2.01 - AICPA Code of Professional Conduct Flashcards
2.01 - AICPA Code of Professional Conduct:
Burrow & Co., CPAs, have provided annual audit and tax compliance services to Mare Corp. for several years. Mare has been unable to pay Burrow in full for services Burrow rendered 19 months ago. Burrow is ready to begin fieldwork for the current year’s audit. Under the ethical standards of the profession, which of the following arrangements will permit Burrow to begin the fieldwork on Mare’s audit?
A) Mar gives Burrow an 18-month note payable for the full amount of the past due fees before Borrow begins the audit
B) Mare commits to pay the past due fee in full before the audit report is issued
C) Mare engaged another firm to perform the fieldwork, and Burrow is limited to reviewing the workpapers and issuing the audit report
B) Mare commits to pay the past due fee in full before the audit report is issued
Independence is considered impaired if, on the date the report on the client’s financial statements for the current period is issued, fees remain unpaid for any professional services provided more than one year prior to the date of the report.
This includes fees that are billed or unbilled and any notes receivable that arise from the fees.
A two-year or an 18-month payment plan would still leave fees unpaid for services beyond the one year period as of the report issuance date.
Even when most of the
work is done by another CPA firm, the CPA issuing the report is bound by the independence rules.
2.01 - AICPA Code of Professional Conduct:
Which of the following statements is true regarding confidentiality?
A) An auditor may allow other accountants and the PCAOB to see confidential information in connection with a valid program of peer review.
B) Most states recognize auditor-client privilege.
C) An auditor may not provide confidential information to members of the auditor’s firm
who are not on the audit engagement team.
D) An auditor will generally refuse a request for confidential information made by the AICPA’s professional ethics division.
A) An auditor may allow other accountants and the PCAOB to see confidential information in connection with a valid program of peer review.
In general, the accountant may not disclose confidential information about a client to a third party without the client’s
permission.
Exceptions include submitting to a review of the CPA’s practice authorized by the AICPA, state society, or state Board of Accountancy.
The accountant must also comply with a valid subpoena or summons since most states do not recognize an auditor-client privilege.
There is nothing preventing a CPA from disclosing client information to a member of the CPA’s firm assuming there was a legitimate reason, with the understanding that the confidentiality requirements apply to that individual as
well.
2.01 - AICPA Code of Professional Conduct:
To which of the following parties may a CPA partnership provide its working papers without either the client’s consent or a lawful subpoena?
A) Neither the IRS nor the FASB
B) The IRS, not the FASB
C) Both the IRS and the FASB
D) The FASB, not the IRS
A) Neither the IRS nor the FASB
A CPA may provide working papers without the client’s consent only when complying with a lawful subpoena or when
cooperating with a quality control review of the CPA’s practice under AICPA, CPA society, or Board of Accountancy authorization.
It would not be appropriate to provide them to either the IRS or the FASB without the client’s permission
2.01 - AICPA Code of Professional Conduct:
Which of the following best describes the effect of a contingent fee arrangement on the auditor’s independence?
A) The contingent fee arrangement impairs independence.
B) The contingent fee arrangement does not impair independence if it is consistent with the registered public accounting firm’s quality control policies.
C) The contingent fee arrangement impairs independence unless approved by the client’s audit committee.
D) The contingent fee arrangement does not impair independence unless more than half of the fee is
subject to contingencies.
A) The contingent fee arrangement impairs independence.
Topic 1.500 of the AICPA Code of Ethics indicates that a CPA may not accept a contingent fee from a client for whom
the CPA performs an audit or review and may only perform a compilation if the lack of independence is disclosed.
2.01 - AICPA Code of Professional Conduct:
According to the AICPA Code of Professional Conduct, which of the following actions will impair independence?
A) Processing payroll for a client’s signature based on client recordkeeping.
B) Participating in the hiring or termination of a client’s employees.
C) Preparing client financial
statements based on information in a trial balance.
D) Assisting a client in drafting a stock-offering
document or memorandum.
B) Participating in the hiring or termination of a client’s employees.
Independence is impaired if the accountant assumes management responsibilities, which include making decisions
regarding the acquisition, use, or disposal of human, financial, and intangible resources. This would include hiring or
terminating client employees.
Preparing financial statements based on a client’s trial balance and processing payroll for a
client’s signature based on the client’s records are normal bookkeeping services that do not impair independence as long as the accountant is not making accounting policy decisions and does not have check signing authority.
Assisting a client in drafting a stock offering document or memorandum does not involve making management decisions or assuming management
responsibilities and does not impair independence.
2.01 - AICPA Code of Professional Conduct:
Which statement is true regarding a situation where an auditor agrees to become an employee of an audit client?
A) The leaving auditor must disclose all correspondence regarding possible employment within 30 days of
receiving a written offer
letter.
B) The audit team member must step down immediately from any supervisory role in the audit, but may continue for two weeks in a nonsupervisory role or until the end of the audit engagement, whichever is
shorter.
C) The audit firm
should consider modifying the audit plan after the auditor leaves.
D) The next annual audit must be separately reviewed by an audit firm professional uninvolved in the audit.
D) The next annual audit must be separately reviewed by an audit firm professional uninvolved in the audit.
When an audit client hires away a member of the audit engagement team, the next annual audit of that client performed by the audit firm must be separately reviewed by an audit firm professional uninvolved in the audit.
The auditor must be immediately removed from any role in the audit.
The audit team member must inform the audit firm of conversations with client about possible employment prior to leaving, and there is no requirement for full disclosure of all such correspondence.
The audit firm must modify the audit plan after the auditor leaves.
2.01 - AICPA Code of Professional Conduct:
Which of the following statements is (are) correct regarding a CPA employee of a CPA firm taking copies of information contained in client files when the CPA leaves the firm?
I. A CPA leaving a firm
may take copies of information contained in client files to assist another firm in serving that client.
II. A CPA leaving a firm
may take copies of information contained in client files as a method of gaining technical
expertise.
A) I only
B) Neither I nor II
C) Both I and II
D) II only
B) Neither I nor II
Working papers are the property of the CPA firm and taking them, or copies of information contained in the client file would not be appropriate for any reason without the permission of the firm.
In addition, since the working papers would contain information about clients that is considered confidential, the CPA would not be able to provide the information to another firm without the client’s permission.
2.01 - AICPA Code of Professional Conduct:
Which of the following statements best describes the ethical standard of the profession pertaining to advertising and solicitation?
A) A CPA may only solicit new clients through mass mailings.
B) There are no prohibitions regarding the manner in which CPAs may solicit new business.
C) A CPA may advertise in any manner that is not false, misleading, or deceptive.
D) All forms of advertising and solicitation are prohibited.
C) A CPA may advertise in any manner that is not false, misleading, or deceptive.
The only restriction on CPAs regarding advertising and other forms of solicitation is that it may not be false,
misleading, or deceptive.
Advertising and solicitation are not prohibited and are not limited to mass mailings.
Although there are not many restrictions, there are some restrictions on how a CPA may solicit new business
2.01 - AICPA Code of Professional Conduct:
According to the SEC, an auditor is not independent of its issuer audit client in which of the following situations?
A) The auditor’s cousin has an insurance policy obtained from the issuer before it became an audit client.
B) The auditor has an investment in an entity that has the ability to exercise significant influence
over the audit client.
C) The auditor’s grandparent was in an accounting role at the audit client and ended employment before
the period under audit began.
D) The auditor has an automobile loan at standard terms from the audit client that is collateralized by the
automobile.
B) The auditor has an investment in an entity that has the ability to exercise significant influence
over the audit client.
An investment in an entity that has an investment in a client entity that gives it the ability to exercise control over a second entity is considered equivalent to having a direct investment in the second entity. Any direct financial interest impairs independence.
An insurance policy would, at most, be considered an indirect financial interest. Held by a cousin, who might be considered a close family member but not an immediate family member, it would not impair independence.
A fully collateralized loan made to an auditor by a client institution, under normal terms, would not impair independence.
Since the grandfather’s employment ended prior to the beginning of the period under audit, independence would not be impaired.
2.01 - AICPA Code of Professional Conduct:
In which of the following circumstances would a covered member’s independence be impaired with respect to an
“issuer” client under PCAOB auditing standards?
A) The member belongs to a client golf club that requires members to acquire a share of the club’s debt securities.
B) The member is designated to serve as guardian of a friend’s children if the need arises, and the friend’s
estate, which would be held in trust for the children, holds significant stock ownership in a client entity.
C) The member’s spouse qualifies because of geographical residence to belong to a client’s credit union, and all transactions with the credit union are conducted under normal operating practices.
D) The member owns municipal utility bonds issued by a client, and the bonds are not material to the member’s wealth.
D) The member owns municipal utility bonds issued by a client, and the bonds are not material to the member’s wealth.
The auditor of an issuer may not have any direct financial interest in an audit client, including an investment in the
client’s bonds, regardless of whether or not it is material. Materiality is only relevant if the financial interest is indirect.
Until such time as the auditor becomes trustee of the estate, the auditor does not have an interest, direct or indirect, in the entity.
Being a member of a credit union would not impair a member’s independence as long as all transactions are conducted under normal operating practices.
Ownership of a share of a client golf club’s debt securities would not impair independence if required as a
prerequisite for membership.
2.01 - AICPA Code of Professional Conduct:
Which of the following acts by a CPA is a violation of professional standards regarding the confidentiality
of client information?
A) Allowing a review of professional practice without client authorization.
B) Responding to an enforceable subpoena.
C) Faxing a tax return to a loan officer at the request of the client.
D) Releasing financial
information to a local bank with the approval of the client’s mail clerk.
D) Releasing financial
information to a local bank with the approval of the client’s mail clerk.
A CPA must not reveal confidential information without client permission. A non-management employee, such as a mail clerk, is not authorized to give client permission.
2.01 - AICPA Code of Professional Conduct:
According to the ethical standards of the profession, which of the following acts generally is prohibited?
A) Accepting a contingent fee for representing a client in connection with obtaining a private letter ruling
from the Internal Revenue Service.
B) Issuing a modified
report explaining the CPA’s failure to follow a governmental regulatory agency’s standards when conducting an attest service for a client.
C) Revealing client tax returns to a prospective purchaser of the CPA’s practice.
D) Retaining client records after the client has demanded their return.
D) Retaining client records after the client has demanded their return.
According to the ethical standards of the profession, retaining client records after the client has demanded their return is generally prohibited.
Accepting a contingent fee for representing a client in connection with obtaining a private letter ruling from the IRS is not generally prohibited.
Issuing a modified report explaining the CPA’s failure to follow a governmental regulatory agency’s standards when conducting an attest service for a client is not generally prohibited.
Revealing client tax returns to a prospective purchaser of the CPA’s practice is not generally prohibited.
2.01 - AICPA Code of Professional Conduct:
Under the ethical standards of the profession, which of the following situations involving nondependent
members of an auditor’s family is most likely to impair the auditor’s independence?
A) A first cousin’s loan from a client.
B) A parent’s immaterial investment in a client.
C) A sibling’s loan to a director of a client.
D) A spouse’s employment with a client.
D) A spouse’s employment with a client.
The independence rules apply to the immediate family of a CPA, which includes the CPA’s spouse and dependents an
the employment of the CPA’s spouse by a client is likely to impair the CPA’s independence.
The same rules do not apply to close relatives, which include parents, siblings, or nondependent children.
A first cousin would not be considered part of the
immediate family
