Auditing Chapter 4
Quiz based on Auditing and Assurance Services 14e by Arens
- 1.
A challenge associated with the Ethical Principles stated in the Code of Professional Conduct is:
- A.
The emphasis on positive activities.
- B.
That they identify ideal conduct.
- C.
The difficulty of enforcing principles, or general ideals.
- D.
That there are too many to remember.
Correct Answer
C. The difficulty of enforcing principles, or general ideals. -
- 2.
“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.
Correct Answer
C. Taking an unbiased and objective viewpoint. -
- 3.
When CPAs are able to maintain their actual independence, it is referred to as independence in:
- A.
Conduct.
- B.
Appearance.
- C.
Fact.
- D.
Total.
Correct Answer
C. Fact. -
- 4.
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.
Correct Answer
A. A staff auditor providing audit services to the client acquires stock in that client. -
- 5.
Interpretations of Rule 101 prohibit covered members from owning any stock or other direct investment in audit clients. Covered members include all but which of the following?
- A.
All partners in an office that has no responsibility for the engagement.
- B.
The firm and its employee benefit plans.
- C.
Individuals on the attest engagement.
- D.
All of the above describe covered members.
Correct Answer
A. All partners in an office that has no responsibility for the engagement. -
- 6.
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 not cause a loss of independence?
- A.
The former partner invests in a current client of the firm and receives retirement benefits from the CPA firm, which are dependent upon the firm’s financial performance.
- B.
The former partner uses the CPA firm’s office space and has significant influence over a client.
- C.
The former partner severs relations with the firm and accepts employment with the firm’s client after having been retired for 18 months.
- D.
The former partner is held out as an associate of the firm and takes part in the firm’s business activities.
Correct Answer
C. The former partner severs relations with the firm and accepts employment with the firm’s client after having been retired for 18 months. -
- 7.
The financial interests of 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.
Correct Answer
D. Sibling living in the same city as the CPA. -
- 8.
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.
Correct Answer
D. An honorary director for a not-for-profit charitable or religious organization. -
- 9.
When the question arises whether a CPA firm may do both bookkeeping and auditing services for the same public company client, the Interpretations of the AICPA’s Code of Professional Conduct:
- A.
Encourage it.
- B.
Prohibit it.
- C.
Allow it.
- D.
Allow each firm to determine the answer on a case-by-case basis.
Correct Answer
B. Prohibit it. -
- 10.
The CPA must not subordinate his or her professional judgment to that of others in any:
- A.
Engagement.
- B.
Audit engagement.
- C.
Engagement excluding tax services.
- D.
Engagement excluding management advisory services.
Correct Answer
A. Engagement. -
- 11.
Which of the following would be a violation of the rule requiring “objectivity” by the CPA?
- A.
The auditor accepts management’s opinion regarding the collection of accounts receivable without an independent evaluation.
- B.
In preparing a client’s tax return, the CPA encourages a client to take a deduction which the CPA believes is risky, but unlikely to be found during an IRS audit.
- C.
Either a or b would be a violation of the rule.
- D.
Neither a nor b would be a violation of the rule.
Correct Answer
C. Either a or b would be a violation of the rule. -
- 12.
Several months after an unqualified audit report was issued, the auditor discovers the financial statements were materially misstated. The client’s CEO agrees that there are misstatements, but refuses to correct them. She claims that “confidentiality” prevents the CPA from informing anyone.
- A.
The CEO is correct and the auditor must maintain confidentiality.
- B.
The CEO is incorrect, but because the audit report has been issued it is too late.
- C.
The CEO is correct, but to be ethically correct the auditor should violate the confidentiality rule and disclose the error.
- D.
The CEO is incorrect, and the auditor has an obligation to issue a revised audit report, even if the CEO will not correct the financial statements.
Correct Answer
D. The CEO is incorrect, and the auditor has an obligation to issue a revised audit report, even if the CEO will not correct the financial statements. -
- 13.
A member in public practice may perform for a contingent fee any professional services for a client for whom the member or member’s firm performs:
- A.
An audit.
- B.
Consulting services
- C.
Preparation of an original tax return.
- D.
Preparation of an amended tax return.
Correct Answer
B. Consulting services -
- 14.
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.
Correct Answer
A. Contingent fees based on savings due to implementation of an information system. -
- 15.
A member in public practice shall neither receive from, nor pay to, a client a commission when the member or member’s firm also performs certain services for that client. Are commissions allowed if the CPA performs: A compilation that will be used by a third party An audit of prospective financial information
- A.
Yes Yes
- B.
No No
- C.
Yes No
- D.
No Yes
Correct Answer
B. No No -
- 16.
If the board of accountancy in the state in which a CPA firm is licensed has rules that are different than the AICPA’s rules, the CPA firm must follow:
- A.
Whichever rules are less restrictive.
- B.
Whichever rules are more restrictive.
- C.
The rules of the AICPA.
- D.
The rules of the state’s board of accountancy.
Correct Answer
B. Whichever rules are more restrictive. -
- 17.
Elise, CPA, owns a public accounting firm and wishes to establish a separate partnership to offer data processing services to the public and other public accountants.
- A.
Elise cannot be a partner in any separate partnership that offers data processing services.
- B.
Elise may form a separate partnership.
- C.
Elise may form a separate partnership as long as partners are CPAs.
- D.
Elise may form a separate partnership, but must give up the public accounting practice.
Correct Answer
B. Elise may form a separate partnership. -
- 18.
The AICPA’s Code of Professional Conduct states that a CPA should maintain integrity and objectivity. The term “objectivity” in the Code refers to a CPA’s ability to:
- A.
Choose independently between alternate accounting principles and auditing standards.
- B.
Distinguish between accounting practices that are acceptable and those that are not.
- C.
Be unyielding in all matters dealing with auditing procedures.
- D.
Maintain an impartial attitude on matters that come under the CPA’s review.
Correct Answer
D. Maintain an impartial attitude on matters that come under the CPA’s review. -
- 19.
CPAs are prohibited from which of the following forms of advertising?
- A.
Self-laudatory advertising.
- B.
Celebrity endorsement advertising.
- C.
Use of trade names, such as “Awesome Auditors.”
- D.
Use of phrases, such as “Guaranteed largest tax refunds in town!”
Correct Answer
D. Use of phrases, such as “Guaranteed largest tax refunds in town!” -
- 20.
Anna Greer, a CPA in public practice, contacts Blake Sawyers, an employee of Jackson & Jackson, LLP, and makes him an offer of employment without first notifying Jackson & Jackson, LLP. According to the AICPA’s Code of Professional Conduct, Anna’s behavior:
- A.
Is a violation of the Code of Professional Conduct.
- B.
Is a violation only if Greer and Sawyers are CPAs.
- C.
Is a violation only if Jackson & Jackson LLP is a CPA firm.
- D.
Is not a violation.
Correct Answer
D. Is not a violation. -
- 21.
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.
Correct Answer
B. The client must hire an external CPA to approve all of the journal entries prepared by the auditor. -
- 22.
Which of the following statements is not true with respect to audit committees?
- A.
Individuals not on a firm’s board of directors should comprise the audit committee.
- B.
The audit committee generally helps in resolving conflicts between the auditors and company management.
- C.
All companies listed on the NYSE are required to have an audit committee.
- D.
Audit committees are required for all companies.
Correct Answer
D. Audit committees are required for all companies. -
- 23.
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.
Correct Answer
D. Definitions. -
- 24.
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: Honor the public trust Serve the client’s interest
- A.
Yes Yes
- B.
No No
- C.
Yes No
- D.
No Yes
Correct Answer
C. Yes No -
- 25.
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 MAS services.
Correct Answer
C. In public practice should be independent in fact and in appearance when providing auditing and other attestations services. -
- 26.
Of the various parts of the AICPA’s Code of Professional Conduct, the:
- A.
Principles are enforceable.
- B.
Ethical Rulings are enforceable.
- C.
Interpretations are enforceable.
- D.
Rules of Conduct are enforceable.
Correct Answer
D. Rules of Conduct are enforceable. -
- 27.
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.
Correct Answer
A. Attestation engagements. -
- 28.
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.
Correct Answer
D. The Interpretations are not enforceable, but a practitioner must justify departure from them. -
- 29.
Ethical Rulings are:
- A.
Issued by the AICPA’s Board of Governors.
- B.
Explanations relating to specific factual circumstances.
- C.
Explanations relating to broad hypothetical circumstances.
- D.
Enforceable.
Correct Answer
B. Explanations relating to specific factual circumstances. -
- 30.
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.
Correct Answer
B. Rules of Conduct. -
- 31.
Rules of Conduct contained in the Code of Professional Conduct apply to all AICPA members for all services provided, whether or not the member is in the practice of public accounting:
- A.
In all circumstances.
- B.
For non-attestation services.
- C.
Except for the single exception of a tax practice.
- D.
Unless it is specifically stated otherwise in the Code.
Correct Answer
D. Unless it is specifically stated otherwise in the Code. -
- 32.
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: Employees Shareholders
- A.
Yes Yes
- B.
No No
- C.
Yes No
- D.
No Yes
Correct Answer
A. Yes Yes -
- 33.
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.
Correct Answer
C. Non-dependent grandfather. -
- 34.
When determining whether independence is impaired because of an ownership interest in a client company, materiality will affect whether ownership is a violation of Rule 101:
- A.
In all circumstances.
- B.
Only for direct ownership.
- C.
Only for indirect ownership.
- D.
Under no circumstances.
Correct Answer
C. Only for indirect ownership. -
- 35.
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.
Correct Answer
C. Material loans. -
- 36.
Interpretations of Rule 101 regarding a “direct financial interest” have presumed that a violation exists in which of the following circumstances, unless other circumstances offset such a presumption?
- 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 client.
Correct Answer
A. When close relatives such as nondependent children, brothers, and sisters have a significant financial interest in the client. -
- 37.
Which of the following circumstances would ordinarily not impair the auditor’s independence?
- A.
Litigation by a client against an audit firm related to tax services.
- B.
Litigation by a client against an audit firm claiming a deficiency in the previous audit.
- C.
Litigation by an audit firm against a client claiming management fraud or deceit.
- D.
Client’s intent to start a lawsuit at some future date, after the current audit is completed, claiming a deficiency in the previous audit.
Correct Answer
A. Litigation by a client against an audit firm related to tax services. -
- 38.
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.
Correct Answer
B. The client is required to file an annual report, including audited financial statements, with the Securities and Exchange Commission. -
- 39.
Which of the following services is not prohibited 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.
Correct Answer
D. Services related to assessing the effectiveness of internal control over financial reporting. -
- 40.
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.
Correct Answer
B. Assisting the company in preparing certain SEC registration statements (e.g., 10-Q, 10-K). -
- 41.
Rule 301 of the AICPA’s Code of Professional Conduct requires CPAs to maintain the confidentiality of client information. This rule would be violated if a CPA disclosed information without a client’s consent as a result of a:
- A.
Subpoena or summons.
- B.
Peer review.
- C.
Complaint filed with the trial board of the Institute.
- D.
Request by a client’s largest stockholder.
Correct Answer
D. Request by a client’s largest stockholder. -
- 42.
A CPA is allowed to accept a referral fee for recommending a client to another CPA if: The client pre-approves the transaction Payment of the referral fee is disclosed to the client
- A.
Yes Yes
- B.
No No
- C.
Yes No
- D.
No Yes
Correct Answer
D. No Yes -
- 43.
Rule 505 of the AICPA’s Code of Professional Conduct permits CPA firms to organize as:
- A.
Proprietorships or partnerships only.
- B.
Proprietorships, partnerships, or professional corporations.
- C.
Proprietorships, general partnerships, general corporations, professional corporations, limited liability companies, and limited liability partnerships if permitted by state law.
- D.
Single proprietorships, partnerships, professional corporations if permitted by state law, or regular corporations.
Correct Answer
C. Proprietorships, general partnerships, general corporations, professional corporations, limited liability companies, and limited liability partnerships if permitted by state law. -
- 44.
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.
Correct Answer
A. The auditor’s checking account, which is fully insured by a federal agency, is held at a client financial institution. -
- 45.
If a nonpublic company asks an accountant to perform a review engagement, and the accountant has an immaterial direct financial interest in the company, the accountant is:
- A.
Independent because the financial interest is immaterial and, therefore, may issue a review report.
- B.
Not independent and, therefore, may not issue a review report.
- C.
Not independent and, therefore, may not be associated with the financial statements.
- D.
Not independent and, therefore, may issue a review report, but may not issue an auditor’s opinion.
Correct Answer
B. Not independent and, therefore, may not issue a review report. -
- 46.
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.
Correct Answer
A. Auditor. -
- 47.
A CPA firm should decline an offer to perform management advisory 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.
Correct Answer
C. Acceptance would require the CPA firm to make management decisions for an audit client. -
- 48.
In which of the following circumstances would a CPA be bound by ethics to refrain from disclosing any confidential information about a client?
- A.
The CPA is issued a summons enforceable by a court order which 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 made available as part of a quality review of the CPA’s practice by a peer review team authorized by the AICPA.
- D.
An inquiry by a disciplinary body of a state CPA society requests confidential client information.
Correct Answer
B. A major stockholder of a client company seeks accounting information from the CPA after management declined to disclose the requested information. -
- 49.
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”
Correct Answer
B. “Consulting fees” -
- 50.
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.
Correct Answer
A. Scope and Nature of Services. -
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Feb 11, 2013Quiz Edited by
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