Question 1

The recommendation of appointment and review of external auditors by the audit committee is an example of

Accepted Answer

The recommendation of appointment and review of external auditors by the audit committee is a safeguard that reduces the risk of conflict of interest between an auditor and management. This is because the audit committee, which is an independent committee of the board of directors, is responsible for overseeing the external auditors' work and ensuring their independence and objectivity. By having the audit committee recommend and review the external auditors, it reduces the risk of the auditors becoming too close to management and losing their independence.

Question 2

Professional accountants, in their fiduciary role, owe primary loyalty to

Accepted Answer

Professional accountants owe primary loyalty to the public interest, as they are responsible for ensuring that financial statements are accurate and reliable, which helps to protect the interests of investors, creditors, and other stakeholders. While they must also adhere to government regulations and serve their clients' needs, their ultimate responsibility is to the public interest.

Question 3

According to Kohlberg, fear of punishment and authorities is a motive for doing right at which stage of moral reasoning?

Accepted Answer

Kohlberg's pre-conventional stage of moral reasoning is characterized by an individual's focus on avoiding punishment and obeying authority figures.

Question 4

If a professional accountant is auditing a public company and she receives company shares as payment for her audit services, she will be violating which of the following fundamental principles?

Accepted Answer

Professional accountants must maintain objectivity in their work to ensure that they do not compromise their professional judgment or their ability to provide unbiased opinions. Accepting shares from a public company for audit services provided would likely compromise the auditor's objectivity, as it creates a financial interest that could significantly influence their judgments or opinions. This would be a violation of the fundamental principle of objectivity. Therefore, accepting shares as payment for audit services is not permissible.

Question 5

A professional accounting firm has several audit and tax clients; however, a single client represents 40% of the firm's revenue. This situation could result in which of the following threats to professional independence?

Accepted Answer

The situation described represents a threat to professional independence due to self-interest. The large proportion of revenue coming from a single client may create a situation where the accounting firm is reluctant to perform audit or tax work that may harm their relationship with the client and potentially result in a loss of revenue.

Question 6

Which organization is developing an international code of conduct for professional accountants?

Accepted Answer

The International Federation of Accountants (IFAC) is developing an international code of conduct for professional accountants. IFAC is a global organization representing accountants in 173 countries, and it sets international standards for the accounting profession. The other organizations listed (IASB, EFA, FASB, PCAOB) have different roles in the accounting field but are not currently developing an international code of conduct for professional accountants.

Question 7

Which organization issues auditing standards, carries out inspections of public accounting firms auditing U.S. public clients, and imposes sanctions when applicable?

Accepted Answer

The Public Company Accounting Oversight Board (PCAOB) is the organization that issues auditing standards, carries out inspections of public accounting firms auditing U.S. public clients, and imposes sanctions when applicable. Choice A (CPAB) is a similar organization in Canada, not the U.S. Choice C (SEC) has regulatory oversight of the PCAOB, but does not carry out these functions directly. Choices D (FASB) and E (AICPA) are involved in setting accounting standards and providing guidance to the profession, but do not have the same regulatory authority as the PCAOB.

Question 8

A professional accountant is auditing client A and providing consulting services to client B. Both clients are in the same industry. If the professional accountant uses specific information from client A's audit to prepare a business plan for client B, he will be violating which of the following fundamental principles?

Accepted Answer

Confidentiality is the fundamental principle that protects the disclosure of client information. If the professional accountant uses specific information from client A's audit to prepare a business plan for client B, he would be violating client A's confidentiality. This would damage the client's trust, reputation, and could lead to legal action. Therefore, a professional accountant should not use confidential information from one client to benefit another client without the prior written consent of the original client.

Question 9

A new audit client was taken on by a professional accountant's firm. The fee for this client's audit engagement is significantly lower than that charged by the prior accountants. This situation could result in which of the following threats to professional independence?

Accepted Answer

The situation described does not inherently lead to threats such as self-review, intimidation, advocacy, or familiarity. The lower fee does not directly create a conflict of interest or compromise the auditor's independence in the context of the threats listed.

Question 10

A professional accountant has been the partner in charge of a particular audit client for the past eight years. This situation could result in which of the following threats to professional independence?

Accepted Answer

The situation described could result in the familiarity threat to professional independence, as the long-standing relationship could lead to a close, personal relationship with the client that may compromise the auditor's ability to exercise objective judgment.

Question 11

Which of the following elements are essential features of a profession?

Accepted Answer

A profession typically requires extensive training, provides important services to society, and involves primarily intellectual skills.

Question 12

If a professional accountant is billing an audit client for more hours than those actually worked, he will be violating which of the following fundamental principles?

Accepted Answer

This action violates the fundamental principle of integrity, which requires honesty and straightforwardness in all professional and business relationships. Billing for more hours than actually worked is dishonest and lacks straightforwardness. It also violates the principle of professional due care, which requires that the accountant exercise competence and diligence in performing his professional activities. However, it does not directly violate the principles of objectivity or confidentiality unless the overbilling is used to conceal other unethical actions.

Question 13

Which of the following values is NOT necessary for an accounting professional?

Accepted Answer

A primary commitment to self-interest goes against the ethical principles of accounting and could lead to fraudulent behavior. Honesty, integrity, and objectivity are all necessary values for an accounting professional.

Question 14

Which of the following is NOT a fundamental principle in codes of conduct for professional accountants?

Accepted Answer

Acting in the client's best interest is not a fundamental principle in codes of conduct for professional accountants. Rather, professional accountants are expected to act in the public interest, by providing independent and objective advice and maintaining the integrity and reputation of the accounting profession.

Question 15

Using partners who do not report to audit partners for the provision of non-assurance services to an assurance client would be an example of

Accepted Answer

Using partners who do not report to audit partners for the provision of non-assurance services to an assurance client would be an example of safeguards reducing the risk of conflict of interest within a professional accounting firm. This is because the non-audit partners would not be under the influence of the audit partner, reducing the risk of bias in the provision of non-assurance services.

Question 16

According to Kohlberg, adherence to moral codes or to codes of law and order is a motive for doing right at which stage of moral reasoning?

Accepted Answer

Kohlberg's conventional stage of moral reasoning is where individuals uphold societal norms and values and adhere to codes of law and order to maintain social order and gain approval from others.

Question 17

The adoption of which of following measures would reduce the expectations gap and lessen public misunderstanding of the auditor's role?

Accepted Answer

Both publishing a statement of management responsibility and expanding the audit report to clarify the auditor's role and the level of assurance would help to close the expectations gap and reduce public misunderstanding of the auditor's role. The statement of management responsibility would help to clarify what responsibilities are held by management in the financial reporting process, while the expanded audit report would give a clearer picture on what the auditor has done and what level of assurance they can provide. Reporting annually to the audit committee and implementing other measures may also help, but they are not as effective as the combination of publishing a statement of management responsibility and expanding the audit report.

Question 18

Which of following duties is essential to maintaining a fiduciary relationship in the accounting profession?

Accepted Answer

All of these duties are essential to maintaining a fiduciary relationship in the accounting profession. Development and maintenance of required knowledge and skills ensure that the accountant is competent. Maintenance of trust is crucial for a fiduciary relationship, as clients must trust that their accountant acts in their best interests. An acceptable personal reputation supports the trust and credibility necessary for a fiduciary relationship.

Question 19

Which organization can issue auditing standards in the United States?

Accepted Answer

The AICPA, FASB, SEC, and PCAOB can all issue auditing standards in the United States.

Question 20

The external review of an audit firm's quality control system is an example of

Accepted Answer

The external review of an audit firm's quality control system is designed to reduce the risk of conflict of interest within a professional accounting firm. This safeguard ensures that the audit firm is meeting the necessary standards and following proper procedures to maintain their quality control system. It does not directly address conflicts of interest within the audit profession or with a client.

Quiz 6: Professional Accounting in the Public Interest