Deck 11: Conflicts of Interest

Question 1

Refer to the above question.After learning that one of the three shareholders has a need for increased dividend cash flow immediately,the CPA should:

A) Share this fact with all three shareholders to see if they can accommodate this particular shareholder's needs
B) Shift her cash flow allocation plan in favor of distributing increased levels of dividends
C) Reach the same conclusion that the CPA would have reached prior to learning of this particular shareholder's need for increased dividend cash flow
D) Consider withdrawing from the professional engagement

Answer 1

D

Question 2

A CPA's conflicts of interest are determined by:

A) The CPA herself
B) The accountancy licensing board of the state in which she works as an accountant
C) The AICPA Conflicts Enforcement Committee
D) The AICPA committee that evaluates issues of independence, objectivity, and conflicts of interest

Answer 2

A

Question 3

An employee at an information systems consulting firm recently asked a partner at the firm for a 20% pay raise.The partner said that this request was excessive.To resolve this issue amicably,the employee and the partner agreed that the firm's managing partner,who is well-respected,would mediate this issue and determine the fair amount of the pay raise.All parties agreed to this arrangement.The managing partner who is deciding this issue is a CPA.She:

A) Does not have to disclose her conflict of interest to this employee because she is not a practicing CPA
B) Does not have to make any disclosures because none are needed
C) Does have to disclose her conflict of interest, but she does not need to get the employee's consent
D) Does have to disclose her conflict of interest and does need to get the employee's explicit consent

Answer 3

B

Question 4

An accountant recent met with the CFO of a major corporation.The accountant and this prospective client are contemplating entering into a professional relationship.The prospective corporate client has a history of violating the Foreign Corrupt Practices Act's provisions concerning bribery of foreign government officials.The accountant's job is to ensure that the company fully complies with this law.To accomplish this,the accountant will perform unannounced reviews of the company's accounting records and internal controls from time to time. The accountant's daughter told the CFO that her father is "an amazing accountant," which facilitated the professional introduction.The accountant's daughter recently was promoted to serve as this corporation's Director of International Sales-Asia Division.In all likelihood,the accountant:

A) Should not agree to provide these services to this prospective client
B) May provide services to this client, as long as the accountant's daughter does not also participate directly in the corporation's presentation of corporate financial transactions in the form of financial statements
C) May provide all requested services because a conflict of interest does not currently exist and is not reasonably foreseeable
D) May provide services to this client because safeguards against conflicts of interest readily are available

Question 5

A CPA agreed to render professional services to all three of the shareholders in a corporation.All three shareholders asked the CPA to determine the amount of corporate earnings that should be distributed as dividends and the amount that should be maintained as Retained Earnings to spur the future growth of the corporation.All three told the CPA that they want to "allocate cash flow to maximize everyone's after-tax wealth." Two weeks after the CPA began this assignment,one of the shareholders told the CPA privately that she "desperately needed immediate cash flow from dividends because her mother recently had a stroke and needs to be able to afford to give her mother proper medical care.This shareholder asked that her mother's medical condition be kept confidential,to respect her mother's wishes.The CPA:

A) Acted properly at the outset of this professional engagement
B) Acted improperly at the outset of this professional engagement because representation of fellow shareholders automatically creates a dual-client conflict of interest
C) Acted improperly at the outset of this professional engagement, but now has a duty to complete the engagement to minimize further harm to her clients
D) Acted improperly at the outset of this professional engagement and has a duty to inform the accountancy licensing board about this misconduct

Question 6

The IFAC code of conduct recognizes the concept of "implied consent." Implied consent,in the context of conflicts of interest,means that:

A) A professional accountant may assume that a client has consented to a conflict of interest based on the surrounding circumstances
B) A professional accountant may insist, before commencing work on a project, that a client consent to a potential conflict of interest
C) Actual consent to a present-day conflict of interest also will be considered to constitute consent to any future conflicts of interest that may arise
D) The likelihood of a conflict arising in the near future can be reasonably inferred from surrounding circumstances

Question 7

An accountant and a prospective client are contemplating entering into a professional relationship in which the accountant will provide monthly bookkeeping services and annual tax return preparation services for this client's hair salon.The accountant's teenage daughter told this prospective client that her father is "an amazing accountant," which facilitated the professional introduction.The accountant's daughter works for this prospective client as a receptionist.In all likelihood,the accountant:

A) May not provide services to this prospective client
B) May provide only tax preparation services to this prospective client because a conflict of interest presently exists
C) May provide only bookkeeping services to this prospective client because a conflict of interest presently exists
D) May provide all requested services because a conflict of interest does not currently exist and is not reasonably foreseeable

Question 8

An auditing firm has a standard fee policy that it maintains internally and uses in bidding on auditing projects.However,in preparing bids,it increases its audit fee by up to 20% for corporate audit clients that have December 31 fiscal year-ends and lowers its audit fees by up to 30% for government entities that have fiscal years that end during the summer months.The auditing firm justifies this pricing practice by noting that its personnel are overwhelmed with work during the end-of-year "busy season," but often are idle during the summer months.This auditor:

A) Does not have a conflict of interest
B) Has a dual-client conflict of interest
C) Has an accountant-client conflict of interest, even if this pricing differential is cost-justified
D) Is not acting with integrity, unless it discloses this pricing policy to all affected clients

Question 9

A CPA firm knows that clients find it difficult to change auditors after a professional relationship has been in place for several years because the termination of an auditor often makes investors concerned about the trustworthiness of a company's financial statements.To take advantage of this fact,this CPA firm routinely bids on new audit engagements at a fee that is likely to be 25 percent lower than the fees bid by its competitors.The CPA firm plans to recoup this fee differential by steadily raising its fees to above-market rates in subsequent years.The CPA firm's policy creates:

A) A current conflict of interest
B) A foreseeable future conflict of interest
C) An appearance of a conflict of interest, but not an actual one
D) No conflict of interest

Question 10

If a CPA leaves a job in public accounting to commence work as a member of a company's internal accounting staff,this CPA:

A) No longer has to be concerned about conflicts of interest
B) Still has to be concerned about conflicts of interest involving former clients as well as conflicts of interest arising at her new workplace
C) Only has to be concerned about conflicts of interest involving her former clients because industry accountants are not subject to the AICPA's conflict of interest rules
D) Does not have to be concerned about conflicts of interest that may arise between loyalty to her new employer and loyalty to her former employer

Question 11

A CPA usually charges $3,000 to prepare a corporate income tax return,including all supplemental schedules.This CPA has agreed to charge the CFO of a mid-size corporation only $10 to prepare the CPA's personal tax return and $5,000 to prepare the corporation's tax return.This CPA:

A) Is engaged in moral licensing
B) Has an accountant-client conflict of interest
C) Has a dual-client conflict of interest
D) Is not acting with integrity

Question 12

Due to the conflict of interest rules,a CPA may:

A) Not provide professional services to two companies in the same industry
B) Not provide professional services to two companies who do business with one another
C) Not provide professional services to two companies who do business with one another if the sales or services are material in amount to one of the parties
D) Generally provide professional services to two companies who do business with one another, even if the sales or services are material in amount to one or both parties

Question 13

When a CPA leaves her job working as an IRS Revenue Agent to accept a job in the Tax Department of a public accounting firm,she primarily:

A) Has to be concerned about conflicts of interest between her new employer and its competitors
B) Has to be concerned about conflicts of interest between her new employer and other employers whose job offers she rejected
C) Has to be concerned about conflicts of interest arising between one of her clients and her former employer
D) Does not have to be concerned about using information learned at the IRS in assisting new clients because a CPA has a duty to use all of her knowledge to best serve her clients

Question 14

Many companies adopt policies that preclude key employees from owning stock in company suppliers.Companies establish this type of policy to:

A) Make it more difficult for key employees to leave their jobs to commence working for a supplier
B) Make it more difficult for key employees to share confidential trade secrets with a supplier
C) Prevent conflicts of interest that might be difficult to detect
D) Prevent conflicts of interest, even though they usually are easy to detect

Question 15

In deciding whether a conflict of interest exists,the relevant standard to be applied is whether:

A) The CPA subjectively believes that a conflict of interest exists
B) A reasonable observer, with reasonable knowledge of the relevant circumstances, would conclude that a conflict of interest exists
C) In an accountant-client conflict of interest situation, at least one of the clients believes, reasonably or unreasonably, that a conflict of interest exists
D) In a dual-client conflict of interest situation, both of the clients themselves believe, reasonably or unreasonably, that a conflict of interest exists

Question 16

A CPA has to focus on whether a conflict of interest exists:

A) Only at the outset of a professional relationship
B) Only after a professional relationship has commenced
C) Both at the outset of a professional relationship and throughout the conduct of a professional relationship
D) In all professional relationships other than the provision of voluntary services to a charitable, civic, or religious organization

Question 17

Two CPAs are good friends as well as partners together in a CPA firm.They recently invested their money together to buy an apartment building.One of the tenants in the apartment building is an employee of their CPA firm,and another tenant is the father of one of the two CPAs.The father's lease terminates soon and the father wishes to renew the lease at the same rental amount that he currently is paying.Under the AICPA's Code of Professional Conduct:

A) Two conflicts of interest exist
B) The father's status as a tenant creates a conflict of interest that cannot be corrected by safeguards
C) The father's status as a tenant creates a conflict of interest that can be remedied by safeguards
D) No conflicts of interest exist

Question 18

A CPA has been asked by an engaged couple to help them budget the amount that they can afford to spend on their upcoming wedding.Both the groom and the bride approached the CPA together and met with him together.The CPA has no prior relationship with either of these individuals.The groom and the bride each have agreed to pay one-half of the CPA's fees.The CPA:

A) Currently does not have an accountant-client conflict of interest, but must be alert to the possibility that one will arise
B) Currently does not have a dual-client conflict of interest, but must be alert to the possibility that one will arise
C) Currently has a conflict of interest and should not accept this professional engagement
D) Currently has a conflict of interest, and should agree to render professional services to this couple only if they give their specific consent to waive this conflict of interest

Question 19

If a conflict of interest arises during the course of providing professional services,a professional accountant:

A) Must consider withdrawing from the professional engagement
B) Is required to withdraw from the professional engagement, but does not have to refund fees previously paid by its client
C) Is required to withdraw from the professional engagement and is required to refund fees previously paid by the client
D) Is not required to withdraw from the professional engagement if the conflict of interest did not exist at the inception of the relationship and it was not reasonably foreseeable at that time

Question 20

The concept of "moral licensing," in the context of conflicts of interest,relates to:

A) A person receiving actual consent to proceed in a professional relationship, despite the potential for a conflict of interest to arise
B) A person receiving implied consent to proceed in a professional relationship, despite the potential for a conflict of interest to arise
C) A person who potentially will benefit from a conflict of interest agreeing to make periodic payments to reimburse any party who is adversely affected by the conflict of interest
D) A person making exaggerated claims about goods or services after having disclosed influences that create the appearance of a conflict of interest

Question 21

The concept of "discounting," in the context of accountant conflicts of interest,means that:

A) An accountant, in evaluating the reliability of a client statement, applies greater professional skepticism
B) A client, in evaluating the reliability of its accountant's statement, applies greater skepticism
C) An accountant weighs immediate satisfaction more heavily than deferred satisfaction
D) A prospective client, in listening to an accountant, weighs immediate satisfaction more heavily than deferred satisfaction

Question 22

A CPA provides services to two clients in the same industry.Both clients have been informed of this fact and have acknowledged their approval in writing.As a result:

A) The CPA nonetheless is violating professional standards concerning conflicts of interest
B) The duty of confidentiality has been waived and does not apply to the two accountant-client relationships mentioned
C) Must be careful to not share specific information learned from one client with the other client
D) Must be careful to not utilize general industry experience gained from serving one client to benefit the other client

Question 23

The determination of whether an American CPA has,or does not have,a conflict of interest is resolved by:

A) A CPA on his or her own
B) The Conflicts Advisory Board of the AICPA
C) A board of the AICPA other than the Conflicts Advisory Board
D) A mediation process between the CPA and its client

Question 24

An Oklahoma CPA provides management advisory services to a large public utility that provides electrical power throughout Oklahoma and is the only supplier of electricity to residential users in Oklahoma.The CPA has been asked to prepare a request for a utility rate increase that will be submitted to state regulators for their approval.The CPA:

A) Has a conflict of interest that should be disclosed to his client
B) Does not have to be concerned about conflicts of interest because the CPA only provides management advisory services
C) Does not have to be concerned about conflicts of interest because utility rates ultimately will be set by independent state regulators
D) Does not have a material conflict of interest because the requested rate increase will apply to all Oklahoma citizens who use this utility's electricity services

Question 25

A CPA performs tax advisory services,but it does not provide tax return preparation services.For this CPA,the most significant conflict of interest that is likely to arise is between:

A) The AICPA's Code of Professional Conduct and IRS Regulations regarding professional conduct
B) The Internal Revenue Code and state tax codes
C) The client and the IRS
D) The duty of loyalty to the client and a duty to the public interest

Question 26

The "Fund of Funds" court decision stands for the proposition that:

A) Auditors inherently have conflicts of interest with their clients
B) Segregating one team of auditors at a CPA firm from another team does not necessarily prevent conflict of interest issues from affecting the firm's ethical obligations
C) The duty of loyalty to one client sometimes has to override the duty of confidentiality owed to a different client
D) The duty of loyalty to a client sometimes has to override the duty of confidentiality owed to that same client

Question 27

What is an apparent conflict of interest? Provide an example.

Question 28

An Oregon CPA provides management advisory services to a large public utility that provides natural gas throughout Oregon and is the only supplier of electricity to residential users in Oregon.The CPA has been asked to prepare a request for a utility rate increase that will be submitted to state regulators for their approval.
a. Does the CPA have a conflict of interest?
b. Would you expect this conflict of interest to impair the CPA's objectivity?
c. Does the CPA have a duty to disclose this conflict of interest?

Question 29

A CPA provides professional services to several businesses in its community.One such client is Primetime Bank,the largest bank in town,and another client is Aeropenetics,Inc.,a large aerospace manufacturer.Aeropenetics,Inc.has a large outstanding loan balance owed to Primetime Bank,and it lately has been experiencing severe liquidity problems.Aeropenetics is a privately-held company and its liquidity problems are not generally known to the public or to Primetime Bank.
In preparing the Allowance for Uncollectible Loans account for Primetime Bank,the CPA must decide whether or not to take into account Aeropenetics' liquidity problems.It learned of these liquidity problems during the course of preparing cash flow budgets for Aeropenetics.
a. What ethical principles are relevant to the CPA's decision?
b. What court cases are relevant to the CPA's decision?
c. What decision should the CPA reach?

Question 30

What is "discounting," as that term is used in the context of conflicts of interest?

Question 31

A CPA's duty to be free of conflicts of interest is most closely related to the AICPA Code of Professional Conduct's Principle of:

A) Due care
B) Objectivity
C) Professional skepticism
D) Nonsubordination of professional judgment

Question 32

When can a CPA provide services to all partners in a client partnership? When can it not provide services to all client partners without obtaining their consent?

Question 33

According to the IFAC Code of Conduct,the determination of whether a professional accountant has,or does not have,a conflict of interest is resolved by:

A) The IFAC Ethics Committee, if the conflict of interest is challenged by the accountant's client
B) Balancing costs to the client and to society against the financial benefits to the CPA
C) Applying the Public Interest Principle
D) By the professional accountant, using professional judgment

Question 34

For a CPA who performs auditing services,the most significant conflict of interest that is likely to arise is between:

A) Two clients who both sell the same product in different geographic markets
B) Two clients who both are aggressively pursuing sales to the same prospective customer
C) The client's interest and the public interest
D) The CPA's interest and another CPA's interests

Question 35

The materiality of a conflict of interest should be evaluated from the perspective of:

A) Whether a reasonable client would consider the conflict to be material
B) Whether a client, acting unreasonably or reasonably, would consider the conflict to be material
C) Whether an objective observer who is reasonably informed about the surrounding facts would conclude that a conflict of interest is material
D) Whether the CPA subjectively, from his or her own vantage point, has concerns about two or more material interests clashing

Question 36

An accountant's conflict of interest:

A) Always can be waived by a client
B) Never can be waived by a client
C) Sometimes cannot be waived by a client
D) Cannot be waived by the doctrine of implied consent, according to the IFAC Code of Conduct

Question 37

What is "implied consent," in the context of conflicts of interest?

Question 38

In the "Fund of Funds" case,the plaintiff contended that:

A) The defendant CPA firm owed it due care in performing professional services and failed to do so
B) The defendant CPA firm violated the Integrity and Objectivity Rule
C) The defendant CPA firm pursued its own self-interest over the public interest
D) The defendant CPA firm had a duty to utilize all available information in performing professional services for the plaintiff