Deck 3: Judgmental and Ethical Decision-Making Frameworks and Associated Professional Standards

Question 1

Individual state boards of accountancy and state societies of CPAs have mostly adopted Rules of Conduct established by the AICPA.

Answer 1

True

Question 2

Contingent fees are prohibited for tax professionals when preparing tax returns for clients

Answer 2

True

Question 3

An auditor of a public client may assist a client in designing and implementing its enterprise resource planning system in order to ensure that controls over the system exist prior to the audit.

Answer 3

False

Question 4

One issue that may threaten independence is that of the time pressure placed on the auditor when an audit is under bid.

Question 5

The Code of Professional Conduct was adopted by the AICPA membership to provide guidance and rules to only its members in public practice.

Question 6

The AICPA Rules of Conduct govern the performance of CPAs in carrying out their public responsibilities.

Question 7

Confidentiality is the cornerstone of the auditing profession.

Question 8

The AICPA's Code of Professional Conduct defines direct ownership as an investment of one percent or more of a client's organization.

Question 9

Information shared by a client to the auditor is protected under privileged communication laws,therefore,it cannot be subpoenaed by a court of law to be used against the client.

Question 10

It is not required for an individual to uphold the code of professional conduct in order to become licensed as a CPA.

Question 11

The AICPA independence rules only apply for attestation clients.

Question 12

An auditor of a public client may perform internal audit outsourcing services for a client because such services may overlap with external audit functions.

Question 13

Direct ownership includes ownership by the CPA plus any spouse or dependent member of his or her household or any partnerships to which the CPA belongs.

Question 14

Public confidence is mostly maintained by the public accounting profession through integrity based on personal moral standards and it is reinforced by codes of conduct.

Question 15

As accounting standards become less rules-based and more principles-based,the role of professional judgement in decision-making will become less important.

Question 16

The Sarbanes-Oxley Act of 2002 amends the Securities and Exchange Act of 1934 and places prohibitions on certain consulting services by auditors for their audit clients.

Question 17

Professional judgment involves applying relevant professional knowledge and experience to unique and potentially uncertain facts and circumstances in order to reach a conclusion or make a decision.

Question 18

Direct ownership in a client's business must be material to the CPA's investment portfolio in order to violate the independence rule.

Question 19

The SEC is concerned with situations between an auditor and a public company that allow the auditor to act as management of the client.

Question 20

When making complex,difficult,and important decisions audit professionals typically do not benefit from a structured approach to their decision-making because they need to remain open-minded.

Question 21

The highest-order rights include rights granted by the government,such as civil rights,legal rights,rights to own property,and license privileges.

Question 22

The first step in the ethical framework is to identify the ethical issue(s).

Question 23

A contingency fee is where no fee will be charged unless a specified finding or result is attained.

Question 24

Rule 101 on integrity and objectivity only applies to covered members as defined by the AICPA.

Question 25

Under the AICPA Code of Professional Conduct,rules take precedent over principals.The principals need to only be considered when a rule is apparent.

Question 26

An ethical problem is the same as an ethical dilemma.

Question 27

Commissions and referral fees are allowed to audit firms as long as the fees are disclosed to the client's board and audit committee.

Question 28

An ethical dilemma occurs when there are conflicting moral duties or obligations.

Question 29

If a member owns several shares of stock of a company during the first few months of the fiscal year under audit and then sells the shares before accepting the engagement,the firm does not violate the independence rules of the AICPA.

Question 30

An ethical problem occurs when an individual is morally or ethically required to do something that conflicts with his or her immediate self-interest.

Question 31

Rights theory focuses on evaluating actions in terms of the fundamental rights of the parties involved.

Question 32

A covered member under the AICPA's rules includes individuals on the engagement team,any individual in a position to influence the engagement team,and all professional staff in the office of the engagement.

Question 33

The AICPA may revoke a member's CPA license for violations of its Code of Professional Conduct.

Question 34

An ethical problem occurs when an individual is morally or ethically required to do something that conflicts with the immediate security interests of others.

Question 35

There is a hierarchy of rights to consider when applying rights theory.

Question 36

Contingent fees are prohibited for any client for which the auditor performs attestation services.

Question 37

Only covered members as defined by the AICPA are required to comply with its independence rules.

Question 38

Utilitarian theory is an approach for addressing ethical problems by identifying a hierarchy of rights that should be considered in solving ethical problems or dilemmas.

Question 39

The Sarbanes Oxley Act requires management to pre-approve any non-audit service by the auditor,including tax services not specifically prohibited.

Question 40

CPAs are no longer able to practice as a sole proprietorship.

Question 41

Loans between the auditor and the client are permitted in some circumstances.

Question 42

A CPA firm is not considered independent when it performs which of the following services for a publicly traded audit client?

A)tax return preparation as approved by the board of directors
B)basic accounting recordkeeping and financial statement preparation
C)accounting information system design and implementation
D)both B and C
E)none of the above

Question 43

An auditor that exercises adequate professional skepticism will be less likely to overlook unusual circumstances,to over-generalize from limited audit evidence,or to use inappropriate assumptions in determining the nature,timing,and extent of audit procedures.

Question 44

Julie Webb,CPA takes out an automobile loan with First national Bank of Wellville (FNBW)while attending the University of Wellville.Julie graduates one year later and is hired as an auditor by Best and Driftwood,LLP.Her first assigned audit engagement is with First national Bank of Wellville,a client of Best and Driftwood.As a new audit assistant,Julie continues to pay her automobile loan payments each month.According to the AICPA,Julie is considered a covered member for FNBW independence purposes because of which of the following conditions?

A)she will be working on the engagement.
B)she has a direct financial interest in FNBW.
C)she graduated in the same area as the client is operating.
D)she has an immaterial direct financial interest in FNBW.

Question 45

A member of the AICPA must safeguard the confidentiality of client information.Auditors,however,must disclose information to non-clients for the following reasons except to:

A)discuss information relating to inadequate disclosure in an audit report.
B)comply with a validly issued and enforceable subpoena or summons.
C)accommodate the review of client audit workpapers under AICPA,PCAOB,or State Board of Accountancy authority.
D)explain to members of the press the financial viability of a client.

Question 46

Which one of the following is an example of a conflict of interest for a CPA?

A)performing tax services and a compilation engagement for a client
B)serving as legal counsel and an auditor for a client
C)providing an audit on internal financial controls and financial statements for a client
D)being employed as a chief financial officer while serving as a member of the board of directors for the same company

Question 47

Professional skepticism is important because without it auditors are susceptible to accepting weak or inaccurate audit evidence.

Question 48

Rule 201 of the General Standards of the Code of Professional Conduct defines professional competence in which of the following ways?

A)sufficient collegiate and continuing professional education.
B)accepting only those engagements that the firm's members can competently perform.
C)adequate planning and supervision of professional performance.
D)none of the above.

Question 49

Which of the following is not an aspect of Rule 201 of the General Standards of the Code of Professional Conduct?

A)a member must not take on an engagement that is beyond the member's professional competence
B)a member must exercise duties prudently and professionally
C)a member must adequately plan and supervise the performance of professional services
D)a member firm must not advertise services to competing clients

Question 50

Audit committees should consider all factors that might affect the independence of the external auditor and should not approve nonaudit services that they believe might impair independence.

Question 51

Audit committees should consider all factors that might affect the independence of which of the following:

A)chief executive officer
B)chief financial officer
C)external auditors
D)all of the above.

Question 52

Brenda Hursch,an auditor,would be considered independent for purposes of an audit of Microship Company even though her spouse worked for Microship Company in which of the following positions?

A)controller.
B)treasurer.
C)order entry staff.
D)none of the above,all roles would impair independence

Question 53

When using a general framework for making high-quality professional decisions,the auditor would typically take all of the following steps except which one of the following:

A)the auditor structures the problem.
B)the auditor assesses the consequences of the potential alternatives.
C)the auditor assesses the risk of potentially losing the client and the impact of the lost fee on the firm.
D)all of the above are steps that would be taken.

Question 54

Which of the following represents a situation in which an auditor is independent of the client?

A)The auditor is paid by the client organization rather than the SEC.
B)The auditor takes a personal loan from the president of the company.
C)The auditor's dependent son holds 25 shares of the client's common stock.
D)The auditor has not received payment for the previous audit services.

Question 55

Members of the AICPA are required to act with integrity and objectivity for which of the following engagements?

A)tax preparation
B)financial statement review services
C)financial statement audits
D)all engagements

Question 56

The auditor is permitted to violate the confidentiality rule in providing relevant information to an inquiry by a major shareholder of the client.

Question 57

In determining the types of activities,engagements and interactions an auditor should have with a client,the CPA and the audit firm must do which of the following?

A)only assess the relationships of clients that pay audit fees that are material to their firm.
B)assess all of their relationships with every client to ensure that independence is intact.
C)focus on client satisfaction above all other considerations.
D)realize that ethics are only guidelines and a matter of personal judgment.

Question 58

Julie Webb,CPA takes out an automobile loan with First National Bank of Wellville (FNBW)while attending the University of Wellville.Julie graduates one year later and is hired as an auditor by Best and Driftwood,LLP.Her first assigned audit engagement is with First National Bank of Wellville,a client of Best and Driftwood.As a new audit assistant,Julie continues to pay her automobile loan payments each month.According to the AICPA,Julie's independence would be considered

A)impaired because Julie has a direct financial interest in FNBW.
B)impaired because Julie has a material indirect financial interest in FNBW.
C)not impaired because Julie has an immaterial indirect financial interest in FNBW.
D)not impaired because Julie is permitted to take normal loans from FNBW.

Question 59

Mark Pulley is an auditor at Pulley and Hurst,LLC.If Pulley's five-year-old daughter owns shares of stock in McBurgers Corporation,then Pulley is considered to have what type of interest in McBurgers Corporation?

A)immaterial indirect interest in McBurgers Corporation.
B)material indirect interest in the McBurgers Corporation.
C)a loophole for claiming independence from McBurgers Corporation.
D)direct interest in McBurgers Corporation.

Question 60

Major threats to the independence of the auditor includes compensation schemes,familiarity with the client and time pressures.

Question 61

A CPA may only practice public accounting in which of the following forms?

A)a partnership.
B)a professional corporation.
C)a sole proprietorship.
D)an organization permitted by state law or regulation.

Question 62

Under the AICPA definition,who among the following would not be considered a covered member?

A)an individual on the attest engagement team.
B)an individual in a position to influence the attest engagement.
C)a partner in the office of the lead engagement partner.
D)all would be considered covered members.

Question 63

A covered member may not have a loan to or from the client,except for permitted and grandfathered loans.When would nonpayment of tax fees due to the auditor by the client be converted to a loan classification?

A)After 90 days.
B)After six months.
C)After one year.
D)After two years.

Question 64

The AICPA Principles of Professional Conduct include which of the following?

A)public interest,objectivity and independence.
B)due professional care and supervision.
C)scope and nature of services and adequate training.
D)integrity and confidentiality

Question 65

Information about a client that cannot be subpoenaed by a court of law is referred to as what type of information?

A)confidential information.
B)privileged communication.
C)contingent information.
D)audit communication

Question 66

Independence is required for which of the following types of services?

A)audits.
B)tax work.
C)consulting.
D)always required of the CPA.

Question 67

Which of the following is included in the AICPA Code of Professional Conduct?

A)Principles,Rules of Conduct and Ethics Rulings
B)Rules of Conduct,Interpretations and Principles.
C)Principles,Rules of Conduct and Ethics Rulings.
D)Principles,Rules of Conduct,Interpretations and Ethics Rulings.

Question 68

Among close relative of the covered member,e.g. ,brothers,sisters,mother,father,and cousins,when is ownership of the client's stock by them considered the same as ownership by the covered member?

A)Key financial position.
B)Immaterial financial interest in the client with covered member's knowledge.
C)Material financial interest in the client without the covered member's knowledge.
D)All are considered part of the covered member's close relatives and so would affect the covered member's independence.

Question 69

Which of the following describes a situation in which moral duties or obligations conflict and one action is not necessarily the correct action?

A)an ethical dilemma.
B)an ethical problem.
C)an ethical theory.
D)none of the above.

Question 70

In which of the following situations would a CPA not be considered independent?

A)where a CPA has obtained an auto loan from a banking client in a prior year.
B)where a CPA has obtained a home mortgage loan in 1988 from a client.
C)where a CPA has obtained an auto lease from a banking client in the current year.
D)where the spouse of a CPA has obtained a home mortgage loan in the current year.

Question 71

A CPA firm is considered independent when it performs which of the following services for a publicly traded audit client?

A)Serving as a member of the client's board of directors.
B)Determining which accounting policies will be adopted by the client as approved by the board of directors.
C)Accounting information system design and implementation as approved by the board of directors.
D)Tax return preparation as approved by the board of directors.

Question 72

Normally the auditor is not permitted to divulge confidential information obtained from a client.Which of the following situations would be a violation of this requirement?

A)to respond to the information request of a shareholder.
B)to respond to a quality review request of the state board of accountancy.
C)to initiate a complaint with the AICPA's ethics division.
D)to ensure adequate disclosure in accordance with GAAP.

Question 73

Which of the following is a purpose of an ethical framework?

A)to provide a defined methodology to solve the ethical problem.
B)to provide a defined methodology to aid the user in making complex ethical decisions.
C)to provide a defined program to solve ethical dilemmas.
D)to provide all of the above.

Question 74

Which of the following represents a situation in which the auditors may disclose client information to outside parties?

A)Bringing working papers to a professional CPA workshop as an example of quality work.
B)Complying with a validly issued and enforceable subpoena or summons.
C)Showing the client's bank statement to a neighbor who is a shareholder to emphasize its cash position.
D)Explaining to the local television news station why the client is likely to miss payroll in the forthcoming periods.

Question 75

The ethical framework derived from utilitarianism and rights theories indicates all of the following steps except

A)identification of the legal issues.
B)determination of affected parties and their rights.
C)determination of the most important rights.
D)development of alternative courses of action.

Question 76

William Tyler,CPA,may not accept a commission for recommending a product or service to which type of client?

A)a tax client.
B)an attestation client.
C)a financial-planning client.
D)a management-services client.
E)all of the above.

Question 77

Rule 201,dealing with General Standards that are applicable to all CPAs no matter the type of services that are rendered,does not include which factor?

A)Due professional care.
B)Integrity and objectivity.
C)Planning and supervision.
D)Sufficient relevant data.

Question 78

In which of the following situations would a CPA not be considered independent?

A)where a CPA has obtained an auto loan from a banking client in the current year.
B)where a CPA has obtained an automobile lease term from a client in the current year.
C)where a CPA has obtained a $4,000 retainer for services from a banking client in the current year.
D)where a CPA has obtained a home mortgage loan from a client in the current year.

Question 79

Independence is not required for which of the following types of services?

A)audits.
B)reviews.
C)consulting.
D)attestation.

Question 80

Which of the following describes a situation in which an individual is morally or ethically required to do something that conflicts with his or her immediate self-interest?

A)an ethical dilemma.
B)an ethical problem.
C)an ethical theory.
D)none of the above.