Deck 4: Aicpa Code of Professional Conduct

Question 1

The conceptual framework for the AICPA Independence standards can best be characterized as:

A) A model to prevent fraud from occurring
B) An approach to identify threats to independence
C) An approach to identify fraud risks
D) A model to assist controllers in dealing with differences of opinion with top management on accounting issues

Answer 1

B

Question 2

James Doty, the chairman of the PCAOB, in his testimony before Congress on the financial crisis of 2007-2008, admitted that auditors should have been more vigilant-not just at Lehman Brothers, but across the board. Which audit areas did Doty signal out for criticism?

A) Inventories and cash flow
B) Capital and operating expenses
C) Special purpose and related-party entities
D) Valuations and end-of-period transactions

Answer 2

D

Question 3

During the investigations by the House Subcommittee on Oversight and Investigations, a question that was raised was:

A) Why was fraud allowed to occur at some many companies
B) Where was the board of directors in all these frauds
C) Where were the auditors
D) Why did the internal controls fail in some many frauds

Answer 3

C

Question 4

The accounting issues at failed savings and loan institutions included:

A) The failure to provide adequate allowances for loan losses
B) The failure to disclose dubious deals between the S&Ls and some of its major customers
C) The existence of inadequate controls to prevent inadequate allowances and control for dubious deals
D) All of these

Question 5

One concern in the Armadillo Foods case in the text of the chapter is:

A) The failure of internal controls
B) Pressure to go along with the misappropriation of assets
C) The failure of the external auditors to catch fraud
D) Pressure to meet financial analysts' earnings estimates

Question 6

The SEC's position on independence can best be characterized as:

A) Proscribing certain financial interests with the client
B) Proscribing certain business relationships with the client
C) Restricting the provision of certain nonaudit services to audit clients
D) All of these

Question 7

The cost to the public to clean up 1,043 failed savings and loan institutions during the period of 1986-1995 was:

A) $152.9 billion including $123.8 billion of U.S. taxpayer losses
B) $300 million including $123.8 million of U.S. taxpayer losses
C) $400 billion including $152.9 billion of U.S. taxpayer losses
D) $400 million including $152.9 billion of U.S. taxpayer losses

Question 8

Each of the following were themes of the investigations of the accounting profession during the 1970s and 1980s except for:

A) Whether low-balling to obtain audits impairs independence
B) Whether nonaudit services impair auditor independence
C) The need for a report on internal controls
D) The importance of developing techniques to prevent and detect fraud

Question 9

One of the Contributions of the Treadway Commission Report and the work of the Committee of Sponsoring Organizations (COSO) was:

A) To establish a voluntary process for peer review
B) To identify red flags that might lead to fraud
C) To identify the tone at the top for management to create an ethical culture
D) All of these

Question 10

The ethics rules that applies solely to those who conduct an audit of a client entity is:

A) Independence
B) Objectivity
C) Integrity
D) All of these

Question 11

The principle of ethical behavior in the AICPA Code that asks questions directly related to ethical courage is:

A) Independence
B) Objectivity
C) Integrity
D) Fraud prevention

Question 12

In its investigation of ZZZZ Best, the House Subcommittee on Oversight and Investigations looked into:

A) Why the board of directors failed to uncover the fraud at ZZZZ Best
B) How the company was able to create 80% or more fictitious revenue
C) How the company was able to create cookie jar reserves
D) All of these

Question 13

The committee that first recommended that the profession institute a voluntary program for peer review was:

A) Metcalf committee
B) Cohen committee
C) The House Subcommittee on Oversight and Investigations
D) Mintz and Morris committee

Question 14

In the Lincoln Savings & Loan failure during the period of failures at savings and loan institutions, Lincoln was charged with:

A) Stealing $300 million from shareholders
B) Causing retirees to lose their life savings
C) Causing employees to lose their jobs
D) Engaging in a Ponzi scheme

Question 15

The International Federation of Accountants (IFAC) research report, Rebuilding Public Confidence in Financial Reporting: An International Perspective, has as its goal which of the following:

A) Creating an international CPA certificate
B) Examine ways of restoring the credibility of financial reporting and corporate disclosure from an international perspective
C) Establishing a global code of conduct
D) All of these

Question 16

Impairments of independence can occur when:

A) A CPA owns a direct financial interest in a client
B) A CPA owns a material indirect financial interest in a client
C) Immediate family members of the CPA are in violation of the independence rules
D) All of these

Question 17

The House Subcommittee on Oversight and Investigations made its recommendations after looking into failures at:

A) ESM Government Securities
B) Continental Illinois National Bank and Trust
C) Penn Square Bank
D) All of these

Question 18

In the ESM fraud discussed in this chapter, Jose Gomez violated the Independence standard because he:

A) Had loans outstanding from the client
B) Engaged in a business relationship with the client
C) Had family members who owned stock directly in the client
D) All of these

Question 19

Assume the external auditor of a client entity also served on the client's board of directors. What aspect of independence would be violated?

A) The auditor may be exposed to an intimidation threat by the client
B) The auditor is involved in a business relationship with the client
C) The auditor serves in a management decision making position with the client
D) All of these

Question 20

CPAs should always adhere to the rules of conduct of the

A) State board of accountancy
B) AICPA
C) IMA
D) All of these

Question 21

The CPA firm that became involved in tax shelter controversies with the IRS was:

A) Ernst & Young
B) Deloitte & Touche
C) PricewaterhouseCoopers
D) KPMG

Question 22

A CPA can accept a contingent fee in providing tax services for an attest client if:

A) The CPA discloses this fact to the tax client
B) The CPA receives the permission of the client to accept such a form of payment
C) The CPA's tax services will be reviewed by a taxing authority
D) All of these

Question 23

A CPA who informs management of a material misstatement in the financial statements can go to the SEC with his/her concerns if:

A) The CPA informed the client of this matter and the client did not inform the SEC within one business day of being informed by the CPA
B) The CPA informed the client of this matter and the client refuses to correct the financial statements
C) The CPA informs the client of this matter and the client fires the CPA
D) All of these

Question 24

In the PeopleSoft case, the auditors violated what aspect of independence?

A) The auditor was exposed to an intimidation threat by the client
B) The auditor was involved in a business relationship with the client
C) The auditor served in a management decision making position with the client
D) All of these

Question 25

A unique aspect of the HealthSouth case discussed in the text of this chapter is:

A) The external auditors failed to assess whether the internal controls operated as intended
B) Top management certified that the financial statements were accurate
C) The external auditors violated the independence standards because they were involved in a business venture with members of top management
D) Top management hyped the stock price to increase the value of their stock options

Question 26

Circular 230 applies to CPAs who:

A) Audit the financial statements of a tax client
B) Practice before the IRS
C) Practice before the SEC
D) All of these

Question 27

CPAs can advertise and solicit clients as long as such practices are:

A) Conducted in a professional manner
B) Informative about the CPA's services
C) Not conducted in a misleading or deceptive manner
D) Paid for by outside parties

Question 28

To avoid violating independence when engaged in nonattest services for an audit client, a CPA must:

A) Make all management decisions and perform all management decisions
B) Evaluate the adequacy and results of the services performed
C) Avoid being biased when providing nonattest services for the audit client
D) Avoid being pressured by the client when providing nonattest services for the audit client

Question 29

Objectivity may be impaired when a CPA prepares a tax return for a client because:

A) The CPA violates the independence rule
B) The CPA violates the integrity rule
C) The CPA serves in a tax advocacy position for the client
D) The CPA must prepare the tax return solely based on the information provided by the client

Question 30

A common requirement/effect of the commissions and contingent fees rule is:

A) A CPA who accepts such a payment always violates independence
B) The CPA must disclose the acceptance of such a payment to the client
C) A CPA is prohibited from accepting such a form of payment when engaged in attest services for a client
D) All of these

Question 31

Statement on Standards for Tax Services No. 1 establishes as a basic principle of providing tax services that the CPA:

A) Must have a good faith belief that the tax return position can be justified if challenged
B) Must have a good faith belief that the information provided by the client is accurate
C) Can never recommend a tax position to the client when it is frivolous
D) All of these

Question 32

In the Fund of Funds case discussed in this chapter, the external auditors violated which rule of conduct?

A) Due care
B) The financial statements were certified as being in conformity with GAAP when that was not the case
C) The financial statements were certified as being in conformity with generally accepted auditing standards when that was not the case
D) Confidentiality

Question 33

If a client refuses to accept an auditors' report that has been modified, the public accounting firm should withdraw from the engagement and give its reasons in writing to the board of directors except when:

A) The auditor is unable to obtain sufficient appropriate evidence about a suspected illegal act
B) The client fails to account for or disclose properly a material amount connected with an illegal act
C) The auditor is unable to estimate amounts involved in an illegal act
D) The auditor is unable to observe the physical inventory

Question 34

Which rule of professional conduct in the AICPA code does not apply both to internal and external accountants who are CPAs and members of the Institute?

A) Independence
B) Integrity
C) Objectivity
D) Due care

Question 35

The requirement that there should be reasonable support for a tax return position before a CPA recommends it to a client most directly aligns with which tax standard:

A) The tax return should not be based on a frivolous position
B) There is a realistic possibility of success if the tax position is challenged
C) It is more likely than not that the tax position will be upheld if challenged
D) Contingent fees cannot be accepted when providing tax services for an audit client

Question 36

The due care principle in the AICPA code:

A) Addresses the quality of the individual who performs professional services
B) Addresses the quality of services performed by the CPA
C) Addresses whether the independence standards has been met
D) All of these

Question 37

Under the Sarbanes-Oxley Act, the auditor's responsibility with respect to internal controls can best be stated as:

A) Develop a system of internal controls that helps to prevent and detect fraud
B) Assess whether the internal controls helps to prevent and detect fraud
C) Assess management's report on internal controls
D) All of these

Question 38

An alternative practice structure can best be described as:

A) A form of ownership where a CPA firm owns a public company and audits that company
B) A form of structure where a public company provides nonattest services for a client that is also provided with attest services by an affiliate of the public company
C) A form of structure where a CPA firm provides nonattest services for a client that is also provided with attest services by a public company
D) A form of structure other than LLP and LLC

Question 39

The confidentiality standard in the AICPA code provides for exceptions to the rule in:

A) In response to a validly issued court summons
B) To provide information to the CPA's peer reviewers
C) To defend oneself in an ethics investigation
D) All of these

Question 40

Each of the following is an outright restriction on providing nonattest services for an attest client except for:

A) Tax services
B) Financial information systems design and implementation
C) Appraisal or valuation services
D) Internal audit outsourcing services

Question 41

Mintz and Morris, both of whom are CPAs, became partners in a tax preparation business in San Marcos, Texas. Which of the following ethics standards must be followed by the two partners?

A) Ethics laws and regulations of the Texas Board of Accountancy
B) Ethics rules of the AICPA
C) Ethics rules of the Texas Society of CPAs
D) All of these

Question 42

To whom do the accounting codes of professional conduct (either the state board of public accountancy or AICPA) apply?

A) Those CPAs in public accounting only.
B) Those CPAs in industry, government, and education.
C) Those CPAs in public accounting, industry, government, and education.
D) Those CPAs in public accounting, doing auditing and taxation.

Question 43

Each of the following is a safeguard that helps to mitigate threats to independence except for:

A) Safeguards created by the profession, legislation, or regulation
B) Safeguards implemented by the attest client, such as a tone at the top
C) Safeguards developed to ensure independence when performing nonattest services
D) Safeguards implemented by the firm, including policies and procedures to implement regulatory requirements

Question 44

Which of the following is not part of standards for the quality of work?

A) Planning and supervision
B) Professional competence
C) Professional data
D) Professional care

Question 45

What is the maximum amount of time an audit manager or partner may spend on nonattest services for an attest client?

A) 20 hours
B) 15 hours
C) 10 hours
D) 8 hours

Question 46

Which of the following situations of a CPA's distant relatives does not impair the CPA's independence?

A) CPA's parent holds a key position with an audit client.
B) CPA's nephew is starting as a salesperson with an audit client.
C) CPA's dependent roommate owns a material interest, and sits on the board, of an audit client.
D) CPA's sister is chief counsel for an audit client.

Question 47

To whom does the CPA owe ultimate allegiance in carrying out professional obligations?

A) Stockholders
B) Public interest
C) Client
D) Stakeholders

Question 48

What is the difference on contingent fees under the PCAOB rules versus the AICPA rules?

A) Both rules allow contingent fees for an audit client if the contingency is based upon findings of government agencies.
B) The AICPA prohibits contingent fees to an audit client.
C) The PCAOB allows contingent fees for non-public company engagements.
D) The PCAOB prohibits contingent fees in tax engagements performed for an audit client.

Question 49

In which of the following is a CPA independent in fact and appearance?

A) The CPA's brother is the controller of the company being audited.
B) The CPA serves on the board of a non-profit with the CFO of the company being audited.
C) The CPA borrowed money for a new car from the CEO of the company being audited.
D) The CPA owes an office building that he leases to the client.

Question 50

Integrity is measured in terms of what is right and just. What is a question that a CPA can ask to test decisions?

A) Am I doing what another CPA would do?
B) Am I serving the interests of my client?
C) Am I protecting my self-interests?
D) Have I retained my integrity?

Question 51

Which of the following is a permitted loan to a CPA from an audit client financial institution?

A) Car loan collateralized by the car
B) Credit cards with a limit greater than $25,000
C) Home mortgage
D) Personal loan of less than $10,000

Question 52

Which of the following services are allowed to be performed for an attest services client by Sarbanes Oxley Act?

A) Financial information systems design and implementation
B) Management functions or human resources
C) Internal audit outsourcing services
D) Pension plan audits

Question 53

Which of the following would be an example of due care?

A) Audit documentation only supplied by the client.
B) Audit documentation is a copy of last year's workpapers.
C) Audit documentation obtained by the auditor with reviews by supervisory personnel.
D) Audit documentation with misapplication of GAAP.

Question 54

Which was the ethical concern exists in the PeopleSoft case?

A) Family relationships between PeopleSoft top managers and EY
B) Tax services provided for PeopleSoft top management by EY
C) Independence in appearance and fact of EY in providing services to PeopleSoft
D) Information systems design and installations services provided for PeopleSoft by EY

Question 55

Which case in the text of the chapter illustrates the danger of a CPA accepting loans from an audit client?

A) Tyco International
B) Enron
C) Adelphia
D) ESM Government Securities

Question 56

The PCAOB rules prohibit auditors from:

A) Providing certain aggressive tax shelters to their public company audit clients
B) Providing tax services to members of the audit client's management who serve in financial reporting oversight roles
C) Providing tax preparation and planning services for public company executives
D) All of these

Question 57

Sarbanes-Oxley Act (SOX) sets new standards for governance that will ultimately impact on which of the following?

A) Foreign companies listed on US exchanges only
B) SEC registrant companies, including foreign companies listed on US
C) NYSE listing companies
D) NASDAQ listing companies

Question 58

Which of the following relationships do not impair CPA-auditor independence?

A) Financial relationships with the client
B) Business relationships with the client
C) Family relationships whereby an immediate family member holds a decision-making position with the client
D) Relationships where a best friend serves in a financial reporting oversight role with the client

Question 59

Which of the following immediate family members or close relatives would not have to follow the independence rules that apply to the CPA according to Interpretation 101-1?

A) CPA's spouse
B) CPA's spousal equivalent
C) CPA's uncle
D) CPA's dependents

Question 60

Why don't auditors prepare financial statements, as well as audit them?

A) It would take away a job from the controller of the company.
B) It would not eliminate errors in the financial statements.
C) It would be a conflict of interest and violates ethical standards.
D) It would streamline the process and be effective.

Question 61

Explain how the Principles of the AICPA Code of Professional Conduct establish standards of behavior for CPAs that are similar to those discussed in chapters 1 and 2.

Question 62

The revenue recognition issue in the Family Games case is:

A) Whether a company can record revenue before it is signed-off by the lawyers
B) Whether a company can record revenue before it is shipped to the customer
C) Whether a company can record revenue before the revenue recognition rules are met
D) All of these

Question 63

In the Lee & Han, LLC case, Barbara Strom should:

A) Report the situation to SEC under the Dodd-Frank Act.
B) Change the audit workpapers to not reflect the market decline in inventory.
C) Discuss the matter with Kate Boller.
D) Report the situation to the firm's oversight or similar committee.

Question 64

What steps should an auditor take when she suspects illegal acts have occurred at a client entity?

Question 65

What are the major threats to independence addressed by the AICPA Conceptual Framework for Independence Standards and how can CPAs/CPA firms mitigate such threats?

Question 66

In the HealthSouth case, the auditors failed to meet their ethical and professional obligations because they failed to uncover fraud in which account?

A) Inventory
B) Contractual allowance
C) Sales returns
D) All of these

Question 67

PricewaterhouseCoopers was investigated by the SEC for independence violations due to:

A) Reporting systems that relied on self-reporting of violations
B) Ownership of client stock
C) Investments by PwC professionals in bank accounts of audit clients
D) All of these
Essay Questions

Question 68

The main ethical issue in Healthcare Fraud case is:

A) Maintaining two sets of accounting books.
B) Inflating healthcare costs submitted to Medicare.
C) Outsourcing operations to a firm known for maximizing expense reimbursements.
D) All of these.

Question 69

Which statement is correct with respect to a CPA's ethical obligation to return client books and records and CPA work papers:

A) Client-provided records in the custody or control of the CPA should be returned to the client at the client's request.
B) CPA work papers should be given to the client at the end of each audit.
C) CPA work product never has to be turned over to the client.
D) All of these

Question 70

Which tax service is still permitted by the PCAOB for audit clients following the KPMG tax shelter case?

A) Aggressive tax shelter for audit clients
B) Auditing of deferred taxes
C) Tax services to audit client management or family members
D) Tax services for a contingent fee

Question 71

The ethical issue raised in the Beauda Medical Center case is similar to that in:

A) ESM Government Securities
B) PeopleSoft
C) Fund of Funds
D) Enron

Question 72

The AOL case described in the text focused mainly on:

A) Proper accounting for line costs
B) Proper accounting for advertising costs
C) Proper accounting for special purpose entities
D) All of these

Question 73

Under what circumstances do you think it would be acceptable for a CPA to blow the whistle on financial wrongdoing by a client? What steps should the CPA take before carrying through with the whistle-blowing action?

Question 74

In the Gee Wiz case, the main ethical issue was:

A) Independence of David in providing tax services to an audit client
B) Confidentiality in disclosing sensitive information about a client of the CPA firm
C) Integrity in providing tax services to an audit client through her own entity
D) Whistleblowing on a client

Question 75

Describe each of the investigations of the accounting profession during the 1970s and 1980s. Given the passage of the Sarbanes-Oxley Act in 2002, do you think these investigations helped to pave the way for SOX improvements?

Question 76

What ethical rules are violated when a CPA auditing a client provides inside information about the client to a friend?

A) Independence and objectivity
B) Objectivity and due care
C) Due care and confidentiality
D) Confidentiality and integrity

Question 77

In the Family Outreach case, Yimei finds three accounts all using the same documentation and amounts. Being skeptical, Yimei should consider doing all but:

A) Report her findings to Kwami, her supervisor
B) Talk to the agency's board of directors
C) Examine more evidence to support her finding
D) Check to see if the accounts were in the prior years' workpapers

Question 78

What are the similarities and differences in the application of the rules of professional conduct in the AICPA with respect to internal accountants who are CPAs and CPA-external auditors?

Question 79

Which is not a permitted form of organization for a CPA practice?

A) Sole proprietorship with name of sole proprietor
B) Limited liability partnership
C) Professional corporation
D) Corporation

Question 80

The question that arises in the First Community Church case is whether:

A) The financial statements have been materially misstated
B) There has been a misappropriation of assets
C) The auditors lacked independence
D) All of these