Deck 19: Professional Conduct, Independence, and Quality Control

Question 1

If a CPA owns an insurance policy issued by an attest client, independence would be considered impaired, even if the policy was purchased under the insurance company's normal terms and procedures and does not offer an investment option.

Answer 1

False

Question 2

As per the Conceptual Framework for AICPA Independence Standards made effective in 2006, a CPA is required to identify and assess the extent to which a threat to independence exists.

Answer 2

True

Question 3

With respect to ethics, the utilitarian theory

A) Suggests that auditors should always verify ownership of a client's material tangible assets.
B) Is primarily concerned with equity and impartiality.
C) Suggests that an individual's actions should not violate the rights of any individual.
D) Recognizes that decisions involve trade-offs between costs and benefits.

Answer 3

D

Question 4

Rules of Conduct are enforceable.

Question 5

Principles are stated at a conceptual level, not a detailed level.

Question 6

Ethical rulings are enforceable.

Question 7

The independence standards issued by the PCAOB do not prohibit the provision of tax services to an attest client.

Question 8

In auditing a privately held entity, an auditor must follow the professional standards established by all of the following except:

A) The AICPA's Auditing Standards Board.
B) The Professional Code of Conduct.
C) The Independence Standards Board.
D) The PCAOB.

Question 9

If an auditor is not independent of the client, it is unlikely that a user of financial statements will place much reliance on the CPA's work.

Question 10

With respect to ethics, the rights-based approach

A) Suggests that auditors should always verify ownership of a client's material tangible assets.
B) Is primarily concerned with equity and impartiality.
C) Suggests that an individual's actions should not violate the rights of any individual.
D) Recognizes that decisions involve trade-offs between costs and benefits.

Question 11

Professionalism refers to the conduct, aims, or qualities that characterize or mark a given profession.

Question 12

The AICPA Code of Professional Conduct deals mainly with behavior and actions of individual auditors.

Question 13

With respect to ethics, the justice-based approach

A) Suggests that auditors should always verify ownership of a client's material tangible assets.
B) Is primarily concerned with equity and impartiality.
C) Suggests that an individual's actions should not violate the rights of any individual.
D) Recognizes that decisions involve trade-offs between costs and benefits.

Question 14

An indirect financial interest is defined as a financial interest that is owned or is under the control of an individual or entity.

Question 15

The rules contained in Section 100 cover issues relating to independence, integrity, and auditing standards.

Question 16

The term "ethics" refers to a person's propensity to follow the laws of the land.

Question 17

The Principles of Professional Conduct set forth the minimum standards.

Question 18

A financial interest is "beneficially owned" when an individual or entity is NOT the recorded owner of the interest but has a right to some or all of the underlying benefits of ownership.

Question 19

When auditing a public company, a CPA must follow the auditing standards and Code of Professional Conduct of the PCAOB.

Question 20

PCAOB rules require tax services provided by a public company auditor to be considered and approved by the company's audit committee.

Question 21

In which one of the following situations would a CPA be in violation of the AICPA Code of Professional Conduct in determining a fee?

A) A fee based on whether the CPA's report on the client's financial statements results in the approval of a bank loan.
B) A fee based on an estimate of the number of hours needed to complete the engagement by auditors of various levels of experience.
C) A fee based on the nature of the service rendered and the CPA's particular expertise instead of the actual time spent on the engagement.
D) A fee based on the fee charged by the prior auditor.

Question 22

What is meant by the Code of Professional Conduct's definition of "holding out"?

A) Informing a client about one's status as a CPA.
B) Withholding an audit report until the fee is paid.
C) Not sharing audit documentation with a successor auditor.
D) Not suggesting that management make an adjusting entry that is deemed immaterial.

Question 23

Which of the following is allowable for a CPA?

A) A used car loan from a banking client where the client has a lien on the car.
B) An uncollateralized signature loan from a client.
C) Owning more than five percent of the outstanding shares of client stock in a retirement account.
D) The audit engagement partner serves on the client's audit committee.

Question 24

In which of the following instances would the independence of the CPA not be considered to be impaired? The CPA has been retained as the auditor of a brokerage firm

A) Which owes the CPA audit fees for more than one year.
B) In which the CPA has a large active margin account.
C) In which the CPA's brother is the controller.
D) Which owes the CPA audit fees for current year services and has just filed a petition for bankruptcy.

Question 25

A CPA, while performing an audit, strives to achieve independence in appearance in order to

A) Reduce risk and liability.
B) Comply with the generally accepted standards of fieldwork.
C) Become independent in fact.
D) Maintain public confidence in the profession.

Question 26

A basic objective of a CPA firm is to provide professional services that conform to professional standards. Reasonable assurance of achieving this basic objective is provided through

A) Compliance with generally accepted reporting standards.
B) A system of quality control.
C) A system of peer review.
D) Continuing professional education.

Question 27

For private companies, accounting firms are prohibited from providing

A) Outsourced internal audit services.
B) Audit services.
C) Review services.
D) None of these.

Question 28

A CPA's license to practice will ordinarily be suspended or revoked automatically for

A) Controlling the bookkeeping for a compilation client.
B) Conviction of willful failure to file personal income tax return.
C) Refusing to respond to an inquiry by the AICPA practice review committee.
D) Accepting compensation while honoring a subpoena to appear as an expert witness.

Question 29

Which of the following is not a Principle of Professional Conduct as defined by the Code of Professional Conduct?

A) Integrity.
B) Due care.
C) Reporting.
D) Scope and nature of services.

Question 30

According to the Code of Professional Conduct, which of the following individuals is not in a position to influence an attest engagement (i.e., not a covered member)?

A) The office's managing partner who determines the compensation of the attest engagement partner.
B) The office's IT expert, who consulted with the engagement partner regarding the client's IT system.
C) The partner in another office in a nearby city who regularly plays golf with the engagement partner.
D) The office's partner who monitors quality control over the attest engagement.

Question 31

In performing an audit, Jackson, CPA, discovers that the professional competence necessary for the engagement is lacking. Jackson informs management of the situation and recommends another local CPA firm and management engages this other firm. Under these circumstances

A) Jackson may request compensation from the other CPA firm for any professional services rendered to it in connection with the engagement.
B) Jackson may accept a referral fee from the other CPA firm.
C) Jackson has violated the AICPA Code of Professional Conduct because of non-fulfillment of the duty of performance.
D) Jackson's lack of competence should be construed to be a violation of generally accepted auditing standards.

Question 32

A violation of the profession's ethical standards would most likely have occurred when a CPA

A) Purchased a bookkeeping firm's practice of monthly write-ups for a percentage of fees received over a three-year period.
B) Made arrangements with a bank to collect notes issued by a client in payment of fees due.
C) Named Smith formed a partnership with two other CPAs and used "Smith & Co." as the firm name.
D) Issued an unqualified opinion on the 2011 financial statements when fees for the 2010 audit were unpaid.

Question 33

A violation of the profession's ethical standards would least likely have occurred when a CPA in public practice

A) Used a records-retention agency to store the CPA's working papers and client records.
B) Served as an expert witness in a damage suit and received compensation based on the amount awarded to the plaintiff.
C) Referred life insurance assignments to the CPA's spouse, who is a life insurance agent.
D) Failed to file his personal tax return.

Question 34

A CPA's retention of client records as a means of enforcing payment of an overdue audit fee is an action that is

A) Considered acceptable by the AICPA Code of Professional Conduct.
B) Ill-advised because it would impair the CPA's independence with respect to the client.
C) Considered discreditable to the profession.
D) A violation of generally accepted auditing standards.

Question 35

The SEC has issued independence rules that differ from the AICPA's in all of the following areas except:

A) Working paper documentation.
B) Provision of other professional services.
C) Human resource and compensation-related issues.
D) Required communication.

Question 36

Which of the following bodies ordinarily would have the authority to suspend or revoke a CPA's license to practice public accounting?

A) The SEC.
B) The AICPA.
C) A state CPA society.
D) A state board of accountancy.

Question 37

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

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

Question 38

Which of the following is not an element of quality control as defined by Statement of Quality Control Standards No. 8?

A) Monitoring.
B) Independence.
C) Human resources.
D) Relevant ethical requirements.

Question 39

Which of the following statements best describes why the profession of certified public accountants has deemed it essential to promulgate a code of conduct and to establish a mechanism for enforcing observance of the code?

A) Ethical standards are established so that users of accounting services know what to expect, the professionals know what behaviors are acceptable, and overseers can take disciplinary action when appropriate.
B) A prerequisite to success is the establishment of an ethical code that stresses primarily the professional's responsibility to clients and colleagues.
C) A requirement of most state laws calls for the profession to establish a code of conduct.
D) An essential means of self-protection for the profession is the establishment of flexible ethical standards by the profession.

Question 40

The quality control standards are concerned primarily with

A) Actions of individual auditors.
B) A firm's monitoring of its practice.
C) Disciplinary actions against individual auditors.
D) Preventing legal action.

Question 41

Within the context of quality control, the primary purpose of continuing professional education and training activities is to enable a CPA firm to provide personnel within the firm with

A) Technical training that ensures proficiency as an auditor.
B) Opportunities for career advancement outside the accounting firm.
C) Knowledge required to fulfill assigned responsibilities.
D) Knowledge required to perform a peer review.

Question 42

A CPA firm would be reasonably assured of meeting its overall responsibility to provide services that conform with professional standards by

A) Adhering to generally accepted accounting principles.
B) Implementing an appropriate system of quality control.
C) Joining professional societies that enforce ethical conduct.
D) Maintaining an attitude of independence in its engagements.

Question 43

Which of the following is an element of a CPA firm's quality control system that should be considered in establishing its quality control policies and procedures?

A) Using the audit risk model.
B) Using statistical sampling techniques.
C) Assigning personnel to engagements.
D) Considering audit risk and materiality.

Question 44

A CPA firm evaluates its personnel advancement experience to ascertain whether individuals assigned to increased degrees of responsibility meet predetermined criteria. This policy is evidence of the firm's adherence to which of the following prescribed standards?

A) Professional ethics.
B) Supervision and review.
C) Accounting and review services.
D) Quality control.

Question 45

Mavis, CPA, has audited the financial statements of South Bay Sales Incorporated for several years and had always been paid promptly for services rendered. Last year's audit invoices have not been paid because South Bay is experiencing cash flow difficulties and the current year's audit is scheduled to commence in one week. With respect to the past due audit fees, Mavis should

A) Perform the scheduled audit and allow South Bay to pay when the cash flow difficulties are alleviated.
B) Perform the scheduled audit only after arranging a definite payment schedule and securing notes signed by South Bay.
C) Inform South Bay's management that the past due audit fees are considered an impairment of auditor independence.
D) Inform South Bay's management that the past due audit fees may be considered a loan on which interest must be imputed for financial statement purposes.

Question 46

What is the primary purpose of the acceptance and continuance of client relationships and specific engagements element of quality control?

A) Guarantee that firms do not associate with clients whose management lacks integrity.
B) Provide reasonable assurance that firms do not associate with clients whose management lacks integrity.
C) Guarantee that firms will not be sued as a result of association with a client.
D) Provide reasonable assurance that firms will not be sued as a result of association with a client.

Question 47

A violation of the profession's ethical standards would most likely occur when a CPA who

A) Is also admitted to the Bar represents on letterhead to be both an attorney and a CPA.
B) Writes a newsletter on financial management also permits a publishing company to solicit subscriptions by direct mail.
C) Is controller of a bank permits the bank to use the controller's CPA title in the listing of officers in its publications.
D) Refused to hire a new employee does so because the CPA deemed the candidate to be "too old."

Question 48

An auditor is about to commence a recurring annual audit engagement. The continuing auditor's independence would ordinarily be considered to be impaired if the prior year's audit fee

A) Was unusually large.
B) Has not been paid and will not be paid for at least twelve months.
C) Has not been paid and the client has filed a voluntary petition for bankruptcy.
D) Was renegotiated during the prior year audit based on the need for expanded testing.

Question 49

The primary purpose of establishing quality control policies and procedures for deciding whether to accept a new client is to

A) Enable the CPA firm to attest to the reliability of the client.
B) Satisfy the CPA firm's duty to the public concerning the acceptance of new clients.
C) Minimize the likelihood of association with clients whose management lacks integrity.
D) Anticipate before performing any fieldwork whether an unqualified opinion can be expressed.

Question 50

In which of the following circumstances would a CPA be bound by ethics to refrain from disclosing any confidential information obtained during the course of a professional engagement?

A) The CPA is issued a summons enforceable by a court order that orders the CPA to present confidential information.
B) A major stockholder of a client company seeks accounting information from the CPA after management declined to disclose the requested information.
C) Confidential client information is requested as part of a quality review of the CPA's practice by a review team authorized by the AICPA.
D) An inquiry by a disciplinary body of a state CPA society requests confidential client information.

Question 51

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 52

In determining estimates of fees, an auditor may take into account each of the following, except the:

A) Value of the service to the client.
B) Degree of responsibility assumed by undertaking the engagement.
C) Skills required to perform the service.
D) Attainment of specific findings.

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 and the client has demanded its return.

Question 54

In order to achieve effective quality control, a firm of independent auditors should establish policies and procedures for

A) Determining the minimum procedures necessary for unaudited financial statements.
B) Setting the scope of audit work.
C) Deciding whether to accept or continue a client.
D) Setting the scope of internal control study and evaluation.

Question 55

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

A) The CPA and XM's president are both on the board of directors of COD Corporation.
B) The CPA and XM's president each owns 25 percent of FOB Corporation, a closely-held company.
C) The CPA has an automobile loan from XM, which is a savings and loan organization and the loan is collateralized by the automobile.
D) The CPA reduced XM's usual audit fee by 40 percent because XM's financial condition was unfavorable.

Question 56

In connection with a lawsuit, a third party attempts to gain access to the auditor's working papers. The client's defense of privileged communication will be successful only to the extent it is protected by the

A) Auditor's acquiescence in use of this defense.
B) Common law.
C) AICPA Code of Professional Conduct.
D) State law.

Question 57

In which of the following instances would the independence of the CPA not be considered to be impaired? The CPA has been retained as the auditor of a

A) Charitable organization in which an employee of the CPA serves as treasurer.
B) Municipality in which the CPA owns $25,000 of the $2,500,000 indebtedness of the municipality.
C) Restaurant where the CPA dines frequently.
D) Company in which the CPA's private investment club owns a one-tenth interest.

Question 58

The profession's ethical standards would most likely be considered to have been violated when the CPA represents that specific consulting services will be performed for a stated fee and it is apparent at the time of the representation that the

A) CPA would not be independent.
B) Fee was a competitive bid.
C) Actual fee would be substantially higher.
D) Actual fee would be substantially lower than the fees charged by other CPAs for comparable services.

Question 59

Following the issuance of a PCAOB draft report, how many days does the CPA firm have to respond to accusations?

A) 10 days.
B) 30 days.
C) 50 days.
D) 90 days.

Question 60

A CPA firm's personnel partner periodically studies the CPA firm's personnel advancement experience to ascertain whether the individuals who were assigned increased degrees of responsibility met predetermined criteria. This is evidence of the CPA firm's adherence to prescribed standards of

A) Quality control.
B) Due professional care.
C) Supervision and review.
D) Fieldwork.

Question 61

Under which of the following circumstances would the independence of a CPA be considered impaired if the CPA, who also is an attorney, serves as auditor and provides legal services to the same client?

A) When the CPA, as legal agent, consummates a business acquisition for the client.
B) When the CPA's audit fees and legal fees are not billed separately.
C) When the CPA uses legal expertise to research a question of income tax law.
D) When the legal services consist of an analysis of the terms of an existing lease agreement.

Question 62

Match each term below with its definition as provided by the AICPA Rules of Conduct.

Question 63

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

A) A client leases part of an office building from the CPA, resulting in a material indirect financial interest to the CPA.
B) The CPA has a material direct financial interest in a client, but transfers the interest into a blind trust.
C) The CPA owns an office building and the mortgage on the building is guaranteed by a client.
D) The CPA belongs to a country club client in which membership requires an annual fee.

Question 64

Which professional and regulatory bodies establish the ethical and professional rules for auditors of: (1) public companies and (2) private companies?

Question 65

Ms. Lembke is a partner for DTS, a CPA firm. She is the lead partner for the firm's largest client, The Grey Elephant. Ms. Zadina, who works in the same office as Ms. Lembke, has a sister who is the controller for The Grey Elephant. Because of potential independence issues, Ms. Zadina does no work for The Grey Elephant. Ms. Zadina is being considered for promotion to partner. What independence issues should Ms. Lembke consider before promoting Ms. Zadina?

Question 66

When can a CPA disclose confidential information without the client's consent?

Question 67

The SEC's rules with respect to services provided by auditors are predicated on three basic principles of auditor objectivity and independence. What are the three basic principles?

Question 68

When auditing a public company, which of the following impairs an auditor's independence?

A) Offering audit services as well as preparing the tax return for the same client.
B) The auditor's spouse works in the assembly line of an audit client.
C) Lack of fee disclosure in the client's annual report.
D) The auditor has been a partner on the engagement for ten years.

Question 69

Why do professions establish codes of conduct that define ethical behaviors for members of the profession?

Question 70

Listed below are definitions of the six Principles of Professional Conduct. For each, identify the principle being defined.
a. A member should observe the profession's technical and ethical standards, strive continually to improve competence and the quality of services, and discharge professional responsibility to the best of the member's ability.
b. Members should exercise sensitive professional and moral judgments in all their activities.
c. A member should be free of conflicts of interest in discharging professional responsibilities.
d. A member in public practice should observe the Principles of the Code of Professional Conduct in determining the type and extent of services to be provided.
e. Members should accept the obligation to act in a way that will honor the public trust and demonstrate commitment to professionalism.
f. To maintain and broaden public confidence, members should perform all professional responsibilities with the highest sense of _____________.

Question 71

Identify the primary purposes of Rules 201-203 of the Rules of Conduct.

Question 72

Distinguish between the following theories of ethical behavior: utilitarianism, a rights-based approach, and a justice-based approach.