Audit Chapter 2

Question 1

What is a contingent fee

Answer 1

A fee dependent on specified findings

Question 2

An accountant with a trade name “Pay Less Tax Services” may be in violation with the AICPA code of professional conduct?

Answer 2

Yes, because members may use a trade name as long as it is not misleading or deceptive. ‘Pay Less’ may be misleading for tax services.

Question 3

A violation of professional ethics may occur when a CPA

Answer 3

is a sole shareholder, in a professional accountancy cooperation, and uses the designation “and company” in the firm title.

the designation is misleading because it may be interpreted to mean more than one owner.

Question 4

The code prohibits false, misleading, and deceptive solicitations.

Answer 4

A representation that specific services will be performed for a certain fee that is substantially lower, when at that time actual fees are higher is a prohibited form of solicitation.

Question 5

When is a contingent fee permitted?

Answer 5

1. When representing a client who is seeking a private letter ruling from the IRS.
2. Lobbying with regards to drafting a statute or regulation.

A contingent fee is permitted for representing a client in an IRS examination of the clients federal income tax return.

Question 6

A CPA advertisement is not acceptable to AICPA Code of Professional Conduct if it states “ Endorsed by AICPA”

True or False?

Answer 6

True. A CPA cannot may not claim to be endorsed by the institute. AICPA does not make endorsements.

A member may however state that he/she is a member.

Question 7

Does a contingent fee arrangement impairs independence?

Answer 7

Yes. A member in public practice cannot perform certain services for a contingent fee without impairing independence.

Question 8

What are some services where contingent fees is prohibited?

Answer 8

1. Audit and review
2. Examination
3. Certain Tax services
4. Compilation used by third party that does not disclose “lack of independence” in its financial report.

Question 9

What are some working papers of a member?

Answer 9

Audit programs, analytical review schedules, statistical sampling results, analysis, and schedules prepared by the client at the request of a member.

Question 10

Who is subject to the AICPA Code of conduct if member does NOT control the business?

Answer 10

The member only

Question 11

Who is subject to the AICPA code of conduct if member controls the business?

Answer 11

The entity and all its other members.

Question 12

According to Department of Labor guidelines, The selected auditor must be:

Answer 12

Auditors must be independent for audits of pension funds administered under the Employee Retirement Income Security Act of 1974. (ERISA)

Question 13

Is the CFO exempted from violation of rules of SOX of 2002 on improper influence on the conduct of audits?

Answer 13

it is against the law for any officer or director of an issuer to do any act to:

1. Fraudulently influence, coerce, manipulate, or mislead any auditor performing an audit if the purpose is to render the FS materially misleading.

A CFO is not exempted.

Question 14

Under SOX of 2002, exactly how many CONSECUTIVE years may an audit partner lead an audit for an issuer?

Answer 14

5 years

Question 15

Before a member of an issuers audit engagement team may begin working for a registrant in a key position…
How many years is required for the cooling off period.?

Answer 15

1 year

Question 16

according to SOX 2002, the PCAOB does NOT have the legal authority to:

Answer 16

Prosecute suspected criminal violations by registered public accounting firms

Question 17

The SEC has strengthened the independence of auditors by requiring that management:

Answer 17

Report nature of disagreements with former auditors. by filing form 8-K

Question 18

Accounting firm independence is least likely to be impaired if the firm:

Answer 18

Has an audit client that employs a former firm professional

Question 19

The AICPA code of Professional Conduct requires compliance with accounting principles promulgated by the bodies designed by the AICPA council to establish such principles.

The Literature considered officially established accounting principles include.

Answer 19

FASB Accounting Standards Codification.

it is the source of authoritative guidance for all public and non public nongovernmental entities.

Question 20

Independence ordinarily would NOT be impaired if the CPA

Answer 20

designs, develop, integrates a client’s information system that is unrelated to its financial statements or accounting records.

Question 21

What would be most helpful to a CPA in deciding whether to accept a new audit client?

Answer 21

CPA should asses his/her competence to conduct the audit.

Question 22

The PCAOB

Answer 22

The PCAOB has no injunctive power, but it may institute administrative proceedings. It may seek disassociations of a person from a registered firm, suspension of the firms registration, or a penalty of up to 15 million.

Question 23

Who may a CPA partnership provide its audit documentation, without being lawfully subpoenaed, or without the clients consent?

Answer 23

Any surviving partner, on death of partner.

Audit documentation may be disclosed to another partner within the accounting firm without the clients consent because such information has not been communicated to others.

A partner has fiduciary obligation to the client not to disclose confidential information without consent.

Question 24

Does a CPA need to be independent when providing compilation and Tax services?

Answer 24

No. A CPA need to be independent when providing attestation services.

Attestation services provides assurance about assertions. They include:

Audits,
Examination,
Reviews, and
Agreed upon procedures

Question 25

What is the risk- based approach?

Answer 25

evaluates member- client relationship to determine whether independence in fact or appearance is jeopardized.

Question 26

Would advising a clients board of trustees impair independence?

Answer 26

independence is not impaired if the CPA role is advisory