Deck 14: Professional Ethics

Question 1

A CPA can accept a contingent fee for a compilation report to be used by a bank for purposes of granting a loan to the client as long as the CPA discloses a lack of independence in the report.

Answer 1

True

Question 2

CPAs are not permitted to advertise except in a few instances.

Answer 2

False

Question 3

In considering general ethics,the primary goal is to arrive at a set of acceptable methods for making ethical decisions.

Answer 3

True

Question 4

Individual persons,not public accounting firms,are subject to the rules of conduct of state CPA societies and the AICPA only if they choose to join these organizations.

Question 5

Discipline of the members of a professional association is carried out by peers.

Question 6

A code of ethics serves as a reference and benchmark for acceptable professional behavior.

Question 7

Confidential information is information that should not be disclosed to outside parties,even if demanded by a court.

Question 8

Members of the AICPA are held responsible for compliance with the Rules of Conduct by all persons associated with them in public practice,including employees and partners.

Question 9

The Sarbanes-Oxley Act of 2002 limits the engagement of and concurring audit partners on an engagement to four-year terms.

Question 10

The AICPA Code of Professional Conduct derives its authority from specific federal legislation.

Question 11

Rule 503 permits commission type fees for all types of services.

Question 12

Ethics in the imperative sense is a function of moral rules and principles,not a situation specific calculation of the consequences.

Question 13

General standards Rule 201 prohibits the acceptance of any engagement that the CPA knowingly cannot handle.

Question 14

A trial board can admonish,suspend,expel,or fine a CPA who has violated the Code of Conduct.

Question 15

Integrity and objectivity are required in connection with all professional services.

Question 16

The SEC independence rules prohibit auditors from providing actuarial services to public company audit clients.

Question 17

All CPAs are subject to the rules of conduct of the AICPA and state CPA societies.

Question 18

Licenses to practice accounting are issued by the AICPA.

Question 19

Compliance with standards,Rule 202,requires adherence to duly promulgated technical standards in all areas of professional service.

Question 20

Financial statement audit services are the only engagements that require independence.

Question 21

Which of the following is not included in Rule of Conduct 102,Integrity and Objectivity?

A) Be prudent in assessment of facts.
B) Be free from conflict of interests.
C) Do not knowingly misrepresent facts.
D) Do not subordinate judgment to others.

Question 22

Dara & Co.audits Hill Corporation.Ellie is the engagement partner on the audit with an office in Buffalo Grove.Which of the following would not be considered a covered member?

A) Jason, who is a member of the attest engagement team with an office in Elmhurst.
B) Adam, who is a tax partner and provided 50 hours of tax service to Hill Company during the year of the audit with an office in Elmhurst.
C) Ben, a partner in Dara & Company, with an office in Buffalo Grove.
D) Julie, a partner in Dara & Company, with an office in Elmhurst.

Question 23

Which of the following is not a restriction placed on audit partners by Sarbanes-Oxley?

A) It limits engagement partners to a five-year term as the engagement partner.
B) It limits other partners associated with the engagement to a seven-year term.
C) Engagement partners must review nonaudit work to ensure that independence has not been compromised.
D) Partners who engage in selling services other than audit, review and attestation, to an audit client are not independent with respect to that client.

Question 24

The SEC requires companies to disclose fees paid to independent public accounting firms for audit and consulting services in the belief that:

A) Such disclosures will end the practice of auditors performing nonaudit services for audit clients.
B) Financial analysts will attribute far less credibility to financial statements audited by public accounting firms that earn substantial nonaudit fees from audit clients.
C) An audit firm's consulting on a client's accounting information processing systems essentially impairs audit independence.
D) Client directors and financial statement users should consider all aspects related to auditors' independence, and information about fees is important.

Question 25

Which of the following is not one of the AICPA Principles of Professional Conduct?

A) Responsibility.
B) Reliability.
C) Objectivity.
D) Due care.

Question 26

An audit client hires a member of the audit engagement team to be its new controller.Sarbanes-Oxley rules require that:

A) The new controller sever all relations with the CPA firm, including any retirement funds.
B) The new controller not take part in any discussions regarding the retention of the audit form.
C) The client find a new audit firm.
D) The client disclose the controller's relationship in the notes to the financial statements.

Question 27

Which of the following philosophical principles in ethics emphasizes the following rules rather than on the consequences of the decision?

A) Imperative principle.
B) Utilitarianism principle.
C) Generalization principle.
D) Moral principle.

Question 28

Maralee has been approached by J.Fox Entertainment to perform an audit of her theatre company.Maralee has never audited a theatre company before.Maralee can

A) Decline the engagement because she does not have the specialized industry knowledge.
B) Recommend another auditor and receive a fee for the referral.
C) Accept the engagement if she can obtain the required knowledge before the end of the engagement.
D) Accept the engagement with the understanding that additional hours will be required to learn and understand the nature of the business.

Question 29

Which of the following philosophical principles in ethics emphasizes the consequences of action rather than on following the rules?

A) Imperative principle.
B) Utilitarianism principle.
C) Generalization principle.
D) Moral principle.

Question 30

What agency has the ultimate authority for defining independence for public companies?

A) AICPA.
B) SEC.
C) Department of Justice.
D) Congress.

Question 31

Which of the following is the responsibility of the Professional Ethics Executive Committee?

A) To enforce SEC ethical standards.
B) To act as an investigative body of the AICPA when ethical violations are suspected.
C) To make and enforce all rules of conduct for CPAs who are AICPA members.
D) To establish minimal ethical standards for financial reporting.

Question 32

Which of the following is allowed under the Government Auditing Standards?

A) Personnel who provide nonaudit services are prohibited from planning, conducting, or reviewing audit work related to the nonaudit service.
B) The audit organization must never reduce the scope of the audit because of nonaudit services it performed.
C) The government entity must have established policies to ensure that the nonaudit services will not affect the audit firm's ability to perform the audit.
D) CPAs who perform nonaudit services are prohibited from being a member of the audit team.

Question 33

Based on Sarbanes-Oxley,who is ultimately responsible for the independence of the external auditor?

A) The CPA firm's engagement partner.
B) The CPA firm's quality control partner.
C) The client's senior management.
D) The audit committee.

Question 34

According to Sarbanes-Oxley,the audit committee must preapprove all audit and nonaudit services.This can be done

A) On a case-by-case basis, yes; through established policies, no; by delegating the responsibility, yes.
B) On a case-by-case basis, yes; through established policies, yes; by delegating the responsibility, no.
C) On a case-by-case basis, no; through established policies, yes; by delegating the responsibility, no.
D) On a case-by-case basis, no; through established policies, no; by delegating the responsibility, yes.

Question 35

Which of the following defines the imperative principle of ethics?

A) Ethic decisions cannot be resolved without evaluating all possible outcomes of all choices.
B) Ethics are a function of moral rules and principles.
C) All ethical decisions will have positive and negative consequences.
D) It is essential that ethical decisions be made for the greater good of society.

Question 36

CPA Krogstad is the executive in charge of the Omaha office of the audit firm.He is responsible for the practice in all areas of audit,tax,and consulting,but he does not serve as a field audit partner or a reviewer.CPA Ward is the partner in charge of the Dodger,Inc.audit (an SEC filing).The audit firm's independence is impaired if:

A) Krogstad owns Dodger common stock.
B) Krogstad's brother owns 10 shares of Dodger common stock.
C) Ward's sister-in-law is a sales representative with a territory in California.
D) Ward's fellow partner CPA Felix in the Omaha office has a wife who owns Dodger stock through a mutual fund held in her own employer's employee benefit plan.

Question 37

Which of the following is not a key element of the definition of ethics?

A) Reflective choice.
B) Moral principles.
C) Definitive conclusions.
D) Consequences of decisions.

Question 38

Rule 201,General Standards,requires a member to comply with standards and interpretations.Which of the following is not a standard covered by Rule 201?

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

Question 39

Julie and Lisa are sisters.Julie is a CPA auditing the company where Lisa works.Julie's independence is impaired if

A) Lisa owns 25 percent of the company.
B) Lisa is the controller.
C) Lisa is the marketing manager.
D) Independence is impaired in all of these situations.

Question 40

Which of the following is true according to Government Auditing Standards?

A) Nonaudit services cannot be provided to a government entity that is an attest client.
B) Nonaudit services are allowed providing the audit organization does not perform management functions, make management decisions, or audit its own work.
C) Nonaudit services are allowed as long as the nature of the service is publicly disclosed and includes a statement that independence has not been compromised.
D) Nonaudit services are allowed if they have been approved by the executive body of the governing organization.

Question 41

The interpretation of Rule 101,Independence,allows members to

A) Hold a material indirect interest in a client.
B) Have loans from a client that are collateralized by cash deposits held by the client.
C) Have home mortgages with a client even if they participate in the engagement.
D) Be a trustee of a client pension or profit sharing trust.

Question 42

Violet,CPA,audits Big Bank,a local financial institution.Which of the following would most likely impair Violet's independence with regard to Big Bank?

A) A home loan with the value of the house exceeding the mortgage balance.
B) A car loan collateralized by the car.
C) A personal loan collateralized by cash deposits at Big Bank.
D) A Visa credit card issued by Big Bank with a balance of $2,500.

Question 43

Which of the following forms of organization would not be allowed under Rule 505,Resolution Concerning Form of Organization and Name,of the Professional Code of Conduct?

A) Limited liability partnership; all partners are CPAs.
B) Limited liability partnership; 70 percent of partners are CPAs.
C) Limited liability corporation; all shareholders are CPAs.
D) Partnership; 40 percent of partners are CPAs.

Question 44

According to the ethical standards of the profession,which of the following acts is generally prohibited?

A) Purchasing a product from a third party and reselling it to a client.
B) Writing a financial management newsletter promoted and sold by a publishing company.
C) Accepting a commission for recommending a product to an audit client.
D) Accepting engagements obtained through the efforts of third parties.

Question 45

The interpretation of Rule 501,Acts Discreditable to the Profession,would not include

A) Membership in an activist political party.
B) Withholding of a client's books until a professional fee is paid.
C) Failure to follow government audit standards in government audits.
D) Authorization for others to make misleading entries in records.

Question 46

The AICPA has interpreted Rule 301,Confidential Client Information,to explicitly allow a CPA to divulge confidential client information to

A) The SEC.
B) The U.S. Department of Justice.
C) The AICPA Professional Ethics Division.
D) The Federal Trade Commission.

Question 47

Which of the following philosophical principles in ethics emphasizes the consideration of projecting the consequences of a choice in terms of this question: "What may be the consequences of similar persons making this choice in similar circumstances?"

A) Imperative principle.
B) Utilitarian principle.
C) Generalization principle.
D) Moral principle.

Question 48

Which of the following statements included in the advertising of a CPA firm is permissible according to Rule 502,Advertising and Other Forms of Solicitation?

A) "Bob Bullet, CEO of A-One Corp, states that we are the best auditors his company has ever used."
B) "We provide the best audit coverage of any firm in the state."
C) "We audit the five largest manufacturing companies in the state."
D) "We have several tax partners who work closely with judges and IRS attorneys on high-profile legal issues."

Question 49

A client has omitted a significant disclosure from the financial statements.The auditor has asked the client to include the information,but the client refuses and claims the information is confidential.The position of the CPA should be that the information

A) Cannot be considered confidential if it is necessary to the completeness of the financial statements.
B) Cannot be considered confidential unless it can be covered by the attorney-client privilege.
C) Is confidential and will be disclosed only under subpoena or for a regulatory investigation.
D) Should be discussed with the audit committee to determine whether the information should be disclosed.

Question 50

According to the profession's ethical standards,an auditor would be considered independent in which of the following instances?

A) The auditor is the officially appointed stock transfer agent of a client.
B) The auditor's checking account that is fully insured by a federal agency is held at a client financial institution.
C) The client owes the auditor fees for more than two years prior to the issuance of the audit report.
D) The client is the only tenant in a commercial building owned by the auditor.

Question 51

Which of the following is required for a CPA firm to designate itself as "Members of the American Institute of Certified Public Accountants" on its letterhead?

A) All owners must be members.
B) The owners whose names appear in the firm name must be members.
C) At least one of the owners must be a member.
D) The firm must be a dues-paying member.

Question 52

Auditors are interested in having independence in appearance because

A) They want to impress the public with their independence in fact.
B) They want the public at large to have confidence in the profession.
C) They need to comply with the Performance Principle of GAAS.
D) Audits should be planned and properly supervised.

Question 53

According to the ethical standards of the profession,which of the following acts is generally prohibited?

A) Issuing a modified report explaining a failure to follow a governmental regulatory agency's standards when conducting an attest service for a client.
B) Revealing confidential client information during a quality review of a professional practice by a team from the state CPA society.
C) Accepting a contingent fee for representing a client in an examination of the client's federal tax return by an IRS agent.
D) Retaining client records after an engagement is terminated prior to completion when the client demands their return.

Question 54

According to Rule 203,Accounting Principles,requires the auditor to adhere to official pronouncements except when

A) Complying would violate client confidentiality.
B) Pending legislation may change the reporting requirements of the client.
C) Adherence to a pronouncement would be misleading.
D) It has been established that financial statement users prefer an alternative presentation of information.

Question 55

To which group can a CPA provide audit documentation without being subpoenaed and without the client's consent?

A) The IRS.
B) The FASB.
C) Another CPA firm performing a peer review.
D) Another CPA firm considering the purchase of the auditing firm.

Question 56

In which of the following circumstances would a CPA who audits XZ Corporation lack independence?

A) The CPA and XZ's president are both on the board of directors of COD Corporation.
B) Both the CPA and XZ's president own 25 percent of FOB Corporation, a closely held company.
C) The CPA has an automobile loan from XZ, a financial institution. The loan is collateralized by the automobile.
D) The CPA reduced XZ's usual audit fee by 40 percent prior to the audit because XZ's financial condition was unfavorable.

Question 57

Red and Green,CPAs are the external auditors for Blue Corporation,a publicly held company.Blue Corporation has outsourced its internal audit function to Red and Green.Which of the following statements is true?

A) Doing internal audit work does not impair the independence of Red and Green.
B) The independence of Red and Green is impaired only if employees of Red and Green act in a management capacity or make management decisions.
C) The independence of Red and Green is impaired only if a member of Red and Green's engagement team is hired to manage an accounting function in Blue Corporation.
D) As a public accounting firm, Red and Green cannot be both the internal and external auditors for publicly held companies and maintain independence.

Question 58

Which of the following sections is not included in the AICPA Rules of Conduct?

A) Responsibilities to Clients.
B) Independence, Integrity, and Objectivity.
C) Responsibilities to Colleagues.
D) General and Technical Standards.

Question 59

The AICPA Council has designated the following bodies to pronounce accounting principles under Rule 203 except the

A) Financial Accounting Standards Board.
B) Auditing Procedures Board.
C) Accounting Principles Board.
D) Governmental Accounting Standards Board.

Question 60

Perry Pinkney,CPA,is one of the general partners in a partnership,which in turn invested 70 percent of its assets in the common stock of Pinkney's audit client (Darby Corporation).According to the AICPA Code of Professional Conduct,Pinkney is considered to have

A) An indirect financial interest in Darby.
B) A direct financial interest in Darby.
C) No financial interest in Darby.
D) A partial financial interest in Darby.

Question 61

The audit committee's responsibility for auditor independence concerns

A) Ensuring that partners of the public accounting firm are not stockholders in the company.
B) Ensuring that nonaudit services provided by the auditor do not impair independence.
C) Reporting on auditor independence to the PCAOB.
D) Ensuring that all nonaudit services are provided by auditors who do not perform the financial statement audit.

Question 62

The AICPA removed its general prohibition of CPAs taking commissions and contingent fees because

A) CPAs prefer more price competition to less.
B) Commissions and contingent fees enhance audit independence.
C) Nothing is inherently wrong about the form of fees charged to nonaudit clients.
D) Objectivity is not always necessary in accounting and auditing services.

Question 63

Ensuring that the auditor is independent in appearance is the responsibility of

A) The public accounting firm.
B) Senior management.
C) The audit committee.
D) The PCAOB.

Question 64

Which of the following agencies issues independence rules for the auditors of public companies?

A) Financial Accounting Standards Board (FASB).
B) Government Accountability Office (GAO).
C) Public Company Accounting Oversight Board (PCAOB).
D) AICPA Accounting and Review Services Committee (ARSC).

Question 65

Which of the following would probably not be considered an "act discreditable to the profession"?

A) Numerous moving traffic violations.
B) Failing to file the CPA's own tax return.
C) Filing a fraudulent tax return for a client in a severe financial difficulty.
D) Refusing to hire Asian Americans in an accounting practice.

Question 66

Audit independence in fact is most clearly lost when

A) A public accounting firm audits competitor companies in the same industry (e.g., Coca-Cola and Pepsi).
B) An auditor agrees to the argument of the client's financial vice president that deferring losses on debt refinancing is in accordance with generally accepted accounting principles.
C) An audit team fails to discover the client's misleading omission of disclosure about permanent impairment of asset values.
D) A public accounting firm issues a standard unqualified report, but the reviewing partner fails to notice that the assistant's observation of inventory was woefully incomplete.

Question 67

When a client's financial statements contain a material departure from an FASB Statement on Accounting Standards and the public accounting firm believes the departure is necessary to ensure that the statements are not misleading,

A) The public accounting firm must qualify the auditors' report for a departure from GAAP.
B) The public accounting firm can explain why the departure is necessary and then give an unqualified opinion paragraph in the auditors' report.
C) The public accounting firm must give an adverse auditors' report.
D) The public accounting firm can give the standard unqualified auditors' report with an unqualified opinion paragraph.

Question 68

Phil Greb has a thriving practice in which he assists attorneys in preparing litigation dealing with accounting and auditing matters.Phil is "practicing public accounting" if he

A) Uses his CPA designation on his letterhead and business card.
B) Is in partnership with another CPA.
C) Practices in a professional corporation with other CPAs.
D) Never lets his clients know that he is a CPA.

Question 69

When the public accounting firm audits FUND-A in a mutual fund complex that has sister funds FUND-B and FUND-C,independence for the audit of FUND-A is not impaired when

A) Managerial-level professionals located in the office where the engagement audit partner is located but who are not on the engagement team own shares in FUND-B, which is not an audit client.
B) The wife of the FUND-A audit engagement partner owns shares in FUND-C (an audit client of another of the firm's offices) and these shares are held through the wife's employee benefit plan funded by her employer, the AllSteelFence Company.
C) Both (a) and (b).
D) Neither (a) nor (b).

Question 70

A public accounting firm's independence is impaired when members of the audit engagement team does which of the following for a public company audit client?

A) Prepares special purchase orders for active plutonium in secure national defense installations.
B) Completes operational internal audit assignments under the directions of the client's director of internal auditing.
C) Prepares outsourced internal audit work on the client's financial accounting control monitoring.
D) Prepares actuarial assumptions used by the client's actuaries for life insurance actuarial liability determination.
E) All of the above would impair the public accounting firm's independence.

Question 71

Which of the following is considered a close relative (but not an immediate family member)as defined by the AICPA?

A) Spouse.
B) Spousal equivalent.
C) Parent.
D) Uncle.

Question 72

AICPA members who work in industry and government must always uphold which of the following AICPA rules of conduct?

A) Rule 101-Independence.
B) Rule 102-Integrity and Objectivity.
C) Rule 301-Confidential Client Information.
D) Rule 302-Contingent Fees.

Question 73

Which of the following is true?

A) Members of an audit engagement team cannot speak with audit client officers about matters outside the scope of the audit while the audit engagement is in progress.
B) Audit team members who leave the public accounting firm for employment with audit clients can provide audit efficiencies (next year) because they are very familiar with the firm's audit plans.
C) Audit team partners who leave the public accounting firm for employment with audit clients can retain variable annuity retirement accounts established in the person's former firm retirement plan.
D) The public accounting firm must discuss with the audit client's board or its audit committee the independence implications of the client's having hired the audit engagement team manager as its financial vice president.

Question 74

CPA Kara Rambo is the auditor of Ajax Corporation.Her audit independence will not be considered impaired if she

A) Owns $1,000 worth of Ajax stock.
B) Has a husband who owns $1,000 worth of Ajax stock.
C) Has a sister who is the financial vice president of Ajax.
D) Owns $1,000 worth of the stock of Pericles Corporation, which is controlled by Ajax as a result of Ajax's ownership of 40 percent of Pericles' stock, and Pericles contributes 3 percent of the total assets and income in Ajax's financial statements.

Question 75

Which of the following would not be considered confidential information obtained in the course of an engagement for which the client's consent would be needed for disclosure?

A) Information about whether a consulting client has paid the CPA's fees on time.
B) The actuarial assumptions used by a tax client in calculating pension expense.
C) Management's strategic plan for next year's labor negotiations.
D) Information about material contingent liabilities relevant for audited financial statements.

Question 76

Which of the following "bodies designated by Council" have been authorized to promulgate accounting principles enforceable under Rule 203 of the AICPA Code of Professional Conduct?

A) Auditing Standards Board.
B) Federal Accounting Standards Advisory Board.
C) Consulting Services Executive Committee.
D) Accounting and Review Services Committee.

Question 77

Which of the following is true if an auditor performs nonaudit services for a government entity?

A) The scope of the audit must be reduced so that the auditor does not audit the area for which the nonaudit work was performed.
B) The auditor is prohibited from providing nonaudit work in areas directly related to the production of accounting information.
C) The senior members of the government entity must document their review of the nonaudit service and indicate why it is appropriate for the auditors to perform this service.
D) The scope of the audit cannot be reduced because the nonaudit work was performed by the public accounting firm.

Question 78

Which of the following "bodies designated by Council" have been authorized to promulgate general standards enforceable under Rule 201 of the AICPA Code of Professional Conduct?

A) AICPA Division of Professional Ethics.
B) Financial Accounting Standards Board.
C) Government Accounting Standards Board.
D) Accounting and Review Services Committee.

Question 79

If a public accounting firm says it always follows the rule that requires adherence to FASB pronouncements in order to give a standard unqualified auditors' report,it is following a philosophy characterized by

A) The imperative principle in moral philosophy.
B) The utilitarian principle in moral philosophy.
C) The generalization principle in moral philosophy.
D) Reliance on members' collective conscience.

Question 80

According to the AICPA Code of Conduct,which of the following acts is generally forbidden to CPAs in public practice?

A) Purchasing bookkeeping software from a hi-tech development company and reselling it to tax clients.
B) Being the author of a "TaxAid" newsletter promoted and sold by a publishing company.
C) Having a commission arrangement with an accounting software developer to receive 4 percent of the price of programs recommended and sold to audit clients.
D) Engaging a marketing firm to obtain new financial planning clients for a fixed fee of $1,000 for each successful contact.