SU 02: Professional Responsibilities

Question 1

Under AICPA code of professional conduct which of the following is required to be independent in appearance and in fact
A tax and management advisory services
B CPA in public practice providing audit and other attestation services

Answer 1

B, according to principles of conduct article 4 - objectivity and independence, a member is public practice should be independent in fact and in appearance when providing audit services.

Question 2

The concept of materiality is least important to an auditor when considering
A adequacy of disclosure of a clients illegal act
B discovery of a weakness in a clients internal control
C effects of a direct financial interest in the client on the CPA independence

Answer 2

C, independence is impaired if a CPA has any direct financial interest in a client. Materiality is irrelevant. In a and b materiality is judged

Question 3

Which acts are generally prohibited according to ethical standards
A purchasing product from third party and reselling it to client
B writing a financial management newsletter promoted and sold by publishing company
C accepting commissions for recommending product to an audit client

Answer 3

C, conduct rule 503 commissions and referral fees, prohibits members in public practice from recommending any product or service to a client when the firm performs 1 audit or review of f/s 2 a compilation of f/s that is reasonably expected to be used by a third party if report does not disclose the lack of independence 3 an examination of prospective f/s

Question 4

According to PCAOB independence is least likely to be impaired if
A provides a service to the audit client on a contingent fees
B receives a commission from the audit client
C has an audit client that employs a former firm professional

Answer 4

C, the firm independence is impaired by the employment of a former firm professional that could adversely affect the audit unless safeguards are put in place.
A and B is incorrect because firm is not independent if firm or affiliate provide services based on contingent fee or receives a commission

Question 5

SOX 2002, has strengthened auditor independence by requiring management of a public company
A include only independent persons on the board
B report disagreements with former auditors
C select auditors thru audit committee

Answer 5

C, the audit committee must hire and pay the external auditor. Such affliction inhibits management from changing auditors to gain acceptance of questionable accounting methods

Question 6

1.) Self-interest

Answer 6

Ownership in client creates self interest

Question 7

2.) Self-review

Answer 7

Audit of a client control system designed by the auditor. Auditors who evaluate their own designed system create threat of self-review

Question 8

3.) Advocacy – Testifying for a client

Answer 8

Advocating on behalf of a client in litigation create threat of advocacy

Question 9

4.) Familiarity – Spouse is on BOD of a client

Answer 9

Having a close relative on the BOD of a client create a threat of familiarity

Question 10

5.) Intimidation

Answer 10

Client threatens to engage new auditor over a dispute. Being threatened by client creates threat of intimidation

Question 11

1.) Ind. Or Not Ind. Leasing property to client under capital lease

Answer 11

a. Not Independent if – Leasing property to a client under a capital lease is deemed to be a loan to the client. Independence is impaired

Question 12

2.) Ind or Not Ind – Sales position held by sister

Answer 12

a. Independent – Independence is impaired if an individual participating in the audit has a close relative who has a key position with the client. Sales positions held by John’s sister is not a key position. Thus, independence is not impaired

Question 13

3.) Ind or Not Ind – Recommending qualified candidate based on client-approved criteria

Answer 13

a. Independent – Recommending qualified employment candidates to a client based on client-approved criteria is not an attest service and does not impair independence. However, making employment decisions does

Question 14

4.) Ind or Not Ind – Providing tax services

Answer 14

a. Independent – Independence is not impaired if the firm provides tax services as long as the services are not prohibited nonaudit services and the provision of services has been approved by the audit committee. But preparing an tax return could impair independence, e.g. if the member had control of client funds or the return was not approved by a client-designated person

Question 15

5.) Ind or Not Ind – Client management sues asserting deficient audit work

Answer 15

a. Independent – Inclusion of a clause in the engagement letter providing for indemnification of the firm by the client does not impair independence

Question 16

6.) Ind or Not Ind – Indemnification Clause

Answer 16

a. Independent – Inclusion of a clause in the engagement letter providing for indemnification of the firm by the client does not impair independence

Question 17

7.) Ind or Not Ind – Member’s indirect immaterial financial interest in client

Answer 17

a. Independent – Immaterial, indirect financial interest does not impair a member’s independence

Question 18

8.) Ind or Not Ind – Joint venture in vacation home with principal shareholder

Answer 18

a. Not Independent – An auditor’s joint interest in a vacation home with a principal shareholder of a client is considered a jointly closely held investment that impair independence if it is material to the auditor

Question 19

9.) Ind or Not Ind - Use of not independent other audit firms work

Answer 19

a. Not Independent – The use of work of another firm that is not independent impairs the firm’s independence

Question 20

Covered Member

Answer 20

1. ) Individual on engagement team that can influence engagement
2. ) A partner or manager that provides nonattest services to client
3. ) A partner in office where lead engagement partner practices in relation to the engagement
4. ) Accounting Firm

Question 21

Impairment for Covered Member Rule 101

Answer 21

A.) Direct Financial Interest
B.) Loans to or from client, officers, directors or 10% shareholders
C.) Material indirect financial interest
D.) Trustee or Executor of estate w/ direct interest in client
E.) Material Joint Investment with client
F.) If firm partner or professional employee own > 5% of client
G.) Is associated with client as officer, manager, employee or promoter
F.) Covered member was formerly employed or associated
I.) Covered member’s family are subject to Rule 101
J.) Close relative holds a key position of influence
K.) Former partner is employed or associated with client in key position

Question 22

Rule 102 - Integrity and Objectivity

Answer 22

A member shall maintain objectivity and integrity

1. ) Knowing Misrepresentation of Facts
2. ) Conflicts of Interest
3. ) Obligations to Employers External Accountant
4. ) Subordination of Members Judegement

Question 23

General Standards Rule 201

Answer 23

1. ) Undertake services only with professional competence
2. ) Exercise due professional care
3. ) Adequate plan and supervise performance of services
4. ) Obtain sufficient relevant data to provide a reasonable basis for conclusion

Question 24

Compliance w Standards Rule 202

Answer 24

Members shall comply with standards issued by designated bodies

Question 25

IFAC Fundamental Principles

Answer 25

1. ) Integrity
2. ) Objectivity
3. ) Professional Competence and Due Care
4. ) Confidentiality
5. ) Professional Behavior

Question 26

Code of Conduct Principles (6)

Framework for Rules

Answer 26

1. ) Responsibilities
2. ) Public Interest
3. ) Integrity
4. ) Objectivity and Independence
5. ) Due Care
6. ) Scope and nature of Services (public practice only)

Question 27

Rules of Conduct

Answer 27

Integrity and Objectivity
Independence (only public practice)
General Standards
Compliance with Standards
Accounting Principles
Acts Discreditable
Contingent Fees
Commissions and Referral Fees
Advertising
Confidential Client Information
Form of Organization and Name]

Question 28

Objectivity and Integrity

Answer 28

Be free of conflicts of interest
Not knowingly misrepresent facts
Not subordinate judgement

Question 29

Professional Standards - General

Answer 29

Professional Competence
Due Professional care
Planning and Supervision
Sufficient Relevant Data

Question 30

Confidential Client Information

Answer 30

Professional Obligations
Comply w/ Subpoena
Official Practice Review
Participate in appropriate investigation
No prohibition for review of practice for a purchase

Question 31

Acts Discreditable

Answer 31

A member may not perform an act that would be discreditable to the profession.

Question 32

The following are situations in which actual or threatened litigation impairs independence:

Answer 32

(1) litigation has begun alleging deficient audit work; (2) litigation has begun alleging fraud or deceit by current management; and (3) management has expressed an intention to commence litigation alleging deficient audit work, and the auditor concludes that it is probable that such a claim will be filed.

Question 33

Knowing misrepresentations of facts include

Answer 33

1) knowingly making materially false and misleading entries in financial statements or records, (2) failing to make corrections in materially false or misleading statements or records when the member has such authority, or (3) signing a document with materially false and misleading information.