firm to attest to the reliability of the client.B.Satisfy the CPA firm's duty to the public concerning the acceptance of new clients.C.Minimize the likelihood of association with clients whose management lacks integrity.D.Anticipate before performing any fieldwork whether an unqualified opinion can be expressed.

AACSB: EthicsAICPA BB: IndustryAICPA FN: Risk AnalysisBlooms: ApplyDifficulty: 2 MediumLearning Objective: 19-14 Be able to describe the elements of quality control and how a firm monitors its quality control system.Topic: Elements of Quality Control56.Following the issuance of a PCAOB draft report, how many days does the CPA firm have to respond to accusations?A.10 days.B.30 days.C.50 days.D.90 days.

AACSB: EthicsAICPA BB: LegalAICPA FN: Decision MakingBlooms: RememberDifficulty: 2 MediumLearning Objective: 19-15 Be familiar with the PCAOB inspection program for accounting firms that audit public companies.Topic: PCAOB Inspections of Registered Public Accounting Firms57.A violation of the profession's ethical standards would most likely occur when a CPA whoA.Is also admitted to the Bar represents on letterhead to be both an attorney and a CPA.B.Writes a newsletter on financial management also permits a publishing company to solicit subscriptions by direct mail.C.Is controller of a bank permits the bank to use the controller's CPA title in the listing of officers in its publications.D.Refused to hire a new employee does so because the CPA deemed the candidate to be "too old."

AACSB: EthicsAICPA BB: LegalAICPA FN: Decision MakingBlooms: ApplyDifficulty: 1 EasyLearning Objective: 19-06 Know the principles of professional conduct.Learning Objective: 19-12 Know the rules of conduct that apply to other responsibilities and practices.Topic: Other Responsibilities and PracticesTopic: Principles of Professional Conduct58.In determining estimates of fees, an auditor may take into account each of the following, except the:A.Value of the service to the client.B.Degree of responsibility assumed by undertaking the engagement.C.Skills required to perform the service.D.Attainment of specific findings.

AACSB: EthicsAICPA BB: LegalAICPA FN: Decision MakingBlooms: ApplyDifficulty: 2 MediumLearning Objective: 19-11 Know the rules of conduct that apply to responsibilities to clients.Topic: Responsibilities to Clients59.An auditor is about to commence a recurring annual audit engagement. The continuing auditor's independence would ordinarily be considered to be impaired if the prior year's audit feeA.Was unusually large.B.Has not been paid and will not be paid for at least twelve months.C.Has not been paid and the client has filed a voluntary petition for bankruptcy.D.Was renegotiated during the prior year audit based on the need for expanded testing.

AACSB: EthicsAICPA BB: LegalAICPA FN: Decision MakingBlooms: ApplyDifficulty: 2 MediumLearning Objective: 19-06 Know the principles of professional conduct.Learning Objective: 19-08 Have a working knowledge of the rules of conduct that apply to independence; integrity; and objectivity.Topic: Independence, Integrity, and ObjectivityTopic: Principles of Professional Conduct60.In which of the following circumstances would a CPA be bound by ethics to refrain from disclosing any confidential information obtained during the course of a professional engagement?A.The CPA is issued a summons enforceable by a court order that orders the CPA to present confidential information.B.A major stockholder of a client company seeks accounting information from the CPA after management declined to disclose the requested information.C.Confidential client information is requested as part of a quality review of the CPA's practice by a review team authorized by the AICPA.D.An inquiry by a disciplinary body of a state CPA society requests confidential client information.

AACSB: EthicsAICPA BB: LegalAICPA FN: Decision MakingBlooms: ApplyDifficulty: 2 MediumLearning Objective: 19-06 Know the principles of professional conduct.Learning Objective: 19-11 Know the rules of conduct that apply to responsibilities to clients.Topic: Principles of Professional ConductTopic: Responsibilities to Clients61.Under which of the following circumstances would the independence of a CPA be considered impaired if the CPA, who also is an attorney, serves as auditor and provides legal services to the same client?A.When the CPA, as legal agent, consummates a business acquisition for the client.B.When the CPA's audit fees and legal fees are not billed separately.C.When the CPA uses legal expertise to research a question of income tax law.D.When the legal services consist of an analysis of the terms of an existing lease agreement.

AACSB: EthicsAICPA BB: LegalAICPA FN: Decision MakingBlooms: ApplyDifficulty: 3 HardLearning Objective: 19-08 Have a working knowledge of the rules of conduct that apply to independence; integrity; and objectivity.Topic: Independence, Integrity, and Objectivity62.According to the profession's ethical standards, a CPA would be considered independent in which of the following instances?A.A client leases part of an office building from the CPA, resulting in a material indirect financial interest to the CPA.B.The CPA has a material direct financial interest in a client, but transfers the interest into a blind trust.C.The CPA owns an office building and the mortgage on the building is guaranteed by a client.D.The CPA belongs to a country club client in which membership requires an annual fee.

AACSB: EthicsAICPA BB: LegalAICPA FN: Decision MakingBlooms: ApplyDifficulty: 3 HardLearning Objective: 19-08 Have a working knowledge of the rules of conduct that apply to independence; integrity; and objectivity.Topic: Independence, Integrity, and Objectivity63.When auditing a public company, which of the following impairs an auditor's independence?A.Offering audit services as well as preparing the tax return for the same client.B.The auditor's spouse works in the assembly line of an audit client.C.Lack of fee disclosure in the client's annual report.D.The auditor has been a partner on the engagement for ten years.

AACSB: EthicsAICPA BB: LegalAICPA FN: Decision MakingBlooms: AnalyzeDifficulty: 2 MediumLearning Objective: 19-09 Know the basic differences between the SEC's independence rules for public company auditors and AICPA standards for audits of nonpublic entities.Topic: SEC and PCAOB Independence Requirements for Audits of Public Companies

Short Answer Questions

64.Why do professions establish codes of conduct that define ethical behaviors for members of the profession?

These rules are established so that users of the professional services know what to expect when they purchase such services. The rules also let members of the profession know what behavior is acceptable and allow the profession to monitor the actions of its members and apply discipline where appropriate.

AACSB: EthicsAICPA BB: Critical ThinkingAICPA FN: Decision MakingBlooms: RememberDifficulty: 1 EasyLearning Objective: 19-01 Know the definitions and general importance of ethics and professionalism.Topic: Ethics and Professional Conduct65.Distinguish between the following theories of ethical behavior: utilitarianism, a rights-based approach, and a justice-based approach.

Utilitarianism focuses on the consequences of a decision on all individuals involved, and not just the decision maker. The ethical choice is the choice that provides the greatest good to the greatest number of people. A rights-based approach focuses on respecting the rights of individuals. The ethical choice is the choice that avoids violating the rights of any involved individual. The justice-based approach is concerned with equity, fairness, and impartiality to all involved. The ethical choice is the choice that fairly and equitably distributes resources among the individuals or groups affected.

AACSB: EthicsAICPA BB: Critical ThinkingAICPA FN: Decision MakingBlooms: UnderstandDifficulty: 2 MediumLearning Objective: 19-02 Be able to explain three basic theories of ethical behavior.Topic: Theories of Ethical Behavior66.Which professional and regulatory bodies establish the ethical and professional rules for auditors of: (1) public companies and (2) private companies?

(1) The principles, rules and regulations that govern ethics and professionalism for auditors of public companies are established by the PCAOB (which were adopted from the AICPA), the SEC, and the ISB.

(2) The rules for private companies are established by the AICPA and the ISB. Note that the rules governing public company audits are more stringent in nature.

AACSB: EthicsAICPA BB: LegalAICPA FN: Decision MakingBlooms: RememberDifficulty: 2 MediumLearning Objective: 19-04 Know how professional ethics standards for auditors have developed over time and the entities involved.Topic: Standards for Auditor Professionalism67.Listed below are definitions of the six Principles of Professional Conduct. For each, identify the principle being defined.

a. A member should observe the profession's technical and ethical standards, strive continually to improve competence and the quality of services, and discharge professional responsibility to the best of the member's ability.b. Members should exercise sensitive professional and moral judgments in all their activities.c. A member should be free of conflicts of interest in discharging professional responsibilities.d. A member in public practice should observe the Principles of the Code of Professional Conduct in determining the type and extent of services to be provided.e. Members should accept the obligation to act in a way that will honor the public trust and demonstrate commitment to professionalism.f. To maintain and broaden public confidence, members should perform all professional responsibilities with the highest sense of ______________.

a. Due care.b. Responsibilities.c. Objectivity and Independence.d. Scope and nature of services.e. Public interest.f. Integrity.

AACSB: EthicsAICPA BB: LegalAICPA FN: Decision MakingBlooms: UnderstandDifficulty: 1 EasyLearning Objective: 19-06 Know the principles of professional conduct.Topic: Principles of Professional Conduct68.Ms. Lembke is a partner for DTS, a CPA firm. She is the lead partner for the firm's largest client, The Grey Elephant. Ms. Zadina, who works in the same office as Ms. Lembke, has a sister who is the controller for The Grey Elephant. Because of potential independence issues, Ms. Zadina does no work for The Grey Elephant. Ms. Zadina is being considered for promotion to partner. What independence issues should Ms. Lembke consider before promoting Ms. Zadina?

Interpretation 101-1 of the AICPA Rules of Conduct states that all partners of a firm must be independent of any attestation clients of the firm. Therefore, if Ms. Zadina is promoted to partner, DTS would no longer be able to provide attestation services for The Grey Elephant. If Ms. Zadina is promoted, she will have to move to another office or DTS will have to give up its largest client.

AACSB: EthicsAICPA BB: LegalAICPA FN: Decision MakingBlooms: AnalyzeDifficulty: 1 EasyLearning Objective: 19-07 Understand the framework for the Rules of Conduct.Learning Objective: 19-08 Have a working knowledge of the rules of conduct that apply to independence; integrity; and objectivity.Topic: Independence, Integrity, and ObjectivityTopic: Rules of Conduct69.The SEC's rules with respect to services provided by auditors are predicated on three basic principles of auditor objectivity and independence. What are the three basic principles?

The three basic principles are: (1) an auditor should not audit his or her own work, (2) an auditor should not function in the role of management, and (3) an auditor should not serve in an advocacy role for his or her client.

AACSB: EthicsAICPA BB: LegalAICPA FN: Decision MakingBlooms: RememberDifficulty: 1 EasyLearning Objective: 19-09 Know the basic differences between the SEC's independence rules for public company auditors and AICPA standards for audits of nonpublic entities.Topic: SEC and PCAOB Independence Requirements for Audits of Public Companies70.Identify the primary purposes of Rules 201-203 of the Rules of Conduct.

Rule 201 captures much of what is contained in the 10 generally accepted auditing standards and codifies it as part of the Code. Rule 202 requires that members of the AICPA comply with professional standards when performing professional services, whether or not they are practicing in public accounting. Rule 203 was adopted to require compliance by CPAs with GAAP.

AACSB: EthicsAICPA BB: LegalAICPA FN: Decision MakingBlooms: RememberDifficulty: 3 HardLearning Objective: 19-10 Know the rules of conduct that apply to general standards and accounting principles.Topic: General Standards and Accounting Principles71.When can a CPA disclose confidential information without the client's consent?

A CPA can disclose confidential information without the client's consent (1) to meet disclosure requirements for GAAP or GAAS; (2) to comply with a valid subpoena; (3) to allow a review of a member's professional practice under the authority of the AICPA, a state CPA society, or a statement board of accountancy; (4) to comply with an investigative or disciplinary proceeding; and (5) to allow a review of a CPA's professional practice in conjunction with the purchase, sale, or merger of the practice.

AACSB: EthicsAICPA BB: LegalAICPA FN: Decision MakingBlooms: ApplyDifficulty: 1 EasyLearning Objective: 19-11 Know the rules of conduct that apply to responsibilities to clients.Topic: Responsibilities to Clients

Matching Questions

72.Match each term below with its definition as provided by the AICPA Rules of Conduct.

1.PartnerExamples include financial statement audits, reviews, and examinations of prospective financial information5

2.Professional servicesAny person or entity, other than the member's employer, that engages a member or a member's firm to perform professional services4

3.Practice of public accountingAny action initiated by a member that informs others of his or her status as a CPA or AICPA-accredited specialist6

4.ClientA proprietor, part owner, or any individual who assumes the risks and benefits of firm ownership or who is otherwise held out by the firm to be the equivalent of any of the aforementioned1

5.Attest engagementThe performance for a client by a member or a member's firm while holding out as CPA(s) of the professional services of accounting, tax, personal financial planning, litigation support services, and those professional services for which standards are promulgated by bodies designated by Council3

6.Holding outAll services performed by member while holding out as a CPA2

AACSB: EthicsAICPA BB: LegalAICPA FN: Decision MakingBlooms: UnderstandDifficulty: 2 MediumLearning Objective: 19-07 Understand the framework for the Rules of Conduct.Topic: Rules of Conduct19-1