Mod 1 Professional Responsibilities Flashcards
1
Q
- Under the ethical standards of the profession, which of the following is a “permitted loan” regardless of the date it was obtained?
a) Home mortgage loan.
b) Student loan.
c) Secured automobile loan.
d) Personal loan.
A
c) Secured automobile loan.
Secured automobile loans, loans collateralized by the cash surrender value of an insurance policy, fully collateralized loans on cash deposits, and outstanding loans on credit cards up to $10,000 are permitted.
2
Q
- Under the ethical standards of the profession, which of the following business relationships would generally not impair an auditor’s independence?
a) Promoter of a client’s securities.
b) Member of a client’s BoD.
c) Client’s trustee for its pension fund.
d) Advisor to client’s board of trustees.
A
d) Advisor to client’s board of trustees
An auditor may serve as an advisor to a client’s board of trustees and not be in violation of the AICPA Code of Professional Conduct or any of its interpretations.
3
Q
- Which of the following actions should a CPA firm take to comply with the AICPA’s quality control standards?
a) Establish procedures that comply with the standards of the SOX Act.
b) Use attributes sampling techniques in testing internal controls.
c) Consider inherent risk and control risk before determining detection risk.
d) Establish policies to ensure that the audit work meets applicable professional standards.
A
d) Establish policies to ensure that the audit work meets applicable professional standards.
This answer is correct because the engagement performance element of quality control standards require that the firm establish policies and procedures to provide it with reasonable assurance that engagements are consis10tly performed in accordance with professional standards and regulatory and legal requirements.
4
Q
- 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.
A
c) An investment held through a regulated mutual fund.
This answer is correct because an investment in a regulated mutual fund is an indirect investment in the stock of the companies in the fund as defined under the Code of Professional Conduct.
5
Q
- An accountant can perform, with preapproval of the audit committee of the board of directors, which of the following nonaudit services during the audit of an issuer?
a) Bookkeeping services.
b) Human resource services.
c) Tax planning services.
d) Internal audit outsourcing services.
A
c) Tax planning services.
This is correct because an auditor may perform tax planning services.
6
Q
- The purpose of establishing quality control policies and procedures for deciding whether to accept or continue a client relationship is to
a) Monitor the risk factors concerning misstatements arising from the misappropriation of assets.
b) Provide reasonable assurance that personnel are adequately trained to fulfill their responsibilities.
c) Minimize the likelihood of associating with clients whose management lacks integrity.
d) Document objective criteria for the CPA firm’s responses to peer review comments.
A
c) Minimize the likelihood of associating with clients whose management lacks integrity.
This answer is correct because the quality control element on accepting or continuing a client relationship has the purposes of (1) considering the integrity of the client, (2) determining that the firm is competent to perform the engagement, and (3) determining that the firm can comply with legal and ethical requirements.
7
Q
- To exercise due professional care an auditor should
a) Critically review the judgment exercised by those assisting in the audit.
b) Examine all available corroborating evidence supporting management’s assertions.
c) Design the audit to detect all instances of illegal acts.
d) Attain the proper balance of professional experience and formal education.
A
a) Critically review the judgment exercised by those assisting in the audit.
This answer is correct because the principle of due care requires the member to observe the profession’s technical and ethical standards, strive continually to improve compe10ce and the quality of services, and discharge responsibility to the best of the member’s ability.
8
Q
- In comparison to U.S. Statements on Auditing Standards regarding audit reports, International Standards on Auditing:
a) Require management to sign the report in addition to the auditor.
b) Require the identification of location of the auditor’s office that audited the client.
c) Require an opinion on internal control.
d) Require the report to be signed in the name of the audit partner.
A
b) Require the identification of location of the auditor’s office that audited the client.
This answer is correct because International auditing standards require identification of the location of the auditor’s office that performed the audit in the audit report.
9
Q
- A cooling-off period of how many years is required before a member of an issuer’s audit engagement team may begin working for the registrant in a key position?
a) One year.
b) Two years.
c) Three years.
d) Four years.
A
a) One year.
This is correct because the requirement is one year.
10
Q
- Which of the following is least likely to be directly examined in an inspection performed by the PCAOB?
a) Audit engagements.
b) Review engagements.
c) Compilation engagements.
d) CPA firm quality control system.
A
c) Compilation engagements
This answer is correct because compilation standards for F/Ss relate to nonpublic companies not under the jurisdiction of either the SEC or the PCAOB.
11
Q
- Rules issued under the Sarbanes-Oxley Act of 2002 restrict former members of an audit engagement team from accepting employment as a chief executive, chief financial or chief accounting officer, or controller of an audit client that files reports with the SEC. How many annual audit period(s) must be completed before such employment can be accepted?
a) One.
b) Two.
c) Three.
d) Five.
A
a) One
This answer is correct because the answer is one annual period.
12
Q
- When the dependent daughter of a partner in a CPA firm owns 10 shares of stock in an audit client, which rule of the Code of Professional Conduct is most directly relevant?
a) Acts discreditable.
b) Commissions and referral fees.
c) Compliance with standards.
d) Independence.
A
d) Independence
Investments by dependents are considered under independence.
13
Q
- Coverage of International Auditing and Assurance Standards Board pronouncements includes:
a) F/S Reviews - Yes; Firm Quality Control - Yes
b) F/S Reviews - Yes; Firm Quality Control - No
c) F/S Reviews - No; Firm Quality Control - Yes
d) F/S Reviews - No; Firm Quality Control - No
A
a) F/S Reviews - Yes; Firm Quality Control - Yes
International Auditing and Assurance Standards Board pronouncements address both reviews and quality control, as well as audits, other assurance and related engagements.
14
Q
- Which of the following is not a broad category of safeguards that mitigate or eliminate threats to independence?
a) Safeguards created by the profession, legislation, or regulation.
b) Safeguards created by peers who performed the audit in the preceding year.
c) Safeguards implemented by the firm, including policies and procedures to implement professional and regulatory requirements.
d) Safeguards implemented by the attest client.
A
b) Safeguards created by peers who performed the audit in the preceding year.
While those who performed the audit in the prior year should have considered threats and safeguards, they are less likely to establish broad safeguards for the subsequent year audit.
15
Q
- Which of the following family relationships is most likely to impair a CPA’s independence with respect to a particular audit client on which the CPA works as a “covered member”?
a) A close relative has a material investment in that client of which the CPA is not aware.
b) A cousin has an immaterial investment in the client of which the CPA is aware.
c) The CPA’s father is president of the audit client.
d) The CPA’s spouse participates in a savings plan sponsored by the client.
A
c) The CPA’s father is president of the audit client.
The CPA’s father is in what is considered a key position, and as such the CPA is not independent.
16
Q
- Under the International Code of Ethics for Professional Accountants an auditor may accept a contingent fee:
a) If it is only for the audit of the entity’s F/Ss.
b) If the company is not publicly held.
c) If appropriate safeguards are established.
d) If those charged with governance approve the fee.
A
c) If appropriate safeguards are established.
This answer is correct because the international code allows contingent fees when appropriate safeguards are established.
17
Q
- A CPA audits the F/Ss 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?
The CPA records transactions in accordance with classifications determined by management.
The CPA prepares F/Ss from a trial balance provided by management.
The CPA posts adjusting journal entries prepared by management to the trial balance.
The CPA authorizes client transactions and reports them to management.
This answer is correct because the Code of Professional Conduct indicates that authorizing transactions impairs CPA independence.
A
d
18
Q
- How many audits of public companies per year does a CPA firm that is registered with the Public Company Accounting Oversight Board (PCAOB) have to perform before it receives an annual inspection from the PCAOB?
One audit.
More than 10 audits.
More than 50 audits.
More than 100 audits.
This answer is correct because CPA firms that audit more than 100 issuers must have an annual inspection by the PCAOB.
A
d
19
Q
- An auditor’s independence is considered impaired if the auditor has
An immaterial, indirect financial interest in a client.
An automobile loan from a client bank, collateralized by the automobile.
A joint, closely held business investment with the client that is material to the auditor’s net worth.
A mortgage loan, executed with a financial institution client on March 1, 1990, that is material to the auditor’s net worth.
The Code prohibits joint closely held investments that are material to the auditor.
A
c
20
Q
- Under Sarbanes-Oxley Act of 2002, exactly how many consecutive years may an audit partner lead an audit for an issuer?
Four years.
Five years.
Six years.
Seven years.
This is correct because an audit partner may lead such an audit for five years.
A
b
21
Q
- When an accountant is not independent, the accountant is precluded from issuing a:
Compilation report.
Review report.
Management advisory report.
Tax planning report.
This answer is correct since a review is an attest engagement that results in limited assurance; accordingly, independence is required.
A
b
22
Q
- Which of the following are issued by the SEC?
Journal of Accountancy.
Accounting Trends and Techniques.
Industry Audit Guides.
Financial Reporting Releases.
This answer is correct because Financial Reporting Releases are issued by the SEC.
A
d
23
Q
- In connection with the element of monitoring, a CPA firm’s system of quality control should ordinarily provide for the maintenance of
A file of minutes of staff meetings.
Updated personnel files.
Documentation to demonstrate compliance with its policies and procedures.
Documentation to demonstrate compliance with peer review directives.
This answer is correct because it provides for maintenance of documentation of the various quality control policies and procedures—it is all encompassing.
A
c
24
Q
- The Public Company Accounting Oversight Board (PCAOB) has authority to establish which of the following relating to public companies?
a) Attestation standards - Yes; Independence standards - Yes
b) Attestation standards - Yes; Independence standards - No
c) Attestation standards - No; Independence standards - Yes
d) Attestation standards - No; Independence standards - No
A
a) Attestation standards - Yes; Independence standards - Yes
This answer is correct because the PCAOB may establish attestation standards, independence standards, auditing standards, and quality control standards.
25
25. Page, CPA, has T Corp. and W Corp. as audit clients. T Corp. is a significant supplier of raw materials to W Corp. Page also prepares individual tax returns for Time, the owner of T Corp. and West, the owner of W Corp. When preparing West’s return, Page finds information that raises going-concern issues with respect to W Corp. May Page disclose this information to Time?
Yes, because Page has a fiduciary relationship with Time.
Yes, because there is no accountant-client privilege between Page and West.
No, because the information is confidential and may not be disclosed without West’s consent.
No, because the information should only be disclosed in Page’s audit report on W Corp.’s financial statements.
This answer is correct because a CPA is prohibited from disclosing confidential information learned in the course of an engagement.
c
26
26. The concept of materiality would be least important to an auditor when considering the:
Decision whether to use positive or negative confirmations of accounts receivable.
Adequacy of disclosure of a client’s illegal act.
Discovery of weaknesses in a client’s internal control.
Effects of a direct financial interest in the client upon the CPA’s independence.
This answer is correct because any direct financial interest, material or immaterial, impairs auditor independence.
d
27
27. Which of the following is not a safeguard to mitigate or eliminate threats to independence according to Conceptual Framework for AICPA Independence Standards?
Those created by the profession, legislation or regulation.
Those implemented by the CPA involved.
Those implemented by the client.
Those implemented by the CPA firm.
This answer is correct because safeguards cannot be effectively implemented by the CPA involved.
b
28
28. Which of the following services cannot be performed for a nonissuer attest client?
Performing data processing services.
Communicating with management about the appropriateness of accounting principles.
Preparing adjusting journal entries for client management consideration.
Signing payroll checks.
Signing payroll checks is a management function that impairs the independence of the CPA.
d
29
29. According to the ethical standards of the profession, a CPA’s independence would most likely be impaired if the CPA
Accepted any gift from a client.
Became a member of a trade association that is a client.
Contracted with a client to supervise the client’s office personnel.
Served, with a client bank, as a cofiduciary of an estate or trust.
This answer is correct because supervision of the client’s office personnel would put the CPA in the role of management and impair independence.
c
30
30. Within the context of quality control, a primary purpose of the engagement performance element is to help ensure that
CPA firm personnel have adequate technical training.
Engagements are adequately supervised.
The CPA firm undertakes only those engagements it is competent to perform.
CPA firm personnel comply with relevant ethical requirements.
This answer is correct because it is an objective of the engagement performance element of quality control.
b
31
31. The Department of Labor (DOL) most frequently conducts financial and performance audits following
Government Auditing Standards.
Sarbanes-Oxley Requirements.
Generally Accepted Auditing Standards.
Financial Accounting Standards Board pronouncements.
This answer is correct because the DOL conducts most of its financial and performance audits following Government Auditing Standards, including audits of compliance with laws, evaluation of economy and efficiency of operations, and evaluation of effectiveness in achieving program results.
a
32
32. Reply as to whether the confirmation of accounts receivable is presumptively required under the following standards:
a) US PCAOB - Yes; Auditing Standards Board - Yes; International Auditing Standards - Yes
b) US PCAOB - Yes; Auditing Standards Board - Yes; International Auditing Standards - No
c) US PCAOB - Yes; Auditing Standards Board - No; International Auditing Standards - No
d) US PCAOB - No; Auditing Standards Board - No; International Auditing Standards - No
b) US PCAOB - Yes; Auditing Standards Board - Yes; International Auditing Standards - No
This answer is correct because while PCAOB and ASB standards presumptively require confirmation, IAS do not.
33
33. Under the ethical standards of the profession, which of the following positions would be considered a position of significant influence in an audit client?
A marketing position related to the client’s primary products.
A policy-making position in the client’s finance division.
A staff position in the client’s research and development division.
A senior position in the client’s human resources division.
This answer is correct because individuals in positions of significant influence include individuals in a policy-making position in the finance department. These individuals can significantly affect the financial statements of the company.
b
34
34. When the auditor of group financial statements (the “principal auditor”) is performing an audit in conformity with International Auditing Standards and a component (other) auditor is involved, which of the following is correct?
The auditor of the group financial statements must refer to the component auditor and must name that auditor.
The auditor of the group financial statements may, but is not required to, refer to the component auditor.
The component auditor must issue its report on the portions of the financial statements it has audited and this report must be included with the report on the group financial statements.
The auditor of the group financial statements may not refer to the component auditor.
This answer is correct because the auditor of group financial statements may not refer to the component auditor under International Auditing Standards.
d
35
35. Which of the following is not considered a threat to independence in the Conceptual Framework for AICPA Independence Standards?
Self-review threat.
Familiarity threat.
Public interest threat.
Financial self-interest threat.
This answer is correct because this concept is not a potential threat to independence.
c
36
36. Which of the following most accurately summarizes the intended use of International Standards on Auditing?
Foreign publicly traded companies.
Publicly traded companies.
Publicly traded companies and private businesses.
Publicly traded companies, private businesses, and governmental entities.
This answer is correct because the ISAs apply to all three types of organization.
d
37
37. In which of the following circumstances would a covered member's independence be impaired with respect to a nonissuer client?
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.
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.
The member owns municipal utility bonds issued by a client, and the bonds are not material to the member's wealth.
The member belongs to a client golf club that requires members to acquire a share of the club's debt securities.
This is correct because a covered member may hold no direct financial interest in an audit client, and such bonds are a direct financial interest.
c
38
38. The audit report of which organization(s) includes section titles?
a) IASB - Yes; PCAOB - Yes
b) IASB - Yes; PCAOB - No
c) IASB - No; PCAOB - Yes
d) IASB - No; PCAOB - No
Note:
IASB = International Auditing & Assurance Standards Board
PCAOB = Public Company Accounting Standards Board
b) IASB - Yes; PCAOB - No
This answer is correct because while section titles are included in audit reports using the International Auditing and Assurance Standards Board format, they are not included in PCAOB format audit reports.
39
39. Governmental auditing is often accomplished under the Single Audit Act. Which of the following may be engaged to do this work?
I.
CPA firms.
II.
Government auditors at the local level.
III.
Government auditors at the state level.
I only is correct.
II only is correct.
II and III only are correct.
I, II, and III are correct.
This answer is correct because there are designated government auditors at local, state, and federal levels that do governmental audits. CPAs may also do governmental audits.
d
40
40. ABC Company is audited by the Albuquerque office of Whitt CPAs. Which of the following individuals would be least likely to be considered a “covered member” by the AICPA Code of Professional Conduct independence standard?
Staff assistant on the audit.
An audit partner in the Silver Springs office who performs no attest services for ABC Company.
A tax partner in Albuquerque who performs no attest services for ABC Company or for any other firm clients.
The partner in charge of Whitt CPAs (she does not work on the ABC Company audit).
This answer is correct because partners in another office who do not work on the audit are not considered covered members.
b
41
41. Which of the following forms of advertising is most likely to be considered a violation of the AICPA Code of Professional Conduct?
Advertising including the types of services offered and the standard fees for the services.
Advertising including the experience of the firm’s professional staff.
Advertising including an indication that the firm has a close relationship with several tax court judges.
Advertising including the percentage of the firm’s staff that have CPA certificates.
The nature of the relationship is very subjective, and certainly whether it has any advantage in court proceedings is at issue.
c
42
42. AICPA independence requirements suggest that a CPA should evaluate whether a particular threat to independence would lead a reasonable person, aware of all the relevant facts, to conclude that:
There is substantial cause for a legal finding of non-independence.
A questioning mind reveals doubt as to independence.
An unacceptable risk of non-independence exists.
The accountant is definitely not independent.
This answer is correct because the requirement simply asks one to consider whether a reasonable person would consider the risk to independence unacceptable.
c
43
43. Which of the following is correct concerning PCAOB inspections?
Engagements and audit areas to be inspected are selected randomly, without consideration of risk aspects.
Inspections may include consideration of aspects of practice management, such as how partner compensation is determined.
When a lack of compliance with standards is identified, the PCAOB staff attempts to determine the cause, which will ultimately lead to identification of a defect in a CPA firm’s quality control system.
All public company audits are inspected.
This answer is correct because inspections may include consideration of such aspects of practice management.
b
44
44. The Government Accountability Office (GAO):
Is primarily concerned with rapid processing of all accounts payable incurred by the federal government.
Conducts operational audits and reports the results to Congress.
Is a multinational organization of professional accountants.
Is primarily concerned with budgets and forecasts approved by the SEC:
This answer is correct because the GAO does conduct operational audits and report the results to Congress.
b
45
45. An audit of financial statements of a nonpublic US company that plans to use the financial statements in a foreign country may be performed using which of the following standards?
a) Auditing Standards Board - Yes; International Auditing Standards - Yes
b) Auditing Standards Board - Yes; International Auditing Standards - No
c) Auditing Standards Board - No; International Auditing Standards - Yes
d) Auditing Standards Board - No; International Auditing Standards - No
a) Auditing Standards Board - Yes; International Auditing Standards - Yes
This answer is correct because either an audit following Auditing Standards Board or one following International Auditing Standards may be appropriate depending upon details of the circumstances involved.
46
46. Which of the following is true about requirements to send a letter of audit inquiry to the client’s lawyer under International Standards on Auditing?
A lawyer’s letter must be obtained in all audits.
A lawyer’s letter must be obtained if the client uses an outside attorney.
A lawyer’s letter must be obtained if the auditor assesses a related risk of material misstatement.
A lawyer’s letter need never be obtained.
This answer is correct because under international auditing standards a lawyer’s letter is only required when the auditor assesses a related risk of material misstatement.
c
47
47. A CPA who is not in public practice but is in business is obligated to follow which of the following rules of conduct?
Independence.
Integrity and objectivity.
Contingent fees.
Commissions.
All members must adhere to the Integrity and Objectivity Rule.
b
48
48. Quality control policies and procedures that are established to decide whether to accept a new client should provide the CPA firm with reasonable assurance that
The CPA firm’s duty to the public concerning the acceptance of new clients is satisfied.
The likelihood of associating with clients whose management lacks integrity is minimized.
Client-prepared schedules that are necessary for the engagement are completed on a timely basis.
Sufficient corroborating evidence to support the financial statement assertions is available.
This answer is correct because CPAs wish to minimize the likelihood of becoming associated with clients whose management lacks integrity.
b
49
49. 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
As a principal financial officer, principal accounting officer, controller, public accountant, or auditor.
Serving on at least one other issuer's audit committee or disclosure committee of the board of directors.
Actively supervising a principal financial officer or principal accounting officer.
Assessing the performance of public accountants with respect to preparation, auditing, or evaluation of financial statements.
This answer is correct because service on at least one other issuer's audit committee or disclosure committee would not be an experience that would necessarily qualify the individual as a financial expert.
b
50
50. Which of the following is not an AICPA pronouncement enforceable under the AICPA Code of Professional Conduct?
Statements on Auditing Standards.
Statements on Standards for Accounting and Review Services.
Statements on Responsibilities in Personal Consulting Advisory Practice.
Statements on Standards for Valuation Services.
This answer is correct since no standards titled Statements on Responsibilities in Personal Consulting Advisory Practice exist. The closest that does exist are Statements on Standards for Consulting Services (which are enforceable).
c
51
51. Which of the following is correct concerning General Accountability Office (GAO) audits?
They are based on the GAO’s mission to support the President in meeting his or her constitutional responsibilities.
They do not include requirements beyond those of generally accepted auditing standards.
Audit team members may not also work on nonattest engagements.
They are generally based on the "Blue Book."
This answer is correct because the GAO standards do not allow personnel working on nonattest engagements to also work on the audit.
c
52
52. A violation of the profession’s ethical standards least likely would have occurred when a CPA
Purchased another CPA’s accounting practice and based the price on a percentage of the fees accruing from clients over a 3-year period.
Received a percentage of the amounts invested by the CPA’s audit clients in a tax shelter with the client’s knowledge and approval.
Had a public accounting practice and also was president and sole stockholder of a corporation that engaged in data processing services for the public.
Formed an association, not a partnership, with two other sole practitioners and called the association "Adams, Betts and Associates."
This answer is correct because the purchase of another practitioner’s practice is acceptable and the professional standards do not prohibit such a contingent payment.
a
53
53. In which of the following situations would a CPA firm be independent with respect to an audit client?
A partner in the office but not assigned to the engagement owns 10% of the outstanding stock of the client.
A professional employee assigned to the engagement has a spouse that is employed as a salesperson by the client.
The partner that manages the firm’s audit practice owns 100 shares of the client’s stock.
A manager that provides twenty hours of nonattest services to the client has a material indirect interest in the client.
This answer is correct because a covered member’s spouse may be employed by an attest client providing that he or she is not employed in a key position.
b
54
54. A CPA firm must do which of the following before it can participate in the preparation of an audit report of a company registered with the Securities and Exchange Commission (SEC)?
Join the SEC Practice Section of the AICPA.
Register with the Public Company Accounting Oversight Board.
Register with the Financial Accounting Standards Board (FASB).
Register with the SEC pursuant to the Securities Exchange Act of 1934.
This answer is correct because the Sarbanes-Oxley Act requires CPA firms that audit companies that are registered with the Securities and Exchange Commission be registered with the Public Company Accounting Oversight Board.
b
55
55. Must a CPA in public practice be independent in fact and appearance when providing the following services?
d) Compilation of personal financial forecast - No; Preparation of a tax return- No; Compilation of a financial forecast - No
This answer is correct because an accountant need be independent only when providing attestation services. An accountant need not be independent to provide compilation services or prepare tax returns.
56
56. Which of the following is true about audit reports under International Standards on Auditing?
An emphasis of a matter paragraph must be added for a change in accounting principle.
In a group audit, the group (principal) auditor may indicate reliance on a component (other) auditor.
The auditor may modify the opinion for an uncertainty about the client’s continued existence as a going concern.
The auditor may not sign the opinion in the name of the audit partner.
This answer is correct because indication of a going concern uncertainty is disclosed under the international standards.
c
57
57. Which of the following is not a source of guidance to CPAs with respect to their professional responsibilities?
Principles of the Code of Professional Conduct
Interpretations of the Code of Professional Conduct
Rules of the Code of Professional Conduct
All of the above are sources of guidance
This answer is correct because all of the items provide guidance to CPAs in meeting their professional obligations.
d
58
58. Pursuant to the AICPA rules of conduct, the auditor’s responsibility to the profession is defined by
The AICPA Code of Professional Conduct.
Federal laws governing licensed professionals who are involved in interstate commerce.
Statements on Auditing Standards.
The bylaws of the AICPA.
This answer is correct because the AICPA Code of Professional Conduct outlines the profession’s rules of conduct and auditor’s responsibility to the profession.
a
59
59. Which of the following is most accurate relating to the International Auditing and Assurance Standards Board (IAASB) and the International Federation of Accountants (IFAC)?
The two are entirely independent of one another.
IFAC is a subcommittee of IAASB:
IAASB is a Board within IFAC:
IFAC and IAASB are the international sections of the Public Company Accounting Oversight Board.
This answer is correct because IAASB is a Board within the broader organization, IFAC:
c
60
60. An issuer may hire an employee of a registered public accounting firm who served on the audit engagement team within the previous year for which of the following positions?
Controller.
CFO.
CEO.
Staff accountant.
This answer is correct because Section 206 of the Sarbanes-Oxley Act requires a one-year "cooling off" period for auditors hired by clients in the position of CEO, controller, CFO, chief accounting officer or person in a similar capacity; it does not include a staff accountant.
d
61
61. Under which of the following circumstances may a CPA charge fees that are contingent upon finding a specific result?
For an examination of prospective financial statements.
For an audit or a review if agreed upon by both the CPA and the client.
For a compilation if a third party will use the financial statement and disclosure is not made in the report.
If fixed by courts, other public authorities, or in tax matters if based on the results of judicial proceedings.
Fees that are fixed by the courts, or other public authorities, or in tax matters if based on the results of judicial proceedings are allowable under the AICPA Code of Professional Conduct.
d
62
62. Which of the following is not true about the Public Company Accounting Oversight Board created by the Sarbanes-Oxley Act of 2002?
The board consists of 5 members.
The board oversees the SEC.
The board has the responsibility to discipline CPA firms that audit public companies.
The board has responsibility to develop independence standards for CPA firms that audit public companies.
This answer is correct because the board is overseen by the SEC.
b
63
63. When a threat to independence arises an auditor should consider
Alternative threats to a lack of independence.
Available safeguards to independence.
Global independence rules.
Required lack of independence approaches.
This answer is correct because for threats, auditors are required by the AICPA independence framework to consider safeguards.
b
64
64. According to the SEC, an auditor is not independent of its issuer audit client in which of the following situations:
The auditor's cousin has an insurance policy obtained from the issuer before it became an audit client.
The auditor has an automobile loan at standard terms from the audit client that is collateralized by the automobile.
The auditor has an investment in an entity that has the ability to exercise significant influence over the audit client.
The auditor's grandparent was in an accounting role at the audit client and ended employment before the period under audit began.
This answer is correct because when an auditor has an investment in an entity that has the ability to exercise significant influence over the audit client, the SEC does not consider that auditor independent.
c
65
65. When performing risk assessment procedures under the International Auditing Standards, the auditor shall consider
Management’s plans avoid the need to perform audit procedures addressing the entity’s ability to continue as a going concern.
Whether management’s risk avoidance techniques relating to the entity’s ability to continue as a going concern appear adequate.
Sufficient appropriate audit evidence exists to assure the entity’s ability to continue as a going concern.
Whether there are events or conditions that may cast significant doubt about the entity’s ability to continue as a going concern.
This answer is correct because the ISA requirement is that the auditor consider whether there are events or conditions that may cast significant doubt about the entity’s ability to continue as a going concern.
d
66
66. 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
The firm that proposes the lowest fee for the work required.
Independent for purposes of examining financial information required to be filed annually with the DOL.
Included on the list of firms approved by the DOL.
Independent of the utility company and not relying on its services.
This is correct because the auditor must be independent.
b
67
67. The AICPA Conceptual Framework for Independence Standards suggests that CPAs evaluate whether a particular threat would lead which type of person to conclude that an unacceptable risk of non-independence exists?
AICPA peer reviewer.
Peer.
SEC inspector.
Reasonably informed third party.
This answer is correct because the AICPA framework requires that a reasonably informed third party’s viewpoint be considered.
d
68
68. In which of the following situations would a CPA’s covered members’ independence be considered to be impaired?
I.
The CPA maintains a checking account that is fully insured by a government deposit insurance agency at an audit-client financial institution.
II.
The CPA has a direct financial interest in an audit client, but the interest is maintained in a blind trust.
III.
The CPA owns a commercial building and leases it to an audit client. The rental income is material to the CPA.
I and II.
II and III.
I and III.
I, II, and III.
This answer is correct because situations II and III are prohibited by the Code of Professional Conduct, while situation I is allowed. Situation I is acceptable since a CPA may maintain a checking account that is fully insured by a government deposit insurance agency in an audit client. The Code of Professional Conduct states that independence is impaired both by a direct financial interest in an audit client, regardless of whether it is placed in a blind trust and by an indirect financial interest such as the earning of a material amount of rental income from an audit client.
b
69
69. The profession’s ethical standards would most likely be considered to have been violated when a CPA
Continued an audit engagement after the commencement of litigation against the CPA alleging excessive fees filed in a stockholder’s derivative action.
Represented to a potential client that the CPA’s fees were substantially lower than the fees charged by other CPAs for comparable services.
Issued a report on a financial forecast that omitted a caution regarding achievability.
Accepted a consulting engagement concerning data processing services for which the CPA lacked independence.
This answer is correct because the professional standards on forecasts require the inclusion of a caution statement as to achievability. Omission of such a caution statement would be a violation of the Code of Professional Conduct which requires that CPAs comply with the appropriate professional standards.
c
70
70. Which of the following is not a broad category of threat to auditor independence?
Familiarity.
Safeguards implemented by the client.
Financial self-interest.
Undue influence.
This answer is correct because the independence framework does not include safeguards implemented by the client as a threat, but as a mitigating factor.
a
71
71.
a
72
72. A CPA should maintain objectivity and be free of conflicts of interest when performing
Audits, but not any other professional services.
All attestation services, but not other professional services.
All attestation and tax services, but not other professional services.
All professional services.
This answer is correct because the Code of Professional Conduct requires objectivity and freedom from conflicts of interests in the performing of all services.
d
73
73. Auditors involved in governmental auditing
I.
Should follow generally accepted government auditing standards established by the US Governmental Accountability Office.
II.
Should follow all relevant AICPA standards that apply to financial related audits.
I only is correct.
II only is correct.
I and II are both correct.
Neither I nor II is correct.
This answer is correct because the US Governmental Accountability Office creates audit standards to be used in governmental auditing. All relevant standards of the AICPA for financial related audits have been incorporated by reference as part of the generally accepted auditing standards.
c
74
74. Assuming appropriate disclosure is made, which of the following fee arrangements generally would be permitted under the ethical standards of the profession?
A fee paid to the client’s audit firm for recommending investment advisory services to the client.
A fee paid to the client’s tax accountant for recommending a computer system to the client.
A contingent fee paid to the CPA for preparing the client’s amended income tax return.
A contingent fee paid to the CPA for reviewing the client’s financial statements.
This answer is correct because a commission may be received providing it is not from a client for which the CPA provides any of the following services: (1) audit or review of financial statements, (2) compilation of financial statements expected to be relied upon by a third party or (3) examination of prospective financial information. In addition, a contingent fee cannot be accepted for preparing an initial or amended tax return.
b
75
75. According to the Code of Professional Conduct of the AICPA, for which type of service may a CPA receive a contingent fee?
Performing an audit of a financial statement.
Performing a review of a financial statement.
Performing an examination of prospective financial information.
Seeking a private letter ruling.
This is correct because contingent fees ordinarily may be received for seeking a private letter ruling when the CPA performs no attest services for that client; as an illustration, a private letter ruling may be obtained from the Internal Revenue Service relating to treatment of a potentially taxable event.
d
76
76.
a
77
77. A violation of the Code of Professional Conduct would least likely have occurred when a CPA in public practice
Used a records-retention agency to store the CPA’s working papers and client records.
Served as an expert witness in a damage suit and received compensation based on the amount awarded to the plaintiff.
Referred life insurance assignments to the CPA’s spouse, who is a life insurance agent.
Served simultaneously as state director of revenues and practiced public accounting in the same state.
Using a records-retention agency to store the CPA’s working papers and client records is considered ethical if client confidentiality is maintained.
a
78
78. Which of the following bodies enforce the audit requirements of the Employee Retirement Security Act of 1974 (ERISA) with respect to employee benefit plans?
Department of Commerce.
The Department of Project Management.
The Securities and Exchange Commission.
The Department of Labor.
This answer is correct because the Department of Labor enforces the audit requirements of ERISA.
d
79
79. Smith, CPA, is a partner of Johnson Accounting Firm. Johnson audited the books of Hometown Bank. Smith’s independence would be impaired under which of the following circumstances?
Smith is a director of Hometown Bank.
Smith has a collateralized automobile loan with Hometown Bank.
Smith had an account with Hometown Bank two years ago.
Smith and a Hometown Bank board member belong to the same church.
This answer is correct because serving as an officer, director, or employee of the bank impairs the auditor’s independence.
a
80
80. Which of the following statements is correct?
Client-prepared records (e.g., the general ledger) may be retained by the CPA until fees due to the CPA are received.
CPA working papers are the joint property of the CPA and the client.
CPA working papers that include copies of client’s records are not available to third parties under any circumstances.
Supporting records not reflected in the client’s records (e.g., proposed adjusting entries) may be withheld by the CPA if fees for the engagement remain unpaid.
This answer is correct because the CPA may retain supporting records which he or she has prepared.
d
81
81. 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?
Information processing.
Engagement performance.
Technology selection.
Professional skepticism.
This answer is correct because engagement performance is an element of quality control (the others are [1] leadership responsibilities for quality within the firm; [2] relevant ethical requirements; [3] acceptance and continuance of client relationships and specific engagements; [4] human resources; and [5] monitoring).
b
82
82. One purpose of establishing quality control policies and procedures for acceptance and continuance of client relationships and specific engagements is to
Undertake engagements only that the accounting firm is compe10t to perform.
Monitor significant deficiencies in the design and operation of the client’s internal control.
Identify noncompliance with aspects of contractual agreements that affect the F/Ss.
Provide reasonable assurance that personnel will be adequately trained to fulfill their assigned responsibilities.
This answer is correct because the quality control standards indicate that a primary purpose is to help insure that the firm is compe10t to perform any engagements that are accepted.
a
83
83. 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?
No, because the CPA would not have a direct financial interest in the client.
Yes, because the stock would be a direct financial interest and materiality is a factor.
Yes, because the stock would be an indirect financial interest and materiality is not a factor.
Yes, because the stock would be a direct financial interest and materiality is not a factor.
This answer is correct because the financial interest of dependents (here, the child) are treated the same as if the CPA held the interest, and any direct financial interest impairs CPA independence.
d
84
84. The series of international standards on auditing financial statements issued by the International Auditing and Assurance Standards Board are referred to as:
Statements on Auditing Standards.
International Standards on Auditing.
International Standards on Attestation.
International Assurance Standards.
This answer is correct because such standards are referred to as International Standards on Auditing (ISAs).
b
85
85. 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 CPA in public practice providing tax and management advisory services.
A CPA in public practice providing auditing and other attestation services.
A CPA not in public practice.
All CPAs.
This answer is correct because independence is required only for audits and other forms of attestation services.
b
86
86. A basic objective of a CPA firm is to provide professional services to conform with professional standards. Reasonable assurance of achieving this basic objective is provided through
Continuing professional education.
A system of quality control.
Compliance with generally accepted reporting standards.
A system of peer review.
This answer is correct because a system of quality control is necessary to provide a CPA firm with reasonable assurance that it is conforming to generally accepted auditing standards.
b
87
87. An audit performed by the Department of Labor is least likely to address
Evaluation of Sarbanes-Oxley required COSO compliance.
Compliance with applicable laws and regulations.
Evaluation of economy and efficiency of operations.
Evaluation of the effectiveness in achieving program results.
This answer is correct because few Department of Labor audits address Sarbanes-Oxley requirements and because the Sarbanes-Oxley Act does not require use of the COSO internal control (or ERP) framework.
a
88
88. One of the objectives of the human resources element quality control mandates that a public accounting firm should establish policies and procedures for recruitment processes which provide reasonable assurance that all personnel
Prepare working papers which are standardized in form and content.
Perform engagements in accordance with professional standards.
Will advance within the organization.
Develop specialties in specific areas of public accounting.
This answer is correct because one of the quality control considerations for a firm of independent auditors is that the policies and procedures for professional development should be established to provide reasonable assurance that personnel have the knowledge required to enable them to perform in accordance with professional standards.
b
89
89. Which of the following can cause a CPA to receive an automatic expulsion from the AICPA?
I.
The CPA’s CPA certificate is revoked by the relevant state board of accountancy.
II.
The CPA is convicted of a felony.
III.
The CPA intentionally did not file his personal tax return as required by federal law.
I only.
II only.
I and II only.
I, II, and III.
This answer is correct. All three of these can result in automatic expulsion of a CPA from the AICPA.
d
90
90. A client company has not paid its year 1 audit fees. According to the AICPA Code of Professional Conduct, in order for the auditor to be considered independent with respect to the year 2 audit, the year 1 audit fees must be paid before the:
Year 1 report is issued.
Year 2 fieldwork is started.
Year 2 report is issued.
Year 3 fieldwork is started.
This answer is correct because the professional standards require payment prior to issuance of the subsequent year audit report.
c
91
91. The organization charged with protecting investors and the public by requiring full disclosure of financial information by companies offering securities to the public is the:
Auditing Standards Board.
Financial Accounting Standards Board.
Government Accounting Standards Board.
Securities and Exchange Commission.
This answer is correct because the Securities and Exchange Commission is the organization charged with protecting investors and the public by requiring full disclosure of financial information by companies offering securities to the public in the United States.
d
92
92.
a
93
93. According to the AICPA Code of Professional Conduct, in which of the following circumstances may a CPA serve on a company’s board of directors?
The CPA audits a bank to which the company has applied for financing, and board approval is required for said financing to occur.
The CPA is asked by the company to test the internal controls of the company and offers compensation to the CPA for said services.
The CPA does not audit the company and has no other business connection with the company.
The CPA performs attestation services for a nonpublic company.
This answer is correct because if the CPA does not provide audit or attestation services for the client, there is no requirement for independence.
c
94
94. Which of the following is not correct relating to the Sarbanes-Oxley Act?
It toughens penalties for corporate fraud.
It restricts the types of consulting CPAs may perform for audit clients.
It created the Public Company Accounting Oversight Board (PCAOB) as a replacement for the Financial Accounting Standards Board.
It eliminates a significant portion of the accounting profession’s system of self-regulation.
This answer is correct because while the Sarbanes-Oxley Act did create the PCAOB, the PCAOB does not replace the Financial Accounting Standards Board.
c
95
95. In relation to the AICPA Code of Professional Conduct, the rules of the International Code of Ethics for Professional Accountants:
Have more definitive prohibitions.
Have fewer definitive prohibitions.
Are more country specific.
Require the application of less judgment.
The international code has fewer definitive prohibitions.
b
96
96. Which of the following is not an element of quality control for a CPA firm?
Relevant ethical requirements.
Acceptance and continuance of clients relationships and specific engagements.
Professional skepticism
Monitoring.
This answer is correct because professional skepticism is not an element of quality control. This is an individual auditor’s mindset.
c
97
97. The Sarbanes-Oxley Act of 2002 prohibits the performance of certain services for audit clients by auditors of public companies. Which of the following is not prohibited?
Bookkeeping services.
Appraisal services.
Tax preparation services.
Management functions.
This answer is correct because the act does not prohibit the performance of tax preparation services.
c
98
98.
c
99
99. Which of the following AICPA standards did the PCAOB not adopt as a part of its interim standards?
Auditing Standards Board Standards.
Attestation Standards.
Accounting and Review Services Standards.
Quality Control Standards.
This answer is correct because the PCAOB did not adopt the AICPA’s Accounting and Review Services Standards because they only apply to nonpublic companies ("non-issuers").
c
100
100. According to the profession’s ethical standards, a CPA who is a covered member would be considered independent in which of the following instances?
A client leases part of an office building from the CPA, resulting in a material indirect financial interest to the CPA.
The CPA has a material direct financial interest in a client, but transfers the interest into a blind trust.
The CPA owns an office building and the mortgage on the building is guaranteed by a client.
The CPA belongs to a country club that is a client in which membership requires the acquisition of a pro rata share of equity.
This answer is correct because as long as membership in a club is essentially a social matter, CPA independence is not impaired.
d
101
101.
b
102
102. Which of the following acts by a CPA is a violation of professional standards regarding the confidentiality of client information?
Releasing financial information to a local bank with the approval of the client’s mail clerk.
Allowing a PCAOB inspector to review working papers of an issuer client without that client’s permission.
Responding to an enforceable subpoena.
Faxing a tax return to a loan officer at the request of the client.
This answer is correct because releasing financial information to a local bank without the approval of management of the client is a violation of confidentiality. Approval by a mail clerk is not sufficient.
a
103
103. If requested to perform a review engagement for a nonpublic entity in which an accountant has an immaterial direct financial interest, the accountant is
Not independent and, therefore, may issue a review report, but may not issue an auditor’s opinion.
Not independent and, therefore, may not issue a review report.
Not independent and, therefore, may not be associated with the financial statements.
Independent because the financial interest is immaterial and, therefore, may issue a review report.
This answer is correct because even an immaterial direct financial interest impairs accountant independent and makes performing attest services (including reviews) not allowable. Independence is considered to be impaired if any direct financial interest in the enterprise is acquired. If an accountant is not independent, he can neither perform a review engagement nor perform an audit.
b
104
104. Which of the following is not a "covered member" under the Independence Rule of the Code of Professional Conduct?
A partner in the same office as the lead attest partner.
A manager that provides five hours of tax services to the client.
A professional employee that is assigned to the engagement.
A partner that manages the attest practice for the firm.
This answer is correct because partners or managers must provide ten or more hours of nonattest services before they are considered to be covered members.
b
105
105. A CPA establishes quality control policies and procedures for deciding whether to accept a new client or continue to perform services for a current client. The primary purpose for establishing such policies and procedures is
To enable the auditor to attest to the integrity or reliability of a client.
To comply with the quality control standards established by regulatory bodies.
To minimize the likelihood of association with clients whose management lacks integrity.
To lessen the exposure to litigation resulting from failure to detect fraud in client financial statements.
This answer is correct because policies and procedures should be established for deciding whether to accept or continue a client in order to minimize the likelihood of association with clients whose management lacks integrity.
c
106
106. Independence standards of the GAO for audits in accordance with generally accepted government auditing standards describe three types of impairments of independence. Which of the following is one of these types of impairments?
External.
Relatives.
Financial.
Unusual.
This answer is correct because the GAO standards identify three types of impairments: personal, external, and organizational.
a
107
107. Which of the following is true about the requirements for confirmation of accounts receivable under International Standards on Auditing?
Confirmation of accounts receivable is required in all audits.
Confirmation of accounts receivable is an optional procedure based on the auditor’s judgment.
Confirmation of accounts receivable is presumptively required.
Confirmation of accounts receivable is required when the accounts are material.
This answer is correct because confirmation is considered an optional procedure that may be performed based on the auditor’s judgment.
b
108
108. Which of the following is not a section title ordinarily included in an international audit report?
Auditor’s responsibility.
Board of directors overall responsibility.
Management’s responsibility for the financial statements.
Opinion.
This answer is correct because there is no section title (or section) on the board of directors overall responsibility included in an ISA audit report.
b
109
109.
d
110
110. A CPA in public practice may not disclose confidential client information regarding auditing services without the client’s consent in response to which of the following situations?
A review of the CPA’s professional practice by a state CPA society.
A letter to the client from the IRS.
An inquiry from the professional ethics division of the AICPA.
A court-ordered subpoena or summons.
This answer is correct because a CPA may not disclose information to the IRS without the client’s consent.
b
111
111. Which of the following actions by a CPA most likely violates the profession’s ethical standards?
Arranging with a financial institution to collect notes issued by a client in payment of fees due.
Compiling the financial statements of a client that employed the CPA’s spouse as a bookkeeper.
Retaining client records after the client has demanded their return.
Purchasing a segment of an insurance company’s business that performs actuarial services for employee benefit plans.
Retention of client records after a demand is made for them is considered a violation of the ethical standards.
c
112
112.
b
113
113. According to the ethical standards of the profession, which of the following acts generally is prohibited?
Accepting a contingent fee for representing a client in connection with obtaining a private letter ruling from the Internal Revenue Service.
Retaining client records after the client has demanded their return.
Revealing client tax returns to a prospective purchaser of the CPA’s practice.
Issuing a modified report explaining the CPA’s failure to follow a governmental regulatory agency’s standards when conducting an attest service for a client.
Retention of client records after the client has demanded them is an act discreditable to the profession.
b
114
114. International Standards on Auditing are issued by
The American Institute of Certified Public Accountants.
The International Organization of Securities Commissions.
The International Federation of Accountants.
The International Auditing Society.
This answer is correct because International Auditing Standards are issued by the International Auditing and Assurance Standards Board of the International Federation of Accountants.
c
115
115. Which of the following acts by a CPA would not necessarily be considered an act discreditable to the profession under the AICPA Code of Professional Conduct?
Prohibiting a client’s new CPA firm from reviewing the audit working papers after the client has requested the CPA to do so.
Engaging in discriminatory employment practices.
Committing a felony.
Knowingly signing a false tax return.
This answer is correct because the CPA, for valid business reasons (e.g., when litigation is involved) may refuse a request by another CPA to allow review of working papers.
a
116
116. According to the AICPA Code of Professional Conduct, which of the following financial interests in the client during the period of the engagement impairs a CPA’s independence?
All direct and indirect financial interests.
Only direct financial interests.
Only direct and material indirect financial interests.
Only material financial interests.
This answer is correct because either a direct or a material indirect financial interest impairs independence.
c
117
117. Which of the following statements is true with respect to the PCAOB and SEC’s concept of independence when an auditor both prepares financial statements and audits those financial statements for a client?
The auditor is not independent.
The auditor is independent if he or she is able to maintain a level of professional detachment.
The auditor can audit the financial statements only if the audit process does not culminate in the expression of an opinion on the financial statements.
The auditor cannot audit the financial statements since a lack of integrity exists.
This answer is correct because the CPA who prepares the financial statements is not considered independent by the SEC or PCAOB.
a
118
118. In which of the following situations is there a violation of client confidentiality under the AICPA Code of Professional Conduct?
A member discloses confidential client information to a court in connection with arbitration proceedings relating to the client.
A member discloses confidential client information to a professional liability insurance carrier after learning of a po10tial claim against the member.
A member whose practice is in bankruptcy discloses a client’s name.
A member uses a records re10tion agency to store client’s records that contain confidential client information.
This answer is correct because a member may not disclose client information in conjunction with a bankruptcy.
c
119
119. Under International Auditing Standards (ISA), the time horizon for a going concern consideration is
Not longer than twelve months from the date of the audit report.
Not longer than twelve months from the date of the financial statements.
At least twelve months from the date of the audit report.
At least twelve months from the date of the financial statements.
This answer is correct because at least twelve months from the date of the audit report is the ISA standard.
c
