Auditing Chapter 4

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

Ethical Rulings.

Rules of Conduct.

Principles.

Interpretations.

2. "Independence" in auditing means:

Maintaining an indirect financial interest.

Not being financially dependent on a client.

Taking an unbiased and objective viewpoint.

Being an advocate for a client.

3. 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:

Encourage it.

Prohibit it.

Allow it.

Allow each firm to determine the answer on a case-by-case basis.

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

Principles.

Rules of Conduct.

Interpretations.

Definitions.

5. 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.

The CEO is correct and the auditor must maintain confidentiality.

The CEO is incorrect, but because the audit report has been issued it is too late.

The CEO is correct, but to be ethically correct the auditor should violate the confidentiality rule and disclose the error.

6. Rule 505 of the AICPA's Code of Professional Conduct permits CPA firms to organize as:

Proprietorships or partnerships only.

Proprietorships, partnerships, or professional corporations.

Proprietorships, general partnerships, general corporations, professional corporations, limited liability companies, and limited liability partnerships if permitted by state law.

Single proprietorships, partnerships, professional corporations if permitted by state law, or regular corporations.

7. Which of the following statements is true? The CPA firm will lose its independence if:

A staff auditor providing audit services to the client acquires stock in that client.

A staff tax preparer who provides 15 hours of non-audit services to the client acquires stock in that client.

A covered member has an indirect, immaterial financial interest in an audit client.

8. The financial interests of which of the following parties would not be included as a "direct financial interest" of the CPA?

Spouse.

Dependent child.

Relative supported by the CPA.

Sibling living in the same city as the CPA.

9. Interpretations of the rules regarding independence allow an auditor to serve as:

A director or officer of an audit client.

An underwriter for the sale of a client’s securities.

A trustee of a client’s pension fund.

An honorary director for a not-for-profit charitable or religious organization.

10. CPAs are prohibited from which of the following forms of advertising?

Self-laudatory advertising.

Celebrity endorsement advertising.

Use of trade names, such as “Awesome Auditors.”

Use of phrases, such as “Guaranteed largest tax refunds in town!”

11. A challenge associated with the Ethical Principles stated in the Code of Professional Conduct is:

The emphasis on positive activities.

That they identify ideal conduct.

The difficulty of enforcing principles, or general ideals.

That there are too many to remember.

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

Actuarial services.

Assisting the company in preparing certain SEC registration statements (e.g., 10-Q, 10-K).

Investment banker services.

Bookkeeping services.

13. In which of the following circumstances would a CPA be bound by ethics to refrain from disclosing any confidential information about a client?

The CPA is issued a summons enforceable by a court order which orders the CPA to present confidential information.

An inquiry by a disciplinary body of a state CPA society requests confidential client information.

14. Of the various parts of the AICPA's Code of Professional Conduct, the:

Principles are enforceable.

Ethical Rulings are enforceable.

Interpretations are enforceable.

Rules of Conduct are enforceable.

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

Dependent child.

Spouse.

Non-dependent grandfather.

All of the above are examples of indirect ownership.

16. When CPAs are able to maintain their actual independence, it is referred to as independence in:

Conduct.

Appearance.

Fact.

Total.

17. 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?

The former partner uses the CPA firm’s office space and has significant influence over a client.

The former partner is held out as an associate of the firm and takes part in the firm’s business activities.

18. 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:

An audit.

Consulting services

Preparation of an original tax return.

Preparation of an amended tax return.

19. Which of the following would be a violation of the rule requiring "objectivity" by the CPA?

The auditor accepts management’s opinion regarding the collection of accounts receivable without an independent evaluation.

Either a or b would be a violation of the rule.

Neither a nor b would be a violation of the rule.

20. The AICPA's Code of Professional Conduct requires independence for all:

Attestation engagements.

Services performed by accountants in public practice.

Accounting and auditing services performed.

Professional work performed by CPAs.

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

Independence.

Compliance with standards.

Accounting.

Acts discreditable to the profession.

22. 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?

The client must accept full responsibility for the financial statements.

The client is required to file an annual report, including audited financial statements, with the Securities and Exchange Commission.

The CPA must not assume the role of employee or of manager.

The CPA must follow applicable auditing standards.

23. The CPA must not subordinate his or her professional judgment to that of others in any:

Engagement.

Audit engagement.

Engagement excluding tax services.

Engagement excluding management advisory services.

24. 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:

Subpoena or summons.

Peer review.

Complaint filed with the trial board of the Institute.

Request by a client’s largest stockholder.

25. 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.

Elise cannot be a partner in any separate partnership that offers data processing services.

Elise may form a separate partnership.

Elise may form a separate partnership as long as partners are CPAs.

Elise may form a separate partnership, but must give up the public accounting practice.

26. 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?

The CPA must not assume a management role or function.

The client must hire an external CPA to approve all of the journal entries prepared by the auditor.

The auditor must comply with GAAS when auditing work prepared by his/her firm.

The client must accept responsibility for the financial statements.

27. According to the profession's ethical standards, an auditor would be considered independent in which of the following instances?

The auditor’s checking account, which is fully insured by a federal agency, is held at a client financial institution.

The auditor is also an attorney who advises the client as its general counsel.

An employee of the auditor serves as treasurer of a charitable organization that is a client.

The client owes the auditor fees for two consecutive annual audits.

28. There are a number of offenses for which a CPA may be expelled from membership in the AICPA. Which of the following is not one of these offenses?

The willful filing of a fraudulent income tax return on a client’s behalf.

Conviction of a crime punishable by imprisonment of 6 months.

The willful aiding in the preparation of a false and fraudulent income tax return.

29. 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:

Is a violation of the Code of Professional Conduct.

Is a violation only if Greer and Sawyers are CPAs.

Is a violation only if Jackson & Jackson LLP is a CPA firm.

Is not a violation.

30. The Code of Professional Conduct is established by the membership of the AICPA, and the Interpretations of the Rules of Conduct are prepared by the:

Financial Accounting Standards Board.

Securities and Exchange Commission.

CPA licensing agencies within each state.

Professional Ethics Executive Committee of the AICPA.

31. 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:

Choose independently between alternate accounting principles and auditing standards.

Distinguish between accounting practices that are acceptable and those that are not.

Be unyielding in all matters dealing with auditing procedures.

Maintain an impartial attitude on matters that come under the CPA’s review.

32. A CPA firm should decline an offer to perform management advisory services engagement if:

The proposed engagement is not accounting-related.

Recommendations made by the CPA firm are to be subject to review by the client.

Acceptance would require the CPA firm to make management decisions for an audit client.

Any of the above is true.

33. 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

Yes Yes

No No

Yes No

No Yes

34. Which of the following statements is not true with respect to audit committees?

Individuals not on a firm’s board of directors should comprise the audit committee.

The audit committee generally helps in resolving conflicts between the auditors and company management.

All companies listed on the NYSE are required to have an audit committee.

Audit committees are required for all companies.

35. 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:

In all circumstances.

Only for direct ownership.

Only for indirect ownership.

Under no circumstances.

36. 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?

“Tax fees”

“Consulting fees”

“Audit-related fees”

“All other fees”

37. 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:

Whichever rules are less restrictive.

Whichever rules are more restrictive.

The rules of the AICPA.

The rules of the state’s board of accountancy.

38. 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

Yes Yes

No No

Yes No

No Yes

39. 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?

All partners in an office that has no responsibility for the engagement.

The firm and its employee benefit plans.

Individuals on the attest engagement.

All of the above describe covered members.

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

Should be independent in fact and in appearance at all times.

In public practice should be independent in fact and in appearance at all times.

In public practice should be independent in fact and in appearance when providing auditing and other attestations services.

In public practice should be independent in fact and in appearance when providing auditing, tax, and MAS services.

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

The Interpretations are not enforceable.

The Interpretations are enforceable.

The Interpretations may be enforceable if they have been reviewed and approved by the AICPA’s Division of Professional Ethics.

The Interpretations are not enforceable, but a practitioner must justify departure from them.

42. Ethical Rulings are:

Issued by the AICPA’s Board of Governors.

Explanations relating to specific factual circumstances.

Explanations relating to broad hypothetical circumstances.

Enforceable.

43. 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?

Immaterial loans.

Home mortgages.

Material loans.

Secured loans.

44. 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:

Auditor.

Client.

Audit committee.

Public.

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

Internal audit outsourcing.

Legal services unrelated to the audit.

Appraisal or valuation services.

Services related to assessing the effectiveness of internal control over financial reporting.

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

Contingent fees based on savings due to implementation of an information system.

Commissions for referring a review client to an insurance agency for insurance coverage.

Preparation of tax returns for which fees are based upon client refunds.

Each of the above is allowed.

47. 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?

Scope and Nature of Services.

Integrity.

Due Care.

The Public Interest.

48. It is not a violation of the AICPA's Code of Professional Conduct for a CPA to:

Base fees for a tax service on the amount of the refund that the client will receive.

49. Which of the following circumstances would ordinarily not impair the auditor's independence?

Litigation by a client against an audit firm related to tax services.

Litigation by a client against an audit firm claiming a deficiency in the previous audit.

Litigation by an audit firm against a client claiming management fraud or deceit.

50. Which of the following is not defined as an act discreditable in either the Rules or the Interpretations of the AICPA's Code of Professional Conduct?

The CPA firm discriminates in its hiring practices based on the age of the applicant.

51. In which of the following instances would the independence of the CPA most likely not be considered to be impaired? The CPA has been retained as the auditor of a:

Charitable organization in which an employee of the CPA serves as treasurer.

Municipality in which the CPA owns $250,000 of the $2,500,000 indebtedness of the municipality.

Cooperative apartment house in which the CPA owns an apartment and is not part of the management.

Company in which the CPA’s investment club owns a one-tenth interest.

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

Automobile loans.

Loans fully collateralized by cash deposits at the same financial institution.

Home mortgages.

Unpaid credit card balances not exceeding $15,000.

53. Which of the following statements is correct?

Non-audit services that are not prohibited by Sarbanes-Oxley or the SEC rules must be approved by management of the client.

Non-audit services that are not prohibited by Sarbanes-Oxley or the SEC rules must be approved by staff of the PCAOB.

Non-audit services that are not prohibited by Sarbanes-Oxley or the SEC rules must be approved by the company’s audit committee.

54. 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

Yes Yes

No No

Yes No

No Yes

55. 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:

In all circumstances.

For non-attestation services.

Except for the single exception of a tax practice.

Unless it is specifically stated otherwise in the Code.

56. 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?

When close relatives such as nondependent children, brothers, and sisters have a significant financial interest in the client.

When close relatives such as nondependent children, brothers, and sisters have any financial interest in the client.

When the CPA owns shares in a mutual fund that has an ownership interest in the client.

When close relatives such as brother, sister, or in-laws are employed by client.

57. Which of the following statements regarding professional and regular corporations is not true?

Shareholders in both professional corporations and regular corporations are individually liable in litigation against the CPA firm.

The shareholders, officers, and employees must comply with all Code of Professional Conduct requirements.

Stock in a public accounting corporation must be held by only those CPAs who are qualified to practice.

The firm name must meet the same requirements as those for a single proprietorship and partnership.

58. Rule 201 - General Standards requires members to comply with certain standards and interpretations. Which of the following is not a standard specifically addressed in Rule 201?

Professional integrity.

Due professional care.

Planning and supervision.

Sufficient relevant data.

59. 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:

Independent because the financial interest is immaterial and, therefore, may issue a review report.

Not independent and, therefore, may not issue a review report.

Not independent and, therefore, may not be associated with the financial statements.

Not independent and, therefore, may issue a review report, but may not issue an auditor’s opinion.

60. Rule 101 indicates that materiality is a consideration for: Evaluating direct investments made by the CPA Evaluating indirect ownership investments

Yes Yes

No No

Yes No

No Yes

61. An audit committee, consisting of members of the client's board of directors who are not a part of company management, is required for all companies:

That have audits performed by AICPA member firms.

That must file 10-K reports with the SEC.

Listed on the New York Stock Exchange.

In all circumstances.

62. 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

Yes Yes

No No

Yes No

No Yes

Auditing Chapter 4

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

2.

What first name or nickname would you like us to use?

2. "Independence" in auditing means:

3. 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:

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

5. 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.

6. Rule 505 of the AICPA's Code of Professional Conduct permits CPA firms to organize as:

7. Which of the following statements is true? The CPA firm will lose its independence if:

8. The financial interests of which of the following parties would not be included as a "direct financial interest" of the CPA?

9. Interpretations of the rules regarding independence allow an auditor to serve as:

10. CPAs are prohibited from which of the following forms of advertising?

11. A challenge associated with the Ethical Principles stated in the Code of Professional Conduct is:

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

13. In which of the following circumstances would a CPA be bound by ethics to refrain from disclosing any confidential information about a client?

14. Of the various parts of the AICPA's Code of Professional Conduct, the:

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

16. When CPAs are able to maintain their actual independence, it is referred to as independence in:

17. 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?

18. 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:

19. Which of the following would be a violation of the rule requiring "objectivity" by the CPA?

20. The AICPA's Code of Professional Conduct requires independence for all:

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

22. 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?

23. The CPA must not subordinate his or her professional judgment to that of others in any:

24. 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:

25. 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.

26. 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?

27. According to the profession's ethical standards, an auditor would be considered independent in which of the following instances?

28. There are a number of offenses for which a CPA may be expelled from membership in the AICPA. Which of the following is not one of these offenses?

29. 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:

30. The Code of Professional Conduct is established by the membership of the AICPA, and the Interpretations of the Rules of Conduct are prepared by the:

31. 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:

32. A CPA firm should decline an offer to perform management advisory services engagement if:

33. 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

34. Which of the following statements is not true with respect to audit committees?

35. 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:

36. 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?

37. 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:

38. 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

39. 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?

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

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

42. Ethical Rulings are:

43. 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?

44. 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:

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

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

47. 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?

48. It is not a violation of the AICPA's Code of Professional Conduct for a CPA to:

49. Which of the following circumstances would ordinarily not impair the auditor's independence?

50. Which of the following is not defined as an act discreditable in either the Rules or the Interpretations of the AICPA's Code of Professional Conduct?

51. In which of the following instances would the independence of the CPA most likely not be considered to be impaired? The CPA has been retained as the auditor of a:

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

53. Which of the following statements is correct?

55. 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:

56. 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?

57. Which of the following statements regarding professional and regular corporations is not true?

58. Rule 201 - General Standards requires members to comply with certain standards and interpretations. Which of the following is not a standard specifically addressed in Rule 201?

59. 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:

60. Rule 101 indicates that materiality is a consideration for: Evaluating direct investments made by the CPA Evaluating indirect ownership investments

61. An audit committee, consisting of members of the client's board of directors who are not a part of company management, is required for all companies:

62. 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

33. 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

38. 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