Professional Ethics Practice Questions

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

True

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

True

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

True

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

False

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.

True

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

False

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

False

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

True

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

True

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

True

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

false

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.

True

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

False

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

False

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

False

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.

False

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.

C.

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


A. AICPA.

B. SEC.

C. Department of Justice.

D. Congress.

B.

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.

C.

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


A. Responsibility.

B. Reliability.

C. Objectivity.

D. Due care.

B.

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.

D.

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.

A.

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.

D.

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.

B.

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.

C.

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.

A.

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.

C.

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.

C.

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.

A.

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.

B.

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.

C.

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.

B.

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.

B.

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.

C.

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.

D.

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.

A.

51. 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.

D.

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.

A.

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.

B.

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.

B.

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."

C.

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.

C.

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.

C.

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).

C.

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.

B.

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.

B.

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.

B.

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).

C.

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.

C.

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.

D.

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.

A.

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.

B.

A CPA's legal license to practice public accounting can be revoked by the


A. American Institute of Certified Public Accountants.

B. State society of CPAs.

C. Auditing Standard Board.

D. State board of accountancy.

D.

An auditor's independence would not be considered impaired if she or he had


A. Owned common stock of the audit client but sold it before the company became a client.

B. Sold short the common stock of an audit client while working on the audit engagement.

C. Served as the company's treasurer for six months during the year covered by the audit but resigned before the company became a client.

D. Performed the bookkeeping and financial statement preparation for the company, which had no accounting personnel and for which the president had no understanding of accounting principles.

A.

When a CPA knows that a tax client has skimmed cash receipts and not reported the income in the federal income tax return but signs the return as a CPA who prepared the return, the CPA has violated which of the following AICPA Rules of Conduct?


A. Rule 301—Confidential Client Information.

B. Rule 102—Integrity and Objectivity.

C. Rule 101—Independence.

D. Rule 203—Accounting Principles.

B.

A CPA firm's independence will be impaired if a retired partner is a director of a non-SEC client and


A. Has fixed retirement benefits.

B. Retains only office privileges with the firm.

C. Is no longer active in the firm.

D. Is no longer associated with the firm.

B.

Which of the following would be permitted by the AICPA?


A. John Smith, CPA owns 50 percent of the firm and Joan Jones, non-CPA, owns 50 percent.

B. Non-CPAs own 25 percent of the firm. The non-CPAs do not have a college degree.

C. Non-CPAs own 40 percent of the firm and follow all AICPA requirements.

D. Fred Smith, a non-CPA, owns 10 percent of the firm and has a full-time job separate from the firm and views the ownership purely as an investment.

C.

The AICPA Code of Professional Conduct contains two basic sections: _______________________ and ________________________.

Principles of Professional Conduct and the Rule of Conduct

. Sterling Stevens, CPA, was auditing Global Services Company. Global Services used an accounting principle that was not in conformity with GAAP.
Rule of Conduct? Violation?

Rule 203 - accounting principles - violation

*must comply with GAAP

Christina Hall, CPA, provided expert testimony for a plaintiff. The defendant in the case was a client of Hall's.
Rule of Conduct? violation?

Rule 102: integrity and objectivity; no violation

Not impaired unless knowingly gives false information.

Sam Miller, CPA, owned 100 shares of Johnson Drilling, Inc., his audit client.
rule of conduct? violation?

*A covered member cannot have a direct financial interest in the client.

Rule 101: independence; violation

Dewey Wise, CPA, obtained a loan from an insurance company using the cash value of the insurance policy as collateral. The loan is for less money than the cash value of the policy.
rule of conduct? violation?

Rule 101: independence; violation

Stella Steinbeck, CPA, was auditing Good Services Company, which used an accounting principle that was not in conformity with GAAP. Good Services believed and Steinbeck concurred that using a generally accepted method would cause the financial statements to be misleading. Therefore, Steinbeck rendered a standard unqualified audit report.
rule of conduct? violation?

Rule 203: accounting principles; no violation

* If complying with GAAP causes misleading FS and you can justify it, give clean opinion and add paragraph. This is called a Departure from promulgated accounting principle which results in an unqualified opinion.*

Jackson, CPA, and one of his audit clients are considering investing in a business together. Jackson would own 25 percent of the business and the client would own 50 percent. Jackson's investment in the business is material to his net worth. Rule of conduct? violation?

Rule 101: independence; violation

*A covered member cannot have a joint investment with a client that is material to the covered member.*

Feller, CPA, is the corporate controller for Robert Corporation. Feller believes his employer may have committed an illegal act. After discussing the matter with his attorney, Feller decides to disclose the matter to the appropriate authorities. Code of Conduct? violation?

Rule 203: confidential client information; no violation

. Brock, CPA, is an owner in the firm Louis and Brock, CPAs. Brock's husband is on the board of directors of Midland Corporation, an audit client of Louis and Brock. Brock does not participate on the audit engagement. Rule of conduct? violation?

Rule 101: Independence; violation

*A covered members immediate family (spouse) cannot have a direct financial interest in client.

Ruth, CPA, owns a building and leases a portion of the space to an audit client. The income from the lease is not material to Ruth.

rule 101: independence; no violation

*Ruth has an immaterial indirect financial interest in the client.

Maris, CPA, performs investment advisory services for an audit client and receives an annual fee based on a percentage of the value of the client's investment portfolio at the end of each year.

Rule 302: contingent fees; violation

1. Brandon Frisby, CPA, found out that his client, Uptonogood, Inc., had failed to properly account for several leases. Frisby informed Uptonogood's management that he must issue a qualified audit report and disclose the lease problem in the report. Uptonogood's management indicated that such a disclosure would constitute a disclosure of confidential information. Nevertheless, Frisby rendered the qualified audit report, including an explanatory paragraph about the inadequate lease accounting.

Rule 301: confidential client information; no violation

rule does not affect a CPA's obligation to comply with rules 202 (compliance with standards) and 203 (accounting principles).*

Priscilla Hudson, CPA, a partner in Hudson and Danhoffer, CPAs, holds the position of honorary director for the Friends of the Symphony Orchestra, a firm audit client.

Rule 101: Independence; no violation

She is only honorary director.

The wife of Gerald Skoch, CPA, is the controller of Fine Corporation. Skoch is an audit partner for the Long Island office of Barnes and Bucknell, CPAs. The Long Island office of Barnes and Bucknell audits Fine Corporation, but Skoch is not part of the audit team and provides no other services to Fine Corporation.

rule 101; independence; violation

Skoch is a partner, but his wife is in a key position (controller) for the client.

. Disclosed client information to another CPA firm during the discussion of a merger of the two firms

Rule 301; client confidential info. - violation

Allowed a company to change the way it values inventory to a method that is not GAAP because following GAAP would be misleading

rule 203: accounting principles - not a violation

*allowed as a departure of rule 203

. Had a new car loan from a bank that is a client when the bank holds the title to the car

rule 101: independence - not a violation

. Based a fee on approval of a bank loan dependent on audited financial statements

Rule 302 - contingent fees; violation

Did not comply with Government Auditing Standards on a government audit.

Rule 501: acts; violation

cpa Was a trustee of client's profit-sharing trust.

rule 101 independence; violation

Accepted referral fees from local attorneys for nonattest clients with the clients' knowledge

rule 503 commissions and referral fees, not a violation

. Performed an audit in accordance with GASB standards

rule 203; accounting principles; not a violation

Advises a client to have an insurance review from a local insurance company in which the CPA has a material financial interest.

rule 102; integrity and objectivity; violation

Promoted the CPA's tax service on local TV station

rule 502 advertising - no violation

What are (a) the AICPA Principles of Professional Conduct, (b) Rules of Conduct, and (c) Interpretation of Rules of Conduct?

a. The Principles of Professional Conduct express the profession's high ideals on ethical conduct. They include essays on responsibilities, the public interest, integrity, objectivity and independence, due care and scope, and nature of services.

b. The Rules of Conduct apply to the services performed by members of the AICPA in public and private practice. At present, they consist of 11 rules of conduct.

c. The Interpretations of Rules of Conduct are detailed explanations of specific rules necessary to help members understand particular applications.

Susan Small, CPA, has Medium Corporation as an audit client. Medium has asked Small to create and install a new computerized payroll system. Because Small does not have the appropriate level of expertise, she referred Medium to Compusystems, Inc., a local software consulting company. Small has an arrangement by which Compusystems pays her 10 percent of any fee received from her referrals. Small has disclosed this to her client.
This situation involves a possible violation of the AICPA's Code of Professional Conduct. State the rule in question and explain why or why not there is a violation of the code. You need not refer to the rule number but should clearly describe the rule in question.

The rule in question is Rule 503: Commissions. Susan Small has violated this rule because she has accepted a commission from an attestation client.

Wally Wide is the partner on the audit engagement for First National Bank for its fiscal year-end of January 31, 2013. Wally was recently promoted to partner. Based on his increase in income, Wally and his family bought a large home and a new car. First National Bank had the most competitive mortgage rate and auto loan rates, so Wally obtained both his mortgage loan and car loan from First National. Wally paid 20 percent down on the house, received no special rate of interest, and the First National Bank holds the title to the house. Wally traded in his old car and made an additional down payment on the car and financed 60 percent of the price of the car with the bank. Again, Wally paid the prevailing interest rate and the bank holds the title to the car.

Required:

This situation involves possible violations of the AICPA's Code of Professional Conduct. State the rule in question and explain why or why not there is a violation of the code. You need not refer to the rule number but should clearly describe the rule in question.

The rule in question is Rule 101—Independence. Wally Wide has violated this rule in the financing of the house. Under Interpretation 101-1.A.4, members are no longer allowed to obtain home mortgages from clients. However, because the auto loan is collateralized by the automobile, Wally has not violated the independence rule on the financing of the car

Ben Big is a partner in the Cleveland office of the national accounting firm of Price Brickhouse. He owns 1,000 shares of common stock in Public, Inc., an audit client of the firm. This amount is not material to his personal investments. The Public, Inc. audit is done out of the New York office. Ben Big has not informed the firm that he owns the shares because he is not on the audit, which the Cleveland office doesn't perform.

Required:

This situation involves a possible violation of the AICPA's Code of Professional Conduct. State the rule in question and explain why or why not there is a violation of the code. You need not refer to the rule number but should clearly describe the rule in question.

The rule in question is Rule 101: Independence. Ben Big has not violated this rule because he is not considered a covered member. Partners are covered members only if they are in the office in which the lead attest engagement partner primarily practices in connection with the attest engagement. Only covered members and their immediate families are prohibited from having a direct financial interest in the client

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