RESA Preweek Flashcards
The Core Competencies of CPAs include:
A. Assurance and information integrity
B. Objectivity
C. Strategic and critical thinking skills
D. Pursuit of life-long learning and excellence
B. Objectivity
Which of the following describes most completely how the profession defines independence?
A. Performing an audit from the public’s POV
B. Avoiding the appearance of a significant interest in an audit client
C. Resisting a client’s reluctance to reveal evidence
D. Accepting responsibility to act professionally and in accordance with the professional Code of Conduct
D. Accepting responsibility to act professionally and in accordance with the professional Code of Conduct
What kind of threats are created by virtue of a close business relationship with assurance clients? A. Self-interest threat B. Self-interest and intimidation threat C. Self-interest and self-review threat D. No threats are created
B. Self-interest and intimidation threat
Family and personal relationships between a member of the assurance team and a director, officer, or employee of the assurance client, LEAST LIKELY create: A. Self-interest threat B. Self-review threat C. Intimidation threat D. Familiarity threat
B. Self-review threat
If the firm personnel make management decisions, the self-review threat created could not be reduced to an acceptable level by any safeguards. Examples of such managerial decisions include the ff., EXCEPT
A. Determining or changing J/E, or the classifications for accounts or transactions or other accounting records without obtaining approval of the audit clients.
B. Authorizing or approving transactions
C. Preparing source documents or originating data (including decisions on evaluation assumptions), or making changes to such documents or data
D. Assisting an audit client in resolving account reconciliation problems
D. Assisting an audit client in resolving account reconciliation problems
The provision of accounting and bookkeeping services to audit clients in emergency or other unusual situations, when it is impractical for the audit client to make other arrangements, would not be considered to pose an unacceptable threat to independence, provided:
A. The firm or network firm does not assume any managerial role or make any managerial decisions
B. The audit client accepts responsibility for the results of the work
C. Personnel providing the services are not members of the assurance team
D. All of the above
D. All of the above
If the valuation services involve the valuation of matters material to the F/S and the valuation involves a significant degree of subjectivity, which is INCORRECT? The self-review threat…
A. Could not be reduced to an acceptable level by any safeguard
B. Could be reduced to an acceptable level by the application of safeguards
C. Such valuation services should not be provided
D. The assurance team should withdraw from the audit engagement, if the team opted to perform the valuation services.
B. Could be reduced to an acceptable level by the application of safeguards
Waste Management and Enron are classic cases wherein the media was critical that auditors:
A. Were ignorant of the existing audit and assurance standards
B. Have failed to plan the audit engagements properly
C. Overlooked suspicions of earnings management reported in the Wall Street Journal
D. Received significant consulting fees relative to audit fees
D. Received significant consulting fees relative to audit fees
The Code of Professional Ethics would most likely be violated if an auditor:
A. Owns a building and leases floor space to an assurance client
B. Has an insured account with a brokerage firm audit client
C. Is engaged by an audit client to identify potential acquisitions
D. Screens candidates for an audit client’s vacant controllership position
A. Owns a building and leases floor space to an assurance client
Peepay, CPA, is an audit manager of the Dom, Day, and Jordan, CPAs, accounting firm. He has just been assigned to the audit of the Lugao Money Market Fund. Peepay has maintained a money market account with LMMF since it opened in 2005. All his savings, amounting to 75% of his total assets, are in this account, which pays the highest interest available in money market funds. However, his account constitutes only 0.00001% of the fund’s assets. Is the audit firm’s independence impaired in this situation?
Yes. Peepay is considered a member of the assurance team, since he is a manager and will provide audit services to LMMF. The firm’s independence is impaired since Peepay holds a direct financial interest.
CPA Troy’s wife owns 20% of the ordinary shares of Pugad Company, which wants Troy to perform the audit for the calendar year ended December 31, 2009.
May Troy perform the audit of Pugad Company for the calendar year ended December 31, 2009?
No, since Troy’s wife’s interest is attributed to him, and he would not be independent.
CPA Troy’s wife owns 20% of the ordinary shares of Pugad Company, which wants Troy to perform the audit for the calendar year ended December 31, 2009. Troy’s wife gave her shares to their dependent 10-year-old daughter, Tiny, on July 1, 2009.
May Troy perform the audit of Pugad Company for the calendar year ended December 31, 2009?
No, for as long as Tiny is a dependent child. The financial interest is considered direct.
CPA Troy’s wife owns 20% of the ordinary shares of Pugad Company, which wants Troy to perform the audit for the calendar year ended December 31, 2009. Troy’s wife gave her shares to their dependent 10-year-old daughter, Tiny, on July 1, 2009. Tiny, acting through a custodian, sold the shares to her grandfather Lolo Dom on August 1, 2009. His purchase, as an accommodation, took two-thirds of his retirement savings.
May Troy now perform the audit of Pugad Company for the calendar year ended December 31, 2009?
No. The appearance of independence is impaired. Moreover, the grandfather’s investment is material (66.67%) in relation to his net financial resources.
On August 20, 2009, Mar Bonafe, CPA and partner, was offered and accepted the engagement to audit the annual F/S of ABC Co. for the fiscal and calendar years ended December 31, 2009. The audit began on Sep. 15, 2009 and ended on March 17, 2010. ABC Co. is regulated by the SEC. Bonafe served as controller of ABC from November 5, 2002 until Jan. 12, 2009, at which time he terminated his employment with ABC.
Mar Bonafe owned a material amount of ABC Corporation’s ordinary shares from November 5, 2002 until August 15, 2009, at which time he sold the said shares.
Is Mar Bonafe in violation of the Code of Ethics due to impairment of independence?
Yes, because Mar Bonafe had an employment relationship with the client during part of the period covered by the financial statements.
The provision of services by a firm or network firm to an audit client that involve the design and implementation of financial information technology systems that are used to generate information forming part of a client’s F/S may most likely create:
A. Self-interest threat
B. Self-review threat
C. intimidation threat
D. Familiarity threat
B. Self-review threat
The making of assumptions with regard to future developments, the application of certain methodologies and techniques, and the combination of both in order to compute a certain value, or range of values, for an asset, liability, or for a business as a whole
Valuation services
A broad range of services, including compliance, planning, provision of formal taxation opinions, and assistance in the resolution of tax disputes
Tax services
May include such activities as acting as an expert witness, calculating estimated damages, or other amounts that might become receivable or payable as the result of litigation or other legal dispute, and assistance with document management and retrieval in relation to a dispute or litigation
Litigation support services
Any service for which the person providing the services must either be admitted to practice before the Courts of the jurisdiction in which such services are to be provided, or have the required legal training to practice law
Legal services
The recruitment of senior management for an assurance client, such as those in a position to affect the subject of the assurance engagement may LEAST LIKELY create
A. Self-interest threat
B. Advocacy threat
C. Intimidation threat
D. Familiarity threat
Executive search services
B. Advocacy threat
CPA Ela Santos performs the audit of the local symphony society. Because of her good work, she was elected an honorary member of the baord of directors. Ela will not be considered indepdendent, unless:
I. The position is in fact purely honorary
II. Listings of directors show she is an honorary director
III. She restricts participation strictly to the use of her name
IV. She does not vote or participate in management functions
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