2.4

Question 1

Audit engagement team members should remain alert for evidence of noncompliance with which of the following relevant ethical requirements?

Answer 1

Performing professional responsibilities with the highest sense of integrity.

“All members should perform all professional responsibilities with the highest sense of integrity to maintain public confidence. Integrity requires a member to be honest and candid within the limits of client confidentiality” (Integrity Principle, Code of Professional Conduct).

Question 2

A CPA is permitted to disclose confidential client information without the consent of the client to

I. Another CPA firm if the information concerns suspected tax return irregularities
II. A state CPA society voluntary peer review board

Answer 2

II only.

Under the Confidential Client Information Rule, a CPA may reveal confidential information without the client’s permission for a state board- or state society-sponsored peer review. Identifying information revealed to the review team is precluded from disclosure. However, a CPA may not disclose information to another CPA firm without the client’s permission or unless pursuant to a valid subpoena.

Question 3

Which of the following reports may be issued only by an accountant who is independent of a client?

Answer 3

Standard report on an examination of a financial forecast.

A member in public practice must be independent in the performance of professional services as required by standards issued by bodies designated by the AICPA Council. These standards include Statements on Standards for Attestation Engagements, which apply to, among other things, prospective financial statements (forecasts and projections). Thus, the Independence Rule and the SSAEs require a practitioner to be independent when performing an examination of a financial forecast.

Question 4

The Confidential Client Information Rule is violated when a member in public practice

Answer 4

Provides client profit and loss percentages to a trade association without the client’s consent.

Prior to disclosing confidential client profit and loss percentages to a trade association, the CPA must have specific client consent.

Question 5

A cooling-off period of how many years is required before a member of an issuer’s audit engagement team may begin working for the registrant in a key position?

Answer 5

one year.

The SEC prohibits a member of an issuer’s audit engagement team from working for the registrant (the issuer) in a key position within 1 year of participating in the audit of that issuer.

Question 6

An issuer may hire an employee of a registered public accounting firm who served on the audit engagement team within the previous year for which of the following positions?

Answer 6

Staff accountant.

Under SEC independence regulations, an accounting firm may not be independent with respect to an audit client if a former partner, principal, shareholder, or professional employee accepts employment with a client. Independence is impaired if (s)he (1) has a continuing financial interest in the firm or (2) is in a position to influence the firm’s operations or financial policies. Moreover, an accounting firm is not independent if a CEO, CFO, controller, or person in an equivalent position for an issuer was (1) employed by that firm and (2) participated in any capacity in the audit of that issuer during the year before the beginning of the audit. Accordingly, a staff accountant’s employment by the client does not impair independence. Such an individual does not have a continuing financial interest in the firm or the ability to influence its operations or policies.

Question 7

Competence as an independent auditor includes all of the following except

Answer 7

Warranting the infallibility of the work performed.

The auditor is not a guarantor. The auditor’s responsibility is to express (or disclaim) an opinion on whether the financial statements, taken as a whole, are presented fairly. The audit is planned and performed to provide reasonable, but not absolute, assurance that the financial statements are not materially misstated.

Question 8

The AICPA Code of Professional Conduct applicable to members in public practice

Answer 8

Establishes standards for auditor independence, integrity, and objectivity.

The Code states Rules for auditor independence, integrity and objectivity, professional standards, responsibilities to clients, and other responsibilities.

Question 9

The AICPA Code of Professional Conduct does not include enforceable Rules of Conduct on which of the following?

Answer 9

Responsibilities to colleagues.

The Code previously included two rules regarding colleagues, but they were deleted after threats of antitrust actions against the profession by the Federal Trade Commission and the U.S. Justice Department. The principles express the profession’s recognition of its responsibilities to colleagues as well as to the public and clients, but adherence to them is not mandatory.

Question 10

The auditor’s opinion refers to U.S. generally accepted accounting principles (U.S. GAAP). Which of the following best describes U.S. GAAP?

Answer 10

Principles issued by bodies designated by the Council of the AICPA.

GAAP are issued by bodies designated by the AICPA Council in accordance with the Compliance with Standards and Accounting Principles Rules of Conduct. For nongovernmental financial accounting purposes, these standards setters include the FASB for U.S. GAAP and the International Accounting Standards Board (IASB) for international financial reporting standards. Moreover, pronouncements of the SEC must be followed by registrants.

Question 11

According to the AICPA Code of Professional Conduct, under which of the following circumstances may a CPA receive a contingent fee for services?

Answer 11

Representing a client in an IRS examination of the client’s federal income tax return.

A contingent fee is permitted for representing a client in an IRS examination by a revenue agent of the client’s federal (or state) income tax return. A contingent fee also is permitted for representing a client who is (1) seeking a private letter ruling from the IRS or (2) lobbying with regard to the drafting of a statute or regulation.

Question 12

Advertising or other forms of solicitation that are false, misleading, or deceptive are not in the public interest, and AICPA members in public practice shall not seek to obtain clients in such a manner. Such activities include all the following except those that

Answer 12

Indicate the CPA’s educational and professional attainments.

Advertising and solicitation are acceptable if they do not involve falsehood or deception.

Question 13

Under the ethical standards of the profession, which of the following business relationships would generally not impair an auditor’s independence?

Answer 13

Advisor to a client’s board of trustees.

Independence is not impaired if the auditor’s role is advisory.

Question 14

Which of the following acts by a CPA is a violation of professional standards regarding the confidentiality of client information?

Answer 14

Releasing financial information to a local bank with the approval of the client’s mail clerk.

The Confidential Client Information Rule states, “A member in public practice shall not disclose any confidential client information without the specific consent of the client.” The consent of the client was not obtained because a mail clerk is not the client. A client is (1) a person or entity that engages the CPA to perform services or (2) a person or entity with respect to which the services are performed.

Question 15

Which of the following is required for a CPA firm to designate itself as “Members of the American Institute of Certified Public Accountants” on its letterhead?

Answer 15

All CPA owners must be members.

The Form of Organization and Name Rule states that a firm may not use the quoted designation unless all of its CPA owners are members of the AICPA.

Question 16

When Congress passed the Sarbanes-Oxley Act of 2002, it imposed greater regulation on public companies and their auditors and required increased accountability. Which of the following is not a provision of the act?

Answer 16

Audit firms must be rotated on a periodic basis.

The act requires rotation of the lead audit or coordinating partner and the reviewing partner on audits of public clients every 5 years. However, the act does not require the rotation of audit firms.

Question 17

Which of the following rules of the AICPA Code of Professional Conduct must be observed only by a member who is in public practice?

Answer 17

Independence.

Public practice consists of the performance of professional services for a client by an AICPA member or his or her firm. Professional services include, but are not limited to, services for which standards are issued by bodies designated by the AICPA Council. A client is (1) any person or entity, other than the member’s employer, that engages the member to perform professional services or (2) a person or entity with respect to which the services are performed.
NOTE: An employer does not include (1) an entity in public practice or (2) governments if certain requirements are met. The Independence Rule explicitly applies only to a member in public practice. Thus, it is limited to professional services performed for a client.

Question 18

Richard, CPA, performs compilation services for Norton Corporation, a nonpublic entity. The compilation reports issued by Richard disclose lack of independence and are not used by third parties. Richard has accepted a commission from a software company for recommending its products to Norton. The commission agreement was disclosed to Norton. Richard also refers Norton to Cruz, CPA, who is more competent with respect to engagements involving the industry in which Norton operates. Cruz performs an audit of Norton’s financial statements and subsequently remits to Richard a portion of the fee collected. The referral fee agreement was likewise disclosed to Norton. Richard accepts the fee. Who, if anyone, has violated the Code of Professional Conduct?

Answer 18

Neither Richard nor Cruz.

A commission is “compensation, except a referral fee, for recommending or referring any product or service to be supplied by another person” (FTC Order dated August 3, 1990). Receipt of a disclosed commission is prohibited only if the CPA performs for the client an audit, a review, a compilation when the report will be used by third parties and the report does not disclose the CPA’s independence, or an examination of prospective financial information. A referral fee is “compensation for recommending or referring any service of a CPA to any person” (FTC Order cited above). Referral fees are allowed if they are disclosed to the client. Consequently, Richard has not violated the Code by accepting either the disclosed commission or the disclosed referral fee. Cruz has not violated the Code by paying the disclosed referral fee.

Question 19

Fact Pattern:
A CPA firm was purchased by a public company. The acquirer performs other professional services and has banking, insurance, and brokerage subsidiaries. The owners and employees became employees of a subsidiary. Also, the previous owners formed a new CPA firm that provides attest services. It leases employees, offices, and equipment from the parent, which also provides advertising, billing, and collection services.
Independence is not impaired when

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Answer 19

A bank subsidiary in the consolidated group provides asset custody services in the ordinary course of business to an attest client of the new CPA firm.

Other entities in the consolidated group and their employees may not be (1) promoters, (2) underwriters, (3) directors, (4) officers, or (5) voting trustees of an attest client. However, with these exceptions, indirect superiors and other consolidated entities may provide services to an attest client that a member could not without impairing independence. For example, a bank’s provision of trustee and asset custody services in the ordinary course of business does not impair independence if the bank is not subject to the independence rules in their entirety (e.g., because it is not significantly influenced by a direct superior).

Question 20

When a CPA is associated with financial statements that do not comply with promulgated GAAP because the statements would be misleading without the departure, the CPA is not required to disclose

Answer 20

The reason the departure does not have a material effect on the statements.

Under the Accounting Principles Rule, a CPA who performs services that require representations of conformity with promulgated GAAP is required to describe (1) the departure, (2) the approximate effects of the departure (if practicable), and (3) the reasons compliance would result in misleading financial statements. But this requirement applies only if the effect on the statements or data is material.