Deck 4: Professional Liability and the Need for Quality Auditor Judgments and Ethical Decisions

Question 1

An individual does not need to agree to uphold the code of professional conduct in order to become licensed as a CPA.

Answer 1

False

Question 2

Under Common Law,liability concepts are developed through court decisions based on negligence,gross negligence,or fraud.

Answer 2

True

Question 3

Audit reports on financial statements can be signed only by those who are licensed as CPAs by their state board of accountancy

Answer 3

True

Question 4

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 5

According to the framework for professional decision making,the first step in decision-making is to structure the audit problem

Question 6

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 7

The confidentiality between auditor and client is legally equivalent as the confidentiality shared between attorney and client.

Question 8

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 9

Auditors are permitted to perform for a contingent fee an audit of the financial statements if the audit committee approves the agreement in advance of the services being provided.

Question 10

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

Question 11

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

Question 12

An auditor of a public client may assist a client in designing and implementing internal controls over financial reporting.

Question 13

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

Question 14

Contingent fees are prohibited for any client for which the auditor performs audit services,but are otherwise permitted.

Question 15

The Principles of the AICPA Code of Professional Conduct provide a very detailed set of rules that represent a low level of actions.

Question 16

The AICPA's Code of Professional Conduct defines an indirect financial interest as an investment of one percent or less of a client's organization,and because the amount is so small it is considered immaterial

Question 17

Confidentiality is the cornerstone of the auditing profession.

Question 18

Commissions and referral fees are allowed to audit firms as long as the audit client is informed of the fees.

Question 19

Gross negligence is a failure to use even minimal care or evidence of activities that show a recklessness or careless disregard for the truth.

Question 20

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

Question 21

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

Question 22

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

Question 23

An ethical dilemma occurs in a situation in which moral duties or obligations conflict.

Question 24

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

Question 25

The expectations gap represents a misunderstanding whereby shareholders mistakenly believe that they are entitled to recover losses on investments for which the auditor provided an unqualified opinion on the financial statements.

Question 26

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

Question 27

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

Question 28

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

Question 29

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 30

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

Question 31

An ethical dilemma occurs an ethically correct action may conflict with an individual's immediate self-interest.

Question 32

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

Question 33

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

Question 34

The Principles of the AICPA Code of Professional Conduct are aspiration in nature; only the Rules of Conduct and their Interpretations are enforceable against members.

Question 35

The deep pocket theory represents a misunderstanding whereby shareholders mistakenly believe that they are entitled to recover losses on investments for which the auditor provided an unqualified opinion on the financial statements.

Question 36

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

Question 37

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

Question 38

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

Question 39

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 40

On an audit,only CPAs are required to comply with the AICPA's independence rules.

Question 41

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 what is Pulley considered to have?

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

Question 42

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)Serving as a chief financial officer as an employee and as a member of the board of directors.

Question 43

An audit firm is considered independent even if 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.
C)Accounting information system design and implementation.
D)Tax return preparation as approved by the board of directors.

Question 44

An audit 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 record keeping and financial statement preparation.
C)Accounting information system design and implementation.
D)Both B and C.
E)None of the above.

Question 45

What is information about a client that cannot be subpoenaed by a court of law called?

A)Confidential information.
B)Privileged communication.
C)Contingent information.
D)Audit communication.

Question 46

Which of the following employment positions could an auditor's spouse hold in a client without violating the independence requirements?

A)Controller.
B)Treasurer.
C)Order entry staff.
D)Internal audit director.

Question 47

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,why is Julie is considered a covered member for FNBW independence purposes?

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 48

Which of the following represents a situation in which an auditor is independent of its 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 49

Which of the following is an acceptable organizational form for an audit firm?

A)A partnership.
B)A professional corporation.
C)A sole proprietorship.
D)Any organizational form permitted by state law or regulation.

Question 50

A member of the AICPA must safeguard the confidentiality of client information.Which of the following is not a valid reason to disclose information to non-clients?

A)To discuss information relating to inadequate disclosure in an audit report.
B)To comply with a validly issued and enforceable subpoena or summons.
C)To accommodate the review of client audit work papers under AICPA,PCAOB,or State Board of Accountancy authority.
D)To explain to members of the press whether a client is likely to miss payroll in the forthcoming periods.

Question 51

Which of following actions satisfies Rule 201 of the General Standards of the Code of Professional Conduct definition of professional competence?

A)Having sufficient collegiate and continuing professional education to perform the audit.
B)Only accepting engagements that the firm's members can competently perform.
C)Adequately planning and supervising of professional performance.
D)None of the above satisfy Rule 201.

Question 52

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

A)Follow the rules exactly as they are written.
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 53

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 54

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.Which of the following best describes Julie's independence status?

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 55

What does the AICPA Code of Professional Conduct consists of?

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 56

For which of the following engagements are members of the AICPA required to act with integrity and objectivity?

A)Tax preparation.
B)Financial statement review services.
C)Financial statement audits.
D)All engagements.

Question 57

In determining auditor independence,the SEC considers which of the following as an independence impairment?

A)An auditor performs the accounting work and then audits it.
B)An auditor has no conflicting interest with the client.
C)An auditor does not act as an advocate for the audit client.
D)An auditor does not act as an employee of the audit client.

Question 58

An auditor who is professionally skeptical will do which of the following?

A)Critically question contradictory audit evidence..\
B)Carefully evaluate the reliability of audit evidence,especially in situations in which fraud risk is high.
C)Reasonably question the authenticity of documentation,while accepting that documents are to be considered genuine unless there is reason to believe the contrary.
D)All of the above.

Question 59

From whom should a CPA not accept a commission for recommending a product or service?

A)A tax client.
B)An audit client.
C)A financial-planning client.
D)A management-services client.
E)Any of the above.

Question 60

What is a situation in which an individual is morally or ethically required to do something that conflicts with his or her immediate self-interest called?

A)An ethical dilemma.
B)An ethical problem.
C)An ethical theory.
D)None of the above.

Question 61

Under Rule 201,what best describes how an AIPCA member should act?

A)With professional competence.
B)With due professional care.
C)After adequate planning and with appropriate supervision.
D)All of the above

Question 62

Which of the following is a cause of action against the auditor for breach of contract?

A)Violating client confidentiality.
B)Providing the audit report on time.
C)Failing to discover an immaterial error or employee fraud.
D)Withdrawing from an audit engagement with justification.

Question 63

Which of following is not required by Rule 201?

A)Professional competency.
B)Integrity and objectivity.
C)Planning and supervision.
D)Gathering sufficient relevant data.

Question 64

Among close relatives 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)When the relative holds a key financial position with the client.
B)When it is an immaterial financial interest in the client with covered member's knowledge.
C)When it is a material financial interest in the client without the covered member's knowledge.
D)In all of the above scenarios.

Question 65

What is the 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 66

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

A)A CPA has obtained an auto loan from a banking client in a prior year.
B)A CPA has obtained a home mortgage loan in 1988 from a client.
C)A CPA has obtained a $4,500 cash advance from a banking client in the current year.
D)A CPA has obtained a $6,500 cash advance from a client in the current year.

Question 67

According to the framework for ethical decision making,which of the following should the decision maker consider?

A)All possible alternative courses of action.
B)The consequences associated with possible actions.
C)Whether the rights framework would cause any course of action to be added.
D)All of the above.

Question 68

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

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

Question 69

Which of the following represents a situation in which 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 70

Which of following is not part of the ethical framework derived from utilitarianism and rights theories?

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 71

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

A)Audit work.
B)Tax work.
C)Consulting.
D)Independence is always required of the CPA.

Question 72

Rule 201 deals with the General Standards that are applicable to all CPAs no matter the type of services that are rendered does not include which of the following factors?

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

Question 73

Commissions and referral fees are not permitted for which types of services?

A)Tax.
B)Reviews.
C)Audits.
D)Both B and C.

Question 74

Among immediate family members,whose ownership of client's stock is not considered the same as the covered member's ownership?

A)Spouse.
B)Dependent children.
C)Non-dependent children.
D)All are considered part of the covered members immediate family.

Question 75

Independence in mental attitude is required of auditor on all audit engagements.What does this independence require?

A)A sympathetic attitude towards management.
B)An attitude of judicial neutrality.
C)An advocacy attitude towards shareholders.
D)An immovable neutrality regardless of the evidence.

Question 76

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

A)Audits.
B)Reviews.
C)Consulting.
D)Attestation.

Question 77

What concepts does the AICPA Principles of Professional Conduct include?

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 78

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 79

What does utilitarian theory hold?

A)There is a decision that exists that is optimal for all people.
B)What is ethical is the action that achieves the least bad for the greatest number of people.
C)What is ethical is the action that achieves the greatest good for the greatest number of people.
D)What is ethical is the action that achieves the greatest good for all people.

Question 80

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

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.