Question 1

The members of a client's "audit committee" should be:

Accepted Answer

A) members of management. 
B) directors who are not a part of company management. 
C) non-directors and non-managers. 
D) directors and managers. 
A) members of management. 
B) directors who are not a part of company management. 
C) non-directors and non-managers. 
D) directors and managers.

Question 2

Ethical Rulings are: I.explanations relating to broad hypothetical circumstances.
II)not enforceable, but one must justify departure.
III)explanations relating to specific factual circumstances.

Accepted Answer

A) I and II 
B) I and III 
C) II and III 
D) I, II, and III 
A) I and II 
B) I and III 
C) II and III 
D) I, II, and III

Question 3

The CPA must not subordinate his or her professional judgment to that of others in any:

Accepted Answer

A) engagement. 
B) audit engagement. 
C) engagement excluding tax services. 
D) engagement where the opinion of a specialist is used. 
A) engagement. 
B) audit engagement. 
C) engagement excluding tax services. 
D) engagement where the opinion of a specialist is used.

Question 4

Under the AICPA's Code of Professional Conduct, CPAs are prohibited from offering audit clients a discount for referring a prospective client even if they are disclosed.

Accepted Answer

A) True 
 B)False

Question 5

Under Rule 505, Form of Organization and Name, a CPA firm may use any name as long as it is not misleading.

Accepted Answer

A) True 
 B)False

Question 6

In the AICPA Code of Professional Conduct, interpretations of rules are more specific than ethical rulings.

Accepted Answer

A) True 
 B)False

Question 7

CPAs may provide bookkeeping services to their private company audit clients, but there are a number of conditions that must be met if the auditor is to maintain independence.Which of the following conditions is not necessary?

Accepted Answer

A) The CPA must not assume a management role or function. 
B) The client must hire an external CPA to approve all of the journal entries prepared by the auditor. 
C) The auditor must comply with GAAS when auditing work prepared by his/her firm. 
D) The client must accept responsibility for the financial statements. 
A) The CPA must not assume a management role or function. 
B) The client must hire an external CPA to approve all of the journal entries prepared by the auditor. 
C) The auditor must comply with GAAS when auditing work prepared by his/her firm. 
D) The client must accept responsibility for the financial statements.

Question 8

An example of an "indirect ownership interest in a client" would be ownership of a client's stock by a member's:

Accepted Answer

A) dependent child. 
B) spouse. 
C) non-dependent grandfather. 
D) All of the above are examples of indirect ownership. 
A) dependent child. 
B) spouse. 
C) non-dependent grandfather. 
D) All of the above are examples of indirect ownership.

Question 9

One of the AICPA's Ethical Principles deals with the public interest.It states that members should accept the obligation to act in a way that will:

Accepted Answer

A)    
B)    
C)    
D)    
A)    
B)    
C)    
D)

Question 10

A member in public practice shall neither receive from, nor pay to, a client a commission when the member or member's firm also performs certain services for that client.Are commissions allowed if the CPA performs:

Accepted Answer

A)    
B)    
C)    
D)    
A)    
B)    
C)    
D)

Question 11

An auditor's independence is considered impaired if the auditor has:

Accepted Answer

A) an immaterial, indirect financial interest in a client. 
B) an outstanding $8,000 balance on a credit card issued by a client. 
C) an automobile loan from a client bank, collateralized by the automobile. 
D) a joint, closely held business investment with the client that is material to the auditor's net worth. 
A) an immaterial, indirect financial interest in a client. 
B) an outstanding $8,000 balance on a credit card issued by a client. 
C) an automobile loan from a client bank, collateralized by the automobile. 
D) a joint, closely held business investment with the client that is material to the auditor's net worth.

Question 12

Under the AICPA independence rules, independence can be considered impaired when:

Accepted Answer

A) billed fees remain unpaid for professional services for more than ninety days. 
B) a client in bankruptcy has unpaid fees for more than one year. 
C) there is litigation by the client related to the auditor's tax or other nonaudit services. 
D) when there is a lawsuit by the client claiming deficiencies in the previous year's audit. 
A) billed fees remain unpaid for professional services for more than ninety days. 
B) a client in bankruptcy has unpaid fees for more than one year. 
C) there is litigation by the client related to the auditor's tax or other nonaudit services. 
D) when there is a lawsuit by the client claiming deficiencies in the previous year's audit.

Question 13

A six-step approach is often used to resolve an ethical dilemma.The first step in this process is to:

Accepted Answer

A) identify the alternative actions available. 
B) identify the ethical issues from the facts. 
C) determine who will be affected by the outcome of the dilemma. 
D) obtain the relevant facts. 
A) identify the alternative actions available. 
B) identify the ethical issues from the facts. 
C) determine who will be affected by the outcome of the dilemma. 
D) obtain the relevant facts.

Question 14

A CPA sole practitioner purchased stock in a client corporation and placed it in a trust as an educational fund for the CPA's minor child.The trust securities were not material to the CPA but were material to the child's personal net worth.Would the independence of the CPA be considered to be impaired with respect to the client?

Accepted Answer

A) Yes, because the stock is a direct financial interest 
B) Yes, because the stock is an indirect financial interest that is material to the CPA's child 
C) No, because the CPA does not have a direct financial interest in the client 
D) No, because the CPA does not have a material indirect financial interest in the client 
A) Yes, because the stock is a direct financial interest 
B) Yes, because the stock is an indirect financial interest that is material to the CPA's child 
C) No, because the CPA does not have a direct financial interest in the client 
D) No, because the CPA does not have a material indirect financial interest in the client

Question 15

Describe an ethical dilemma that an auditor or an accountant might face in his or her business career, then illustrate how the auditor or accountant might use the six-step approach presented in the text to resolve that dilemma.Be specific.

Accepted Answer

An ethical dilemma is a situation a pers

Question 16

Each of the following situations involves a possible violation of the rule on independence.For each situation, (1)decide whether the Code of Professional Conduct has been violated, and (2)briefly explain how the situation violates (or does not violate)the Code of Professional Conduct.
a.Harry Brown is a partner in the Topeka office of Hedley & Co., CPAs.Harry's brother is employed in an audit-sensitive position by Jensen Appliances, a publicly held company in Kansas.Jensen Appliances is one of Hedley & Co.'s audit clients.Neither Harry nor personnel from the Topeka office is involved in the audit of Jensen.
Violation?
 Yes No

Accepted Answer

a.No violation.Although partners in a CP

Question 17

Rule 301 of the AICPA's Code of Professional Conduct requires CPAs to maintain the confidentiality of client information.This rule would be violated if a CPA disclosed information without a client's consent as a result of a:

Accepted Answer

A) subpoena or summons. 
B) peer review. 
C) complaint filed with the trial board of the Institute. 
D) request by a client's largest stockholder. 
A) subpoena or summons. 
B) peer review. 
C) complaint filed with the trial board of the Institute. 
D) request by a client's largest stockholder.

Question 18

Which of the following represents all of the ways a CPA firm can be organized under Rule 505?

Accepted Answer

A) Proprietorships and partnerships 
B) Proprietorships, partnerships, and professional corporations 
C) Proprietorships, general partnerships, general corporations, professional corporations, limited liability companies, and limited liability partnerships if permitted by state law 
D) Single proprietorships, partnerships, professional corporations if permitted by state law, or regular corporations 
A) Proprietorships and partnerships 
B) Proprietorships, partnerships, and professional corporations 
C) Proprietorships, general partnerships, general corporations, professional corporations, limited liability companies, and limited liability partnerships if permitted by state law 
D) Single proprietorships, partnerships, professional corporations if permitted by state law, or regular corporations

Question 19

Which of the following services is not prohibited by the SEC whenever a CPA also audits the company?

Accepted Answer

A) Actuarial services 
B) Assisting the company in preparing certain SEC registration statements (e.g., 10-Q, 10-K) 
C) Investment banker services 
D) Bookkeeping services 
A) Actuarial services 
B) Assisting the company in preparing certain SEC registration statements (e.g., 10-Q, 10-K) 
C) Investment banker services 
D) Bookkeeping services

Question 20

For which of the following professional services must CPAs be independent?

Accepted Answer

A) Management advisory services 
B) Audits of financial statements 
C) Preparation of tax returns 
D) All three of the above 
A) Management advisory services 
B) Audits of financial statements 
C) Preparation of tax returns 
D) All three of the above

Exam 4: Professional Ethics

The members of a client's "audit committee" should be:

Ethical Rulings are: I.explanations relating to broad hypothetical circumstances. II)not enforceable, but one must justify departure. III)explanations relating to specific factual circumstances.

The CPA must not subordinate his or her professional judgment to that of others in any:

Under the AICPA's Code of Professional Conduct, CPAs are prohibited from offering audit clients a discount for referring a prospective client even if they are disclosed.

Under Rule 505, Form of Organization and Name, a CPA firm may use any name as long as it is not misleading.

In the AICPA Code of Professional Conduct, interpretations of rules are more specific than ethical rulings.

CPAs may provide bookkeeping services to their private company audit clients, but there are a number of conditions that must be met if the auditor is to maintain independence.Which of the following conditions is not necessary?

An example of an "indirect ownership interest in a client" would be ownership of a client's stock by a member's:

One of the AICPA's Ethical Principles deals with the public interest.It states that members should accept the obligation to act in a way that will:

A member in public practice shall neither receive from, nor pay to, a client a commission when the member or member's firm also performs certain services for that client.Are commissions allowed if the CPA performs:

An auditor's independence is considered impaired if the auditor has:

Under the AICPA independence rules, independence can be considered impaired when:

A six-step approach is often used to resolve an ethical dilemma.The first step in this process is to:

Describe an ethical dilemma that an auditor or an accountant might face in his or her business career, then illustrate how the auditor or accountant might use the six-step approach presented in the text to resolve that dilemma.Be specific.

Rule 301 of the AICPA's Code of Professional Conduct requires CPAs to maintain the confidentiality of client information.This rule would be violated if a CPA disclosed information without a client's consent as a result of a:

Which of the following represents all of the ways a CPA firm can be organized under Rule 505?

Which of the following services is not prohibited by the SEC whenever a CPA also audits the company?

For which of the following professional services must CPAs be independent?

The Demand for Audit and Other Assurance Services

The Cpa Profession

Audit Reports

Legal Liability

Audit Responsibilities and Objectives

Audit Evidence

Audit Planning and Analytical Procedures

Materiality and Risk

Internal Control, Control Risk, and Section 404 Audits

Fraud Auditing

The Impact of Information Technology on the Audit Process

Overall Audit Strategy and Audit Program

Audit of the Sales and Collection Cycle: Tests of Controls and Substantive Tests of Transactions

Audit Sampling for Tests of Controls and Substantive Tests of Transactions

Completing the Tests in the Sales and Collection Cycle: Accounts Receivable

Audit Sampling for Tests of Details of Balances

Audit of the Acquisition and Payment Cycle: Tests of Controls, Substantive Tests of Transactions, and Accounts Payable

Completing the Tests in the Acquisition and Payment Cycle: Verification of Selected Accounts

Audit of the Payroll and Personnel Cycle

Audit of the Inventory and Warehousing Cycle

Audit of the Capital Acquisition and Repayment Cycle

Audit of Cash and Financial Instruments

Completing the Audit

Other Assurance Services

Internal and Governmental Financial Auditing and Operational Auditing

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