Chapter 3

Front 1

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

Back 1

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

Front 2

The AICPA Code of Professional Conduct contains both general ethical principles that are aspirational in character and also a

Back 2

Set of specific, mandatory rules describing minimum levels of conduct a member must maintain.

Front 3

When management refuses to disclose material noncompliane with laws and regulations identified by the independent auditor, the independent auditor may be charged with violating the AICPA Code of Professional Conduct for

Back 3

Disclaiming an opinion.

Front 4

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

Back 4

Possessing the ability to act with integrity and objectivity.

Front 5

An auditor strives to achieve independence in appearance to

Back 5

Maintain public confidence in the profession.

Front 6

The concept of materiality is least important to an auditor when considering the

Back 6

Effects of a direct financial interest in the client on the CPA's independence.

Front 7

Under the ethical standards of the profession, which of the following situations involving nondependent members of an auditor's family is most likely to impair the independence of an individual participating in an audit engagement?

Back 7

A spouse's employment with a client.

Front 8

A CPA purchased stock in an audit client corporation and placed it in a revocable educational trust for the CPA's dependent minor child. The trust securities were not material to the CPA but were material to the child's personal net worth. Is the independence of the CPA considered to be impaired with respect to the client?

Back 8

Yes, because the stock is considered a direct financial interest and, consequently, materiality is not a factor.

Front 9

The appearance of independence of a CPA, or that CPA's firm, is most likely to e impaired if the CPA

Back 9

Serves as an executor and trustee of the estate of an individual who owned the majority of the stock of a clsely held client corporation.

Front 10

In which of the following circumstances will a CPA who audits XM Corporation lack independence?

Back 10

The CPA and XM's president each own 25% of FOB Corporation, a clsely held company.

Front 11

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

Back 11

The auditor's checking account, which is fully insured by a federal agency, is held at a client finanial institution.

Front 12

A CPA audits the financial statements of a local bank. Accourding to the AICPA Code of Professional Conduct, the appearance of independence ordinarily is not impaired if the CPA

Back 12

Uses the bank's time-sharing computer service to solve client-related problems.

Front 13

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

Back 13

Credit union of which the CPA is a member.

Front 14

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

Back 14

CPA prepared an actuarial report using assumptions not approved by the client.

Front 15

Which of the following legal situations would be considered to impair the auditor's independence?

Back 15

Actual litigation by the auditor against the current management alleging management fraud or deceit.

Front 16

In which of the following situations would a covered member's independence be considered to be impaired?

Back 16

The covered member has a direct financial interest in an audit cleint, but the interest is maintained in a blind trust.

&

The covered member owns a commercial building and leases it to an audit client. The lease is properly classified as a capital lease, and the rental income is material to the CPA.

Front 17

According to the profession's ethical standards, a CPA is considered independent in which of the following instances?

Back 17

The CPA belongs to a country club client in which membership requires the acquisition of a pro rata share of equity.

Front 18

An audit independence issue might be raised by the auditor's paricipation in consulting services engagements. Which of the following statements is most consistent with the profession's attitude toward this issue?

Back 18

The auditor should not make management decisions for an audit client.

Front 19

Burrow & Co., CPAs, have provided annual audit and tax compliance serevices to Mare Corp. for several years. Mare has been unable to pay Burrow in full for services Burrow rendered 19 months ago. Burrow isready to begin field work for the current year's audit. Under the ethical standards of the profession, which of the following arrangements will permit Burrow to begin the field work on Mare's audit?

Back 19

Mare commits to pay the past due fee in full before the audit report is issued.

Front 20

Under the ethical standards of the profession, which of the following investments by a CPA in a corporate client is an indeirect financial interest?

Back 20

An investment held through a regulated mutual fund.

Front 21

Which of the following acts by a CPA who is not in public practive is most likely to be a violation of the etical standards of the profession?

Back 21

Using the CPA designation without disclosing employment status in connection with financial statements issued for external use by the CPAs employer.

Front 22

The AICPA Code of Professional Conduct states, in part, that a CPA should maintain integrity and objectivity. Objectivity in the Code refers to a CPA;s ability

Back 22

To maintain an impartial attitude on all maters that come under the CPA's review.

Front 23

A violation of the profession's ethical standards would most likely have occurred when a CPA in public practice

Back 23

Serves on a municipal board of income tax appeals, discloses that status to concerned parties, participates as a board member in a tax appeal involving a client, but does not receive the client's consent for such action.

Front 24

Eagle Company's financial statements contain a departure from generally accepted accounting prinviples because, due to unusual circumstances, the statements would otherwise be misleading. The auditor should express an opinion that is

Back 24

Unmodified and describe the departure in an other-matter paragraph.

Front 25

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

Back 25

Consulting with Experts = Yes

Obtaining Specialty Accreditation = No

Front 26

Which of the following statements concerning an accountant's disclosure of confidential client data is ordinarily true?

Back 26

Disclosure may be made to any party on consent of the client.

Front 27

A CPA;s retention of client-provided records after a demand has been made for them is an action that is

Back 27

Prohibited under the AICPA Code of Professional Conduct.

Front 28

To which of the following parties may a CPA partnership provide its audit documentation, without being lawfully subpoenaed or without the client's consent?

Back 28

Any surviving partner(s) on the death of a partner.

Front 29

Thorp, CPA, was engaged to audit Ivor Co.'s financial statements. During the audit, Thorp discovered that Ivor's inventory contained stolen goods. Ivor was indicted and Thorp was subpoenaed to testify at the criminal trial in state court. IVor claimed accountant-client privilege to prevent Thorp from testifying. Which of the following statements is most likely true regarding Ivor's claim?

Back 29

Ivor can claim an accountant-client privilege onl in jurisdictions that have enacted a statute creating such a privilege.

Front 30

The AICPA Code of Professional Conduct is violated if a CPA accepts a fee for services and the fee is

Back 30

Payable after a specified finding is attained in a review of financial statements.

Front 31

An issuer client who disagrees with the independent auditor on a significant matter affecting its financial statements has several courses of action. Which of the following courses of action would be inappropriate?

Back 31

Appeal to the FASB to review the signigicant matter.

Front 32

The profession's ethical standards most likely are violated when a CPA represents that specific consulting services will be performed for a stated fee and it is apparent at the time of the representation that the

Back 32

Actual fee would be substantially higher.

Front 33

Inclusion of which of the following statements in a CPA's advertisement is not acceptable pursuant to the AICPA Code of Professional Conduct?

Back 33

Paul Fall

Certified Public Accountant

Endorsed by AICPA

Front 34

Richard, CPA, performs compilation services for Norton Corporation, a nonpublic entity. The compilation reports issued by Richard disclose lack of independence and are not used by third parties. Richard has accepted a commission from a software company for recommending its products to Norton. The commission agreement was disclosed to Norton. Richard also refers Norton to Cruz, CPA, who is more competent with respet to engagements involving the industry in which Norton operates. Cruz performs an audit of NOrton's financial statements and subsequently remits to Richard a portion of the fee collected. The referral fee agreement was lkewise disclosed to Norton. Richard accepts the fee. Who, if anyone, has violated the Code of Professional Conduct?

Back 34

Neither Richard nor Cruz.

Front 35

Which of the following is required for a CPA firm to designate itself as "Members of the American Institute of Certified Public Accountants" on its letterhead?

Back 35

All CPA ownders must be members.

Front 36

The Sarbanes-Oxley Act of 2002 has strengthened auditor independence by requiring that management of a public company

Back 36

Select auditors through audit committees.

Front 37

A member of the AICPA who is engaged to prepare an income tax return has a duty to prepare it in such a manner that the tax is

Back 37

The legal minimum.

Front 38

When a member of the AICPA prepares a taxpayer's federal income tax return, the member has the responsibility to

Back 38

Be an advocate for the entity's position.

Front 39

A CPA must sign the prepare's declaration on a federal income tax return

Back 39

Only when the CPA prepares a tax return for compensation.

Front 40

The preparer of a federal income tax return signs a preparer's declaration that states,

Under penalties of perjury, I declare that I have examined this return, including accompanying schedules and statements, and to the best of my knowledge and belief, it is true, correct, and complete. Declaration of preparer (other than the taxpayer) is based on all information of which the preparer has any knowledge.

A member of the AICPA who signs this declaration as preparer of a client's tax return warrants that

Back 40

Information furnished by the client was relied upon in preparing the tax return unless it appeared incorrect, inconsistent, or incomplete.

Front 41

Which of the following is implied when a member of the AICPA signs the preparer's declaration on a federal income tax return?

Back 41

The tax return is not misleading ased on all information of which the member has knowledge.

Front 42

According to the AICPA Statements on Standards for Tax Services, why must a CPA be satisfied that a reasonable effort has been made to obtain information needed to provide appropriate answers to the questions on a tax return before signing the preparer's declaration?

Back 42

The declaration requires the CPA to state that the return is true, correct, and complete based upon all informaton of which the preparer has knowledge.

Front 43

In accordance with the AIPA's Statements on Standards for Tax Services, when a reasonable basis exists for omission of an answer to an applicable question on a tax return,

Back 43

The member-preparer need not provide an explanation for the omission on the return.

Front 44

Jones, amember of the AICPA, prepared Smith's federal income tax return and appropriately signed the preparer's declaration. Several months later, Jones learned that Smith improperly altered several figures before mailing the tax return to the IRS. Jones should communicate disapproval of this action to Smith and

Back 44

Take no further action with respect to the current year's tax return but considr the implications of Smith's actions for any future relationship.

Front 45

According to the AICPA's standards, which of the following actions should be taken by a member tax preparer who discovers an error in a taxpayer's reviously filed tax return?

Back 45

Advise the taxpayer.

Front 46

Kopel was engaged to prepare Riff Raff's Year 1 federal income tax return. During the tax preparation interview, Raff told Kopel that he paid $3,000 in property taxes in Year 1. Actually, Raff's property taxes amounted to only $600. Based on Raff's word, Kopel deducted the $3,000 on Raff's return, resulting in an understatement of Raff's tax liability. Kopel had no reason to believe that the information was incorrect. Kopel did not request underlying documentation and was reasonably satisfied by Raff's representation that Raff had adequate records to support the deduction. Which of the following satements is true?

Back 46

Kopel is not subject to the preparer penalty for willful unerstatement of tax liability because Kopel was justified in relying on Raff's representation.

Front 47

According to the profession's standards, which of the follwing are considered consulting services?

Back 47

Advisory Services = Yes

Implementation Services = Yes

Assurance Services = No

Front 48

A pervasive characteristic of a CPA's role in a consulting services engagement is that of being a(n)

Back 48

Objective advisor.

Front 49

The form of communication with a client in a consulting service should be

Back 49

Either oral or written.

Front 50

Which of the following general standards apply to consulting services?

Back 50

Due Professional Care = Yes

Independence in Mental Attitude = No

Planning and Supervision = Yes

Front 51

According to the standards of the profession, which of the following events will require a CPA performing a consulting services engagement for a nonaudit client to withdraw from the engagement?

Back 51

NEITHER:

The CPA has a conflict of interest that is disclosed to the client, and the client consents to the CPA's continuing the engagement.

&

The CPA fails to obtain a written understanding from the client concerning the scope of the engagement.

Front 52

Which of the following statements applies to consultation services engagements?

Back 52

A practitioner should obtain sufficient relevant data to complete the engagement.

Front 53

The AICPA Code of Professional Conduct

Back 53

Expects the CPA to honor the public trust.

Front 54

The AICPA Code of Professional Conduct does not include enforceable Rules of Conduct on which of the following?

Back 54

Responsibilities to colleagues.

Front 55

CPAs are required to complete engagements competently. Competence includes all of the following except

Back 55

An unbiased mental attitude.

Front 56

Jaye B. Honest, CPA, was offered the engagement to audit Wicket Corporation for the year ended June 30, Year 3. She had served as a director of Wicket Corporation until June 30, Year 1, and her spouse currently owns 600 of the 10,000 outstanding shares of Wicket Corporation. Jaye disassociated from Wicket prior to being offered the engagement. Moreover, the engagement does not cover any period that includes Jaye's association or emplyment with Wicket. Under the AICPA Code of Professional Conduct, she should

Back 56

Refuse the engagement because of her spouse's stock owndership.

Front 57

The Conceptual Framework for AICPA Independence Standards

Back 57

Adopts a risk-based approach to analysis of independence matters.

Front 58

Dickins & Co., CPAs, offers to maintain on its computer certain routine accounting records for its audit client, Lake. If Lake accepts the offer and Dickins & Co. continues to function as independent auditor, Dickins & Co. is most likely to violate the rules relating to auditor's independence of which organization(s)?

Back 58

SEC = Yes

AICPA = No

Front 59

A CPA who has a direct financial interest in a nonclient having a material investment in the CPA's audit client

Back 59

Lacks independence.

Front 60

Jordan is the executive partner of Cain & Jordan, CPAs. One of its clients is a large nonprofit charitable organization. The organization has asked Jordan to be on its board of directors, which consists of a large number of the community's leaders. For Jordan to be considered independent, which of the following requirements must be met?

Back 60

Board Participation Purely Honorary = Yes

Audit Participation by Jordan Prohibited = No

Front 61

Under the Code's Independence Rule, which of the following must be independent in the performance of an audit?

Back 61

All individuals on the attest engagement team, except those performing routine clerical functions.

Front 62

Under the AICPA Code of Professional Conduct, a covered member is most likely not permitted to

Back 62

Have any joint closely held investment with a principal shareholder of an audit client during the period of the audit engagement.

Front 63

The Code prohibits loans to a covered member from a client financial instituition exept for certain permitted loans made under normal lending procedures, terms, and requirements. When making the comparison between the terms of the member's loan and those of other borrowers, which item(s) should be considered in the determination of normal lending procedures?

Back 63

All of the answers are correct.

Front 64

Which of the following does not impair a CPA's independence?

Back 64

The client is in bankruptcy and has not paid fees related to the previous year's audit.

Front 65

Within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934, an accountant deemed to be independent with regard to a specific entity must

Back 65

Confirm in writing its independence from the audit

&

Discuss its independence with the audit committee

Front 66

A CPA who is employed by a nonaccounting corporation performs services for the employer, includin auditing the employer's financial statements. Reports issued with respect to such activities are distributed with the CPA's name and CPA designation appearing on the corporate letterhead. These reports should

Back 66

Make no reference to GAAS.

Front 67

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

Back 67

Prematurely expressing an opinion based on an audit because of time pressures from the client.

Front 68

A CPA most likely does not violate the Code's Integrity and Objectivity Rule, if the CPA

Back 68

Performs expert witness services for a nonissuer attest client that is one of many plaintiffs in a class action lawsuit.

Front 69

The General Standards Rule does not require a member to

Back 69

Provide assurance about prospective financial statements.

Front 70

Ann Covington, CPA, has been asked to perform a consulting services engagement concerning the analysis of a potential merger. She has little experience with the industry involved. What is her most appropriate action?

Back 70

Accept the engagement and perform additional research or consult with others to obtain sufficient competence.

Front 71

When a CPA is associated with financial statements that do not comply with promulgated GAAP because the statements would be misleading without the departure, the CPA is not required to disclose

Back 71

The reason the departure does not have a material effect on the statements.

Front 72

Under the AICPA Code of Professional Conduct, a CPA may express an unmodified opinion on financial statements that contain a departure from GAAP if (s)he can demonstrate that because of unusual circumstances the financial statements would be misleading if the departure were not made. Which of the following is an example of unusual circumstances that could justify such a departure?

Back 72

The evolution of a new form of business.

Front 73

The Confidential Client Information Rule is violated when a member in public practice

Back 73

Provides client profit and loss percentages to a trade association without the client's consent.

Front 74

A member of the AICPA may render which service under a contingent fee arrangement?

Back 74

A CPA provide investment advisory services, with the fee based on a percentage of the client's ivestment portfolio.

Front 75

An external auditor is not permitted to discuss confidential client information without the specific consent of the client. This ethical proscription

Back 75

Will not preclude the auditor from complying with a validly issued court subpoena.

Front 76

With respect to records in a CPA's possession, the Code of Professional Conduct provides that

Back 76

Extensive analyses of inventory prepared by the client at the auditor's request are working papers that belong to the auditor and need not be furnished to the client upon request.

Front 77

Advertising or oter forms of solicitation that are false, misleading, or deceptive are not in the pblic interest, and AICPA members in public practice shall not seek to obtain clients in such a manner. Such activities include all the following except those that

Back 77

Indicate the CPA's educational and professional attainments.

Front 78

Ann Able, CPA, is considering forming a partnership with Ben Brown for the purpose of practicing public accounting. Which of the following is true?

Back 78

Brown need not be a CPA if the partnership does not represent itself as a partnership of CPA's.

Front 79

Bsed on the Code of Professional Conduct, a CPA

Back 79

May not, upon leaving a firm, take any of the firm's client files without permission.

Front 80

A violation of the profession's ethical standards most likely occurs when a CPA

Back 80

Receives as a commission a percentage of the amounts invested by the CPA's audit clients in a tax shelter with the client's knowledge and approval.

Front 81

Under the Form of Organization and Name Rule, and the related resolution of the AICPA Council, which of the follwing is a characteristic of a form of organization in which a member may practice public accounting?

Back 81

A majority of the ownership of the firm must belong to CPAs.

Front 82

A violation of the profession's ethical standards most likely occurs when a CPA who

Back 82

Maintains a separate, distinct practive but forms an association with other CPAs for joint advertising. The group practices public accounting under the association's name.

Front 83

Which action is not considered a discreditable act under the Code's Acts Discreditable Rule?

Back 83

A CPA has a bank collect notes received from a client in payment of fees.

Front 84

Which of the following violates the AICPA's Code of Professional Conduct?

Back 84

A member shares offices with another member. Their joint letterhead implies that a partnership exists when each member is in fact practicing individually.

Front 85

Which is most likely a violation of the AICPA Code of Professional Conduct?

Back 85

A member does not timely file his or her own personal federal income tax return.

Front 86

According to SEC independence regulations,

Back 86

Preapproval of accountants' services may be in accord with detailed policies and procedures rather than explicit.

Front 87

According to the PCAOB, an accounting firm's independence is least likely to be impaired if the firm

Back 87

Has an audit client that employs a former firm professional.

Front 88

According to the PCAOB, an accounting firm is most likely to be independent of its audit client if

Back 88

The firm recommended an aggressive tax position to the client that is more likely than not to be legally allowed.

Front 89

The IFAC's Code of Ethics for Professional Accountants considers threats to compliance with fundamental principles and safeguards that eliminate or reduce them. Threats may involve

Back 89

Familiarity, such as an immediate relative's service as a director of the client.

Front 90

Under the IFAC's Code of Ethics for Professional Accountants, independence is most likely impaired when

Back 90

An immediate family member of a member of the audit team is a director of the client.

Front 91

According to the IFAC's Code of Ethics for Professional Accountants section on professional appointment,

Back 91

An accountant generally needs the client's permission to communicate with the current accountant.

Front 92

Under the IFAC's Code of Ethics for Professional Accountants,

Back 92

An accountant in public practice may accept an inconsequential gift from a client.

Front 93

Inspections performed by the PCAOB focus on quality control of registered CPA firms that perform audits of public companies (issuers). As required by the Sarbanes-Oxley Act, inspections determine all of the following except that

Back 93

Only staff with prior experience work on audits.

Front 94

When Congress passed the Sarbanes-Oxley Act of 2002, it imposed greater regulation on public companies and their auditors and required increased accountability. Which of the following is not a provision of the act?

Back 94

Audit firms must be rotated on a periodic basis.

Front 95

Which of the following most likely is an allowable service that an auditor may provide to a public client?

Back 95

Tax compliance services.

Front 96

Statements on Standards for Tax Services (SSTSs) have been issued by the Tax Executive Committee of the AICPA. The SSTSs

Back 96

Are enforceable under the AICPA Code of Professional Conduct.

Front 97

As part of an annual audit of a client, a member of the AICPA prepares the federal income tax return. What modifications should be made to the preparer's declaration when signing the return?

Back 97

Modify to Conform to Audit Report = No

Modify to State That Information Was from Audited Financial Statements = No

Front 98

In accordance with Statements on Standards for Tax Services, which of the following is not considered a basis for a good faith belief that a tax return position may be recommended by a member of the AICPA?

Back 98

A low probability that the return will be audited.

Front 99

Elwyn, a member of the AICPA, is preparing a federal tax return for Emma, who stated that she had made about $150 of cash donations to charitable donations had been given to solicitors at supermarkets, airports, and other similar settings. What should Elwyn do with this information when preparing the tax return?

Back 99

Identify $150 as "Other miscellaneous contributions."

Front 100

Statements on Standards for Consulting Services are issued by the AICPA Management Consulting Services Executive Committee. Shich statement concerning consulting services is false?

Back 100

Consulting services ordinarily involve external reporting.