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1. Which of the following best describes what is meant by the term generally accepted auditing principles?
a. Rules acknowledged by the accounting profession because of their universal application
b. Pronouncements issued by the auditing standards board
c. Measures of the quality of the auditor's performance
d. Procedures to be used to gather evidence to support financial statements
C) GAAS deal with measures of the quality of the performance of an audit.
d. relates to acts to be performed, not standards
b. GAAS has been issued by groups prior to the ASB
a. there may or may not have been universal compliance
2. For which of the following can a member of the AICPA receive and automatic expulsion from the AICPA?
a. Member convicted of felony
b. Member files his own fraudulent tax return
c. Member files a fraudulent tax return for a client knowing it is fraudulent
All can result in expulsion
3. Which of the following is an example of a safeguard implemented by the client that might mitigate a threat to independence?
a. Required continuing education for all attest engagement team members
b. An effective corporate governance structure
c. Required second partner review of an attest engagement
d. Management selection of the CPA firm
B) An effective corporate governance structure is a control that can be implemented by a client that increases independence of the attest team
a. is a safeguard implemented by regulation or CPA firm
c. is a safeguard implemented by the CPA firm
d. Represents a threat rather than a safeguard
4. Which of the following is a "self-review" threat to member independence?
a. An engagement team member has a spouse that serves as CFO of the attest client
b. A second partner review is required on all attest engagements
c. An engagement team member prepares invoices for the attest client
d. An engagement team member has a direct financial interest in the attest client
C) The team member would be reviewing his or her own work
a. is an example of a familiarity threat
b. is a safeguard threat to independence
d. is a financial self interest threat to independence
5. According to the standards of the profession, which of the following circumstances will prevent CPA performing audit engagements from being independent?
a. Obtaining a collateralized automobile loan from a financial institution client
b. Litigation with a client relating to billing for consulting services for which the amount is immaterial
c. Employment of the CPA's spouse as a client's director of internal audit
d. Acting as an honorary trustee for a not-for-profit organization client
C) According to the Code of Professional Conduct, a spouse may be employed by a client if she does not exert significant influence over the client's financial statements
6. The profession's ethical standards most likely would be considered to have been violated when a 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. Actual fee would be substantially higher
b. Actual fee would be substantially lower than the fees charged by other CPAs for compatible services
c. CPA would not be independent
d. Fee was a competitive bid
A) According to Rule 102 of the Code of Professional Conduct, in performing any professional services, a member shall maintain objectivity and integrity, avoid conflicts of interest, and not knowingly misrepresent the facts
b. and d. are not intentional mistakes
c. one must remain objective, independence is not required unless a CPA is performing attest services
7. According to the ethical standards of the profession, which of the following acts are 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 their return
D. If an engagement is terminated prior to completion, the member is required to return only client records
8. According to the profession's ethical standards, which of the following events may justify a departure from a statement of financial accounting standards?
a. New Legislation
b. Evolution of a new form of business transactions
Both are Acceptable
9. May a COA hire for the CPA's public accounting firm a non-CPA systems analyst who specializes in developing computer systems?
a. Yes, provided the CPA is qualified to perform each of the specialists tasks
b. Yes, provided the CPA is able to supervise the specialist and evaluate the specialist's end product
c. No, because non-CPA professionals are not permitted to be associated with CPA firms in public practice
d. No, because developing computer systems is not recognized as service performed by public accounting
B) Such a situation is allowed when the CPA is qualifies to supervise and evaluate the work of a specialist
a. the CPA need not be qualified to perform the specialist's tasks
c. non-CPA pros are permitted to be associated with CPA firms in public practice
d. nonprofessionals may be hired and because developing computer systems is recognized as a service performed by public accountants
10. Stephanie Seals is a CPA who is working as a controller for Brentwood Corporation. She is not in public practice. Which statement is true?
a. She may also use the CPA designation on her business cards if she also puts her employment title on them
b. She may use the CPA designation on her business cards as long as she does not mention Brentwood Corporation or her title as controller
c. She may use the CPA designation on company transmittals but not on her business cards
d. She may not use the CPA designation because she is not in public practice
A) She may use the CPA designation on her business cards when she does not imply independence, but shows her title and employer
11. According to the standards of the profession, which of the following activities would most likely not impair a CPA's independence?
a. Providing advisory services for the client
b. Contracting with a client to supervise the client's office personnel
c. Signing a client's checks in emergency situations
d. Accepting a luxurious gift from a client
A) Accounting and consulting services do not normally impair independence because the member's role is advisory
12. Which of the following reports may be issued only by an accountant who is independent of the client?
a. Standard report on an examination of a financial forecast
b. Report on consulting services
c. Compilation report on historical financial statements
d. Compilation on a financial project
A) AT 101 requires an accountant be independent for all attest engagements. An attest engagement is one which the accountant expresses a conclusion about the reliability of assertions which are the responsibility of another party. A standard report on an examination of a financial forecast requires an accountant to express an opinion, which requires an accountant to be independent
13. According to the standards of the profession, which of the following activities may be required in exercising due care?
a. Consulting with experts
b. Obtaining specialty accreditation
A) Consulting with experts
14. Larry Simpson is a CPA and is serving as an expert witness in a trial concerning a corp's financial statements. Which of the following is true?
a. Simpson's status as an expert witness is based upon his knowledge, expertise, and training
b. Simpson is required by AICPA ruling to present his position objectively
c. Simpson may regard himself as acting as an advocate
A) and B) When a CPA is an expert witness, he should not act as an advocate, but should give his/her position based on objectivity. The expert witness does this based on specialized knowledge, training, and expertise
15. 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
C) A member in public practice shall not for a commission recommend or refer to a client any product or service.
16. To exercise due professional care an auditor should
a. Critically review the judgment exercised by those assisting in the audit
b. Examine all available corroborating evidence supporting management's assertions
c. Design the audit to detect all instances of illegal acts
d. Attain the proper balance of professional experience and formal education
A) The principle of due care requires the member to observe the profession's technical and ethics standards, strive continually to improve competence and the quality of service, and discharge responsibility to the best of the member's abilities
17. Kar, CPA is a staff auditor participating in the audit engagement of Fort Inc. Which of the following circumstances impairs Kar's independence?
a. During a period of professional engagement, Kar receives from Fort 2 football tickets worth $75
b. Kar owns stock in a corp that Fort's 401K also invests in
c. Kar's friend, an employee of another local accounting firm, prepares Fort's tax returns
d. Kar's sibling is director of internal audit at Fort
D) The fact that a close relative of Kar works for Fort impairs Kar's independence
18. On June 1, 2006, a CPA obtained a 100K personal loan from a financial institution client for whom the CPA provided compilation services, the loan was fully secured and considered material to the CPA's net worth. The CPA paid the loan in full on 12/31/07. On 4/3/07, the client asked the CPA to audit the client's F/S for the year ended Dec 31 07. Is the CPA independent with respect to the audit of the clien'ts 12/31/07 F/S?
a. Yes, because the loan was fully secured
b. Yes, because the CPA was not required to be independent when the loan was granted
c. No, because the CPA had a loan with the client during the period of a professional engagement
d. No, because the CPA had a loan with the client during the period covered by the financial statements
B) Independence is not required for the performance of a compilation engagement
19. Which of the following statements are correct regarding a CPA firm taking copies of information contained in client files when the CPA leaves the firm?
a. A CPA leaving a firm may take copies of information contained in the client files to assist another firm in serving the client
b. A CPA leaving a firm may take copies of information contained in client files as a method of gaining technical experience
c. Both are correct
d. Neither are correct
D) Both statements are incorrect, either would violate rule 301 on confidential client information
20. Which of the following statements is correct regarding an accountant's working papers?
a. The accountant owns the working papers and generally may disclose them as the accountant sees fit
b. The client owns the working papers but the accountant has custody of them until the accountant's bill is paid in full
c. The accountant owns the working papers but generally may not disclose them without the client's consent or a court order
d. The client owns the working papers but in the absense of the accountant's consent may not disclose them without a court order
C) Information in the CPA's working papers is confidential and may not be disclosed except with the client's consent or by court order
21. According to the profession's standards, which of the following would be considered consulting services?
a. Advisory services
b. Implementation services
c. Product services
d. All of the above
D) All are consulting services.
22. Which of the following events would require a CPA performing a consulting services engagement for a non audit client to withdraw from the engagement?
a. The CPA has a conflict of interest that is disclosed to the client and the client consents to the CPA continuing the service
b. The CPA fails to obtain a written understanding from the client concerning the scope of the engagement
D) Neither. Independence is not required and the understanding can be written or oral
23. Which of the following services may a CPA perform in carrying out the consulting service for a client?
a) Analyst of the client's accounting system
b) Review of the client's prepared business plan
c) Preparation of the information for obtaining financing
d) All of the above
D) All are acceptable
24. Under the statements on Standards for Consulting Services, which of the following statements best reflects a CPA's responsibility when undertaking a consulting services engagement? The CPA Must...
a. Not seek to modify any agreement with the client
b. Not perform any attest services for the client
c. Inform the client of significant reservations concerning the benefits of the engagement
d. Obtain a written understanding with the client concerning the time for completion of the engagement
C) The AICPA statement on standards for consulting services, section 100 describes general standards for all consulting services, in addition to those established under the AICPA code of professional conduct. Section 100 addresses the areas of client interest, understanding with the client and communication with the client. Specifically, this section states that the accountant should inform the client of significant reservations concerning the scope or benefits of the engagement
25. Which of the following services is a CPA generally required to perform when conducting a personal financial planning engagement
A) Assisting the client to identify tasks that are essential in order to act on planning decisions
B) Assisting the client to take action on planning decisions
C) Monitoring progress in achieving goals
D) Updating recommendations and revising planning decisions
A) Personal financial planning engagements are those that involve developing strategies and making recommendations to assist a client in defining and achieving personal financial goals. It involves all the following:
Defining engagement objectives
Planning specific procedures appropriate to engagement
Developing basis for recommendations
Communicating recommendations to client
Identifying tasks for taking action on planning decisions
26. Cable Corp orally engaged Drake & Co CPAs to audit its financial statements. Cable's management informed Drake that it suspected the accounts receivable were materially overstated. Though the financial statements Drake audited included a materially overstated accounts receivable balance, Drake issued an unqualified opinion. Cable used the financial statements to obtain a loan to expand its operations. Cable defaulted on the loan and incurred a significant loss. If Cable sues Drake for negligence in failing to discover the overstatement, Drake's best defense would be that Drake did not:
A) Have privity of contract with Cable
B) Sign an engagement letter
C) Perform the audit recklessly or with an intent ot deceive
D) Violate the GAAS in performing the audit
D) A CPA is not automatically liable for failure to discover a materially overstated account. The CPA can be liable if the failure to discover was due to the CPA's negligence. Performing the audit in accordance with GAAS is usually a good defense.
27. Which of the following statements best describes whether a CPA has met the required standard of care in conducting an audit of a client's financial statements?
A) The client's expectations with regard to the accuracy of the audited financial statements
B) The accuracy of the financial statements and whether the statements conform to GAAP
C) Whether the CPA conducted the audit with the same skill and care expected of an ordinary prudent CPA under the circumstances
D) Whether the audit was conducted to investigate and discover all acts of fraud
C) In order to meet the required standard of due care in conducting an audit of a client's financial statements, a CPA has the duty to perform with the same degree of skill and judgment expected of an ordinary prudent CPA under the circumstances
28. Ford & co CPAs issued an unqualified opinion on Owen's corp's financial statements. Relying on these financial statements, Century Bank lent Owens $750K. Ford was unaware that Century would receive a copy of the financial statements or that Owens would use them to obtain a loan. Owens defaulted on the loan. To succeed in a common law fraud action against Ford, Century must prove in addition to other elements that Century was:
A) Free from contributory negligence
B) In privity of contract with Ford
C) Justified in relying on financial statements
D) In privity of contract with Owens
C) The following elements are needed to establish fraud against an accountant:
1) Misrepresentation of the accountant's expert opinion
2) Scienter shown by either the accountant's knowledge of falsity or reckless disregard of the truth
3) Reasonable reliance by injured party
4) Actual damages
29. When performing an audit, a CPA
A) Must exercise the level of care, skill, and judgment expected of a reasonably prudent CPA under the circumstances
B) Must strictly adhere to generally accepted accounting principles
C) Is strictly liable for failing to discover client fraud
D) Is not liable unless the CPA commits gross negligence or intentionally disregards GAAS
A) In the performance of an audit, a CPA has the duty to exercise the level of care, skill and judgment expected of a reasonably prudent CPA under the circumstances
30. When performing an audit, a CPA will most likely be considered negligent when the CPA fails to
A) detect all of a client's fraudulent activities
B) Include a negligence disclaimer in the client engagement letter
C) Warn a client of a known internal control weakness
D) Warn a client's customers of embezzlement by the client's employees
C) A CPA will be liable for negligence when he fails to exercise due care. The standard for due care is guided by state and federal statutes, court decisions, contracts with clients, conformity with GAAS & GAAP and standards of the professions. AU 325 requires that if the auditor becomes aware of weaknesses in the design or operation of the internal control structure, these weaknesses,, termed reportable conditions, be communicated to the audit committee of the client
31. A CPA's duty of due care to a client most likely will be breached when a CPA
A) Gives a client an oral instead of written report
B) Gives a client incorrect advice based on an honest error of judgment
C) Fails to give tax advice that saves the client money
D) Fails to follow GAAS
D) A CPA's duty of due care is guided by the following standards:
1) federal court statues
2) court decisions
3) contract with the client
4) GAAS and GAAP
5) customs of the profession
Therefore failure to follow GAAS constitutes a breach of the CPA's duty of due care
32. Which of the following elements if present would support a finding of constructive fraud on the part of a CPA?
a. Gross negligence in applying GAAS
b. Ordinary negligence in applying GAAS
c. Identified third party users
A) A CPA's liability for constructive fraud is established by the following elements:
1) Misrepresentation of a material fact
2) Reckless disregard of the truth
3) Reasonable reliance of the financial statements by the injured party
4) Actual damages
Gross negligence constitutes a reckless disregard for the truth
33. If a CPA recklessly departs from the standards of due care when conducting an audit, the CPA will be liable to third parties who are unknown to the CPA based on
b. Gross Negligence
c. Strict liability
d. Criminal deceit
B) A forseeable third party is someone not identified to the CPA, but who may be expected to receive the accountant's audit report and rely upon it. Even though this party is unknown to the CPA, the CPA is liable for gross negligence or fraud
34. In a common law action against an accountant, lack of privity is a viable defense if the plaintiff
a. Is the client's creditor who sues the accountant for negligence
b. Can prove the presence of gross negligence that amounts to a reckless disregard for the truth
c. Is the accountant's client
d. Based upon fraud
A) Lack of privity can be a viable defense against third parties in a common law case of negligence or breach of contract. A client's creditor is not in privity of contract with the accountant
35. A CPA audited the financial statements of Shelly Company. The CPA was negligent in the audit, Sanco, a supplier of Shelly, is upset because Sanco has extended Shelly a high credit limit based on the financial statements which were incorrect. Which of the following statements is the most correct.
A) In most states, both Shelly and Sanco can recover from the CPA for damages due to the negligence
B) States that use the Ultramares decision will allow both Shelly and Sanco to recover,
C) In most states, Sanco cannot recover as a mere foreseeable third party
D) Generally, Sanco can recover, but Shelly cannot
C) Since Sanco was a forseeable third party instead of an actually forseen third party by the CPA, Sanco in most states cannot recover
36. Under the Ultramares rule, to which of the following parties will an accountant be liable for negligence?
A) Parties in privity
B) Foreseen parties
A) Under the Ultramares rule, the accountant is held liable only to parties whose primary benefit the financial statements are intended. This generally means only the client or third party beneficiaries who are in privity of contract with the accountant. Many courts have recently departed from the Ultramares decision to allow forseen third parties to recover from the accountant
37. While conducting an audit, Larson Associates CPA's, failed to detect material misstatements included with the prospectus for a public offering of securities made by the client. Larson knew that its opinion and the financial statements would be used for this purpose. In a suit by a purchaser against Larson for common law negligence, Larson's best defense would be that the
A) audit was conducted in accordance with GAAS
B) client was aware of the misstatements
C) Purchaser was not in privity of contract
D) Identity of the purchaser was not known to Larson at the time of the audit
A) In order to establish common law liability against an accountant based upon negligence, it must be proven that:
1) The accountant had the duty to exercise due care
2) The accountant breached the duty of due care
3) Damage or loss resulted
4) A casual relationship between the fault of the accountant and the resulting damages
The accountant may escape liability if due care can be established
38. While conducting an audit, Larson Associates CPA's, failed to detect material misstatements included with the prospectus for a public offering of securities made by the client. Larson knew that its opinion and the financial statements would be used for this purpose. In a suit by a purchaser against Larson for common law fraud, Larson's best defense would be that
A) Larson did not have actual or constructive knowledge of the misstatements
B) Larson's client knew or should have known of the misstatements
C) Larson did not did have actual knowledge that the purchaser was an intended beneficiary of the audit
D) Larson was not in privity of contract with its client
A) To establish a CPA's liability for common law fraud, the following elements must be present:
1) Misrepresentation of a material fact or the accountant's expert opinion
2) Scienter, shown either by an intent to mislead of reckless disregard of the truth
3) Reasonable or justified reliance by injured parties
4) Actual damages resulted
Larson did not have actual or constructive knowledge of the misstatements, the scienter element would not be present and Larson would not be liable
39. Quincy bought Teal Corp common stock in an offering registered under the securities act of 1933. Worth & Co., CPA's, gave an unqualified opinion on Teal's financial statements that were included in the registration statement filed with the SEC. Quincy sued Worth under the provisions of the 1933 Act that deal with omission of facts required to be in the registration statement. Quincy must prove that
a. There was fraudulent activity by worth
b. There was a material misstatement in the financial statements
c. Quincy relied on Worth's opinion
d. Quincy was in privity with Worth
B) The securities act of 1933 requires that a plaintiff need only prove that damages were incurred and that there was a material misstatement or omission in order to establish a prima facie case against a CPA. The act does not require that the plaintiff prove that he relied on the financial information or that there were negligence or fraud present. Securities act of 1933 eliminates the necessity for privity of contract
40. Beckler & Associates, CPAs, audited and gave an unqualified opinion on the financial statements contained misstatements that resulted in a material overstatement of Queen's net worth. Queen provided the audited financial statements to Mac Bank in connection with a loan made by Mac to Queen. Beckler knew that the financial statements would be provided to Mac. Queen defaulted on the loan. Mac sued Bckler to recover the losses associated with Queen's default. Which of the following must Mac prove in order to recover?
a. Beckler was negligent in conducting the audit
b. Mac Relied on the financial statements
C) Both. Mac is a third party that the accountant knew would rely on the financial statements contained material misstatements. Mac can recover by showing that the accountant was negligent in the audit. Mac also needs to establish that it did rely on the financial statements in order to recover from the accountant for the losses on Queen
41. Dart corp, engaged Jay Associates, CPSs to assist in a public stock offering. Jay audited Dart's financial statements and gave an unqualified opinion despite knowing that the financial statements contained misstatements. Jay's opinion was was included in Dart's registration statement. Larson purchased shares in the offering and suffered a loss when the stock declined in value after the misstatements became known. In a suit against Jay and Dart under the section 11 liability provisions of the securities act of 1933, Larson must prove that:
A) Jay knew of the misstatements
B) Jay was negligent
C) The misstatements contained in Dart's were material
D) The unqualified opinion contained in the registration statement was relied on by Larson
C) Under the SEC act of 1933, a CPA is liable to any third party purchaser of of registered securities for losses resulting from misstatements in the financial statements included in the registration statement. The plaintiff must establish that damages were incurred and that the misstatements were material misstatements of facts.
42. Dart corp, engaged Jay Associates, CPSs to assist in a public stock offering. Jay audited Dart's financial statements and gave an unqualified opinion despite knowing that the financial statements contained misstatements. Jay's opinion was was included in Dart's registration statement. Larson purchased shares in the offering and suffered a loss when the stock declined in value after the misstatements became known. If Larson succeeds in the section 11 suit against Dart, Larson would be entitled to
A) Damages of 3x the original public offering price
B) Rescind the transaction
C) Monetary damages only
D) Damages, but only if the shares were resold before the suit was started
C) In a section 11 suit under the 1933 act, the plaintiff may recover damages equal to the difference between the amount paid and the market value of the stock at the time of the suit. If the stock has been sold, then the damages are the difference between the amount paid and the sale price.
43. Under the liability provisions of Section 11 of the securities Act of 1933, a CPA may be liable to any purchaser of a security for certifying materially misstated financial statements that are included in the security's registration statement. Under section 11, a CPA usually will not be liable to the purchaser:
A) If the purchaser is contributorily negligent
B) If the CPA can prove due diligence
C) Unless the purchaser can prove privity with the CPA
D) Unless the purchaser can prove scienter on the part of the CPA
B) Under section 11 of the 1933 act, if the plaintiff proves damages and the existence of a material misstatement or omission in the financial statements included in the registration statement, these are sufficient to win against the CPA unless the CPA can prove one of the applicable defenses. Due diligence is one of the defenses.
44. Under the liability provisions of Section 11 of the securities Act of 1933, a CPA may be liable to any purchaser of a security for certifying materially misstated financial statements that are included in the security's registration statement. Under section 11, which of the following must be proven by a purchaser of the security?
A) Reliance on the financial statements
B) Fraud by the CPA
Neither) To impose liability under section 11 of the SEC Act of 1933 for a misleading registration statement, the plaintiff must prove the following:
1) Damages were incurred
2) A material misstatement or omission was present in financial statements included in the registration statement.
45. Ocean and associates CPAs audited the financial statements of Drain Corporation. As a result of Ocean's negligence in conducting the audit, the financial statements included material misstatements, Ocean was unaware of this fact. The financial statements and Ocean's unqualified opinion were included in a registration statement and prospectus for an original public offering of stock by Drain. Sharp purchased shares in the offering. Sharp received a copy of the prospectus prior to the purchase but did not read it. The shares declined in value as a result of the misstatements in Drain's financial statements becoming known. Under which of the following Acts is Sharp most likely to prevail in a lawsuit against Ocean?
A) SEC act of 1934 section 10(b) rule 10b-5
B) securities act of 1933, section 11
B) The proof requirements necessary to establish an accountants liability under the securities act of 1933, section 11 are as follows
1) plaintiff must prove damages were incurred
2) The plaintiff must prove there was a material misstatement or omission in financial statements included in the registration statement
46. Danvy, a CPA, preformed an audit for Lank Corporation. Danvy also performed an S-1 review to review events subsequent to the balance sheet date. If Danvy fails to further investigate suspicious facts, under which of these can he be found negligent?
A) The audit but not the review
B) The review but not the audit
C) Neither the audit nor the review
D) Both the audit and the review
D) If an accountant is negligent, he may have liability not only for a negligently performed audit but also for a negligently performed review when there were facts that should require the accountant to investigate further because of their suspicious nature. This is true even though a review is not a full audit
48. Under the antifraud provisions of section 10b of the SEC act of 1934, a CPA may be liable if the CPA acted.
B) With independence
C) Without due diligence
D) Without good faith
D) Under Rule 10b-5 of section 10b of the 1934 Act, a CPA may be liable if if he makes a false statement of a material fact or an omission of a material fact in connection with the purchase or a sale of a security. Scienter is required which is shown by either knowledge of falsity or reckless disregard for the truth. Of the four answers given, lack of good faith best describes this scienter requirement.
49. Under section 11 of the Securities Act of 1933, which of the following standards may a CPA use as a defense
A) Generally Accepted Accounting Principles
B) Generally accepted fraud detection standards
B) Under section 11 of the securities act of 1933, the CPA may be liable for material misstatements or omissions in certified financial statements. The CPA may escape liability by showing due diligence. This often can be proved by showing the he followed GAAP.
50. Dart Corp engaged Jay Associates, CPAs to assist in a public stock offering . Jay audited Dart's financial statements and gave an unqualified opinion, despite knowing that the financial contained misstatements. Jay's opinion was included in Dart's registration statement. Larson purchased shares in the offering and suffered a loss when the stock declined in value after the misstatements became known. If Larson succeeds in the section 10b and rule 10b-5 suit, Larson would be entitled to
A) Only recover the original public offering price
B) Only rescind the transaction
C) The amount of any loss covered by fraud
D) punitive damages
C) In a civil suit under section 10b -5, the damages are generally the difference between the amount paid and the market value at the time of the suit, or the difference between the amount paid and the sales price if sold.
51. Which of the following statements is correct with respect to ownership, possession, or access to a CPA firm's audit working papers.
A) Working papers may never be obtained by 3rd parties unless the client consents
B) Working papers are not transferable to a purchaser of a CPA practice unless the client consents
C) Working papers are subject to the privileged communication rule which in most jurisdictions, prevents any third party access to the working papers
D) Working papers are the client's exclusive property
B) In general, the accountant's work papers are owned by the accountant. However, the CPA's ownership of the working papers is custodial in nature and the CPA is required to preserve confidentiality of the client's affairs. Normally, the CPA firm cannot allow transmission of information included in the working papers to third parties without the client's consent. This prevents a CPA firm from transferring work papers to a purchaser of a CPA practice unless the client consents
52. Which of the following statements is correct regarding a CPAs working papers? The working papers must be:
A) Transferred to another accountant purchasing the CPAs practice even if the client hasn't given permission
B) Transferred permanently to the client if demanded
C) Turned over to any government agency that requests them
D)Turned over pursuant to a valid federal court subpoena
D) The working papers are owned by the CPA, but the CPA must preserve confidentiality. They cannot be transmitted to another party unless the client consents or unless the CPA is required to under a valid court or governmental agency subpoena.
53. To which of the following parties may a CPA partnership provide its working papers, without being lawfully subpoenaed or without the client's consent?
A) The IRS
B) The FASB
C) Any surviving partners on the death of a partner
D) A CPA before purchasing a partnership interest in the firm
C) Any of the partners of a CPA partnership can have access to the partnership's working papers. Third parties outside the firm need to have the client's consent or a legal subpoena.
54. To which of the following parties may a CPA partnership provide its working papers without either the client's consent?
A) The IRS
B) The FASB
D) To preserve confidentiality, a CPA may not allow transmission of information in the working papers to other parties. Exceptions are consent of client or the production of an enforceable subpoena. There are no exceptions for the IRS or the FASB
55. A CPA is permitted to disclose confidential client information without the consent of the client to
A) Another CPA who has purchased the CPAs tax practice
B) Another CPA firm if the information concerns suspected tax return irregularities
C) A state CPA society voluntary quality control review board
D) In a jurisdiction having an accountant client privilege statute, the CPA generally may not turn over work papers without the client's permission. It is allowable to do so, however, for use in a quality review under AICPA authorization or to be given the state CPA society quality control panel
56. Thorp CPA was engaged to audit Ivor's financial statements. During the audit, Thorp discovered that Ivor's inventory contained stolen goods. Ivor was indicted and Thorp was subpoenaed to testify at the criminal trial. Ivor claimed accountant-client privilege to prevent Thorp from testifying. Which of the following Statements is correct regarding Ivor's claim?
A) Ivor can claim an accountant-client privilege only in states that have enacted a stature creating such a privilege
B) Ivor can claim an accountant-client privilege only in federal courts
C) The accountant-client privilege can be claimed only in civil suits
D) The accountant client privilege can be claimed only to limit testimony to audit subject matter
A) privileged communications between the accountant and client are recognized only in a few states, therefore if a state statute has been enacted creating such a privilege, Ivor will be able to prevent Thorp from testifying
57. A violation of the profession's ethical standards most likely would have occurred when a CPA
A) Issues an unqualified opinion on the 2002 financial statements when fees for the 2001 audit were unpaid
B) Recommend a controller's position description with candidate specifications to an audit client
C) Purchased a CPA firm's practice of monthly writeups for a percentage of fees to be received over a 3 month period
D) Made arrangements with a financial institution to collect notes issued by a client in payment if fees due for the current year's audit
A) The requirement is to identify the situation in which it is most likely that a violation of the profession's ethical standards would have occurred. Answer A is correct because independence is impaired if fees remain unpaid for the professional services of the preceding year when the report on the client's current year is issued. Accordingly, no report should have been issued on the 2002 FS when fees for the 2001 audit were unpaid
58. Which of the following statements concerning an accountant's disclosure of confident client date is generally correct?
A) Disclosure may be made to any state agency without subpoena
B) Disclosure may be made to any party on consent of client
C) Disclosure may be made to comply with an IRS audit request
D) Disclosure may be made to comply with generally accepted accounting principles
B) A CPA must not disclose confidential information of a client unless the client gives consent to disclose it to that third party
59. McGee is auditing Nevus corporation and detects probable criminal activity by one of the employees. McGee believes this will have a material impact on the financial statements. The financial statements of Nevus Corporation are under the SEC act of 1934. Which of the following is correct?
A) Mcgee should report this to the SEC
B) Mcgee should report this to the Justice Department
C) Mcgee should report this to Nevus Corporation's audit committee or board of directors
D) McGee will discharge his duty by requiring that anote of this be included in the FS
C) Under the Private Securities Litigation Reform Act, the auditor should inform audit committee or the board of directors
60. Which of the following is an auditor not required to establish procedures for under the Private Securities Litigation Reform Act?
A) To develop a comprehensive internal control system
B) To evaluate the ability of the firm to continue as a going concern
C) To detect material illegal acts
D) To identify material related party transaction
A) The Private Securities Litigation Reform act requires that auditors of firms covered under the securities exchange act of 1934 establish procedures to do the items in B, C and D
61. Which of the following is an auditor required to do under the private securities legislation reform act concerning audits under the federal SEC act of 1934
A) Establish procedures to detect material illegal acts of the client being audited
B) Evaluate the ability of the firm being audited to continue as a going concern
Under the private securities litigation reform act, an auditor who audits financial statements under the FSEC act of 1934 is required to establish procedures to 1) detect illegal acts 2) Identify material related party transactions 3) Evaluate the ability of the firm to continue as a going concern
62. Lin CPA is auditing the fs of exchange corp under the FSEC act of 1934. He detects what he believes are probably material illegal acts. What is his duty under the Private Securities Litigation Reform Act
A) He must inform the principle shareholders within ten days
B) He must inform the audit committee or the board of directors
C)He need not inform anyone beyond requiring that that the fs are prepared fairly
D) He should not inform anyone since he owes a duty of confidentially to the client
B) Under the Private Securities Litigation Reform Act, he is required to report this to the audit committee of the board of directors
63. The private securities litigation Reform act
A) Applies only to securities not purchased from a stock exchange
B) Does not apply to common stock of a publicly held corporation
C) Amends the Federal Securities act of 1933 and the Federal SEC act of 1934
D) Does not apply to preferred stock of a publicly held corporation
C) The private securities litigation reform act amends both the 1933 & 34 acts which apply to common stock sold on a stock exchange
65. Which of the following nonattest services are auditors allowed to perform for a public company?
A) Bookkeeping services
B) Appraisal services
C) Tax services
D) Internal audit services
C) The Sarbanes Oxley act of 2002 established a number of nonattest services that may not be performed by the auditor for a public company. Tax services may be performed but must be approved by the companies audit committee
66. Which of the following bards has the responsibility to regulate CPA firms that audit public companies?
A) Auditing Standards Board
B) Public Oversight Board
C) Public Company Accounting Oversight Board
D) Accounting Standards Board
C) The SOX act established the PCAOB to regulate CPA firms that audit public companies
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