A6 Becker Wrong answers M7-M9

Question 1

According to the profession’s ethical standards, an auditor would be considered independent in which of the following instances?

A.	 The client is the only tenant in a commercial building owned by the auditor.

B.	 The client owes the auditor fees for more than two years prior to the issuance of the audit report.

C.	 The auditor's checking account that is fully insured by a federal agency, is held at a client financial institution.

D.	 The auditor is the officially appointed stock transfer agent of a client.

Answer 1

Choice “C” is correct. Because the deposit account is fully insured, independence is not considered to be impaired.

Choice “A” is incorrect. If the client is the auditor’s only tenant, the auditor definitely has a financial interest in the client’s well being, and this situation impairs independence.

Choice “B” is incorrect. If fees are owed for more than one year, the auditor is considered to be a creditor of the client, and independence is impaired.

Choice “D” is incorrect. It has been held that an auditor who is appointed the stock transfer agent of a corporation is not considered to be independent because the functions of a stock transfer agent are similar to that of a manager of the client.

Question 2

If fees are owed for more than _ _ _ _ _ _ _ _ _ _ _ _ , the auditor is considered to be a creditor of the client, and independence is impaired.

Answer 2

ONE YEAR

Question 3

The spouse of a covered member of an accounting firm is in a permitted employment situation at an attest client and participates in the client’s employee stock ownership plan. According to the AICPA Code of Professional Conduct, which of the following actions is required of the spouse when beneficial financial interests are distributed?

A.	 The spouse must dispose of the shares as soon as practicable, but at most 30 days after the right to dispose is obtained.

B.	 The spouse must serve as a trustee for the share-based compensation arrangement to receive put options as part of the compensation arrangement.

C.	 The spouse must hold the shares for a minimum of 30 days after the right to dispose is obtained.

D.	 The spouse must not exercise any put option to require the employer to repurchase the beneficial financial interests until after 30 days from receipt.

Answer 3

Choice “A” is correct. According to the AICPA Code of Professional Conduct, when the spouse of a covered member is in a permitted employment situation at an attest client and participates in the client’s employee stock ownership plan (ESOP), the spouse must dispose of the shares as soon as practicable, but at most 30 days after the right to dispose is obtained.

Note: SEC Rules regarding ESOP are more restrictive and require the immediate family member to dispose the received publicly traded shares as soon as possible.

Choice “B” is incorrect. If the spouse is a trustee for the share-based compensation, then independence is impaired.

Choice “C” is incorrect. When the financial interests are distributed or when the immediate family member has a right to dispose of the financial interests, the spouse must dispose the shares no later than 30 days after the right to dispose is obtained.

Choice “D” is incorrect. The spouse should exercise the put option as soon as permitted.

Question 4

According to the Discreditable Acts Rule, what are some examples of discreditable acts?

Answer 4

• Negligence in preparing financial statements or records
• Failing to follow regulatory requirements in performing professional services
• Posting critical comments on social media about a client or client personnel
• Complaining about the pressures of the job
• Discriminating or harassing employment practices
• Failure to file one’s tax return or pay taxes
• Withholding client records
• Promoting or marketing the member’s abilities to provide professional services or makes claims about the member’s experience or qualifications in a manner that is false, misleading, or deceptive
• Failure to return records to a client after the client makes a demand
• A CPA solicits recent Uniform CPA Examination questions without written
  authorization from the AICPA.

Question 5

Title III (Corporate Responsibility) of the Sarbanes-Oxley Act of 2002 specifically notes that members of the audit committee are to be members of the issuer’s board of directors but are to otherwise be _ _ _ _ _ _ _ _ _ _ _ _ _.

Answer 5

Independent

NOTE: To qualify as independent, audit committee members may not accept compensation from the issuer for consulting or advisory services and may not be an affiliated person of the issuer.

Question 6

With respect to independance, fully collateralized loans made within the normal course of business, such as by a financial institution _ _ _ _ _ _ _ _ _ _ _ _ _ _ _.

Answer 6

do not impair independence.

Question 7

The requirement is that all _ _ _ _ _ _ __ _ correcting adjustments identified by the auditor be reflected in the financial statements.

Answer 7

material
.

NOTE: Immaterial adjustments are not required.

Question 8

The _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ , describes that a CPA should comply with the appropriate standards.

Answer 8

Compliance with Standards Rule

Note: A CPA who is engaged to perform a government audit neglects to follow certain government auditing requirements and discloses in the audit report the fact that such requirements were not followed and the reasons for it. In this case, the CPA may not necessarily have failed to follow the Compliance with Standards Rule because in extremely rare circumstances, a CPA may depart from certain government auditing requirements.

Question 9

A CPA that signs a document containing immaterial false and misleading information, or permits or directs another CPA to do so, has failed to follow the _ _ _ _ _ _ _ _ _ _ _ _ _ _ _.

Answer 9

Integrity and Objectivity Rule

Question 10

Per _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ of the Sarbanes-Oxley Act of 2002, corporate officials (which would include the chief executive officer, or CEO, and the chief financial officer, or CFO) must both sign certain representations regarding annual and quarterly financial reports filed with the U.S. Securities and Exchange Commission (SEC). The representations include that they have reviewed the report; that the report does not contain untrue statements or omit material information; that the report fairly presents in all material respects the financial condition and results of operations; that significant deficiencies, material weaknesses, and fraud have been disclosed to auditors and the audit committee; and that they are responsible for the establishment and effectiveness of internal controls.

Answer 10

Title III (Corporate Responsibility)

Question 11

What are 3 components of a code of ethics established by an issuer for its senior officers to establish standards?

Answer 11

• Ethical handling of any conflicts of interest.
• Compliance with applicable laws and regulations.
• Timely disclosures of financial information.

Question 12

What are the ethical principles of Generally accepted government auditing standards (GAGAS)?

Answer 12

• Serving the public interest
• Integrity
• Objectivity
• Proper use of government information, resources, and positions
• Professional Behavior

Question 13

_ _ _ _ _ _ _ _ _ _ includes independence of mind and appearance when providing audits, maintaining an attitude of impartiality, having intellectual honesty, and being free of conflicts of interest.

Answer 13

Objectivity

Question 14

The _ _ _ _ _ _ _ _ _ _ _ _ _ is defined as the collective well-being of the community of people and entities served by the auditor. Auditor services should be designed to meet those needs.

Answer 14

public interest

Question 15

_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ includes an auditor’s honest effort in the performance of professional services in accordance with the relevant technical and professional standards.

Answer 15

Professional behavior

Question 16

_ _ _ _ _ _ _ _ _ _ _ _ _ _ includes auditors conducting their work with an attitude that is objective, fact-based, nonpartisan, and non-ideological with regard to the audited entities and users of the auditor’s reports.

Answer 16

Integrity

Question 17

A government internal audit function is presumed to be free from organizational independence impairments for reporting internally when the head of the organization:

A.	 Is not accountable to those charged with governance.

B.	 Is a line-manager of the unit under audit.

C.	 Is removed from political pressures to conduct audits objectively, without fear of political reprisal.

D.	 Performs auditing procedures that are consistent with generally accepted accounting principles.

Answer 17

Choice “C” is correct. A government internal audit function is presumed to be free from organizational independence impairments for reporting internally when the head of the organization is removed from political pressures to conduct audits objectively, without fear of political reprisal.

Choice “A” is incorrect. Accountability to those charged with governance generally increases the objectivity of the internal auditors.

Choice “B” is incorrect. If the head of the organization is also the line manager under the current audit, there is a potential conflict of interest with these two roles and potential pressure on behalf of the internal auditor to provide a more favorable audit opinion.

Choice “D” is incorrect. The audit procedures used for the government audit should be consistent with generally accepted government auditing standards (GAGAS), not GAAP.

Question 18

The Generally Accepted Government Auditing Standards Framework for Independence identifies an inappropriate influence on auditor judgment or behavior caused by a financial or other interest as a:

A.	 Self-interest threat.

B.	 Bias threat.

C.	 Management participation threat.

D.	 Self-review threat.

Answer 18

LEARN THESE THREATS

Choice “A” is correct. The self-interest threat is the threat that a financial or other interest will inappropriately influence an auditor’s judgment or behavior.

Choice “B” is incorrect. Bias threat is the threat that an auditor will, as a result of political, ideological, social, or other convictions, take a position that is not objective.

Choice “C” is incorrect. Management participation threat is the threat that results from an auditor’s taking on the role of management or otherwise performing management functions on behalf of the entity undergoing an audit.

Choice “D” is incorrect. The self-review threat is the threat that an auditor or audit organization that has provided nonaudit services will not appropriately evaluate the results of previous judgments made or services performed as part of the nonaudit services when forming a judgment significant to an audit.

Question 19

The auditor should determine whether providing a nonaudit service would create a threat to independence, either by itself or in aggregate with other nonaudit services provided, with respect to any audit it performs in accordance with Generally Accepted Government Auditing Standards. A critical component of this determination is:

A.	 Consideration of management’s ability to effectively oversee the nonaudit service to be performed.

B.	 Ability to remove the auditor involved in the nonaudit service from the audit team.

C.	 Ability of a professional staff member who was not a member of the audit team to review the work performed.

D.	 Ability of outside auditors to independently review the nonaudit service.

Answer 19

Choice “A” is correct. A critical component of the determination of whether providing a nonaudit service would create a threat to independence is consideration of management’s ability to effectively oversee the nonaudit service to be performed.

Choice “B” is incorrect. Removal of an auditor involved in a nonaudit service is an important safeguard to address a threat to independence but does not represent a critical component of determining whether a nonaudit service would create a threat to independence.

Choice “C” is incorrect. Use of a professional staff member who was not a member of the audit team to review the work performed is an important safeguard to address a threat to independence but does not represent a critical component of determining whether a nonaudit service would create a threat to independence.

Choice “D” is incorrect. Use of outside auditors to independently review nonaudit services is an important safeguard to address a threat to independence but does not represent a critical component of determining whether a nonaudit service would create a threat to independence.

Question 20

Carlisle & Company is auditing the Town of Dunderhead in accordance with Generally Accepted Government Auditing Standards (GAGAS) and has determined that no one on the city’s staff is competent enough to maintain and close the accounting records of the city. Believing that he is performing a service for his client, the audit manager takes possession of the books and records, posts transactions, develops trial balances and produces audited financial statements in time to fully comply with statutory filing requirements. The audit manager has created a threat to independence identified by GAGAS that is defined as:

A.	 Self-review threat.

B.	 Self-interest threat.

C.	 Familiarity threat.

D.	 Management participation threat.

Answer 20

Choice “D” is correct. The assumption of accounting duties and taking possession of the books and records represents a management participation threat. Management participation threat is the threat that results from an auditor’s taking on the role of management or otherwise performing management functions on behalf of the entity undergoing an audit.

Choice “A” is incorrect. The self-review threat is the threat that an auditor or audit organization that has provided nonaudit services will not appropriately evaluate the results of previous judgments made or services performed as part of the nonaudit services when forming a judgment significant to an audit.

Choice “B” is incorrect. The self-interest threat is the threat that a financial or other interest will inappropriately influence an auditor’s judgment or behavior.

Choice “C” is incorrect. Familiarity threat is the threat that aspects of a relationship with management or personnel of an audited entity, such as a close or long relationship, or that of an immediate or close family member, will lead an auditor to take a position that is not objective.

Question 21

Safeguards to threats to independence identified by Generally Accepted Governmental Auditing Standards are generally not effective to mitigate:

A.	 Management participation threat.

B.	 Self-review threat.

C.	 Undue influence threat.

D.	 Self-interest threat.

Answer 21

Choice “A” is correct. If an auditor were to assume management responsibilities for an audited entity, the management participation threat created would be so significant that no safeguards could reduce the threat to an acceptable level.

Choice “B” is incorrect. The self-review threat might be mitigated by involving another audit organization to perform or reperform part of the audit.

Choice “C” is incorrect. The undue influence threat might be mitigated by having a professional staff member who was not a member of the audit team review the work performed.

Choice “D” is incorrect. The self-interest threat might be mitigated by removing the individual from an audit in which that individual’s financial or other interest or relationships pose a threat to independence.

Question 22

According to the U.S. Department of Labor, an auditor of an employee benefit plan would be considered independent if:

A.	 The auditor is committed to acquire a material indirect financial interest in the plan sponsor.

B.	 A member of the auditor's firm is an investment advisor to the plan.

C.	 The auditor's firm maintains financial records for the plan.

D.	 An actuary associated with the auditor's firm renders services to the plan.

Answer 22

Choice “D” is correct. According to the U.S. Department of Labor, an auditor of an employee benefit plan would be considered independent if an actuary associated with the auditor’s firm renders services to the plan.

Choice “A” is incorrect. An auditor of an employee benefit plan independence would be considered impaired if the auditor is committed to acquire a material indirect financial interest in the plan sponsor.

Choice “B” is incorrect. An auditor of an employee benefit plan independence would be considered impaired if a member of the auditor’s firm is an investment advisor to the plan.

Choice “C” is incorrect. An auditor of an employee benefit plan independence would be considered impaired if the auditor’s firm maintains financial records for the plan.

Question 23

In which of the following situations would an auditor who is rendering an audit opinion on the financial statements of an employee benefit plan that will be filed with the Department of Labor be considered independent?

A.	 The auditor's spouse has obtained an immaterial direct financial interest in the employee benefit plan.

B.	 A member of the auditor's firm was an investment advisor to the employee benefit plan during the period of professional engagement but was not providing services as of the date of the opinion.

C.	 A member of the auditor's firm was a voting trustee of the plan in a prior year but has since disassociated from the plan and did not participate in auditing the financial statements of the plan.

D.	 The auditor obtained a material indirect financial interest in the employee benefit plan.

Answer 23

Choice “C” is correct. Independence would not be impaired when a member of the auditor’s firm was a voting trustee of the plan in a prior year but has since disassociated from the plan and did not participate in auditing the financial statements of the plan.

Choice “A” is incorrect. Independence would be impaired if the auditor’s spouse has obtained an immaterial direct financial interest in the employee benefit plan. Any direct financial interest in the employee benefit plan by the covered member or the covered member’s immediate family impairs independence.

Choice “B” is incorrect. Independence would be impaired when a member of the auditor’s firm was an investment advisor to the employee benefit plan during the period of professional engagement.

Choice “D” is incorrect. Independence would be impaired if the auditor obtained a material indirect financial interest in the employee benefit plan.