CPA Professional Code Of Conduct Quiz

1. A bank retains a CPA firm to perform an audit. During the period of the professional engagement, a manager in the CPA firm obtains a mortgage from the bank. He works in the same office as the lead partner on the audit but does not provide any services to the bank. Is the firm’s independence impaired?

Yes

No

The firm's independence is not impaired in this situation because the manager who obtained the mortgage does not provide any services to the bank. As long as there is no direct or indirect involvement of the manager in the audit of the bank, the independence of the firm remains intact. The fact that the manager works in the same office as the lead partner on the audit does not automatically impair independence unless there is a conflict of interest or a direct involvement with the client.

Explanation

The firm's independence is not impaired in this situation because the manager who obtained the mortgage does not provide any services to the bank. As long as there is no direct or indirect involvement of the manager in the audit of the bank, the independence of the firm remains intact. The fact that the manager works in the same office as the lead partner on the audit does not automatically impair independence unless there is a conflict of interest or a direct involvement with the client.

2. A CPA firm is considering hiring the controller of one of its audit clients as a part-time independent contractor during tax season. She would help prepare tax returns for other clients of the CPA firm, all of which are nonattest clients. The firm has two offices and she would be working out of the one that does not provide any services to her primary employer. If she is hired, would the CPA firm’s independence be impaired with respect to that client?

Yes

No

Yes, the CPA firm's independence would be impaired with respect to that client if they hire the controller of one of its audit clients as a part-time independent contractor during tax season. This is because the controller would be working for both the CPA firm and the audit client, creating a conflict of interest. The controller's involvement in preparing tax returns for other clients of the CPA firm could potentially compromise the independence and objectivity of the firm's audit services for the audit client.

Explanation

Yes, the CPA firm's independence would be impaired with respect to that client if they hire the controller of one of its audit clients as a part-time independent contractor during tax season. This is because the controller would be working for both the CPA firm and the audit client, creating a conflict of interest. The controller's involvement in preparing tax returns for other clients of the CPA firm could potentially compromise the independence and objectivity of the firm's audit services for the audit client.

3. A partner in a multioffice CPA firm owns 2% of a potential audit client. The engagement would be performed by an office with which he is not associated. The partner would not provide any services to the client nor be in a position to influence the engagement team. Is the firm independent to perform the audit?

Yes

No

The partner's ownership of 2% in the potential audit client does not create a significant financial interest that would impair the firm's independence. Additionally, since the partner is not associated with the office performing the engagement and has no involvement in providing services or influencing the engagement team, there are no threats to independence. Therefore, the firm is considered independent to perform the audit.

Explanation

The partner's ownership of 2% in the potential audit client does not create a significant financial interest that would impair the firm's independence. Additionally, since the partner is not associated with the office performing the engagement and has no involvement in providing services or influencing the engagement team, there are no threats to independence. Therefore, the firm is considered independent to perform the audit.

4. A CPA firm performs an audit of a large manufacturing company. One of the firm’s managers, who plans to provide a significant amount of tax services to the company, has a spouse who inherited a small amount of stock in it. The manager does not work in the same office as the lead audit partner. Is the firm’s independence impaired?

Yes

No

The firm's independence is impaired because the manager's spouse has a financial interest in the manufacturing company. This could potentially create a conflict of interest and compromise the objectivity and impartiality of the audit. Even though the manager doesn't work in the same office as the lead audit partner, their relationship still poses a threat to independence.

Explanation

The firm's independence is impaired because the manager's spouse has a financial interest in the manufacturing company. This could potentially create a conflict of interest and compromise the objectivity and impartiality of the audit. Even though the manager doesn't work in the same office as the lead audit partner, their relationship still poses a threat to independence.

5. A partner’s dependent son works as an inventory clerk during the summer months for an audit client of the firm. The partner is located in the office in which the lead audit engagement partner practices. Is the firm independent?

Yes

No

The firm is considered independent because the partner's dependent son is working as an inventory clerk for the audit client during the summer months. This does not create a direct financial relationship between the partner and the client, and therefore does not impair the firm's independence.

Explanation

The firm is considered independent because the partner's dependent son is working as an inventory clerk for the audit client during the summer months. This does not create a direct financial relationship between the partner and the client, and therefore does not impair the firm's independence.

6. A manager in a multioffice CPA firm serves on the board of directors of a potential review client. The manager would not be assigned to provide services to the client nor located in the office that would perform the engagement. Is the firm independent to perform the review?

Yes

No

No, the firm is not independent to perform the review. According to the AICPA Code of Professional Conduct, independence is impaired if a covered member serves on the board of directors of a client. Even though the manager would not be directly involved in providing services to the client or located in the office performing the engagement, their position on the board still creates a conflict of interest and compromises the firm's independence.

Explanation

No, the firm is not independent to perform the review. According to the AICPA Code of Professional Conduct, independence is impaired if a covered member serves on the board of directors of a client. Even though the manager would not be directly involved in providing services to the client or located in the office performing the engagement, their position on the board still creates a conflict of interest and compromises the firm's independence.

7. A multioffice CPA firm has been asked to perform an audit of a company, and the engagement will be handled by the Jersey City, New Jersey, office. Three firm managers, who work in a separate office, pooled their money to purchase the company’s stock. After the purchase, each owns 2% of that company’s outstanding common stock. The audit would not involve any members of the managers’ office. Is the firm independent to perform the engagement?

Yes

No

The firm is not independent to perform the engagement because three firm managers, who work in a separate office, have a financial interest in the company being audited. Their ownership of 2% of the company's stock creates a self-interest threat to independence, as they may be biased in their audit work to protect their investment. Independence is a fundamental principle in auditing, and any financial interest in the audited company by the auditors or their immediate family members can compromise their objectivity and integrity. Therefore, the firm should not perform the engagement to maintain independence and ensure unbiased audit results.

Explanation

The firm is not independent to perform the engagement because three firm managers, who work in a separate office, have a financial interest in the company being audited. Their ownership of 2% of the company's stock creates a self-interest threat to independence, as they may be biased in their audit work to protect their investment. Independence is a fundamental principle in auditing, and any financial interest in the audited company by the auditors or their immediate family members can compromise their objectivity and integrity. Therefore, the firm should not perform the engagement to maintain independence and ensure unbiased audit results.