Question 1

Which term best describes a situation in which an individual is morally or ethically required to do something that conflicts with his or her immediate self-interest?
A) An ethical dilemma.
B) An ethical problem.
C) An ethical theory.
D) None of the above.

Accepted Answer

An ethical dilemma is a situation that requires an individual to choose between two or more moral or ethical values, each with its own set of consequences. In this type of situation, the individual is required to make a decision that conflicts with their immediate self-interest or personal values. An ethical problem and ethical theory do not necessarily involve conflicting personal interests.

Question 2

Which of the following would be the first form filed with the SEC describing a major change in corporate governance?
A) 8-K
B) 8-Q
C) 10-K
D) 10-Q

Accepted Answer

The 8-K is the first form that must be filed with the SEC to report any major changes in corporate governance, such as changes in management, a change in control, or amendments to the company's bylaws. The 10-K and 10-Q forms are used for regular annual and quarterly filings, respectively, while the 8-Q is used for interim quarterly filings.

Question 3

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.

Accepted Answer

Information that is protected by privilege communication cannot be subpoenaed by a court of law. This type of information is typically confidential and includes communications between an attorney and their client, doctor and patient, or clergy and parishioner, for example.

Question 4

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.

Accepted Answer

Disclosing information to members of the press, who are not involved in the client's affairs or authorized to receive confidential information, is not a valid reason for a member of the AICPA to disclose client information.

Question 5

Compliance with GAAP was an unsuccessful defense in which of the following court cases?
A) Credit Alliance v. Arthur Andersen & Co..
B) Ultramares Corp. v. Touche.
C) Ernst and Ernst v. Hochfelder.
D) Herzfeld v. Laventhol, Krekstein, Horwath & Horwath

Accepted Answer

The answer of Compliance with GAAP was an unsuccessful defense...

Question 6

Liability based on federal securities law is known as which type of law?
A) Common Law
B) Contract Law
C) Commercial Law
D) Statutory Law

Accepted Answer

Liability based on federal securities law is governed by the Securities Act of 1933 and the Securities Exchange Act of 1934, which are both statutory laws enacted by the federal government. Therefore, the correct answer is D - Statutory Law. Common Law, Contract Law, and Commercial Law are not specifically related to federal securities law.

Question 7

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.

Accepted Answer

Pulley is considered to have a direct financial interest in McBurgers Corporation because his daughter, a dependent, owns shares in the company.

Question 8

Under common law, which standard may a client sue an auditor for failure to demonstrate due care?
A) Negligence
B) Gross Negligence
C) Fraud
D) All of the above.

Accepted Answer

Under common law, a client can sue an auditor for negligence, gross negligence, or fraud if the auditor fails to demonstrate due care.

Question 9

Which of the following is a principle of the Code of Ethics of the International Ethics Standards Board for Accountants but not a principle found in the AICPA Professional Code of Conduct?
A) Integrity
B) Professional Behavior
C) Confidentiality
D) Objectivity

Accepted Answer

All four principles (Integrity, Professional Behavior, Confidentiality, and Objectivity) are found in both the Code of Ethics of the International Ethics Standards Board for Accountants and the AICPA Professional Code of Conduct. Therefore, the best choice is the principle that is only found in the Code of Ethics of the International Ethics Standards Board for Accountants, which is not included in the AICPA Professional Code of Conduct. The only principle that fits this criteria is Professional Behavior (option B).

Question 10

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.

Accepted Answer

A professionally skeptical auditor will critically question contradictory audit evidence, evaluate the reliability of audit evidence in situations with high fraud risk, and reasonably question the authenticity of documentation while also accepting that documents are genuine unless there is reason to believe otherwise. Therefore, all three options are true and the correct answer is D.

Question 11

Which of the following represents a situation in which an auditor is independent of its client?
A) The audit fee paid by the client represents 10% of the auditor's annual gross revenue.
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.

Accepted Answer

An auditor is considered independent if their judgment and audit work are not influenced by relationships or financial dependencies with the client. Option A, where the audit fee constitutes 10% of the auditor's annual gross revenue, does not automatically impair independence unless it creates a financial dependency on the client. The other options (B, C, D) directly involve financial interests or personal relationships that could impair independence.

Question 12

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.

Accepted Answer

Julie's independence is not impaired because auditors are allowed to have loans, such as an automobile loan, from a financial institution client as long as the loans are made under normal lending procedures, terms, and requirements.

Question 13

The concept of the Third-Party Beneficiary Test was established by which court case?
A) Credit Alliance Corp. v. Arthur Andersen & Co.
B) Ultramares Corp. v. Touche.
C) Citizens State Bank v. Timm, Schmidt, & Co.
D) Rosenblum v. Adler.

Accepted Answer

The Third-Party Beneficiary Test was established by the court case Ultramares Corp. v. Touche.

Question 14

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.

Accepted Answer

Rule 201 of the General Standards of the Code of Professional Conduct deals with matters related to the professional competence of a member, exercise of duties, and planning and supervision of services. However, it does not address advertising services to competing clients, which is covered by other rules of the code. Therefore, option D is the correct choice as it is not an aspect of Rule 201.

Question 15

Which of the following may an auditor use as a defense under the Securities Act of 1933?
A) Contributory Negligence
B) Scienter
C) Due Care
D) Immaterial loss

Accepted Answer

An auditor may use due care as a defense under the Securities Act of 1933. Due care means that the auditor performed their responsibilities with reasonable diligence and skill. Contributory negligence, scienter, and immaterial loss are not valid defenses under the Act.

Question 16

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.

Accepted Answer

Order entry staff is a low-level position that has no financial reporting responsibilities and would not affect the auditor's independence. The other positions have higher-level responsibilities and could present a threat to independence.

Question 17

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.

Accepted Answer

Julie is considered a covered member because she will be working on the audit engagement for FNBW, which makes her subject to independence rules.

Question 18

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.

Accepted Answer

A CPA should not accept a commission for recommending a product or service from an audit client because it would create a conflict of interest and impair the CPA's independence in performing the audit. Accepting commissions from tax, financial planning, or management services clients may also create conflicts of interest, but they are not as serious as with an audit client.

Question 19

Which of the following is not one of the reasons for increased litigation related to audits?
A) Class action lawsuit.
B) Increased complexity of accounting standards.
C) Contingent-fee-based compensation for law firms.
D) Joint and several liability doctrines.

Accepted Answer

The increased complexity of accounting standards is actually one of the reasons for increased litigation related to audits, so it is not the answer. The other options are all valid reasons for increased litigation: class action lawsuits allow large groups of plaintiffs to combine their claims into a single suit, contingent-fee-based compensation incentivizes law firms to pursue litigation even with uncertain outcomes, and joint and several liability doctrines make it easier for plaintiffs to recover damages from defendant parties.

Question 20

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.

Accepted Answer

Members of the AICPA are required to act with integrity and objectivity in all engagements, regardless of the specific service being provided. This includes tax preparation, financial statement review services, and financial statement audits.

Quiz 4: Professional Liability, Auditor Judgment Frameworks, and Professional Responsibilities

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

Which of the following would be the first form filed with the SEC describing a major change in corporate governance?

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

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?

Compliance with GAAP was an unsuccessful defense in which of the following court cases?

Liability based on federal securities law is known as which type of law?

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?

Under common law, which standard may a client sue an auditor for failure to demonstrate due care?

Which of the following is a principle of the Code of Ethics of the International Ethics Standards Board for Accountants but not a principle found in the AICPA Professional Code of Conduct?

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

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

The concept of the Third-Party Beneficiary Test was established by which court case?

Which of the following is not an aspect of Rule 201 of the General Standards of the Code of Professional Conduct?

Which of the following may an auditor use as a defense under the Securities Act of 1933?

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

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

Which of the following is not one of the reasons for increased litigation related to audits?

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