Chapter 6 Deck 1

Question 1

Under the ethical standards of the profession in the United States, which of the following circumstances would impair independence in the audit of an issuer but would not impair independence in the audit of a nonissuer?

Answer 1

The ethical standards that apply to the audits of issuers (SOX/PCAOB/SEC) require that the lead partner rotate off the audit engagement after 5 years. The AICPA Code of Professional Conduct, which is followed when auditing nonissuers, does not require audit partner rotation.

Question 2

The concept of materiality would be least important to an auditor when considering the:

Answer 2

Any direct financial interest in a client impairs independence, even if it is immaterial.

Question 3

What types of services must be pre approved through the audit committee?

Answer 3

All audit, review, attestation, tax and significant non-audit services must be preapproved by the audit committee, even if provided on a recurring basis.

Question 4

The auditor of an issuer may provide which of the following tax services?

Answer 4

Permitted tax services include tax compliance, tax planning, and tax advice. The PCAOB prohibits tax services related to confidential or aggressive tax transactions and tax services to corporate officers of audit clients or immediate family members of corporate officers.

Question 5

Which of the following items impairs independence under U.S. ethics standards, but does not necessarily impair independence under the IFAC Code of Ethics for Professional Accountants?

Answer 5

Under the IFAC Code of Ethics, an auditor may provide internal audit services if appropriate safeguards are put in place to limit or eliminate any threats to independence. Internal audit outsourcing services may not be provided to audit clients under U.S. ethics standards

Question 6

Under the ethical standards of the profession, which of the following situations involving nondependent members of an auditor’s family is most likely to impair the auditor’s independence?

Answer 6

According to the Independence Rule, independence requirements extend to the member’s spouse, dependent children, and dependent relatives. A spouse working for a client is considered part of the class of “members” subject to independence requirements.

Question 7

Under the ethical standards of the profession, which of the following investments in a client is not considered to be a direct financial interest?

Answer 7

According the Independence Rule of the Code of Professional Conduct, independence is impaired based on control or the appearance of control that a member can exert over the investment. While it is still not desirable to even own shares in a nonclient regulated mutual fund that has investments in the client company, this answer choice is the best given the choices. The member does not control which stocks the mutual fund is investing in.

Question 8

According to the Independence Rule of the Code of Professional Conduct, a member’s independence is impaired with respect to a client who is more than ?

Answer 8

one year overdue in the payment of professional fees. An attestation engagement, such as an audit, requires independence of mind and in appearance. Fees from prior work must be paid in full before the issuance of a report on the following year’s work.

Question 9

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

Answer 9

The Code of Professional Conduct provides that a CPA may not commit a discreditable act. Retaining a client’s records after a demand for their return has been ruled to be a discreditable act.

Question 10

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

Answer 10

Exercise of due care dictates consultation or referral when a professional engagement exceeds the CPA’s personal competence. There is no requirement to obtain specialty accreditation.

Question 11

According to the profession’s ethical standards, which of the following events may justify a departure from GAAP?

Answer 11

Accounting Principles Rule provides that while GAAP should be followed, unusual circumstances, such as new legislation or the evolution of a new form of business transaction, can justify a departure.

Question 12

To exercise due professional care an auditor should:

Answer 12

Due care in performing an audit requires a member to plan and supervise adequately any professional activity for which he or she is responsible. This includes critical review at every level of supervision of the work done and the judgment exercised by those assisting in the examination.

Question 13

Must a CPA in public practice be independent of mind and in appearance when providing the following services?

Answer 13

Independence is not required for compilation engagements or for preparation of a tax return.

Question 14

Which of the following statements best explains why the CPA profession has found it essential to promulgate ethical standards and to establish means for ensuring their observance?

Answer 14

A distinguishing mark of a profession is its acceptance of responsibility to the public.

Question 15

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

Answer 15

The accountant must be independent to issue a standard report on an examination of a financial forecast

Question 16

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

Answer 16

Because the deposit account is fully insured, independence is not considered to be impaired.

Question 17

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

Answer 17

Membership in a social club in which membership requirements involve acquisition of a pro rata share of equity does not impair independence because such equity is not considered to be a direct financial interest. The member, however, should not serve in any management capacity.

Question 18

An auditor’s independence is considered impaired if the auditor has:

Answer 18

According to the Independence Rule, independence is impaired with an audit client if the auditor has a direct financial interest regardless of materiality, or a material indirect financial interest in the client. A joint, closely-held business investment with the client that was material would be a clear violation.

Question 19

Under the ethical standards of the profession, which of the following positions would be considered a position of significant influence in an audit client?

Answer 19

The Independence Rule of the Code of Conduct requires auditors to be independent of their clients. Independence is not impaired by an immediate family member’s employment with a client provided that (s)he is not in a key position. Having a policy-making position in the client’s finance division would clearly be a key position.

Question 20

Under which of the following circumstances may a CPA charge fees that are contingent upon finding a specific result?

Answer 20

Fees are not regarded as being contingent when they are fixed by courts or other public authorities or in tax matters, if they are based on the results of court proceedings or the findings of governmental agencies. Further, contingent fees are permitted for compilations only if the member includes a statement that the member is not independent.