Question 1

Under the interpretations to the AICPA Code, 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.

Accepted Answer

The answer of Under the interpretations to the AICPA Code,...

Question 2

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

Accepted Answer

The members of a client's "audit committee" should be directors who are not a part of company management. This is to ensure independence from management and to provide oversight and governance of the audit process. The audit committee is responsible for selecting, overseeing, and compensating the external auditor, as well as reviewing the financial statements and related disclosures. It is important that the audit committee is composed of individuals who are not involved in the day-to-day operations of the company to avoid any conflicts of interest that may arise.

Question 3

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.

Accepted Answer

The answer of Don Crosby, a partner in a national...

Question 4

Which of the following services are allowed by the SEC whenever a CPA also audits the company?

Accepted Answer

The SEC allows CPAs to provide services related to assessing the effectiveness of internal control over financial reporting while also auditing the company. However, internal audit outsourcing, legal services unrelated to the audit, and appraisal or valuation services are not allowed.

Question 5

A staff member in a national CPA firm is not allowed to own stock in a client corporation even if the staff member is not involved in the client corporation's audit engagement under the AICPA's independence rule.

Accepted Answer

Under the AICPA's independence rule, a staff member in a national CPA firm is allowed to own stock in a client corporation as long as the staff member is not involved in the audit engagement of that client and the investment does not represent a significant financial interest relative to the staff member's net worth, thereby not impairing independence.

Question 6

Under the Sarbanes-Oxley Act, the audit committee of a public company

Accepted Answer

The Sarbanes-Oxley Act mandates that the audit committee is responsible for the oversight of the work of the independent auditor, ensuring that the auditor is effectively carrying out its duties in an unbiased and accurate manner.

Question 7

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

Accepted Answer

The audit committee of a public company is responsible for hiring the auditor. A is incorrect because audit committee members should be independent and not part of the company's management. B is incorrect because while having financial expertise is beneficial, it is not a requirement for all members of the audit committee. D is incorrect as there is no set minimum number of audit committee members, although it is recommended to have at least three members.

Question 8

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

Accepted Answer

The answer of The Sarbanes-Oxley Act requires which employees of...

Question 9

Auditors are allowed to have an indirect financial interest in an audit client, such as ownership of stock in a client's company by the auditor's brother, as long as the amount of the financial interest is immaterial to the brother.

Accepted Answer

According to the independence rules set by the PCAOB, auditors are allowed to have indirect financial interests in an audit client as long as the amount is immaterial to them or their close family members, such as siblings. Therefore, in the given scenario, the auditor's ownership of stock in a client's company by the auditor's brother would not be considered a violation of independence as long as the amount is immaterial to the brother.

Question 10

Which of the following services is not prohibited by the SEC whenever a CPA also audits the company?

Accepted Answer

Assisting the company in preparing certain SEC registration statements (e.g., 10-Q, 10-K) is not prohibited by the SEC as long as the auditor does not make managerial decisions or assume management responsibilities. This activity is seen as a non-audit service that can coexist with the audit function under certain conditions, ensuring the auditor's independence is not impaired.

Question 11

Both SEC rules and the Sarbanes-Oxley Act prohibit auditors from providing bookkeeping services to their public company audit clients.

Accepted Answer

This is true. Both SEC rules and the Sarbanes-Oxley Act prohibit auditors from providing bookkeeping services to their public company audit clients to maintain independence and reduce the risk of a conflict of interest.

Question 12

The prohibition on direct financial interests applies to covered members in a position to influence an engagement.

Accepted Answer

The AICPA's Code of Professional Conduct prohibits covered members from having direct financial interests in an client's financial statements or information when they are in a position to influence the engagement. This includes auditors, consultants, and others who provide professional services to clients.

Question 13

CPA firms are required to be independent when performing any professional service.

Accepted Answer

CPA firms are required to maintain independence primarily when performing audit and assurance services, not for all professional services such as tax preparation or consulting, where independence is not a mandatory requirement.

Question 14

All litigation by a client related to tax or other nonaudit services will impair independence.

Accepted Answer

Not all litigation by a client related to tax or other nonaudit services will impair independence. The impairment of independence depends on the nature of the litigation and its relation to the audit function. For example, litigation that directly questions the audit work or integrity of the auditor would impair independence, while litigation related to nonaudit services might not, depending on the specifics of the case.

Question 15

Some CPA firms do not permit any ownership by staff of a client's stock regardless of which office serves that particular client.

Accepted Answer

This is a common policy in many CPA firms to avoid conflicts of interest and maintain independence in their audit and advisory services to clients.

Question 16

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.

Accepted Answer

The Sarbanes-Oxley Act mandates a one-year cooling-off period before a member of an audit team can accept a key management position with an audit client, to ensure independence and reduce conflicts of interest.

Question 17

Audit firms frequently merge with other audit firms or form professional associations to enhance their capabilities to provide professional services. In these situations, it is not required for the network firm to be independent of audit and review clients of the other network firms for a period of 5 years.

Accepted Answer

According to the International Code of Ethics for Professional Accountants, network firms must be independent of audit and review clients of other network firms for a period of 2 years.

Question 18

A partner of a CPA firm performing the audit of the Red Cross may be an honorary director of the Red Cross and also vote and participate in management functions at the Red Cross.

Accepted Answer

According to the AICPA Code of Professional Conduct, "an individual associated with an attest client in a position to influence the attest engagement" should not serve as an officer, director, or trustee of the client organization. Therefore, a partner of a CPA firm performing the audit of the Red Cross should not be an honorary director and participate in management functions at the Red Cross.

Question 19

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

Accepted Answer

The Sarbanes-Oxley Act allows tax consulting services for audit clients. However, appraisal or valuation services, financial information systems design and implementation, and internal audit outsourcing are prohibited non-audit services for audit clients under the Act.

Question 20

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

Accepted Answer

The answer of Each of the following situations involves a...

Quiz 4: Professional Ethics