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CHAPTER 19

MULTIPLE CHOICE

c 1. A client company has not paid its 2004 audit fees. According to the AICPA Code of Professional
Conduct, for the auditor to be considered independent with respect to the 2005 audit, the 2004
audit fees must be paid before the
a. 2004 report is issued.
b. 2005 fieldwork is started.
c. 2005 report is issued.
d. 2006 fieldwork is started. (AICPA ADAPTED)

d 2. Inclusion of which of the following in a promotional brochure published by a public accounting


firm would be most likely to result in a violation of the AICPA rules of conduct?
a. Reprints of newspaper articles that praise the firm's expertise.
b. Services offered and fees for such services, including hourly rates and fixed fees.
c. Educational and professional attainments of partners.
d. Testimonials and endorsements. (AICPA ADAPTED)

a 3. According to the AICPA Code of Professional Conduct, a member who has a financial interest in
a partnership that invests in a potential client is considered to have
a. An indirect financial interest in the client.
b. A direct financial interest in the client.
c. No financial interest in the client.
d. A partial financial interest in the client. (AICPA ADAPTED)

a 4. The AICPA Rules of Conduct will ordinarily be considered to have been violated when the
member 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 members for comparable
services.
c. Fee was a competitive bid.
d. Member would not be independent. (AICPA ADAPTED)

d 5. 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 services in the current year and has just filed a petition for
bankruptcy. (AICPA ADAPTED)

a 6. Pursuant to the AICPA rules of conduct, the auditor's responsibility to the profession is defined by
a. The AICPA Code of Professional Conduct.
b. Federal laws governing licensed professionals who are involved in interstate commerce.
c. Statements on Auditing Standards.
d. The Bylaws of the AICPA. (AICPA ADAPTED)

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a 7. 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 firm, and management engages this other firm. Under these circumstances
a. Jackson may request compensation from the other firm for any professional services rendered to
it in connection with the engagement.
b. Jackson may accept a referral fee from the other firm.
c. Jackson has violated the AICPA Code of Professional Conduct because of nonfulfillment of the
duty of performance.
d. Jackson's lack of competence should be construed to be a violation of generally accepted auditing
standards. (AICPA ADAPTED)

c 8. 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. Cooperative apartment house in which the CPA owns an apartment and is not part of the
management.
d. Company in which the CPA's investment club owns a one-tenth interest. (AICPA ADAPTED)

d 9. The AICPA Code of Professional Conduct recognizes that the reliance of the public, the
government, and the financial community on sound financial reporting imposes particular
obligations on CPAs. The Code derives its authority from
a. Public laws enacted over the years.
b. General acceptance of the Code by the financial community.
c. Requirements of governmental regulatory agencies, such as the SEC.
d. Bylaws of the AICPA. (AICPA ADAPTED)

c 10. Which of the following most completely describes how independence has been defined by the
profession?
a. Performing an audit from the viewpoint of the public.
b. Avoiding the appearance of significant interests in the affairs of an audit client.
c. Possessing the ability to act with integrity and objectivity.
d. Accepting responsibility to act professionally and in accordance with a professional code of
ethics. (AICPA ADAPTED)

c 11. The appearance of independence of a CPA, or that CPA's firm, could be impaired if the CPA
a. Owns a unit in a cooperative apartment house where each unit has a vote in the cooperative, and
the CPA, who does not participate in the management, has been retained as the auditor for the
cooperative.
b. Joins a trade association that is a client and serves in a nonmanagement capacity.
c. Accepts a gift from a client.
d. None of the above. (AICPA ADAPTED)

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c 12. An audit independence issue might be raised by the auditor's participation in management
advisory services engagements. Which of the following statements is most consistent with the
profession's attitude toward this issue?
a. Information obtained as a result of a consulting engagement is confidential to that engagement
and should not influence performance of the attest function.
b. The decision as to loss of independence must be made by the client based on the facts of the
particular case.
c. The auditor should not make management decisions for an audit client.
d. The auditor who is asked to review management decisions is also competent to make these
decisions and can do so without loss of independence. (AICPA ADAPTED)

a 13. The AICPA Code of Professional Conduct states, in part, that a CPA should maintain integrity and
objectivity. Objectivity in the Code refers to a CPA's ability
a. To maintain an impartial attitude on all matters that come under the CPA's review.
b. To independently distinguish between accounting practices that are acceptable and those that are
not.
c. To be unyielding in all matters dealing with auditing procedures.
d. To independently choose between alternate accounting principles and auditing standards.
(AICPA ADAPTED)

c 14. The AICPA Code of Professional Conduct states that a CPA shall not disclose any confidential
information obtained in the course of a professional engagement except with the consent of his or
her client. In which of the situations that follow would disclosure by a CPA be in violation of the
Code?
a. Disclosing confidential information to properly discharge the CPA's responsibilities in accordance
with the profession's standards.
b. Disclosing confidential information in compliance with a subpoena issued by a court.
c. Disclosing confidential information to another accountant interested in purchasing the CPA's
practice.
d. Disclosing confidential information in a review of the CPA's professional practice by a peer
review team. (AICPA ADAPTED)

a 15. Which of the following fee arrangements is in violation of the AICPA Code of Professional
Conduct?
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 the outcome of a bankruptcy proceeding.
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. (AICPA ADAPTED)

a 16.Which of the following is prohibited by the AICPA Code of Professional Conduct?


a. Use of a firm name that indicates specialization.
b. Practice of public accounting in the form of a professional corporation.
c. Use of the partnership name for a limited period by one of the partners in a public accounting
firm after the death or withdrawal of all other partners.
d. Holding 10 of 1,000 outstanding shares as an investment in a commercial corporation that
performs bookkeeping services. (AICPA ADAPTED)

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b 17. Which organizations operate to enforce ethical conduct among certified public accountants?
a. The SEC and state boards of accountancy.
b. The AICPA, state societies of CPAs, and state boards of accountancy.
c. The AICPA, state societies of CPAs, and the SEC.
d. The National Association of State Boards of Accountancy.

a 18. Cases involving ethical misconduct reach the Joint Trial Board if
a. Both the AICPA or state society of CPAs concur on their findings, but do not issue a joint
administrative reprimand.
b. The AICPA refers the case owing to its own backlog of ethics cases.
c. The state board of accountancy disagrees with a ruling by either the AICPA or the state society of
CPAs.
d. The case has national implications.

d 19. The Principles of the AICPA's Code of Professional Conduct


a. Are enforceable on AICPA members.
b. Derive their authority from state boards of accountancy.
c. Include the Code's Rules of Conduct.
d. Express each member's responsibilities to the public, to clients, and to colleagues in the
profession.

d 20. Which of the following describes most completely how the profession defines independence?
a. Performing an audit from the public's point of view.
b. Avoiding the appearance of a significant interest in an audit client's interests.
c. Resisting a clients reluctance to reveal evidence.
d. Accepting responsibility to act professionally and in accordance with a professional Code of
Conduct.

b 21. Which of the following publications does not qualify as a statement of generally accepted
accounting principles under the Code of Professional Conduct?
a. Accounting interpretations issued by the FASB.
b. Accounting interpretations issued by the AICPA.
c. AICPA Accounting Research Bulletins.
d. Statements of Financial Accounting Standards issued by the FASB.

c 22. Which of the following is required for a firm's letterhead to include Member of the American
Institute of Certified Public Accountants?
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.

b 23. In which of the following circumstances would a CPA be bound to refrain from disclosing
confidential information obtained during 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 information.
c. Confidential client information is made available 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.

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b 24. Richard, CPA, performs accounting services for Norton Corporation. Norton wishes to offer
shares to the public and asks Richard to audit the financial statements. Richard refers Norton to
Cruz, CPA, who is more competent in the area of registration statements. Cruz performs the audit
of Norton's financial statements and subsequently thanks Richard for the referral by giving
Richard a portion of the audit fee. Richard accepts the fee. Who, if anyone, has violated
professional ethics?
a. Only Richard.
b. Both Richard and Cruz.
c. Only Cruz.
d. Neither Richard nor Cruz.

d 25. The AICPA Code of Professional Conduct would be violated if a member accepted a fee for
services and the fee was
a. Fixed by a public authority.
b. Based on a price quotation submitted in competitive bidding.
c. Based on the result of judicial proceedings.
d. Payable after a specified finding was attained.

d 26. Inclusion of which of the following statements in a CPA's advertisement is not acceptable under
the AICPA Code of Professional Conduct?
a. Paul Fall
Certified Public Accountant
Fluency in Spanish and French
b. Paul Fall
Certified Public Accountant
Tax Specialist
c. Paul Fall
Certified Public Accountant
Free Consultation
d. Paul Fall
Certified Public Accountant
Endorsed by the AICPA

a 27. Which of the following is prohibited by the AICPA Code of Professional Conduct?
a. A firm that designates itself Members of the AICPA when one partner has been expelled from
the AICPA.
b. Practice of public accounting in the form of a professional corporation.
c. Use of the partnership name for a limited period by one of the partners in a public accounting
firm after the death or withdrawal of all other partners.
d. Holding as an investment 10 of 1,000 outstanding shares in a commercial corporation that
performs bookkeeping services.

SHORT ANSWER

1. Name the four instances in which litigation would impair auditor independence.

Answer:
Litigation by management alleging deficiencies in audit work.
Litigation by the auditor alleging management fraud or deceit.

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An expressed intent by management to commence litigation alleging deficiencies in
audit work.
Litigation unrelated to audit work but material nevertheless either to the firms or to
the clients financial statements.

2. Address the ways that the SEC judges independence in a relationship or service.

Answer:

To judge independence, the SEC considers four general issues. Whether a relationship or a
service:
Creates a mutual or conflicting interest.
Places the auditor in the position of auditing his or her own work.
Results in the auditor acting as a clients management or employee.
Places the auditor in the position of acting as the clients advocate.

3. Describe the purpose of Rule 302 as it pertains to AICPA members.

Answer:
Rule 302 prohibits fee arrangements with audit and attest clients whereby no fee is paid unless a
particular outcome is attained or the fee is contingent upon a particular outcome, the intent being
to remove AICPA members from potentially compromising conflicts of interest. Rule 302 offers
several opportunities for AICPA members to enter into contingent fee arrangements with
nonattest service clients.

4. Compare and contrast the successor auditor and the predecessor auditor.

Answer:
A successor auditor is one who has accepted an engagement or been invited to submit a proposal,
and places the burden on the successor to initiate communication with the predecessor auditor, the
auditor precedes the successor auditor.

5. Describe the two methods of self-regulation that is used to monitor public accounting firms
standards of quality control and quality review.

Answer:
Today, self-regulation is achieved through two means:
Quality control the internal policies and procedures a firm designs to assure
consistent performance and achievement across engagements.
Peer review/Quality review an independent outside review of a firms quality
control performed by practitioners not otherwise employed by the firm reviewed.

PROBLEMS

1. For each of the following five elements of quality control you are required to define the element
of quality control and also to give one example of quality control policies.

a. Independence, Integrity, and Objectivity


b. Personnel Management
c. Acceptance and Continuance of Clients

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d. Engagement Performance
e. Monitoring

Answer:
Note - examples may vary among students.

a. Independence, Integrity, and Objectivity Establish policies to provide reasonable


assurance that all staff are independent of attest clients to the extent required by the
AICPA Code of Professional Conduct.
Example Require that all staff identify attest clients in which they own securities.
b. Personnel Management Establish policies for hiring, advancement, assigning
personnel to engagements, and professional development.
Example Designate a staff member to assign personnel to engagements. Base
assignments on engagement needs and on staff career development.
c. Acceptance and Continuance of Clients Establish policies to preclude accepting or
continuing services for managements that lack integrity.
Example Outsource background checks for all proposed clients management.
d. Engagement Performance Establish polices for planning, performing, supervising,
reviewing, documenting, and communicating the results of each engagement.
Example Assign staff to review planning memos, working papers, and reports, and
designate a consulting partner for each industry the firm serves.
e. Monitoring Establish policies for monitoring compliance with the firms quality
control policies and procedures.
Example Assign an assessment director to document quality control compliance.

2. Name and define the six Principles of Professional Conduct.

Answer:

a. Responsibilities In carrying out their responsibilities as professional, members should


exercise sensitive professional and moral judgment in all other activities.
b. The Public Interest Members should accept the obligation to act in a way that will
serve the public interest, honor the public trust, and demonstrate commitment to
professionalism.
c. Integrity To maintain and broaden public confidence, members should perform all
professional responsibilities with the highest sense of integrity.
d. Objectivity and Independence A member should maintain objectivity and be free of
conflicts of interest in discharging professional responsibilities. A member in public
practice should be independent in fact and appearance when providing auditing and other
attestation services.
e. Due Care A member should observe the professions technical and ethical standards,
strive continually to improve competence and the quality of services, and discharge
professional responsibility to the best of the members ability.
f. Scope and Nature of Services A member in public practice should observe the Code
of Professional Conduct in determining the scope and nature of services to be provided.

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