Unit 2-Professional Responsibilities

Question 1

What are the princciples of the code of professional conduct that applies to professional services performed by AICPA members?

Answer 1

Responsibilities
The public interest 
integrity
objectivity and independence
due care
scope and nature of services

Question 2

What does the principle responsibilities represent in the code of professional conduct?

Answer 2

All members should exercise sensitive professional and moral judgments when carrying out their professional responsibilities.

Question 3

What does the principle The public interest represent in the code of professional conduct?

Answer 3

All members should act to benefit the public interest, honor the public trust, and demonstrate commitment to professionalism.

Question 4

What does the principle Integrity represent in the code of professional conduct?

Answer 4

All members should perform all professional responsibilities with the highest sense of integrity to maintain public confidence.

Question 5

What does the principle Objectivity and independence represent in the code of professional conduct?

Answer 5

all members should maintain objectivity and be free of conflicts of interest. a member in public practice should be indpendent in fact (mind) and appearance when providing attestation services

Question 6

What does the principle Due Care represent in the code of professional conduct?

Answer 6

All members should follow the profession’s technical and ethical statndards, strive for improved competence and quality service, and discharge professional responsibility to the best of the member’s ability.

Question 7

What does the principle Scope and nature of services represent in the code of professional conduct?

Answer 7

A member in public practice should follow the principles of the code of professional conduct in determining the nature and scope of services. This principle is for members in public practice only

Question 8

What are the mandatory rules of conduct?

Answer 8

rule 101 Independence
rule 102 integrity and objectivity(1)
rule 201 general standards(1)
rule 202 compliance with standards(1)
rule 203 accounting principles(1)
rule 301 confidential client information
rul 302 contingent fees
rule 501 acts discreditable(1)
rule 502 advertising and other forms of solicitation
rule 503 commissions and referral fees
rule 505 form of organization and name (1)

(1) These rules of conduct apply to all members.

Question 9

What is a covered member?

Answer 9

1) An individual on the engagement team or who can influence the engagement
2) A partner or manager who provides nonattest services to a client
3) a partner in the office where the lead engagement partner primarily practices in relation to the engagement
4) the accounting firm, including the firm’s employee benefit plans.

The covered member also applies to the covered member’s immediate family (spouse and dependents)

Question 10

When is independence impaired?

Answer 10

• independence is impaired if a covered member has a direct financial interest in a client
• independence is impaired if a covered member has loans to or from a client or its officers, directors, or 10% (or greater) owners
• independence is impaired if a covered member has a material indirect financial interest in a client.
• independence is impaired if a covered member is a trustee of a trust or executor of an estate that has a direct or material indirect financial interest in a client.
• independence is impaired if a covered member has a material joint, closely held investment with a client.
• independence is impaired if a firm partner or professional employee owns more that 5% of a client.
• independence is impaired if a firm or one of its partners or professional employees is associated with the client as an officer, director, manager, employee, promoter, underwirter
• independence may be imparied if a covered member was formerly employed by or associated with the client as an officer director, promoter, underwriter
• independence is impaired if an individual participating on the engagement team (or able to exert influence or that is a partner in the lead partners office) has a close relative (sibling, parent, or non dependent child) who holds a key position with the client or certain financial interest.
• independence of the firm is impaired if a former partner or professional employee of the firm is employed by or associated with an attest client in a key position

Question 11

When is independence NOT impaired?

Answer 11

• by certain loans from a client financial institution (eg. bank). These include (1) auto loans and leases collateralized by the auto (2) loans fully collateralized by the cash surrender value of insurance (3) loans fully collateralized by cash deposits and (4) credit cards with a total outstanding balance of 10,000 or less on a current basis by the payment due date.
• certain loans that are considered “grandfathered” because they were in existence before independence rules became more restrictive.
• indiependence is not impaired if the person is no longer associated or active with the CPA firm and any retairement compensation is fixed

Question 12

True or false? Can an immediate family member of a covered member hold a direct or material indirect financial interest in an attest client through participation in a plan if the member is not able to influence the attest engagement, and the family member has no other investment option

Answer 12

True

Question 13

When is an accounting firm not indpendent?

Answer 13

If a CEO, CFO, controller, or person in ans equivalent position for an issuer was (a) employed by that firm and (b) participated in any capacity in the audit of that issur during the year before the beginning of the audit

Question 14

What services to attest clients would impair independence?

Answer 14

-Appraisal, valuation, or actuarial services if they involve a significant degree of uncertainty
-expert witness services
-internal audit services
tax advocacy services
-Recruiting, hiring, terminating, or compensationg employees

Question 15

what services can be provided to attest clients and not impair independence?

Answer 15

• consulting services(if the client is responsible for the decisions)
• Tax preparation and compliance services
• business risk advising services
• providing general advice based on audit findings

Question 16

True or false? Is independence impaired for attest engagements of nonissures by providing bookkeeping, payroll processing, or other conventional recordkeeping functions?

Answer 16

False- independence is not impaired

Question 17

True or false? is independence impaired by actual or threatened litigation by either the CPA or the client

Answer 17

True- indpendence is impaired

Question 18

True or false? is independence impaired if a member holds an honorary directorship or trusteeship of a not for profit organization that is a client

Answer 18

False- independence is not impaired if 1) the position must be clearly honorary, and the member must not be able to vote or participate in board or management decsions 2) the member must be identified as an honorary director or trustee

Question 19

what is classified as affiliates of the client?

Answer 19

• an entity that a client can control
• an entity that controls the client if the client is material to the entity
• an entity in which a client has a material direct financial interest that gives the client significant influence over the entity
• an entity with significant influence over the client in the form of a material direct financial interest
• a sister entity of a client if the sister entity and the client are material to the entity that controls both
• a trustee deemed to control a trust client that is not an investment company
• the sponsor of the plan if the client is a single employer employee benefit plan
• any union or participating employer that has significant influeence over a client that is a multiple or multi-employer employee benefit plan
• an employee benefit plan sponsored by either a client or an entity controlled by the client
• An investment advisor, general partner, or trustee of an investment company client (fund) who (a) has a material interest in the fund and (b) has significant influence or contorl over the fund

Question 20

is independence impaired if a member did not, and could not, reasonably know about the relationship?

Answer 20

no- independence is not impaired

Question 21

What are nonattest services?

Answer 21

Tax

consulting

Question 22

What can restricted-use reports be issued on?

Answer 22

• agreed-upon procedures,
• internal control
• prospective financial information
• compliance
• pro forma financial information
• managements discussiona nd analysis

Question 23

Is independence impaired if, during the period of a professional engagement, a member or his/her firm had any cooperative arrangement with the client that was material to the member’s firm or to the client?

Answer 23

Yes- Independence will be impaired. A cooperative arrangement exists when a member’s firm and a client jointly participate in a business activity.

Question 24

What does the code of professional conduct state about the rule of integrity and objectivity?

Answer 24

a member shall maintain objectivity and integrity, be free of conflicts of interest, not knowingly misrepresent facts, and not subordinate his/her judgement to others when prerforming professional services

Question 25

what does knowingly misrepresent facts include?

Answer 25

• knowingly making materially false and misleading entries in financial statements or records
• failing to make corrections in materially false or misleading statements or records when the member has such authority
• signing a document with material false and misleading information

Question 26

What should a member do when his/her supervisor may disagree about statement preparation or recording of transactions?

Answer 26

(1) the member should do nothing if the supervisor’s position is an acceptable alternative and does not materially misrepresent the facts (2) if a materail misstatement would result, the member should consult the appropriate higher level of supervisor and consider documenting relevant matters (3) if appropriate action still has not been taken, the member should consider the (a) continuing relationship with the employer, (b) obligation to communicate with third parties and (c) desirability of consulting legal counsel.

Question 27

what are the steps in performance of professional services?

Answer 27

professional competence
due professional care
plan and supervise
sufficient relevant data

Question 28

Professional competence

Answer 28

competence involves technical qualifications and the ability to supervise and evaluate the work. it relates to knowledge of standards, techniques, and technical subject matter and the ability to exercise sound judgment

Question 29

due professional care

Answer 29

an auditor should follow profressional standards, bith technical and ethical. she also should (a) continually improve competence and the quality of services and (b) diligent in discharging professional responsibilities to the best of his/her ability

Question 30

professional judgement

Answer 30

it is the application of training, knowledge, and experience in the context of professional standards. it involves making informed decisions about the actions appropriate in a particular audit. Professional judgments needs to be documented. theaudit documentation should suffice to allow an experienced auditor, with no commection to the audit, to understand the judgements mde in reaching comclusions about significat findings or issues

Question 31

Professional skepticism

Answer 31

The auditor should have a questioning mind and critically assess audit evidence

Question 32

Who is GAAP isssued by?

Answer 32

• Fiancial accounting standards board(FASB)
• Governmental Accounting Standards board(GASB)
• international accounting standards board(IASB)

Question 33

accounting principles- rule 203

Answer 33

Any material departure from an accounting principle issued by an AICPA-designated standard setter prevents a member from expressing an opinion (or stating affirmatively) that the financial statements (or other financial datea) of any entity are presented in conformity with generally accepted accounting principles(GAAP)

Question 34

positive assurance

Answer 34

expressing an opinion (or stating affirmatively) that the financial statements (or other financial datea) of any entity are presented in conformity with generally accepted accounting principles(GAAP)

Question 35

limited assurance

Answer 35

stating that he/she is not aware of any material modifications that should be made to achieve conformity with GAAP

Question 36

when is a departure material?

Answer 36

a departure is material if it has a material effect on the financial statements or data as a whole

Question 37

In what cases may a member be able to provide assurance about conformity with GAAP despite a material departure?

Answer 37

1) the member must be able to demonstrate that, due to unusual circumstances, the financial statements or data would have been misleading without a departure from GAAP. The member must describe a) the departure b) its approximate effects, if practicable and c) the reasons compliance with the principle would be misleading
2) events that may justify departures from established accounting principles are new legislation or evolution of a new form of business tranaction
3) an unusual degree of materiality or conflicting industry practices ordinarily does not justify departures

Question 38

Confidiential client information

Answer 38

a member in public practice must not disclose confidential client information without the client’s consent. However, this rule does not affect a CPA’s obligations to
1) comply with a valid subpoena or summons or with applicable laws and regulations

2) discharge his/her professional obligations
3) cooperate in an official review of his/her professional practice
4) Initiate a complaint with or respond to any inquiry made by an appropriate investigative or disciplinary body

Question 39

contingent fees

Answer 39

a contingenet fee is established as part of an agreement under which the amount of the fee is dependent upon the finding or result.

fees are not considered to be contingent if 1) they are fixed by the courts and 2) in tax matters when they are based on the results of judicial proceedings or the findings of governmental agencies

Question 40

when can a member in public practice must NOT perform for a contingent fee?

Answer 40

1) an audit or review of a financial statement
2) a compilation of a financial statement if a) the member might reasonably expect that a 3rd party will use the statement and b) the report does not disclose the lack of indepenence
3) an examination of prospective financial information( a financial forecast or projection)

also
a member in public practice must not prepare the following for a contingent fee:
1) an original tax return
2) an amended tax return
3) a claim for a tax refund

Question 41

response to request for records

Answer 41

client provided records must be returned after a client request without exception. they are “accounting or other records belonging to the client that were provided to the member by or on behalf of the client

right to withold from client: NONE

Question 42

Members working papers

Answer 42

are the members property and need not be made available tot he client or others unless required by

a) statue
b) regulation
c) contract

Right to withhold from client: Absolute barring legal or contractual exception

Question 43

Members work products

Answer 43

are items (example: tax returns) that the member was engaged to prepare. they may be witheld if

a) fees are due
b) the work product is incomplete
c) the member is complying with professional standards( eg withholding an audit report until issues are resolved)
d) litigation exists regarding the engagement or the members work.

Right to withhold from client: if fees due, work product incomplete, need to comply with standards, or litigation exists

Question 44

member-prepared records

Answer 44

are records that the member was not specifically engaged to prepare. without them, the clients financial informaion is incomplete.

a) they are not otherwise available to the client
b) examples are 1) journal entries and 2) supporting schedules and documents prepared as part of an engagement c) member-prepared records related to a completed and issued work product shoudl be provided to the client unless fees are due

Right to withhold from client: If Fees due

Question 45

What are considered acts discreditable in the rules of conduct Rule 501?

Answer 45

-Response to requests for records
-Discrimination and harassment
-Not following the requirements of governmental bodies
-not following governmental audit standards, guides, procedures, statutes, rules and regulations
-Disclosure of CPA exam questions
-negligence
failure to file a tax return or pay tax
-regulated entities and limitation of liability
-inappropriately using confidential information obtain from employment
-false, misleading, or deceptive acts

Question 46

what are the acts that are considred false, misleading, or deceptive and are prohibited because they are against the public interest

Answer 46

a) creating false expectations of favorable results
b) implying the ability to influence and court, regulatory agence, etc.
c) representing that specific services will be performed for a stated fee when it is likely at the time that the fees will be substantially increased and the client is not advised of the possibility
d) other representations that would cause a reasonable person to misunderstand or be deceived

Question 47

What are prohibited commissions

Answer 47

they are commissions that are received when a member in public practice

1) recommends or refers a) to a client any product or service or b) any product or service to be supplied by a client
2) also performs for the client a) an audit, b) a review, c) a compilation reasonably expected to be used by a third party if the member’s lack of independence is not disclosed,or d) an examination of prospective financial information (PFI)

Question 48

According to a council resolution, if a firm holds itself out as CPAs or performs audits, reviews, or examination of prospective financial informaiton, it must have certain attributes which are?

Answer 48

1) CPAs own a majority of the firm
2) a CPA must be responsible for all services
3) a non cpa owner must be active as a member of the firm or its affiliates
4) non cpa owners cannot hold themselves out as CPAs
5) a member must not permit a person she controls to do what is prohibited to the member by the code a) the member also may be responsible for the acts of such a person who is an associate in the practice of public accounting
6) non-CPA owners are not eligible to be AICPA members unless they meet the requirements for membership
7) owners must, at all times, be the veneficial owners of the equity attributed to them. If an owner ceases to be actively engaged as a member of the firm or its affiliates, his/her ownership should be transferred to the firm or other qualified owners within a reasonable time

Question 49

APS

Answer 49

Alternate practice Structures

Question 50

What are the responsibilities and activities of the PCAOB?

Answer 50

1) register prublic accounting firms
2) oversee the audit of public companies(issuers) that are subject to the securities laws
3) establish or adopt standards on auditing, quality control, ethics, and independence
4) inspect audit firms to a) examine selected audit and review engagements b) evaluate the system of quality and c) test audit, supervisory, and quality control procedures
5) conduct investigations and disiplinary proceedings concerning, and impose appropriate sanctions upon, registered public accounting firms and associated persons

Question 51

What are the four categories that an issuer must disclose in its proxy statement or annual filing fees paid to the accountant?

Answer 51

a) audit
b) audit-related
c) tax
d) all other

Question 52

Rotation of partners

Answer 52

The lead and concurring (reviewing) audit partners must rotate every 5 years, with a 5 year time out period. Other audit partners must rotate every 7 years with a 2 year time out.

Question 53

Prohibited Nonaudit services

Answer 53

a) appraisal and other valuation services
b) designing and implementing financial information systems
c) internal auditing or actuarial functions
d) management servces
e) human resource services
f) bookkeeping
g) expert servces not pertaining to the audit
h) investment banking or advisory services
i) broker-dealer services

Question 54

Audit committees

Answer 54

1) each member of the audit committee must be independent member of the board of directors
2) the audit committee must be directly responsible for appointing, compensating, and overseeeing the work of the auditor

3) Audit committees must have at lease one member designated as a financial expert with relevant experience( eg, as principal financial or accounting officer, a supervisor of such persons, or as an assessor of the preparation or audit of financial statements) a financial expert must
a) understand GAAP and financial statements
b) be able to assess the general application of GAAP in accouning for estimates, accruals and reserves
c) have experience with financial statments having a breadth and level of complexity comparable to those of the registrant
d) understand internal controls and the procedures for financial reporting; and
e) understand audit committee functions.

Question 55

according to the professions ethical standards, which of the following events may justify a departure from an established accounting principle?

                        new legislation              evolution of a new form of
                                                                          business transaction a                                  no                                yes b                                  yes                               no c                                   yes                               yes d                                   no                               no

Answer 55

C) in general, strict compliance with accounting principles is required. However conduct rule 203 recognizes that, due to unusual circumstances, adhering to GAAP may cause financial statements to be misleading. new legislation and the evolution of a new form of business transaction are events that may justify departure from an established accounting principle.

Question 56

a CPA is permitted to disclose confidential client information without the consent of the client to
I. another CPA firm if the information concerns suspected tax return irregularities

II. a state CPA society voluntary peer review board

a) I only
b) II only
c) Both I and II
d) Neither I nor II

Answer 56

B) Under conduct rule 301, confidential client information, a CPA may reveal confidential information without the clients permission for a state board or state society sponsored peer review. Identifying information revealed to the review team is precluded from disclosure. However, a CPA may not disclose information to another CPA firm without the clients permission or unless pursuant to a valid subpoena.

Question 57

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 57

C) conduct rule 503, commissions and referral fees, prohibits a member in public practice from recommending any product or service to a client when the firm performs 1) an audit or review of financial statements 2) a compilation of a financial statement that is reasonably expected to be used by a third party if the report does not diclose the CPAs lack of independence, or 3) an examination of prospective financial information for that client

Question 58

With respect to records in a CPAs possession, the code of professional conduct provides that

a) an auditor may retain client provided records after a demand is made for them, if fees due with respect to a completed engagement have not been paid.
b) Member-prepared records that contain journal entries not reflected in the clients records need not be furnished to the client upon request
c) Extensive analytical review schedules prepared by the client at the auditors request are working papers that belong to the auditor and need not be furnished to the client upon request
d) The auditor who returns client records must comply with any subsequent request to again provide such information

Answer 58

C) a members working papers are the members property, not client-provided records, and need not be made available.

Question 59

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

a) accepting a contingent fee for representing a client in connection with obtaining a private letter from the IRS
b) retaining client-provided records after the client has demanded their return
c) revealing client tax returns to a prosepective purchaser of the CPAs practice
d) issuing a modified report explaining the CPA failure to follow a governmental regulatory agencys standards when conducting an attest service for a client.

Answer 59

B) retention of client provided records after the client has demanded their return is an act discreditable to the profession.

Question 60

According to SEC independence regulations

a) all audit partners must rotate every 5 years
b) preapproval of accountants services may be in accord with detailed policies and procedures rather than explicit
c) the issuer must disclose only those fees maid to the account for audit work
d) no partner may sell nonaudit services to the client during an audit

Answer 60

b) audit committees ordinarily must preapprove the services performed by accountants ( permissible nonaudit services and all audit, review, and attest engagements) Approval must be either explicit or in accordance with detailed policies and procedures. if approval is based on detailed policies and procedures, the audit committee must be informed, and no delegation of its authority to management is allowed.

Question 61

according to the PCAOB, an accounting firms independence is least likely to be impaired if the firm

a) provides a service to the audit client for a contingent fee
b) receives a commission from the audit client
c) has an audit client that employs a former firm professional
d) provides tax services to a person in a financial reporting oversight role at the audit client

Answer 61

C) firm independence is impaired by a clients employment of a former firm professional that could adversely affect the audit unless safeguards are established. pre-change safeguards include removal from the audit of those negotiating with the client, and post change safeguards include possibly modifying the audit plan

Question 62

under the IFACs code of ethics for professional accountants, fundamental principles include
I. Objectivity and independence
II professional behavior
III confidentiality
IV the public interest

a) I and II only
b) II and III only
c) III and IV only
d) I, II, III, and IV

Answer 62

B) professional behavior and confidentiality are fundamental principles

Question 63

what are fundamental principles under the IFACs code of ethics for professional accountants?

Answer 63

integrity
objectivity
professional competence and due care
confidentiality 
professional behavior

Question 64

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

a) 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.
b) 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.
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 64

C) Independence is impaired if a covered member has a direct financial interest in a client, e.g., ownership of equity, debt securities (such as bonds issued by an attest client), or other investments in a client. A direct financial interest impairs independence even if it is not material to the member’s wealth.

Question 65

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 not disclose this information because the identity of its clients is confidential information.
b) A CPA firm may disclose this information unless disclosure would suggest that the client may be experiencing financial difficulties.
c) A CPA firm may disclose this information if the practice is limited to performing asset valuations in anticipation of mergers and acquisitions.
d) 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.

Answer 65

B)
A member shall not disclose confidential client information without the client’s consent unless it is disclosed to (1) comply with a valid subpoena or summons or with applicable laws and regulations, (2) discharge his or her professional obligations, (3) cooperate in an official review of his or her professional practice, or (4) initiate a complaint with or respond to any inquiry made by an appropriate investigative or disciplinary body. In a bankruptcy case, the implication that a client is in financial difficulty may make his or her name confidential information. If no exception applies, client confidentiality has been violated.

Question 66

Which of the following most completely describes how independence has been defined by the accounting profession?

a) Accepting responsibility to act professionally and in accordance with a professional code of ethics.
b) Performing an audit from the viewpoint of the public.
c) Avoiding the appearance of significant interests in the affairs of an audit client.
d) Possessing the ability to act with integrity and objectivity.

Answer 66

D) Integrity, objectivity, and independence are overlapping concepts. Integrity requires honesty and candor within the limits of confidentiality. It also requires, among other things, observation of the principle of objectivity and independence. Objectivity is impartiality, intellectual honesty, and freedom from conflicts of interest. Independence precludes relationships that “may appear to impair objectivity in rendering attestation services.” In rendering services, a member in public practice should therefore be independent in appearance as well as in fact.

Question 67

In which of the following instances is the independence of the CPA most likely not considered to be impaired? The CPA has been retained as the auditor of a

a) Company in which the CPA’s investment club owns a 10% interest.
b) Charitable organization in which the spouse of the CPA serves as treasurer.
c) Credit union of which the CPA is a member.
d) Municipality in which the CPA owns $25,000 of the $2,500,000 indebtedness of the municipality.

Answer 67

C)According to an Ethics Ruling, membership in a credit union will not impair independence if (1) the member or his or her partners or employees individually qualify for the membership other than as a result of the services rendered; (2) the member has no significant influence over credit union policies; (3) any loans to the member meet the requirements of Interpretation 101-5; and (4) any deposits are fully insured or, if uninsured, the amounts are not material.

Question 68

Fenn & Co., CPAs, has time available on a computer that it uses primarily for its own internal record keeping. Aware that the computer facilities of Delta Equipment Co., one of Fenn’s audit clients, are inadequate for the company’s needs, Fenn offers to maintain on its computer certain routine accounting records for Delta. If Delta were to accept the offer and Fenn were to continue to function as independent auditor for Delta, Fenn most likely would be in violation of

a) SEC, but not AICPA, provisions pertaining to auditors’ independence.
b) Neither AICPA nor SEC provisions pertaining to auditors’ independence.
c) Both SEC and AICPA provisions pertaining to auditors’ independence.
d) AICPA, but not SEC, provisions pertaining to auditors’ independence.

Answer 68

a)
Under the Sarbanes-Oxley Act of 2002 and the SEC rules promulgated under it, performing bookkeeping or accounting services for a public company audit client impairs the independence of the audit firm. The major exception to this rule is for results that are not subject to audit. The AICPA view is that the firm ordinarily may retain its independence while keeping client accounting records, provided certain requirements are met. For example, when providing bookkeeping services, independence would not be impaired if the member records transactions for which management has approved the account classifications, posts coded transactions to the general ledger, prepares financial statements based on the trial balance, posts client-approved entries to the trial balance, or proposes entries or other changes in the financial statements if they are reviewed by the client and its management understands their nature and effects. However, determining or changing entries, account codings or classifications for transactions, and other accounting records without client approval; authorizing or approving transactions; preparing source documents; and making changes in source documents without client approval are activities that would impair independence. The application of these inconsistent positions seldom causes conflict because large clients, which are the most likely to report to the SEC, usually have their own accounting and computer systems and need not request these services from their auditors. Moreover, the SEC rules apply to publicly traded companies only.

Question 69

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

a) Vigorous enforcement of an established code of ethics is the best way to prevent unscrupulous acts.
b) Ethical standards that emphasize excellence in performance over material rewards establish a reputation for competence and character.
c) A requirement for a profession is to establish ethical standards that stress primarily a responsibility to clients and colleagues.
d) A distinguishing mark of a profession is its acceptance of responsibility to the public.

Answer 69

d)
According to Article II of the Principles section of the AICPA Code of Professional Conduct, “Members should accept the obligation to act in a way that will serve the public interest, honor the public trust, and demonstrate commitment to professionalism.” According to the accompanying explanation, “A distinguishing mark of a profession is acceptance of its responsibility to the public.”

Question 70

On June 1, Year 1, a CPA obtained a $100,000 personal loan from a financial institution client for whom the CPA provided compilation services. The loan was fully secured and considered material to the CPA’s net worth. The CPA paid the loan in full on December 31, Year 1. On April 3, Year 2, the client asked the CPA to audit the client’s financial statements for the year ended December 31, Year 2. Is the CPA considered independent with respect to the audit of the client’s December 31, Year 2, financial statements?

a) Yes, because the CPA was not required to be independent at the time the loan was granted.
b) Yes, because the loan was fully secured.
c) No, because the CPA had a loan with the client during the period covered by the financial statements.
d) No, because the CPA had a loan with the client during the period of a professional engagement.

Answer 70

A)
An attest engagement requires independence as required by AICPA standards (ET 92). Accountants who perform audits and reviews are required by AICPA standards to be independent. However, a compilation merely assists management in presenting information in the form of financial statements. It does not provide any assurance that no material modifications should be made for them to be in accordance with the applicable reporting framework. Although a compilation is not an assurance engagement, it is an attest engagement (AR 60). Furthermore, AICPA standards do not require an accountant to be independent to perform a compilation. But if (s)he is not independent, a final paragraph of the report should so state (AR 80). Thus, the CPA was not required to be, and was not, independent during Year 1. Because the loan was paid in full during Year 1, the CPA is considered independent with respect to the audit of the client’s Year 2 financial statements. The CPA had no loan from the client during the engagement.

Question 71

Conduct Rule 501 states that a member of the AICPA shall not commit an act discreditable to the profession. Which of the following most likely is not considered such an act?

a) After the relationship of a nonowner member with the firm is terminated, the member takes copies from the firm’s client files without permission.
b) Failure to provide the client with client records prepared by the member.
c) Retention of client-provided records after a demand is made for them in a state that specifically grants the CPA a lien on all client records.
d) Withholding as a result of nonpayment of fees for a completed engagement adjusting and closing journal entries not reflected in the client’s books.

Answer 71

d)
The member’s duty to return client-provided records is absolute. However, the duty to return other information not reflected in the client’s books and records is not absolute. For example, the duty to return supporting records for an issued work product is conditional upon payment of fees with respect to information such as adjusting, closing, combining, or consolidating entries. Supporting records contain information not in the client’s books and records without which its financial information is incomplete. They are produced by the member and are not otherwise available to the client.

Question 72

A member of the AICPA owns an interest in a separate business that performs tax services. If the member does not control the business, who must comply with the Code of Professional Conduct?

a) The entity’s employees.
b) The other owners.
c) The member only.
d) The entity and the member.

Answer 72

C)
A member in public practice may own an interest in a separate business that performs the services for which standards are established, e.g., if the member, individually or with his or her firm or members of the firm, controls the separate business (as defined by the FASB Codification), the entity and all its owners and employees must comply with the Code. Absent such control, the member, but not the separate business, its other owners, and its employees, would be subject to the Code.

Question 73

A violation of the AICPA’s ethical standards most likely would have occurred when a CPA

a) Arranged with a financial institution to collect notes issued by a client in payment of fees due.
b) Compiled the financial statements of a nonpublic client that employed the CPA’s spouse as a bookkeeper.
c) Received a fee for referring audit clients to a company that sells limited partnership interests.
d) Performs a valuation of a client’s business for tax planning purposes.

Answer 73

C)
Conduct Rule 503 prohibits a member in public practice from accepting a commission for recommending any product or service to a client when the firm performs (1) an audit or review of financial statements, (2) a compilation of a financial statement that is reasonably expected to be used by a third party if the report does not disclose the CPA’s lack of independence, or (3) an examination of prospective financial information for that client.

Question 74

A CPA who performs primary actuarial services for a nonissuer client normally is precluded from expressing an opinion on the financial statements of that client if the

a) Actuarial services are a major determinant of the pension expense.
b) Fees for the actuarial services have not been paid.
c) CPA prepared an actuarial report using assumptions not approved by the client.
d) Actuarial assumptions used are not in accordance with GAAS.

Answer 74

c)

A member must evaluate the effect on his or her independence of performing nonattest services. The member should not assume management responsibilities for the attest client. A nonattest service impairs independence if it involves the performance of an appraisal, valuation, or actuarial service using significant assumptions not determined or approved by the client.

Question 75

Among other things, Conduct Rule 102, Integrity and Objectivity, prohibits knowing misrepresentation of facts. A member of the AICPA violates this element of the rule when (s)he

a) Fails to correct an entity’s records that are inaccurate even if (s)he has no authority to do so.
b) Suggests that a client invest in a business in which the member has an interest.
c) Knowingly makes false and misleading journal entries in the records if some are material.
d) Signs a document containing false and misleading information regardless of its materiality.

Answer 75

c)

Knowing misrepresentations of facts include (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.

Question 76

Which of the following, if any, is prohibited by the AICPA Code of Professional Conduct?

a) All of the answers are permitted by the AICPA Code of Professional Conduct.
b) Practice of public accounting in the form of a professional corporation that uses a firm name indicating specialization.
c) Use of the partnership name for a limited period by one of the partners in a public accounting firm after the death or withdrawal of all other partners.
d) Failing to provide working papers to the client after a request has been made.

Answer 76

a)

None of the responses state conduct prohibited by the Code.

Question 77

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 belongs to a client golf club that requires members to acquire a share of the club’s debt securities.
c) 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.
d) The member owns municipal utility bonds issued by a client, and the bonds are not material to the member’s wealth.

Answer 77

d)

Independence is impaired if a covered member has a direct financial interest in a client, e.g., ownership of equity, debt securities (such as bonds issued by an attest client), or other investments in a client. A direct financial interest impairs independence even if it is not material to the member’s wealth.

Question 78

Which of the following most completely describes how independence has been defined by the accounting profession?

a) Accepting responsibility to act professionally and in accordance with a professional code of ethics.
b) Performing an audit from the viewpoint of the public.
c) Possessing the ability to act with integrity and objectivity.
d) Avoiding the appearance of significant interests in the affairs of an audit client.

Answer 78

c)

Integrity, objectivity, and independence are overlapping concepts. Integrity requires honesty and candor within the limits of confidentiality. It also requires, among other things, observation of the principle of objectivity and independence. Objectivity is impartiality, intellectual honesty, and freedom from conflicts of interest. Independence precludes relationships that “may appear to impair objectivity in rendering attestation services.” In rendering services, a member in public practice should therefore be independent in appearance as well as in fact.