CH6 Professional Responsibilities

Question 1

According to the standards of the profession, which of the following activities may be required in exercising due care?

A.
Consulting with experts

B.
Obtaining specialty accreditation

C.
Both consulting with experts and obtaining specialty accreditation

D.
Neither consulting with experts nor obtaining specialty accreditation

Answer 1

A.
Consulting with experts

The standards of the profession provide that an accountant may be required to consult with an expert in order to carry out the job in a competent fashion. The obtaining of specialty accreditation 委派 is generally not required.

Question 2

The auditor with final responsibility has a primary supervisory responsibility to explain to the staff assistants:

A.
that immaterial irregularities are not to be reported to the client’s audit committee.

B.
how the results of various auditing procedures performed by the assistants should be evaluated.

C.
what benefits may be attained by the assistants’ adherence to established time budgets.

D.
why certain documents are being transferred from the current file to the permanent file.

Answer 2

B.
how the results of various auditing procedures performed by the assistants should be evaluated.

The primary supervisory responsibility of the auditor with final responsibility is to explain to the staff assistants how the results of various auditing procedures performed by the assistants should be evaluated. This is most in keeping with directing the efforts of the assistants regarding their responsibilities and the objectives of the audit procedures.

Additional items that may be discussed would be whether or not to communicate immaterial irregularities, how the time budgets relate to the auditing procedures, and which documents are to be stored in the current files versus the permanent file.

Question 3

Which of the following areas of professional responsibility should be observed by a CPA not in public practice?

A.
Objectivity

B.
Independence

C.
Objectivity and independence

D.
None of the answer choices are correct.

Answer 3

A.
Objectivity

Although a CPA not in public practice does not have to maintain independence, the CPA does have to maintain objectivity. Objectivity is defined in the AICPA Code of Professional Conduct as “a state of mind, a quality that lends value to a member’s services. It is a distinguishing feature of the profession. The principle of objectivity imposes the obligation to be impartial, intellectually honest, and free of conflicts of interest.” (ET 0.300.050.02)

Question 4

PCAOB Rule 3522 regarding tax transactions prevent which of the following nonaudit tax services?

A.
Original, or amended, federal returns

B.
Services related to state and local returns

C.
Services related to marketing, planning, or opining in favor of the tax treatment of a transaction

D.
All tax services are prevented by the PCAOB.

Answer 4

C.
Services related to marketing, planning, or opining in favor of the tax treatment of a transaction

Rule 3522 of the Public Company Accounting Oversight Board prevents registered public accounting firms from marketing, planning, or opining in favor of tax treatment of a transaction. Should public accounting firms violate this rule, they will no longer be considered independent.

Question 5

The objective of an ordinary audit of financial statements by the independent auditor is the expression of an opinion on the fairness with which they present, in all material respects, the financial position, results of operations, and cash flows in conformity with generally accepted accounting principles. The auditor’s responsibilities regarding such an engagement include:

A.
performing the audit in accordance with generally accepted accounting principles.

B.
expressing an opinion in every case.

C.
adopting sound accounting policies and procedures.

D.
identifying circumstances in which generally accepted accounting principles have not been consistently observed.

Answer 5

D.
identifying circumstances in which generally accepted accounting principles have not been consistently observed.

The auditor’s responsibilities regarding an ordinary audit engagement include identifying circumstances in which generally accepted accounting principles have not been consistently observed.

The auditor must perform the audit in accordance with generally accepted auditing standards (not accounting principles—read every answer choice carefully). The auditor does not always express an opinion—there are circumstances under which he will disclaim, or not express, an opinion.

Adopting sound accounting policies and procedures and establishing and maintaining an internal control structure are specifically and explicitly stated as the responsibility of management. (The auditor must adopt sound auditing policies and procedures.)

Question 6

Under the Statements on Standards for Consulting Services, which of the following statements best reflects a CPA’s responsibility when undertaking a consulting services engagement? The CPA must:

A.
not seek to modify any agreement made with the client.

B.
not perform any attest services for the client.

C.
inform the client of significant reservations concerning the benefits of the engagement.

D.
obtain a written understanding with the client concerning the time for completion of the engagement.

Answer 6

C.
inform the client of significant reservations concerning the benefits of the engagement.

Before accepting and during the performance of the engagement, the member should consider the applicability of ET 1.100.001 (Integrity and Objectivity Rule). If the member believes that he or she can perform the services with objectivity, the member would not be prohibited from accepting the engagement. The member should also consider informing the company and the executives of possible results of the engagement prior to accepting the engagement.

Question 7

Which of the following is an element of a CPA firm’s quality control system that should be considered in establishing its quality control policies and procedures?

A.
Complying with laws and regulations

B.
Using statistical sampling techniques

C.
Assigning personnel to engagements

D.
Considering audit risk and materiality

Answer 7

C.
Assigning personnel to engagements

The elements of a CPA firm’s quality control system are identified in Statement on Quality Control Standards (SQCS) 7 as:

• leadership responsibilities for quality within the firm,
• relevant ethical requirements,
• acceptance and continuance of client relationships and - specific engagements,
• human resources,
• engagement performance, and monitoring.

Policies and procedures for assigning personnel to engagements ensure that only technically trained and proficient personnel perform the audit work. Audit risk, materiality, and statistical sampling techniques are considered in the planning and performance of an audit of financial statements. Compliance with laws and regulations is an audit objective.

Question 8

The primary purpose of establishing quality control policies and procedures for deciding whether to accept new clients is to:

A.
minimize the likelihood of association with clients whose management lacks integrity.

B.
monitor significant deficiencies in the design and operation of the client’s internal control.

C.
identify noncompliance with aspects of contractual agreements that affect the financial statements.

D.
provide reasonable assurance that personnel will be adequately trained to fulfill their assigned responsibilities.

Answer 8

A.
minimize the likelihood of association with clients whose management lacks integrity.

It is the responsibility of a firm of independent auditors to adopt a quality control system. This system provides reasonable assurance that the personnel of the firm comply with generally accepted auditing standards. The quality control standards relate to the firm as a whole and would not involve specific references to the design and operation of a client’s internal control or a client’s noncompliance with contractual agreements.

The primary purpose of a firm’s quality control policies and procedures for deciding whether to accept new clients is to minimize the likelihood of association with clients whose management lacks integrity. If management lacks integrity, the auditor would assign a large inherent risk of material misstatement to the audit that may not be able to be overcome by lowering detection risk. An auditor would not want to be associated with such a client.

An auditor is required, by the general standards of fieldwork, to have adequate training and proficiency to perform the audit. The abilities of audit team members would be another consideration at the beginning of an audit, which would involve deciding which staff members will be assigned to the engagement and whether or not to call in a specialist. The quality control standard regarding accepting new clients would not provide reasonable assurance that the audit personnel are adequately trained.

Question 9

The Securities Act of 1933:

A.
created the Securities and Exchange Commission.

B.
requires investors to take responsibility for registration accuracy.

C.
requires public accounting firms to register with the SEC.

D.
is concerned with preventing fraud in securities sales.

Answer 9

D.
is concerned with preventing fraud in securities sales.

The Securities Act of 1933 exists to provide information to investors about securities offered for sale. It requires all those firms who are not exempt to register before selling their securities, and for those associated with the registration statement to take responsibility for the accuracy of the registration. Full and fair disclosure is meant to prevent misrepresentation or fraud associated with the sale of securities.

The Securities Exchange Act of 1934 created the SEC.

Question 10

The PCAOB has the authority to enforce SOX Title III, Section 303, in which type of proceedings?

A.
Criminal

B.
Civil

C.
Regulatory

D.
The PCAOB has no authority to enforce rules and regulations.

Answer 10

B.
Civil 公民的

The Public Company Accounting Oversight Board (PCAOB) has the authority to enforce Section 303 of the Sarbanes-Oxley Act (SOX) in civil proceedings.

Although Section 303 gives the Securities and Exchange Commission (SEC) exclusive authority to enforce the section, in practice the PCAOB enforces compliance and levies civil monetary penalties while the SEC oversees the PCAOB’s operations.

Question 11

According to the AICPA Code of Professional Conduct, which of the following disclosures of client information by a member CPA to an outside party would normally require client consent?

A.
Disclosure of confidential client information to a third-party service provider when the member does not enter into a confidentiality agreement with the provider

B.
Disclosure to a potential client of the name of a client for whom the member or member’s firm performed professional services

C.
Disclosure of confidential client information to the member’s liability insurance carrier in response to a potential claim

D.
Disclosure of confidential client information to a court or in documents in connection with a subpoena

Answer 11

A.
Disclosure of confidential client information to a third-party service provider when the member does not enter into a confidentiality agreement with the provider

A member in public practice is allowed to use a third-party service provider for administrative support provided the member has entered into an agreement with the service provider to maintain client confidentiality.

However, in the event the member does not enter into a confidentiality agreement with a third-party service provider, specific client consent must be obtained before disclosing any confidential client information to the service provider.

Question 12

The auditor with final responsibility for an engagement and one of the assistants have a difference of opinion about the results of an auditing procedure. If the assistant believes it is necessary to be disassociated from the matter’s resolution, the CPA firm’s procedures should enable the assistant to:

A.
refer the disagreement to the AICPA’s Quality Review Committee.

B.
document the details of the disagreement with the conclusion reached.

C.
discuss the disagreement with the entity’s management or its audit committee.

D.
report the disagreement to an impartial peer review monitoring team.

Answer 12

B.
document the details of the disagreement with the conclusion reached.

AU-C 220.A20 explains, “Members of the engagement team have a professional responsibility to bring to the attention of appropriate personnel matters that, in their professional judgment, are difficult or contentious and may require consultation” that might arise with respect to audit issues. In addition, each assistant has a right to document the disagreement if the assistant believes it is necessary to be disassociated from the resolution of the matter.

Question 13

The IESBA Code of Ethics for Professional Accountants establishes ethical requirements for professional accountants through which of the following?

A.
Conceptual Framework

B.
Rules

C.
Interpretations

D.
All of the answer choices are correct.

Answer 13

A.
Conceptual Framework

The International Ethics Standards Board for Accountants (IESBA) Code of Ethics for Professional Accountants only establishes a conceptual framework. They have not issued Rules or Interpretations (or Rulings). The conceptual framework promotes compliance with five fundamental principles of professional ethics: integrity, objectivity, professional competence and due care, confidentiality, and professional behavior.

Question 14

Under the ethical standards of the profession, which of the following investments by a CPA in a corporate client is an indirect financial interest?

A.
An investment held in a retirement plan

B.
An investment held in a blind trust

C.
An investment held through a regulated mutual fund

D.
An investment held through participation in an investment club

Answer 14

C.
An investment held through a regulated mutual fund

Under the ethical standards of the profession, an investment held through a regulated mutual fund is an indirect financial interest. Indirect financial interests are the underlying investments of a mutual fund.

Question 15

As set forth by Title I of the Sarbanes-Oxley Act of 2002, Section 105, “Investigations and Disciplinary Proceeding,” the PCAOB may investigate any act or practice, or omission to act, by a registered public accounting firm that may violate any provision of the Sarbanes-Oxley Act, PCAOB rules, securities laws, and professional standards. Possible disciplinary actions include:

A.
temporary suspension or permanent revocation of registration.

B.
civil monetary penalties.

C.
requiring additional professional education or training.

D.
All of the answer choices are correct.

Answer 15

D.
All of the answer choices are correct.

As set forth by Section 105 (Title I) of the Sarbanes-Oxley Act, the Public Company Accounting Oversight Board (PCAOB) may investigate any act or practice, or omission to act, by a registered public accounting firm that may violate any provision of the Sarbanes-Oxley Act, PCAOB rules, securities laws, and professional standards.

Possible disciplinary actions include temporary suspension or permanent revocation of registration; temporary or permanent suspension of persons; temporary or permanent limitation on activities, functions, or operations of the firm; civil monetary penalties; censure; additional professional education or training; and any other sanction provided for in the PCAOB rules. Additionally, the PCAOB will strictly sanction intentional or knowing conduct, including reckless conduct, that results in violations and repeat violations.

Question 16

Auditors performing work under GAGAS, in addition to having competence, technical knowledge, skills, and experience to perform the audit, must:

A.
have completed a GAO-approved self-study course in governmental auditing.

B.
have an active CPA license.

C.
complete at least 24 hours of CPE relating to governmental auditing every two years.

D.
There are no additional requirements.

Answer 16

C.
complete at least 24 hours of CPE relating to governmental auditing every two years.

In addition to having competence, technical knowledge, skills, and experience to perform the audit professionally, auditors must complete at least 24 hours of CPE relating to governmental auditing every two years. Individuals who work on GAGAS audits for 20% or more of their time must complete at least 80 hours of CPE relating to governmental auditing every two years.

Question 17

According to the AICPA Code of Professional Conduct, which of the following activities results in an act discreditable to the profession?

A.
A CPA solicits recent Uniform CPA Examination questions without written authorization from the AICPA.

B.
A CPA signs a document containing immaterial false and misleading information, or permits or directs another CPA to do so.

C.
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.

D.
A CPA fails to give a client copies of the CPA’s workpapers related to a completed and issued work product upon the client’s request because the client has not paid fees payable to the CPA for the work product.

Answer 17

A. A CPA solicits recent Uniform CPA Examination questions without written authorization from the AICPA.

The Code of Professional Conduct (the Code) of the American Institute of Certified Public Accountants (AICPA) provides guidance and rules to all members in the performance of their professional responsibilities. Compliance with the Code is voluntary and depends on members’ understanding, voluntary actions, reinforcement by peers and public opinion, and ultimately on disciplinary proceedings, when necessary, against members who fail to comply with the rules.

The Code itemizes a number of acts that would be a discredit to the profession, including the following:
-A member who solicits or knowingly discloses Uniform CPA Examination questions and/or answers without the written authorization of the AICPA shall be considered to have committed an act discreditable to the profession in violation of the “Acts Discreditable Rule.” (ET1.400.020.01)

The other answer choices are not considered “acts discreditable” in the Code:

• Signing a document containing material (not immaterial) false and misleading information is discreditable.
• It is discreditable to neglect to follow certain government auditing requirements if such actions are not disclosed in the audit report.
• Failing to give a client copies of the workpapers for a completed and issued work product upon the client’s request is an act discreditable if the client has paid the appropriate fees.

Question 18

According to the standards of the profession, which of the following events would require a CPA performing a consulting services engagement for a nonaudit client to withdraw from the engagement?

I. The CPA has a conflict of interest that is disclosed to the client and the client consents to the CPA continuing the engagement.
II. The CPA fails to obtain a written understanding from the client concerning the scope of the engagement.
A.
I only

B.
II only

C.
Both I and II

D.
Neither I nor II

Answer 18

D.
Neither I nor II

The fact that the CPA has a conflict of interest will not prevent the CPA from performing a consulting service for a nonaudit client, provided the CPA is able to carry out the task while maintaining objectivity and integrity. Since the CPA in this case has disclosed this potential conflict of interest to the client and the client has given consent, continuation of the service is permitted. While there should be some understanding with the client regarding the nature of the engagement, this understanding does not have to be reduced to writing.

Adding “non” to “audit” completely changes the meaning of the question. Watch out for negative questions (and even double negatives) on the CPA Examination.

Question 19

SOX Title II prevents a registered public accounting firm from performing an audit if a person employed at the client in a significant accounting position was previously employed at the registered public accounting firm and engaged on that audit. How long must the firm wait prior to being allowed to conduct the audit?

A.
One year

B.
Two years

C.
Five years

D.
It is up to audit committee to determine the cool-off period.

Answer 19

A.
One year

Should a member of a registered public accounting firm that participated on the engagement become employed with the client in a significant accounting position (CEO, CFO, controller, CAO, or equivalent position), the firm is prevented from conducting the audit for a one-year period.

Question 20

A CPA 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 are not material to the CPA’s wealth but are material to the child’s personal net worth. According to the AICPA Code of Professional Conduct, would this action impair the CPA’s independence with the client?

A.
No, because the CPA would not have a direct financial interest in the client

B.
Yes, because the stock would be a direct financial interest and materiality is a factor

C.
Yes, because the stock would be an indirect financial interest and materiality is not a factor

D.
Yes, because the stock would be a direct financial interest and materiality is not a factor

Answer 20

D.
Yes, because the stock would be a direct financial interest and materiality is not a factor

If the CPA has any direct or material indirect financial interest in the client, independence is impaired.

A direct financial interest is a financial interest:
- owned directly by an individual or entity, or
- under the control of an individual or entity, or
- beneficially owned through an investment vehicle, estate, trust, or other intermediary when the beneficiary:
controls the intermediary or
- has the authority to supervise or participate in the - intermediary’s investment decisions.

This investment would qualify as a direct financial interest.

Question 21

The nature and extent of a CPA firm’s quality control policies and procedures will depend on various factors, including its:

A.
size and operating characteristics.

B.
size.

C.
operating characteristics.

D.
None of the answer choices are correct.

Answer 21

A.
size and operating characteristics.

In general, a system of quality control should have policies and procedures to give reasonable assurance that standards of quality are maintained. The concept “reasonable assurance” allows for the consideration of a CPA firm’s size, nature of practice, and cost-benefit considerations when determining the nature and extent of quality control policies and procedures.

Question 22

According to the profession’s standards, which of the following would be considered consulting services?

A.
Advisory, implementation, and product services

B.
Advisory and implementation services

C.
Advisory and product services

D.
Implementation and product services

Answer 22

A.
Advisory, implementation, and product services

Advisory services, implementation services, and product services all fall within the broad category of “consulting services.” Such services are subject to the Statements of Standards for Consulting Services and also include consultations, transaction services, and staff and other support services.

Question 23

Registered public accounting firms will lose independence of its audit clients if they perform tax services for persons in financial accounting oversight roles unless:

A.
the person is only in the oversight role because they serve on the board of directors.

B.
the person’s relationship to the audit client is through an affiliate, and the financial statements of the affiliate are not material to the consolidated financial statements.

C.
the person in the financial accounting role is not in that role prior to a hiring, promotion, or change in employment event.

D.
All of the answer choices are exceptions that would not impair independence.

Answer 23

D.
All of the answer choices are exceptions that would not impair independence.

Rule 3523 of the Public Company Accounting Oversight Board allows for certain exceptions in performing tax services for persons in financial accounting oversight roles. The above examples are all exceptions that would not impair independence.

Question 24

Which of the following is a conceptual similarity between generally accepted auditing standards and the attestation standards?

A.
Both sets of standards require the CPA to report on the adequacy of disclosure in the financial statements.

B.
All of the standards of fieldwork in generally accepted auditing standards are included in the attestation standards.

C.
The requirement that the CPA be independent in mental attitude is included in both sets of standards.

D.
Both sets of standards are applicable to engagements regarding financial forecasts and projections.

Answer 24

C.
The requirement that the CPA be independent in mental attitude is included in both sets of standards.

Both an audit and an attest engagement require that the auditor be independent in mental attitude.

An attest engagement involves a report on a subject matter, or an assertion about the subject matter, that is the responsibility of another party. An attest engagement does not necessarily involve financial statements; the subject matter could include the price of a market basket of goods on a certain date, a breakeven analysis, internal control, or human resources practices. Due to this diversity in types of engagements, the attestation standards do not require the CPA to report on the adequacy of disclosure in the financial statements. The preparation of prospective financial statements (financial forecasts and projections) is covered solely under the attestation standards.

The standards of fieldwork for attest engagements do not contain any mention of obtaining a sufficient understanding of the entity and its environment, including its internal control. This requirement does, however, appear in generally accepted auditing standards (GAAS).

Question 25

Which of the following is a correct statement about the circumstances under which a CPA firm may or may not disclose the names of its clients without the clients’ express permission?

A.
A CPA firm may disclose this information if the practice is limited to bankruptcy matters, so that prospective clients with similar concerns will be able to contact current clients.

B.
A CPA firm may disclose this information if the practice is limited to performing asset valuations in anticipation of mergers and acquisitions.

C.
A CPA firm may disclose this information unless disclosure would suggest that the client may be experiencing financial difficulties.

D.
A CPA firm may not disclose this information because the identity of its clients is confidential information.

Answer 25

C.
A CPA firm may disclose this information unless disclosure would suggest that the client may be experiencing financial difficulties.

The Internal Revenue Service (IRS) has rules against a CPA or other preparer disclosing a tax return client’s name. Since auditing and tax preparation have been separated by the Sarbanes-Oxley Act, audit clients could be disclosed. Such disclosure would be prohibited if it would suggest the company had financial problems, such as a company consulting a bankruptcy specialist.

Question 26

Which of the following laws requires that benefits be provided to employees after they leave a position?

A.
Health Insurance Portability and Accountability Act

B.
Family and Medical Leave Act

C.
Employee Retirement Income Security Act

D.
Comprehensive Budget Omnibus Reconciliation Act

Answer 26

D.
Comprehensive Budget Omnibus Reconciliation Act

The Comprehensive Budget Omnibus Reconciliation Act (COBRA) requires employers to offer former employees continued benefits after they leave a position for a certain period of time. However, employees are normally responsible for the insurance premiums.

Question 27

Under the Code of Professional Conduct of the AICPA, which of the following is required to be independent in fact and appearance when discharging professional responsibilities?

A.
A CPA in public practice providing tax and management advisory services

B.
A CPA in public practice providing auditing and other attestation services

C.
A CPA not in public practice

D.
All CPAs

Answer 27

B.
A CPA in public practice providing auditing and other attestation services

The AICPA Code of Professional Conduct clearly states, “For a member in public practice, the maintenance of objectivity and independence requires a continuing assessment of client relationships and public responsibility” (ET 0.300.050.04). The independence is required in both auditing and other attestation services.

Question 28

Registered public accounting firms and associated persons must be independent of their audit clients during:

A.
the fiscal year of which the financial statements are being audited.

B.
the fiscal year and engagement period of which the financial statements are being audited.

C.
the engagement period of which the financial statements are being audited.

D.
There are no independence requirements for registered public accounting firms, as they are under the direct supervision of the PCAOB.

Answer 28

C.
the engagement period of which the financial statements are being audited.

Rule 3520 of the Public Company Accounting Oversight Board requires that registered public accounting firms and their associated persons must be independent during the professional and audit engagement period. There are currently no requirements to be independent prior to the engagement period.

Question 29

The members of the audit team, including the auditor with final responsibility for the audit, should discuss:

A.
the susceptibility of the entity’s financial statements to material misstatement.

B.
staff suggestions concerning the establishment and maintenance of time budgets.

C.
the need for using the work of specialists and internal auditors.

D.
how to document staff disagreements regarding technical issues.

Answer 29

A.
the susceptibility of the entity’s financial statements to material misstatement.

An engagement team discussion with the audit team is primarily to give guidance to the staff regarding the susceptibility of the entity’s financial statements to material misstatement. This conference is the first step in the supervision of the audit—instructing and directing assistants in the performance of the fieldwork.

Staff suggestions concerning time budgets are discussed, and the need for using the work of specialists and internal auditors is established during the audit planning. Staff disagreements regarding technical issues are discussed, documented, and resolved when such disagreements arise during the course of the fieldwork.

Question 30

Which of the following factors most likely would lead a CPA to conclude that a potential audit engagement should be rejected?

A.
The details of most recorded transactions are not available after a specified period of time.

B.
Internal control activities requiring the segregation of duties are subject to management override.

C.
It is unlikely that sufficient appropriate audit evidence is available to support an opinion on the financial statements.

D.
Management has a reputation for consulting with several accounting firms about significant accounting issues.

Answer 30

C.
It is unlikely that sufficient appropriate audit evidence is available to support an opinion on the financial statements.

A disclaimer of opinion is warranted when restrictions on the scope of the audit are so severe, whether client-imposed or due to other reasons, that the auditors are unable to obtain sufficient audit evidence to enable them to form an opinion.

Question 31

Which of the following statements represents a quality control requirement under Government Auditing Standards?

A.
A CPA who conducts government audits is required to undergo an annual external quality control review when an appropriate internal quality control system is not in place.

B.
A CPA seeking to enter into a contract to perform an audit should provide the CPA’s most recent external quality control review report to the party contracting for the audit.

C.
An external quality control review of a CPA’s practice should include a review of the workpapers of each government audit performed since the prior external quality control review.

D.
A CPA who conducts government audits may not make the CPA’s external quality control review report available to the public.

Answer 31

B.
A CPA seeking to enter into a contract to perform an audit should provide the CPA’s most recent external quality control review report to the party contracting for the audit.

A quality control requirement under Government Auditing Standards requires a CPA seeking to enter into an audit contract to provide the CPA’s most recent external quality control review report to the party contracting for the audit.

Question 32

Violations with any of the applicable auditing and related professional practice standards may result in:

A.
disciplinary proceedings by the PCAOB.

B.
criminal prosecution.

C.
the inability to practice public accounting with respect to public companies in the future.

D.
the inability to practice public accounting with respect to private companies in the future.

Answer 32

A.
disciplinary proceedings by the PCAOB.

Registered public accounting firms that do not comply with applicable Public Company Accounting Oversight Board standards may be subject to PCAOB disciplinary proceedings as set forth by Section 105 of the Sarbanes-Oxley Act. Any violation of the PCAOB’s rules is treated in the same manner as a violation of the Securities Exchange Act of 1934.

Question 33

Which of the following is an element of a CPA firm’s quality control policies and procedures applicable to the firm’s accounting and auditing practice?

A.
Information processing

B.
Engagement performance

C.
Technology selection

D.
Professional skepticism

Answer 33

B.
Engagement performance

The CPA firm’s system of quality control should include policies and procedures addressing the following elements:

• Leadership responsibilities for quality within the firm (“tone at the top”)
• Relevant ethical requirements
• Acceptance and continuance of client relationships and specific engagements
• Human resources
• Engagement performance
• Monitoring

Question 34

Each of the following is an ethical principle that should guide the work of auditors in the conduct of audits under government auditing standards, except:

A.
materiality.

B.
integrity.

C.
the public interest.

D.
proper use of government information.

Answer 34

A.
materiality.

According to GAS (Government Auditing Standards) 1.14, the ethical principles that guide the work of auditors who conduct audits in accordance with Generally Accepted Government Auditing Standards (GAGAS) are the public interest; integrity; objectivity; proper use of government information, resources and positions; and professional behavior.

The “public interest” is defined in the government standards as “the collective well-being of the community of people and the entities the auditors serve” (GAS 1.15). Integrity includes “auditors conducting their work with an attitude that is objective, fact-based, nonpartisan, and nonideological with regard to audited entities and users of the auditors’ reports” (GAS 1.17). Government information is “to be used for official purposes and not inappropriately for the auditor’s personal gain or in a manner contrary to law or detrimental to the legitimate interests of the audited entity or the audit organization” (GAS 1.20).

Materiality in GAGAS financial audits is considered an “additional consideration” in GAGAS audits (GAS 4.46).

Question 35

According to the Sarbanes-Oxley Act of 2002, the PCAOB has the legal authority to perform each of the following, except:

A.
prosecute suspected criminal violations by registered public accounting firms.

B.
process, review, and approve the registration of public accounting firms that audit issuers.

C.
inspect and review selected audit engagements of registered public accounting firms.

D.
establish auditing, quality control, and independence standards for audits of issuers.

Answer 35

A.
prosecute suspected criminal violations by registered public accounting firms.

The Public Company Accounting Oversight Board (PCAOB) was established by the Sarbanes-Oxley Act of 2002 and oversees the audits of issuers (public companies) that are subject to the securities laws to protect the interests of investors and to further the public interest in the preparation of informative, accurate, and independent audit reports. The PCAOB is not an agency or establishment of the U.S. government and therefore does not have the authority to prosecute accounting firms.

The PCAOB is charged with the following responsibilities:

• Register public accounting firms that prepare audit reports for issuers.
• Establish or adopt auditing, quality control, ethics, independence, and other standards relating to the preparation of audit reports for issuers.
• Conduct inspections of registered public accounting firms.
• Conduct investigations and disciplinary proceedings concerning, and impose appropriate sanctions when justified upon, registered public accounting firms and associated persons of such firms.
• Enforce compliance with the Sarbanes-Oxley Act, the rules of the PCAOB, professional standards, and the securities laws relating to the preparation and issuance of audit reports and the obligations and liabilities of accountants with respect thereto, by registered public accounting firms and associated persons thereof.

Question 36

Title IV of the Sarbanes-Oxley Act of 2002 requires which of the following?

A.
That financial statements reflect all material correcting adjustments identified by the registered public accounting firm

B.
That financial statements reflect all material off-balance sheet transactions, arrangements, obligations, and other relationships

C.
That pro forma information, if included, does not contain any untrue statements or omission of material facts

D.
All of the answer choices are correct.

Answer 36

D.
All of the answer choices are correct.

Title IV of Sarbanes-Oxley requires that the financial statements reflect all material correcting adjustments, material off-balance-sheet transactions, arrangements, obligations, and other relationships, and that pro forma information, if included, does not contain untrue statements or omissions of material facts.

Question 37

In order for a firm to designate itself as “Members of the AICPA”:

A.
all CPA owners must be members of the AICPA.

B.
all owners, not just CPA owners, must be members of the AICPA.

C.
the majority of CPA owners must be members of the AICPA.

D.
the majority of all owners, not just CPA owners, must be members of the AICPA.

Answer 37

A.
all CPA owners must be members of the AICPA.

Based on the AICPA’s Code of Professional Conduct, a firm may only designate itself as “Members of the AICPA” when all CPA owners are members.

Question 38

Any officer or director of an issuer is strictly prohibited from:

A.
investing in stock or in stock options of the issuer.

B.
owning more than 10% of the issuer’s stock.

C.
taking any action to fraudulently influence the registered public accounting firm or any of its members.

D.
All of the answer choices are correct.

Answer 38

C.
taking any action to fraudulently influence the registered public accounting firm or any of its members.

Title III, Section 303, of the Sarbanes-Oxley Act (SOX) prohibits any officer or director from taking any action to fraudulently influence, coerce, manipulate, or mislead any independent public or certified accountant engaged in the performance of the audit of the financial statements of the issuer.

Question 39

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

A.
Examining a client’s prospective financial information

B.
Preparing a client’s federal income tax return

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

D.
Reviewing a client’s financial statements

Answer 39

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

A member in public practice may not receive a contingent fee for any professional services from a client for whom the firm prepares an audit, review, compilation (for use by a third party, and lack of independence has not been disclosed), or an examination of prospective financial information. They also may not prepare an original or amended tax return or claim for refund for a contingent fee for any client.

However, a fee is not considered contingent if it is fixed by the courts or other public authorities, or in tax matters, if it is determined based on the results of judicial processing or finding of a governmental agency.

Therefore, representing a client in an IRS examination by a revenue agent of the client’s federal or state income tax return is an example of where a contingent fee would be permitted.

Question 40

Section 408 of SOX Title IV, “Enhanced Review of Periodic Disclosures by Issuers,” dictates that:

A.
each issuer disclose whether or not the audit committee is comprised of at least one member who is a financial expert.

B.
the SEC will review disclosures made by issuers.

C.
issuers disclose to the public on a rapid and current basis any additional information concerning material changes in the financial condition or operations.

D.
each issuer disclose whether or not they have adopted a code of ethics for senior financial officers.

Answer 40

B.
the SEC will review disclosures made by issuers.

Section 408 of the Sarbanes-Oxley Act (SOX) dictates that the SEC will review disclosures made by issuers. Special attention will be paid to the disclosures of issuers:

who have issued material restatements of financial statements,
who experienced significant volatility in their stock price,
have the largest market capitalization,
are emerging companies with disparities in price to earnings ratios, and
with operations that significantly affect any material sector of the economy.

Question 41

According to the ethical standards of the profession, which of the following acts is generally prohibited?

A.
Purchasing a product from a third party and reselling it to a client

B.
Writing a financial management newsletter promoted and sold by a publishing company

C.
Accepting a commission for recommending a product to an audit client

D.
Accepting engagements obtained through the efforts of third parties

Answer 41

C.
Accepting a commission for recommending a product to an audit client

Accepting a commission from a client for recommending a product would be a violation of ET Section 1.520.001 of the AICPA Code of Professional Conduct, which provides that a member in public practice cannot accept a commission for recommending a product or service to a client where the accountant performs audits or reviews of financial statements.

A member may purchase a product and resell it to a client (ET 1.520.060).

Question 42

Should a professional accountant inadvertently violate one of the principles of the IESBA Code of Ethics for Professional Accountants, they should:

A.
remove themselves from the engagement immediately.

B.
correct the violation promptly and apply safeguards.

C.
disclose the violation to the International Federation of Accountants (IFAC).

D.
All of the answer choices are correct.

Answer 42

B.
correct the violation promptly and apply safeguards.

Inadvertent violations of the International Ethics Standards Board for Accountants (IESBA) Code of Ethics for Professional Accountants do not necessarily compromise compliance with the conceptual framework, and as such, professional accountants should promptly correct the violation and apply safeguards to avoid future violations.

Question 43

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

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

B.
Allowing a review of professional practice without client authorization

C.
Responding to an enforceable subpoena

D.
Faxing a tax return to a loan officer at the request of the client

Answer 43

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

A CPA is prohibited from releasing client information without the client’s consent. A client would include the people in direct involvement with producing the financial information and, therefore, the mail clerk is not allowed to give approval.

Question 44

Title II of the Sarbanes-Oxley Act prohibits registered public accounting firms from providing certain nonaudit services. These services include all of the following except:

A.
tax preparation services.

B.
financial information systems design and implementation.

C.
internal auditing outsourcing services.

D.
legal services and expert services unrelated to the audit.

Answer 44

A.
tax preparation services.

Title II of the Sarbanes-Oxley Act of 2002 specifically prohibits bookkeeping, financial information systems design and implementation, appraisal or valuation services, actuarial services, internal audit outsourcing, management functions, broker or dealer services, and legal services. Tax services are permissible, but must be preapproved by the audit committee.

Question 45

The profession’s ethical standards most likely would be considered to have been violated when a CPA represents that specific consulting services will be performed for a stated fee and it is apparent at the time of the representation that the:

A.
actual fee would be substantially higher.

B.
actual fee would be substantially lower than the fees charged by other CPAs for comparable services.

C.
CPA would not be independent.

D.
fee was a competitive bid.

Answer 45

A.
actual fee would be substantially higher.

In performing consulting services, the CPA is not allowed to quote a fee where it is apparent that the actual fee will be substantially higher. Such an act would violate several of the AICPA Principles of Professional Conduct—service to the public, integrity, due care, and determination of scope of services.

There is generally no problem associated with charging either a competitive or lower fee than other CPAs in the area.

Since this is an engagement for consulting services (and not an audit or attestation engagement), there is no requirement that the CPA be independent.

Question 46

Effective policies and procedures ask that the auditor adequately plan the work and properly supervise any assistants. These policies and procedures are ordinarily interpreted to require:

A.
thorough review of the existing safeguards over access to assets and records.

B.
limited review of the indications of employee fraud and noncompliance with laws and regulations.

C.
objective review of the adequacy of the technical training and proficiency of firm personnel.

D.
critical review of the judgment exercised at every level of supervision.

Answer 46

D.
critical review of the judgment exercised at every level of supervision.

The planning and supervision standard is ordinarily interpreted to require critical review of the judgment exercised at every level of supervision. The first standard of fieldwork requires that the evidence gathering phase of the audit examination be planned and properly supervised. A system of quality controls should be in place that gives reasonable assurance that standards of quality are maintained within the firm with regard to supervision. Policies and procedures for the conduct and supervision at all organization levels should exist to provide reasonable assurance that the work performed meets the firms’ standards of quality. This would require critical review of the judgment exercised at every level of supervision.

Question 47

Effective policies and procedures ask that the auditor adequately plan the work and properly supervise any assistants. These policies and procedures are ordinarily interpreted to require:

A.
thorough review of the existing safeguards over access to assets and records.

B.
limited review of the indications of employee fraud and noncompliance with laws and regulations.

C.
objective review of the adequacy of the technical training and proficiency of firm personnel.

D.
critical review of the judgment exercised at every level of supervision.

Answer 47

D.
critical review of the judgment exercised at every level of supervision.

The planning and supervision standard is ordinarily interpreted to require critical review of the judgment exercised at every level of supervision. The first standard of fieldwork requires that the evidence gathering phase of the audit examination be planned and properly supervised. A system of quality controls should be in place that gives reasonable assurance that standards of quality are maintained within the firm with regard to supervision. Policies and procedures for the conduct and supervision at all organization levels should exist to provide reasonable assurance that the work performed meets the firms’ standards of quality. This would require critical review of the judgment exercised at every level of supervision.

Question 48

According to the standards of the profession, which of the following would be considered a part of a consulting services agreement?

I. Expressing a conclusion about the reliability of a client’s financial statements
II. Reviewing and commenting on a client-prepared business plan

A.
I only

B.
II only

C.
Both I and II

D.
Neither I nor II

Answer 48

B.
II only

Any form of a conclusion on financial statements, when relied on by the client or third parties, could be assumed to be an attest function. Thus an attest function cannot be considered a consulting function. Conversely, a review of a proposed management plan would be a consultant action as it is an exclusively internal procedure of the company. As stated in the Statement on Standards for Consulting Services 1 (Consulting Services: Definitions and Standards: Introduction. 2):

Consulting services differ fundamentally from the CPA’s function of attesting to the assertions of other parties. In an attest service, the practitioner expresses a conclusion about the reliability of a written assertion that is the responsibility of another party, the asserter. In a consulting service, the practitioner develops the findings, conclusions, and recommendations presented. The nature and scope of work is determined solely by the agreement between the practitioner and the client. Generally, the work is performed only for the use and benefit of the client.

Consulting services may include consultations that are usually of a short-term nature based on existing knowledge of the circumstances of client (reviewing and commenting on a client prepared business plan and suggesting computer software for client investigation); advisory services (developing findings, conclusions and recommendations for client consideration and decision making); implementation services (putting an action plan into effect—such as computer systems implementation); transaction services designed usually for a specific transaction, usually with a third party (insolvency services, valuation services); staff and other support services to perform specific tasks for the client (computer programming, controllership activities, etc.); and product services to provide support in the installation, use and maintenance of a product (software).

Question 49

Based on Rule 3521 of the PCAOB, in order for registered public accounting firms to maintain independence, they can only accept contingent fees or commission:

A.
if they are approved by the audit committee.

B.
if they are approved by the PCAOB.

C.
if they are disclosed as a nonaudit fee.

D.
Contingent fees and commissions are currently not allowed.

Answer 49

D.
Contingent fees and commissions are currently not allowed.

Based on Rule 3521 of the Public Company Accounting Oversight Board, contingent fees and commission will result in a lack of independence for the registered public accounting firm.

Question 50

A person identified as an audit committee financial expert of an issuer generally must have acquired the attributes of a financial expert through any of the following experiences except:

A.
as a principal financial officer, principal accounting officer, controller, public accountant, or auditor.

B.
serving on at least one other issuer’s audit committee or disclosure committee of the board of directors.

C.
actively supervising a principal financial officer or principal accounting officer.

D.
assessing the performance of public accountants with respect to preparation, auditing, or evaluation of financial statements.

Answer 50

B.
serving on at least one other issuer’s audit committee or disclosure committee of the board of directors.

“Financial expert” is defined in SOX Title IV as whether a person has, through education and experience as a public accountant or auditor or a principal financial officer, comptroller, or principal accounting officer of an issuer:

an understanding of GAAP and financial statements;
experience in:
the preparation or auditing of financial statements of generally comparable issuers and
the application of such principles in connection with the accounting for estimates, accruals, and reserves;
experience with internal accounting controls; and
an understanding of audit committee functions.
There is no requirement that the financial expert had to obtain this experience by serving on a prior audit committee or board of directors.

Question 51

In which of the following circumstances would a covered member’s independence be impaired with respect to a nonissuer client?

A.
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.

B.
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.

C.
The member owns municipal utility bonds issued by a client, and the bonds are not material to the member’s wealth.

D.
The member belongs to a client golf club that requires members to acquire a share of the club’s debt securities.

Answer 51

C.
The member owns municipal utility bonds issued by a client, and the bonds are not material to the member’s wealth.

According to the AICPA Code of Professional Conduct, independence will be impaired if, during the period of the professional engagement, a covered member had or was committed to acquire any direct or material indirect financial interest in the client. Although the bonds are not material in relation to the member’s total wealth, independence is still impaired because the ownership of the bonds represents a direct financial interest in the client.

Independence is not violated if a 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 because the member is the children’s guardian, but is not a trustee of the estate held in trust for the children.

Independence is not impaired by membership in a client credit union.

According to an AICPA ethics ruling, as long as the membership in the golf club is essentially a social matter, the covered member’s association with the golf club would not impair independence because the debt ownership is not considered to be a direct financial interest.

Question 52

The GAO standards list several threats to independence. A structural threat is defined as:

A.
external influences or pressures that will impact an auditor’s ability to make independent and objective judgments.

B.
the threat that results from an auditor taking on the role of management.

C.
when an audit organization’s placement within a government entity will impact their ability to perform work and report results objectively.

D.
when, due to a long or close relationship with management or other personnel, the auditor will be too sympathetic or accepting of work.

Answer 52

C.
when an audit organization’s placement within a government entity will impact their ability to perform work and report results objectively.

The GAO has identified seven types of circumstances that could lead to threats of independence:

Self-interest
Self-review
Bias
Familiarity
Undue influence
Management participation
Structural threats
A structural threat is the threat that an audit organization's placement within a government entity, in combination with the structure of the government entity being audited, will impact the audit organization's ability to perform work and report results objectively.

Question 53

Prior to rules of the PCAOB becoming effective, they must be approved by the:

A.
AICPA.

B.
IASB.

C.
SEC.

D.
Congress.

Answer 53

C.
SEC.

The SEC must approve all rules of the Public Company Accounting Oversight Board prior to such rules becoming effective.

Question 54

Which of the following bodies promulgates standards for audits of issuers (publicly traded companies)?

A.
Securities and Exchange Commission (SEC)

B.
Auditing Standards Board (ASB)

C.
American Institute of Certified Public Accountants (AICPA)

D.
Public Company Accounting Oversight Board (PCAOB)

Answer 54

D.
Public Company Accounting Oversight Board (PCAOB)

The purpose of the PCAOB is to oversee the audits of issuers (publicly traded companies) that are subject to the securities laws. The SEC has not exercised its authority to set standards for issuers, but rather has relied on standards set by the PCAOB. The ASB, a subdivision of the AICPA, is the current standard-setting body for private companies.

Question 55

Which organization’s mission is “to promote the value of professional accountants worldwide”?

A.
American Institute of Certified Public Accountants (AICPA)

B.
International Federation of Accountants (IFAC)

C.
International Accounting Standards Board (IASB)

D.
Securities and Exchange Commission (SEC)

Answer 55

B.
International Federation of Accountants (IFAC)

The International Federation of Accountants (IFAC) is the organization whose mission is to serve the public interest by contributing to the development, adoption, and implementation of high-quality standards and guidance; facilitating the adoption and implementation of high-quality standards and guidance; contributing to the development of strong professional accountancy organizations and accounting firms, and to high-quality practices by professional accountants; promoting the value of professional accountants worldwide; and speaking out on public interest issues.

Question 56

The controller of a small utility company has interviewed audit firms proposing to perform the annual audit of their employee benefit plan. According to the guidelines of the Department of Labor (DOL), the selected auditor must be:

A.
the firm that proposes the lowest fee for the work required.

B.
independent for purposes of examining financial information required to be filed annually with the DOL.

C.
included on the list of firms approved by the DOL.

D.
independent of the utility company and not relying on its services.

Answer 56

B.
independent for purposes of examining financial information required to be filed annually with the DOL.

The Employee Retirement Income Security Act (ERISA) regulates employers who offer pension or welfare benefit plans. According to ERISA, auditors of employee benefit plans must be independent, in that they should not have any financial interests in the plan or the plan sponsor that would affect their ability to render an objective, unbiased opinion about the financial condition of the plan.

Question 57

In terms of services that can be performed, the AICPA and SEC vary in what services can be performed by auditors of private and public (issuers) companies. Which of the following bookkeeping services is allowed by the AICPA but prohibited by the SEC?

A.
Preparing source documents

B.
Recording transactions

C.
Preparing financial statements

D.
All of these services are prohibited by both the AICPA and SEC.

Answer 57

C.
Preparing financial statements

The AICPA does not prohibit auditors from assisting in the preparation of financial statements, whereas the SEC does. Both the AICPA and SEC prohibit auditors from preparing source documents and recording transactions.

Question 58

A CPA firm would be reasonably assured of meeting its responsibility to provide services that conform with professional standards by:

A.
adhering to generally accepted auditing standards.

B.
having an appropriate system of quality control.

C.
joining professional societies that enforce ethical conduct.

D.
maintaining an attitude of independence in its engagements.

Answer 58

B.
having an appropriate system of quality control.

QC Section 10.03 states, “The firm must establish a system of quality control designed to provide the firm with reasonable assurance that the firm and its personnel comply with professional standards and applicable regulatory and legal requirements, and that the firm or engagement partners issue reports that are appropriate in the circumstances.”

Thus, having an appropriate system of quality control provides reasonable assurance.

Question 59

During an audit of the financial statements of a company, the CFO provides a spreadsheet to the audit team that contains a number of errors that are material to the financial statements. Under what circumstances would this situation be a violation of the rules of the Sarbanes-Oxley Act of 2002 on improper influence on the conduct of audits?

A.
The CFO discovers and corrects most of the errors in the spreadsheet, which was prepared by a staff accountant. One immaterial error remains of which the CFO is aware, and this error remains undetected by the audit team, but the financial statements end up being fairly presented.

B.
The audit team discovers the errors through alternate procedures when they discern that the spreadsheet was improperly manipulated by the CFO. This intentional conduct of the CFO does not succeed in affecting the audit.

C.
The CFO had the spreadsheet prepared by a vendor of the company; the vendor intentionally misstates information in the spreadsheet, and the CFO does not discover the misstatements. The errors remain undetected by the audit team, and the financial statements are materially misleading.

D.
The CFO was unaware of the errors in the spreadsheet, which was prepared by a staff accountant and reviewed by the CFO. The errors remain undetected by the audit team, and the financial statements are materially misleading.

Answer 59

B.
The audit team discovers the errors through alternate procedures when they discern that the spreadsheet was improperly manipulated by the CFO. This intentional conduct of the CFO does not succeed in affecting the audit.

It is prohibited for any issuer’s officer or director to take any action to fraudulently influence, coerce, manipulate, or mislead any independent public or certified accountant engaged in the performance of an audit of the financial statements of that issuer for the purpose of rendering such financial statements materially misleading.

Question 60

For public accounting firms to issue or participate in the issuance of any report of an issuer, they must comply with all of the following requirements except:

A.
register with the PCAOB.

B.
sign a consent statement accepting their responsibilities to the Board.

C.
comply with any request for testimony or production of documents.

D.
ignore any other professional guidance in conflict with the directive of the Board.

Answer 60

D.
ignore any other professional guidance in conflict with the directive of the Board.

To participate in the issuance of any report of the issuer, public accounting firms must register with the PCAOB, sign a consent statement, and comply with a request for testimony or the production of documents. PCAOB Rule 3100 requires that public accounting firms comply with all applicable auditing and related professional practice standards.

Question 61

When a former partner of a registered public accounting firm who left the firm two years ago accepts a financial reporting oversight role at an issuer audit client, the independence of the registered public accounting firm is considered impaired unless which of the following is true?

A.
The former partner discloses the relationship to the issuer audit client’s board of directors.

B.
The former partner was employed by the registered public accounting firm for a period of two years or less.

C.
The former partner has no remaining capital balance in the registered public accounting firm.

D.
The former partner exerts only limited influence over the registered public accounting firm’s operations and financial policies.

Answer 61

C.
The former partner has no remaining capital balance in the registered public accounting firm.

A firm’s independence is considered impaired when a partner or professional employee leaves the firm and is subsequently employed by or associated with an attest client in a key position unless all of the following conditions are met:

• Amounts due to the former partner or professional employee for his or her previous interest in the firm and for unfunded, vested retirement benefits are not material to the firm.
• The former partner or professional employee is not in a position to influence the accounting firm’s operations or financial policies.
• The former partner or professional employee does not participate or appear to participate in and is not associated with the firm, whether or not compensated for such participation or association, once employment with the client begins.

Question 62

Section 404 of the Sarbanes-Oxley Act of 2002 requires each annual report of an issuer to include which of the following?

A.
Representations from the company’s external auditors that the company has effective internal control over operations

B.
Management representations that the company’s external auditors have examined its internal control over compliance with laws and regulations

C.
Reasonable assurances that fraud will be identified before the issuance of the company’s annual report

D.
Management’s assessment of the effectiveness of internal control over financial reporting

Answer 62

D.
Management’s assessment of the effectiveness of internal control over financial reporting

Section 404 of the Sarbanes-Oxley Act of 2002 (SOX) requires management to make an assessment of the effectiveness of internal controls over financial reporting.

The registered public accounting firm is to attest to the accuracy of management’s assessment, not to provide a representation of the effectiveness of the internal controls.

Section 404 is not limited to ensuring compliance with laws and regulations. It is also meant to prevent fraudulent financial reporting, which is an ethics and operational issue, not only a legal compliance issue.

The assessment is not designed to detect fraud, but to ensure that there is proper oversight and controls in order to prevent fraud.

Each annual report filed with the SEC must contain an internal control report, which states the responsibility of management for establishing and maintaining an adequate internal control structure and procedures for financial reporting. It also contains an assessment, as of the end of the most recent fiscal year of the issuer, of the effectiveness of the internal control structure and procedures. Registered public accounting firms are required to attest to, and report on, the assessment made by management regarding internal control.

Question 63

Which of the following is the authoritative body designated to promulgate attestation standards?

A.
Auditing Standards Board

B.
Governmental Accounting Standards Board

C.
Financial Accounting Standards Board

D.
Government Accountability Office

Answer 63

A.
Auditing Standards Board

In the preface to the AT section for the Statements on Standards for Attestation Engagements is a notation that indicates, “These statements are issued by the Auditing Standards Board, the Accounting and Review Services Committee, and the Management Consulting Services Executive Committee.” These are units of the American Institute of CPAs.

The FASB and GASB are independent authoritative bodies designated to promulgate financial accounting and reporting standards for business (for-profit) and governmental (and not-for-profit) entities.

The Government Accountability Office (GAO) is the accounting, auditing, and investigating agency of the U.S. Congress. This agency has promulgated “Standards for Audit of Governmental Organizations, Programs, Activities, and Functions” (the “Yellow Book”).

Question 64

Section 402 of SOX Title IV, “Enhanced Conflict of Interest Provisions,” dictates that:

A.
it is unlawful for any issuer to extend or maintain credit in the form of a personal loan to or for any director or executive officer of that issuer.

B.	 	
any person who is directly or indirectly the beneficial owner of more than 10% of any class of any equity security or is a director or an officer of the issuer must file statements required by SOX and the SEC.

C.
each annual report filed with the SEC must contain an internal control report.

D.
each issuer must disclose whether or not they have adopted a code of ethics for senior financial officers.

Answer 64

A.
it is unlawful for any issuer to extend or maintain credit in the form of a personal loan to or for any director or executive officer of that issuer

Section 402 of Title IV of the Sarbanes-Oxley Act (SOX) dictates that it is unlawful for any issuer to extend or maintain credit in the form of a personal loan to or for any director or executive officer of that issuer.

Section 403 requires disclosures from a person who is directly or indirectly a beneficial owner of more than 10% of any class of any security registered pursuant to Section 12 of the Securities Exchange Act of 1934.

Section 404 requires that an internal control report be filed with each annual report. Management must acknowledge responsibility for establishing and maintaining adequate internal control.

Section 406 requires disclosure of whether or not the issuer had adopted a code of ethics for senior financial officers (and if not, why not). Any change in or waiver of this code requires disclosure as well.

Question 65

Which of the following fee arrangements generally would not be permitted under the ethical standards published in the Treasury Department Circular 230?

A.
A referral fee paid by a CPA to obtain a client

B.
A commission for compiling a client’s internal-use financial statements

C.
A contingent fee for preparing a client’s income tax return

D.
A contingent fee for representing a client in tax court

Answer 65

C.
A contingent fee for preparing a client’s income tax return

Treasury Circular 230 states in section 10.27 that a practitioner shall not prepare an original or amended tax return or claim for a tax refund for a contingent fee for any client.

A contingent fee is one that is determined based on the outcome of the services provided. For instance, it would be prohibited for a CPA’s fee to increase if the tax refund increases.

Charging a contingent fee is permitted for representing a client in a tax examination or in tax court. Referral fees to obtain clients and commissions for compiling internal-use financial statements are permitted.

Question 66

According to the Code of Professional Conduct of the AICPA, for which type of service may a CPA receive a contingent fee?

A.
Performing an audit of a financial statement

B.
Performing a review of a financial statement

C.
Performing an examination of prospective financial information

D.
Seeking a private letter ruling

Answer 66

D.
Seeking a private letter ruling

According to ET 1.510.001 (“Contingent Fees”) of the AICPA Code of Professional Conduct, contingent fees are permitted when they involve a legal proceeding or ruling.

When a CPA is receiving a contingent fee for a private letter ruling, it would be allowed and not be considered actually “contingent” because it would most likely be fixed by the legal jurisdiction.

Contingent fees are prohibited for a CPA performing an audit, a review of a financial statement, or an examination of prospective financial information.

Question 67

Requirements of GAGAS for auditors and audit firms include all of the following except:

A.
80 hours of CPE in governmental auditing every two years for those auditors who spend at least 20% of their time on these audits.

B.
a system of quality control that includes independence, legal, and ethical requirements.

C.
an external peer review every other year.

D.
human resources policies and procedures.

Answer 67

C.
an external peer review every other year.

The Government Accountability Office (GAO) requires auditors who spend 20% or more of their time performing government audits to have 80 hours of CPE every two years directly related to government auditing (also called “Yellow Book” hours). Adding, on top of that requirement, state requirements for tax and ethics hours, government auditors have a heavy education requirement.

A firm that performs government audits must have a system of quality control in place to assure compliance with professional standards and legal and ethical requirements. The quality control system should address, among other areas, human resources policies and procedures.

An external peer review is required at least once every three years.

Question 68

With respect to Auditing Standards and Ethics and Independence Rules, the PCAOB:

A.
has adopted its own rules.

B.
relies on guidance of the AICPA.

C.
relies on guidance of the AICPA and its state societies.

D.
has yet to make any rules.

Answer 68

A.
has adopted its own rules.

In addition to adopting some rules from the AICPA and Auditing Standards Board (ASB), the Public Company Accounting Oversight Board has adopted its own rules regarding auditing standards, ethics, and independence.

Question 69

A CPA audits the financial statements of a client. The CPA has also been asked to perform bookkeeping functions for the client. Under the AICPA Code of Professional Conduct, which of the following activities would impair the CPA’s independence with respect to the client?

A.
The CPA records transactions in accordance with classifications determined by management.

B.
The CPA prepares financial statements from a trial balance provided by management.

C.
The CPA posts adjusting journal entries prepared by management to the trial balance.

D.
The CPA authorizes client transactions and reports them to management.

Answer 69

D.
The CPA authorizes client transactions and reports them to management.

The AICPA Code of Professional Conduct states that the CPA should not perform management functions or make management decisions for the attest client. Authorizing client transactions would be a management function. In each of the other answer choices, management has made the decisions, evaluated the adequacy of the services performed, and accepted responsibility for the services. Those services would most likely be permitted under the Code without compromising independence.

Question 70

Able, CPA, was engaged by Wedge Corp. to audit Wedge’s financial statements. Wedge intended to use the audit report to obtain a $10 million loan from Care Bank. Able and Wedge’s president agreed that Able would give an unmodified opinion on Wedge’s financial statements in the audit report even though there were material misstatements in the financial statements. Care refused to make the loan. Wedge then gave the audit report to Ranch to encourage Ranch to purchase $10 million worth of Wedge common stock. Ranch reviewed the audit report and relied on it to purchase the stock. After the purchase, Able’s agreement with Wedge’s president was revealed. As a result, Wedge stock lost half its value and Ranch sued Able for fraud. What will be the result of Ranch’s suit?

A.
Ranch will win because Able intentionally gave an unmodified opinion on Wedge’s materially misstated financial statements.

B.
Ranch will win because Able is strictly liable for errors made in auditing Wedge’s financial statements.

C.
Ranch will lose because Ranch is not a foreseen user of Able’s audit report.

D.
Ranch will lose because Ranch is not in privity with Able.

Answer 70

A.
Ranch will win because Able intentionally gave an unmodified opinion on Wedge’s materially misstated financial statements.

Since Able, CPA, was aware of material misstatements in Wedge Corp. financial statements, he has committed fraud by giving an unmodified opinion on the statements.

Question 71

Section 11(A) of the Securities Act of 1933:

A.
shifts the burden of proof in a lawsuit from the investor to the CPA who audited the financial statements.

B.
requires that the CPA be proven to have committed fraud in a lawsuit brought by an investor.

C.
protects the CPA who audits the financial statements of a registrant if the CPA follows section 11(A) to the letter.

D.
removes the discussion of materiality from any lawsuits brought by an investor against a CPA.

Answer 71

A.
shifts the burden of proof in a lawsuit from the investor to the CPA who audited the financial statements.

A CPA who audits the financial statements associated with a registration statement may be sued by anyone who acquires the securities. The CPA must show that the misstatement in the financial statements was immaterial, that the financial statements were not misleading, or that he exercised due diligence in the audit. The burden of proof is shifted to the CPA.

The investor does not have to prove fraud, deceit, or reliance in order to win the lawsuit.