Deck 5: Ethics and the Audit Profession

Question 1

Which of the following is(are)true concerning the Ethical Principles of the Code of Professional Conduct?
I)They identify ideal conduct.
II)They are general ideals and are not enforceable.

A) I only
B) II only
C) I and II
D) Neither I nor II

Answer 1

C

Question 2

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

Answer 2

D

Question 3

A six-step approach is often used to resolve an ethical dilemma.The first step in this process is to:

A) identify the alternative actions available.
B) identify the ethical issues from the facts.
C) determine who will be affected by the outcome of the dilemma.
D) obtain the relevant facts.

Answer 3

D

Question 4

Describe an ethical dilemma that an auditor or an accountant might face in his or her business career,then illustrate how the auditor or accountant might use the six-step approach presented in the text to resolve that dilemma.Be specific.

Question 5

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

Question 6

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

Question 7

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.

Question 8

One of the main reasons people act unethically is that they choose to act selfishly.

Question 9

A rationalization method that can easily result in unethical behavior is the argument that "everybody does it."

Question 10

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:

A) Financial Accounting Standards Board.
B) Securities and Exchange Commission.
C) CPA licensing agencies within each state.
D) Professional Ethics Executive Committee of the AICPA.

Question 11

Explain why there is a special need for ethical conduct in the auditing profession.

Question 12

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 other attestation services.

Question 13

________ means that a person acts according to conscience,regardless of the situation.

A) Caring
B) Fairness
C) Integrity
D) Respect

Question 14

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.

Question 15

Which of the following statements is true when the CPA has been engaged to perform an audit of financial statements?

A) The CPA firm is engaged and paid by the client; therefore, the firm has primary responsibility to be an advocate for the client.
B) The CPA firm is engaged and paid by the client, but the primary beneficiaries of the audit are those who rely on the financial statements.
C) Should a situation arise where there is no convincing authoritative standard available, and there is a choice of actions which could impact a client's financial statements, the CPA is free to endorse the choice which is in the investors' interests.
D) The CPA firm has primary responsibility to the FASB.

Question 16

Ethics are:

A) needed in the professions, but is not needed for society in general.
B) a set of moral principles or values.
C) not formed by life experiences.
D) always incorporated in laws.

Question 17

The underlying reason for a code of professional conduct for any profession is:

A) the need for public confidence in the quality of service of the profession.
B) it provides a safeguard to keep unscrupulous people out.
C) it is required by federal legislation.
D) it allows licensing agencies to have a yardstick to measure deficient behavior.

Question 18

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:

A)
B)
C)
D)

Question 19

Ethical Rulings are:
I)explanations relating to broad hypothetical circumstances.
II)not enforceable,but one must justify departure.
III)explanations relating to specific factual circumstances.

A) I and II
B) I and III
C) II and III
D) I, II, and III

Question 20

When a member observes the profession's technical and ethical standards and strives to continually improve her competence and quality of services,she is exercising:

A) due care.
B) integrity.
C) independence.
D) objectivity.

Question 21

An advantage of specific rules in the Code of Professional Conduct is the enforceability of minimum behavior and performance standards.

Question 22

For which of the following professional services must CPAs be independent?

A) Management advisory services
B) Audits of financial statements
C) Preparation of tax returns
D) All three of the above

Question 23

In the AICPA Code of Professional Conduct,ethical rulings are less specific than rules of conduct.

Question 24

Each state also has rules of conduct that are required for licensing by the state.

Question 25

The Sarbanes-Oxley Act ________ a CPA firm from doing both bookkeeping and auditing services for the same public company client.

A) encourages
B) prohibits
C) allows
D) allows on a case-by-case basis

Question 26

Identify and describe each of the four parts to the AICPA's Code of Professional Conduct.Also discuss which parts are officially enforceable and which are not.

Question 27

Interpretations of rules of conduct in the Code of Professional Conduct are not officially enforceable and practitioners need not justify departure from them.

Question 28

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

A) conduct.
B) appearance.
C) fact.
D) total.

Question 29

The AICPA Code of Professional Conduct permits the auditor to perform a wide variety of non-audit services for audit clients.

Question 30

In the AICPA Code of Professional Conduct,the sixth principle of professional conduct,entitled "Scope and Nature of Services," applies to members of the AICPA who work in public practice,business,government,or education.

Question 31

"Independence" in auditing means:

A) maintaining an indirect financial interest.
B) not being financially dependent on a client.
C) taking an unbiased viewpoint.
D) being an advocate for a client.

Question 32

The Conceptual Framework for AICPA Independence Standards can be used when making decisions on ethical matters not explicitly addressed in the Code.

Question 33

What are the six Ethical Principles stated in the Code of Professional Conduct?
Briefly discuss each principle.Are these principles enforceable?

Question 34

Which of the following statements is true with respect to audit committees?

A) Audit committee members should consist of members of the company's management.
B) All members of the audit committee must be financial experts.
C) The audit committee of a public company is responsible for hiring the auditor.
D) Audit committees must have a minimum of ten members.

Question 35

In the AICPA Code of Professional Conduct,interpretations of rules are more specific than ethical rulings.

Question 36

An advantage of the principles of professional conduct in the Code of Professional Conduct is that they are more easily enforced than are the specific rules of conduct.

Question 37

In the AICPA Code of Professional Conduct,the second principle of professional conduct,entitled "The Public Interest," applies only to members of the AICPA in public practice and not to members who work as accountants in business,government,or education.

Question 38

Briefly describe the advantages and disadvantages of a code of conduct based on general statements of ideal conduct as opposed to specific rules that define unacceptable behavior.

Question 39

The provisions of the Sarbanes-Oxley Act of 2002 are most likely to allow which of the following non-audit services for audit clients?

A) Appraisal or valuation services (e.g., pension, post-employment benefit liabilities)
B) Financial information systems design and implementation
C) Internal audit outsourcing
D) Tax consulting

Question 40

The Sarbanes-Oxley Act requires which employees of an accounting firm to rotate off the engagement every five years?

A)
B)
C)
D)

Question 41

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.

Question 42

For a public company,the Sarbanes-Oxley Act requires audit committee approval of all non-audit services prior to their performance by the company's external auditor.

Question 43

Which of the following services are allowed 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

Question 44

Independence is required of a CPA when performing:

A) external audits.
B) all attestation services.
C) all attestation and tax services.
D) all professional services.

Question 45

A direct financial interest violates independence in which of the following circumstances?

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 the client

Question 46

The Sarbanes-Oxley Act requires a cooling off period of ________ before a member of an audit team can work for a client in a key management position?

A) One year
B) Eighteen months
C) Three years
D) Five years

Question 47

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

Question 48

A public company may obtain internal audit services from their financial statement auditor if it is approved by the company's audit committee.

Question 49

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

A) independence.
B) compliance with standards.
C) accounting.
D) acts discreditable to the profession.

Question 50

The financial interests of a CPA's family members can affect the CPA's independence.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

Question 51

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 cause a loss of independence?

A) The former partner works in the maintenance department of an audit client of his former firm.
B) The former partner's grandson works in the warehouse of an audit client of his former firm.
C) The former partner was held out as an associate of the firm.
D) The former partner purchased 5% of the stock of an audit client of his former firm.

Question 52

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.

Question 53

CPAs may provide bookkeeping services to their private company 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.

Question 54

Interpretations of Independence Rule 101 prohibit covered members from owning any stock or other direct investment in audit clients.Covered members would include which of the following?

A)
B)
C)
D)

Question 55

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.

Question 56

The audit committee of a private company need not approve all non-audit services provided by the company's financial statement auditor.

Question 57

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

Question 58

The members of a client's "audit committee" should be:

A) members of management.
B) directors who are not a part of company management.
C) non-directors and non-managers.
D) directors and managers.

Question 59

When determining whether independence is impaired because of an ownership interest in a client company,materiality will affect ownership:

A) in all circumstances.
B) only for direct ownership.
C) only for indirect ownership.
D) under no circumstances.

Question 60

A CPA firm should decline an offer to perform consulting 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.

Question 61

An auditor's independence is considered impaired if the auditor has:

A) an immaterial, indirect financial interest in a client.
B) an outstanding $8,000 balance on a credit card issued by a client.
C) an automobile loan from a client bank, collateralized by the automobile.
D) a joint, closely held business investment with the client that is material to the auditor's net worth.

Question 62

Don Crosby,a partner in a national CPA firm,has just learned that his self sufficient daughter has accepted a position as the CFO of Sunglasses,Inc.,a current client within the office with which he is employed.Explain the independence ramifications on 1)Don's independence,2)his office,and 3)the firm's independence.

Question 63

Each of the following situations involves a possible violation of the rule on independence.For each situation,(1)decide whether the Code of Professional Conduct has been violated,and (2)briefly explain how the situation violates (or does not violate)the Code of Professional Conduct.
a.Harry Brown is a partner in the Topeka office of Hedley & Co.,CPAs.Harry's brother is employed in an audit-sensitive position by Jensen Appliances,a publicly held company in Kansas.Jensen Appliances is one of Hedley & Co.'s audit clients.Neither Harry nor personnel from the Topeka office is involved in the audit of Jensen.
Violation?
Yes No

Question 64

Which of the following circumstances impairs an auditor's independence?
I)Litigation by a client against an audit firm claiming a deficiency in the previous audit
II)Litigation by a client against an audit firm related to tax services
III)Litigation by an audit firm against a client claiming management fraud or deceit

A) I and II
B) I and III
C) II and III
D) I, II, and III

Question 65

A CPA sole practitioner purchased stock in a client corporation and placed it in a trust as an educational fund for the CPA's minor child.The trust securities were not material to the CPA but were material to the child's personal net worth.Would the independence of the CPA be considered to be impaired with respect to the client?

A) Yes, because the stock is a direct financial interest
B) Yes, because the stock is an indirect financial interest that is material to the CPA's child
C) No, because the CPA does not have a direct financial interest in the client
D) No, because the CPA does not have a material indirect financial interest in the client

Question 66

A CPA's financial interests in nonclients may have an effect on independence if the nonclients are investors in or investees of the client.Which situation would not impair a CPA's independence?

A) The client has an immaterial investment in a nonclient investee in which the CPA has an immaterial investment.
B) The CPA has a material indirect financial interest in a nonclient in which the client has a material investment.
C) The client investor has a nonmaterial investment in the nonclient investee in which the CPA has a material investment.
D) The CPA has a joint closely held investment with the client in a nonclient that is material to the client as well as the CPA.

Question 67

Which of the following is least likely to impair a CPA firm's independence with respect to an audit client in the Oklahoma City office of a national CPA firm?

A) A partner in the Oklahoma City office owns an immaterial amount of stock in the client.
B) A partner in the Jersey City office owns 25% of the client's stock.
C) A partner in the Oklahoma City office, who does not work on the audit engagement, previously served as controller for the audit client.
D) A partner in the Chicago office previously served as vice president of finance for the audit client.

Question 68

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.

Question 69

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.

Question 70

Under Rule 101,Independence,independence is considered to be impaired if fees remain unpaid for professional services provided more than six months before the date of the current year's report.

Question 71

Rule 101,Independence,prohibits a CPA from performing both audit services and bookkeeping services for the same public company in the same year.

Question 72

Interpretations to the Rules of Conduct permit a CPA firm to do both bookkeeping and auditing for the same private company 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.

Question 73

Oehlers,CPA,is a staff auditor participating in the engagement of Capital Trust,Inc.Which of the following circumstances impairs Oehlers independence?

A) Oehlers' sister is an internal auditor employed by Capital Trust.
B) Oehlers' friend, and employee of another local accounting firm, prepares the tax return of Capital Trust's CEO.
C) Oehlers and Capital Trust's 401K plan own stock with the same corporation.
D) During the period of professional engagement, Capital Trust and Oehlers discussed business over lunch at a first-class restaurant.

Question 74

Julie and Lisa are sisters.Julie is a CPA auditing the company where Lisa works.Julie's independence is impaired if:

A) Lisa is the controller.
B) Lisa owns 25% of the company.
C) Lisa is the marketing manager.
D) all of the above.

Question 75

The Code of Conduct rule on independence indicates that materiality must be considered when:

A)
B)
C)
D)

Question 76

Under the AICPA independence rules,the auditor:

A) is prohibited from performing a company's audit and installing and designing the client's new information system.
B) does not need to document the understanding and willingness of the client to perform all management functions associated with the nonaudit service.
C) is prohibited from doing any bookkeeping services for the client if performing the audit.
D) must follow the more restrictive SEC independence rules when dealing with a public company.

Question 77

Which of the following loans would be prohibited between a CPA firm or its members and an audit client?

A) Automobile loans
B) Loans fully collateralized by cash deposits at the same financial institution
C) New home mortgage loans
D) Unpaid credit card balances not exceeding $10,000 in total

Question 78

Under the AICPA independence rules,independence can be considered impaired when:

A) billed fees remain unpaid for professional services for more than ninety days.
B) a client in bankruptcy has unpaid fees for more than one year.
C) there is litigation by the client related to the auditor's tax or other nonaudit services.
D) when there is a lawsuit by the client claiming deficiencies in the previous year's audit.

Question 79

Which of the following circumstances impairs an auditor's independence?
I)Litigation by a client against an audit firm claiming a deficiency in the previous audit
II)Litigation by a client against an audit firm related to tax services
III)Litigation by an audit firm against a client claiming management fraud or deceit

A) I and II
B) I and III
C) II and III
D) I, II, and III

Question 80

Which of the following instances would impair a CPA's independence when they have been retained as the auditor?
I)A charitable organization where the CPA serves as treasurer
II)A municipality where the CPA owns $250,000 of the $25 million outstanding bonds of the municipality
III)A company that the CPA's investment club owns a 10% investment interest

A) I and II
B) I and III
C) II and III
D) I, II, and III