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3: Chapter Judgmental and Ethical Decision-Making Frameworks and Associated Professional Chapter 3: Judgmental and Ethical Decision-Making Frameworks and Associated Professional Standards Standards Student: ___________________________________________________________________________ 1. When making complex, difficult, and important decisions audit professionals typically do not benefit from a structured approach to their decision-making because they need to remain open-minded. True False 2. Professional judgment involves applying relevant professional knowledge and experience to unique and potentially uncertain facts and circumstances in order to reach a conclusion or make a decision. True False 3. As accounting standards become less rules-based and more principles-based, the role of professional judgement in decision-making will become less important. True False 4. Individual state boards of accountancy and state societies of CPAs have mostly adopted Rules of Conduct established by the AICPA. True False 5. Public confidence is mostly maintained by the public accounting profession through integrity based on personal moral standards and it is reinforced by codes of conduct. True False 6. It is not required for an individual to uphold the code of professional conduct in order to become licensed as a CPA. True False 7. One issue that may threaten independence is that of the time pressure placed on the auditor when an audit is under bid. True False 8. The Sarbanes-Oxley Act of 2002 amends the Securities and Exchange Act of 1934 and places prohibitions on certain consulting services by auditors for their audit clients. True False 9. An auditor of a public client may perform internal audit outsourcing services for a client because such services may overlap with external audit functions. True False 10. An auditor of a public client may assist a client in designing and implementing its enterprise resource planning system in order to ensure that controls over the system exist prior to the audit. True False 11. The SEC is concerned with situations between an auditor and a public company that allow the auditor to act as management of the client. True False 12. The Code of Professional Conduct was adopted by the AICPA membership to provide guidance and rules to only its members in public practice. True False 13. The AICPA Rules of Conduct govern the performance of CPAs in carrying out their public responsibilities. True False 14. Confidentiality is the cornerstone of the auditing profession. True False 15. The AICPA independence rules only apply for attestation clients. True False 16. The AICPA's Code of Professional Conduct defines direct ownership as an investment of one percent or more of a client's organization. True False 17. Direct ownership includes ownership by the CPA plus any spouse or dependent member of his or her household or any partnerships to which the CPA belongs. True False 18. Direct ownership in a client's business must be material to the CPA's investment portfolio in order to violate the independence rule. True False 19. Information shared by a client to the auditor is protected under privileged communication laws, therefore, it cannot be subpoenaed by a court of law to be used against the client. True False 20. Contingent fees are prohibited for tax professionals when preparing tax returns for clients True False 21. Contingent fees are prohibited for any client for which the auditor performs attestation services. True False 22. Commissions and referral fees are allowed to audit firms as long as the fees are disclosed to the clients board and audit committee. True False 23. The first step in the ethical framework is to identify the ethical issue(s). True False 24. The highest-order rights include rights granted by the government, such as civil rights, legal rights, rights to own property, and license privileges. True False 25. CPAs are no longer able to practice as a sole proprietorship. True False 26. An ethical problem occurs when an individual is morally or ethically required to do something that conflicts with the immediate security interests of others. True False 27. An ethical problem occurs when an individual is morally or ethically required to do something that conflicts with his or her immediate self-interest. True False 28. An ethical dilemma occurs when there are conflicting moral duties or obligations. True False 29. An ethical problem is the same as an ethical dilemma. True False 30. Rights theory focuses on evaluating actions in terms of the fundamental rights of the parties involved. True False 31. There is a hierarchy of rights to consider when applying rights theory. True False 32. Only covered members as defined by the AICPA are required to comply with its independence rules. True False 33. A covered member under the AICPAs rules includes individuals on the engagement team, any individual in a position to influence the engagement team, and all professional staff in the office of the engagement. True False 34. Under the AICPA Code of Professional Conduct, rules take precedent over principals. The principals need to only be considered when a rule is apparent. True False 35. Rule 101 on integrity and objectivity only applies to covered members as defined by the AICPA. True False 36. The AICPA may revoke a members CPA license for violations of its Code of Professional Conduct. True False 37. If a member owns several shares of stock of a company during the first few months of the fiscal year under audit and then sells the shares before accepting the engagement, the firm does not violate the independence rules of the AICPA. True False 38. A contingency fee is where no fee will be charged unless a specified finding or result is attained. True False 39. Utilitarian theory is an approach for addressing ethical problems by identifying a hierarchy of rights that should be considered in solving ethical problems or dilemmas. True False 40. The Sarbanes Oxley Act requires management to pre-approve any non-audit service by the auditor, including tax services not specifically prohibited. True False 41. Major threats to the independence of the auditor includes compensation schemes, familiarity with the client and time pressures. True False 42. Loans between the auditor and the client are permitted in some circumstances. True False 43. The auditor is permitted to violate the confidentiality rule in providing relevant information to an inquiry by a major shareholder of the client. True False 44. An auditor that exercises adequate professional skepticism will be less likely to overlook unusual circumstances, to over-generalize from limited audit evidence, or to use inappropriate assumptions in determining the nature, timing, and extent of audit procedures. True False 45. Professional skepticism is important because without it auditors are susceptible to accepting weak or inaccurate audit evidence. True False 46. Audit committees should consider all factors that might affect the independence of the external auditor and should not approve nonaudit services that they believe might impair independence. True False 47. When using a general framework for making high-quality professional decisions, the auditor would typically take all of the following steps except which one of the following: A. the auditor structures the problem. B. the auditor assesses the consequences of the potential alternatives. C. the auditor assesses the risk of potentially losing the client and the impact of the lost fee on the firm. D. all of the above are steps that would be taken. 48. Audit committees should consider all factors that might affect the independence of which of the following: A. chief executive officer B. chief financial officer C. external auditors D. all of the above. 49. Mark Pulley is an auditor at Pulley and Hurst, LLC. If Pulley's five-year-old daughter owns shares of stock in McBurgers Corporation, then Pulley is considered to have what type of interest in McBurgers Corporation? A. immaterial indirect interest in McBurgers Corporation. B. material indirect interest in the McBurgers Corporation. C. a loophole for claiming independence from McBurgers Corporation. D. direct interest in McBurgers Corporation. 50. Brenda Hursch, an auditor, would be considered independent for purposes of an audit of Microship Company even though her spouse worked for Microship Company in which of the following positions? A. controller. B. treasurer. C. order entry staff. D. none of the above, all roles would impair independence 51. A CPA firm is not considered independent when it performs which of the following services for a publicly traded audit client? A. tax return preparation as approved by the board of directors B. basic accounting recordkeeping and financial statement preparation C. accounting information system design and implementation D. both B and C E. none of the above 52. Julie Webb, CPA takes out an automobile loan with First National Bank of Wellville (FNBW) while attending the University of Wellville. Julie graduates one year later and is hired as an auditor by Best and Driftwood, LLP. Her first assigned audit engagement is with First National Bank of Wellville, a client of Best and Driftwood. As a new audit assistant, Julie continues to pay her automobile loan payments each month. According to the AICPA, Julie's independence would be considered A. impaired because Julie has a direct financial interest in FNBW. B. impaired because Julie has a material indirect financial interest in FNBW. C. not impaired because Julie has an immaterial indirect financial interest in FNBW. D. not impaired because Julie is permitted to take normal loans from FNBW. 53. Julie Webb, CPA takes out an automobile loan with First national Bank of Wellville (FNBW) while attending the University of Wellville. Julie graduates one year later and is hired as an auditor by Best and Driftwood, LLP. Her first assigned audit engagement is with First national Bank of Wellville, a client of Best and Driftwood. As a new audit assistant, Julie continues to pay her automobile loan payments each month. According to the AICPA, Julie is considered a covered member for FNBW independence purposes because of which of the following conditions? A. she will be working on the engagement. B. she has a direct financial interest in FNBW. C. she graduated in the same area as the client is operating. D. she has an immaterial direct financial interest in FNBW. 54. In determining the types of activities, engagements and interactions an auditor should have with a client, the CPA and the audit firm must do which of the following? A. only assess the relationships of clients that pay audit fees that are material to their firm. B. assess all of their relationships with every client to ensure that independence is intact. C. focus on client satisfaction above all other considerations. D. realize that ethics are only guidelines and a matter of personal judgment. 55. Which of the following represents a situation in which an auditor is independent of the client? A. The auditor is paid by the client organization rather than the SEC. B. The auditor takes a personal loan from the president of the company. C. The auditors dependent son holds 25 shares of the clients common stock. D. The auditor has not received payment for the previous audit services. 56. Members of the AICPA are required to act with integrity and objectivity for which of the following engagements? A. tax preparation B. financial statement review services C. financial statement audits D. all engagements 57. Which one of the following is an example of a conflict of interest for a CPA? A. performing tax services and a compilation engagement for a client B. serving as legal counsel and an auditor for a client C. providing an audit on internal financial controls and financial statements for a client D. being employed as a chief financial officer while serving as a member of the board of directors for the same company 58. Which of the following is not an aspect of Rule 201 of the General Standards of the Code of Professional Conduct? A. a member must not take on an engagement that is beyond the member's professional competence B. a member must exercise duties prudently and professionally C. a member must adequately plan and supervise the performance of professional services D. a member firm must not advertise services to competing clients 59. Rule 201 of the General Standards of the Code of Professional Conduct defines professional competence in which of the following ways? A. sufficient collegiate and continuing professional education. B. accepting only those engagements that the firm's members can competently perform. C. adequate planning and supervision of professional performance. D. none of the above. 60. A member of the AICPA must safeguard the confidentiality of client information. Auditors, however, must disclose information to non-clients for the following reasons except to: A. discuss information relating to inadequate disclosure in an audit report. B. comply with a validly issued and enforceable subpoena or summons. C. accommodate the review of client audit workpapers under AICPA, PCAOB, or State Board of Accountancy authority. D. explain to members of the press the financial viability of a client. 61. A CPA firm is considered independent when it performs which of the following services for a publicly traded audit client? A. Serving as a member of the clients board of directors. B. Determining which accounting policies will be adopted by the client as approved by the board of directors. C. Accounting information system design and implementation as approved by the board of directors. D. Tax return preparation as approved by the board of directors. 62. A CPA may only practice public accounting in which of the following forms? A. a partnership. B. a professional corporation. C. a sole proprietorship. D. an organization permitted by state law or regulation. 63. William Tyler, CPA, may not accept a commission for recommending a product or service to which type of client? A. a tax client. B. an attestation client. C. a financial-planning client. D. a management-services client. E. all of the above. 64. Information about a client that cannot be subpoenaed by a court of law is referred to as what type of information? A. confidential information. B. privileged communication. C. contingent information. D. audit communication 65. Which of the following describes a situation in which moral duties or obligations conflict and one action is not necessarily the correct action? A. an ethical dilemma. B. an ethical problem. C. an ethical theory. D. none of the above. 66. Which of the following describes a situation in which an individual is morally or ethically required to do something that conflicts with his or her immediate self-interest? A. an ethical dilemma. B. an ethical problem. C. an ethical theory. D. none of the above. 67. Which of the following is included in the AICPA Code of Professional Conduct? A. Principles, Rules of Conduct and Ethics Rulings. B. Rules of Conduct, Interpretations and Principles. C. Principles, Rules of Conduct and Ethics Rulings. D. Principles, Rules of Conduct, Interpretations and Ethics Rulings. 68. The AICPA Principles of Professional Conduct include which of the following? A. public interest, objectivity and independence. B. due professional care and supervision. C. scope and nature of services and adequate training. D. integrity and confidentiality 69. In which of the following situations would a CPA not be considered independent? A. where a CPA has obtained an auto loan from a banking client in the current year. B. where a CPA has obtained an automobile lease term from a client in the current year. C. where a CPA has obtained a $4,000 retainer for services from a banking client in the current year. D. where a CPA has obtained a home mortgage loan from a client in the current year. 70. In which of the following situations would a CPA not be considered independent? A. where a CPA has obtained an auto loan from a banking client in a prior year. B. where a CPA has obtained a home mortgage loan in 1988 from a client. C. where a CPA has obtained an auto lease from a banking client in the current year. D. where the spouse of a CPA has obtained a home mortgage loan in the current year. 71. Which of the following represents a situation in which the auditors may disclose client information to outside parties? A. Bringing working papers to a professional CPA workshop as an example of quality work. B. Complying with a validly issued and enforceable subpoena or summons. C. Showing the clients bank statement to a neighbor who is a shareholder to emphasize its cash position. D. Explaining to the local television news station why the client is likely to miss payroll in the forthcoming periods. 72. The ethical framework derived from utilitarianism and rights theories indicates all of the following steps except A. identification of the legal issues. B. determination of affected parties and their rights. C. determination of the most important rights. D. development of alternative courses of action. 73. Which of the following is a purpose of an ethical framework? A. to provide a defined methodology to solve the ethical problem. B. to provide a defined methodology to aid the user in making complex ethical decisions. C. to provide a defined program to solve ethical dilemmas. D. to provide all of the above. 74. Normally the auditor is not permitted to divulge confidential information obtained from a client. Which of the following situations would be a violation of this requirement? A. to respond to the information request of a shareholder. B. to respond to a quality review request of the state board of accountancy. C. to initiate a complaint with the AICPAs ethics division. D. to ensure adequate disclosure in accordance with GAAP. 75. Under the AICPA definition, who among the following would not be considered a covered member? A. an individual on the attest engagement team. B. an individual in a position to influence the attest engagement. C. a partner in the office of the lead engagement partner. D. all would be considered covered members. 76. Rule 201, dealing with General Standards that are applicable to all CPAs no matter the type of services that are rendered, does not include which factor? A. Due professional care. B. Integrity and objectivity. C. Planning and supervision. D. Sufficient relevant data. 77. Independence is required for which of the following types of services? A. audits. B. tax work. C. consulting. D. always required of the CPA. 78. Independence is not required for which of the following types of services? A. audits. B. reviews. C. consulting. D. attestation. 79. Commissions and referral fees are not permitted in which types of situations? A. Tax. B. Reviews. C. Audits. D. Both B and C. 80. Among close relative of the covered member, e.g., brothers, sisters, mother, father, and cousins, when is ownership of the clients stock by them considered the same as ownership by the covered member? A. Key financial position. B. Immaterial financial interest in the client with covered members knowledge. C. Material financial interest in the client without the covered members knowledge. D. All are considered part of the covered members close relatives and so would affect the covered members independence. 81. A covered member may not have a loan to or from the client, except for permitted and grandfathered loans. When would nonpayment of tax fees due to the auditor by the client be converted to a loan classification? A. After 90 days. B. After six months. C. After one year. D. After two years. 82. The General Standards of Rule 201 are required of all members of the AICPA. They include all of the following except A. professional competency. B. integrity and objectivity. C. planning and supervision. D. sufficient relevant data. 83. An auditor that has an attitude that includes a questioning mind and a critical assessment of audit evidence is considered which of the following? A. Professionally Skeptical. B. Professionally Independent. C. Professionally Competent. D. Professionally Efficient. 84. An auditor who is professionally skeptical will do which of the following? A. Critically question contradictory audit evidence. B. Carefully evaluate the reliability of audit evidence, especially in situations in which fraud risk is high. C. Reasonably question the authenticity of documentation. D. All of the above. 85. According to international auditing standards, professional skepticism includes being alert to all of the following except: A. Audit evidence that contradicts other audit evidence obtained. B. Long-standing relationships with management that should be used as a basis to trust the information they provide. C. Information that brings into question the reliability of documents and responses to inquiries to be used as audit evidence. D. Conditions that may indicate possible fraud. 86. The importance of independence Why is "independence" referred to as the cornerstone of auditing? 87. Understanding contingent fees A. Define the term "contingent fee." B. Explain the circumstances under which a CPA may and may not accept a contingent fee. 88. Non-audit services prohibited or permitted under Sarbanes-Oxley Harry Rawlins CPAs, are engaged by DK, Inc., a public company to perform the year-end audit. A. B. Discuss the types of services that Harry Rawlins CPAs will not be able to perform for DK under the Sarbanes-Oxley Act of 2002. Under what circumstances may Harry Rawlins CPAs perform certain non-audit services for DK, Inc. under Sarbanes-Oxley Act of 2002? 89. AICPA Code of Professional Conduct, Rule 101 Livingston and Associates is a CPA firm in Las Vegas, Nevada and it performs the financial statement audit for Smith Plastics, Inc. For each non-related situation below, determine if each individual represented is independent of Smith Plastics and if Livingston and Associates (the Firm) is independent of Smith Plastics: A. B. C. D. E. Sam Livingston, an audit partner, meets Jill Warner, CFO of Smith Plastics after the engagement begins and they fall in love. Sam and Jill marry in Lake Tahoe, California a short time later. Sam Livingston will not be on the audit engagement team of Smith Plastics. The Firm hires Billy Messer as a staff auditor. Billy is aware that his father has a material investment in Smith Plastics. Billy will not work on the Smith Plastics audit. Lucy Brown is an audit manager at the Firm. Bob, her high school aged son, owns 1% of the equity of Smith Plastics. The investment is not material to Bob or Lucy's net worth. Lucy is assigned as the audit manager for the Smith Plastics engagement. Smith Plastics has paid all but $5,000 of the previous years audit fees. Julie Simpson, tax partner at the Firm has a 401k plan with multiple securities making up the balance. One of the securities in the plan is that of Smith Plastics which comprises .05% of the total balance of Julie's 401k. Julie does not have a significant portion of her retirement or savings in this particular plan. 90. Keeping client information confidential The rule on confidentiality is intended to protect the client's information. The rule, however, does not apply in certain circumstances. A. B. Explain the rule on confidentiality. Identify the circumstances in which the rule of confidentiality does not apply. 91. Engagement fees Jonathan Tubb, CPA, agrees to prepare a 2009 tax return for Don Brogan. Tubb agrees to accept 30 percent of the refund obtained as his fee. Discuss the ethics of this situation using the ethical framework. 92. Independence Discuss what audit independence is and why it is important to the audit firm and the profession. What are some major threats to audit firm independence and what are some of the steps that audit firms and the profession have taken in addressing those threats? Chapter 3: Judgmental and Ethical Decision-Making Frameworks and Associated Professional Standards Key 1. When making complex, difficult, and important decisions audit professionals typically do not benefit from a structured approach to their decision-making because they need to remain open-minded. FALSE 2. Professional judgment involves applying relevant professional knowledge and experience to unique and potentially uncertain facts and circumstances in order to reach a conclusion or make a decision. TRUE 3. As accounting standards become less rules-based and more principles-based, the role of professional judgement in decision-making will become less important. FALSE 4. Individual state boards of accountancy and state societies of CPAs have mostly adopted Rules of Conduct established by the AICPA. TRUE 5. Public confidence is mostly maintained by the public accounting profession through integrity based on personal moral standards and it is reinforced by codes of conduct. TRUE 6. It is not required for an individual to uphold the code of professional conduct in order to become licensed as a CPA. FALSE 7. One issue that may threaten independence is that of the time pressure placed on the auditor when an audit is under bid. TRUE 8. The Sarbanes-Oxley Act of 2002 amends the Securities and Exchange Act of 1934 and places prohibitions on certain consulting services by auditors for their audit clients. TRUE 9. An auditor of a public client may perform internal audit outsourcing services for a client because such services may overlap with external audit functions. FALSE 10. An auditor of a public client may assist a client in designing and implementing its enterprise resource planning system in order to ensure that controls over the system exist prior to the audit. FALSE 11. The SEC is concerned with situations between an auditor and a public company that allow the auditor to act as management of the client. TRUE 12. The Code of Professional Conduct was adopted by the AICPA membership to provide guidance and rules to only its members in public practice. FALSE 13. The AICPA Rules of Conduct govern the performance of CPAs in carrying out their public responsibilities. TRUE 14. Confidentiality is the cornerstone of the auditing profession. FALSE 15. The AICPA independence rules only apply for attestation clients. TRUE 16. The AICPA's Code of Professional Conduct defines direct ownership as an investment of one percent or more of a client's organization. FALSE 17. Direct ownership includes ownership by the CPA plus any spouse or dependent member of his or her household or any partnerships to which the CPA belongs. TRUE 18. Direct ownership in a client's business must be material to the CPA's investment portfolio in order to violate the independence rule. FALSE 19. Information shared by a client to the auditor is protected under privileged communication laws, therefore, be it cannot subpoenaed by a court of law to be used against the client. FALSE 20. Contingent fees are prohibited for tax professionals when preparing tax returns for clients TRUE 21. Contingent fees are prohibited for any client for which the auditor performs attestation services. TRUE 22. Commissions and referral fees are allowed to audit firms as long as the fees are disclosed to the clients board and audit committee. FALSE 23. The first step in the ethical framework is to identify the ethical issue(s). TRUE 24. The highest-order rights include rights granted by the government, such as civil rights, legal rights, rights to own property, and license privileges. FALSE 25. CPAs are no longer able to practice as a sole proprietorship. FALSE 26. An ethical problem occurs when an individual is morally or ethically required to do something that conflicts with the immediate security interests of others. FALSE 27. An ethical problem occurs when an individual is morally or ethically required to do something that conflicts with his or her immediate self-interest. TRUE 28. An ethical dilemma occurs when there are conflicting moral duties or obligations. TRUE 29. An ethical problem is the same as an ethical dilemma. FALSE 30. Rights theory focuses on evaluating actions in terms of the fundamental rights of the parties involved. TRUE 31. There is a hierarchy of rights to consider when applying rights theory. TRUE 32. Only covered members as defined by the AICPA are required to comply with its independence rules. TRUE 33. A covered member under the AICPAs rules includes individuals on the engagement team, any individual in a position to influence the engagement team, and all professional staff in the office of the engagement. FALSE 34. Under the AICPA Code of Professional Conduct, rules take precedent over principals. The principals need to only be considered when a rule is apparent. FALSE 35. Rule 101 on integrity and objectivity only applies to covered members as defined by the AICPA. FALSE 36. The AICPA may revoke a members CPA license for violations of its Code of Professional Conduct. FALSE 37. If a member owns several shares of stock of a company during the first few months of the fiscal year under audit and then sells the shares before accepting the engagement, the firm does not violate the independence rules of the AICPA. TRUE 38. A contingency fee is where no fee will be charged unless a specified finding or result is attained. TRUE 39. Utilitarian theory is an approach for addressing ethical problems by identifying a hierarchy of rights that should be considered in solving ethical problems or dilemmas. FALSE 40. The Sarbanes Oxley Act requires management to pre-approve any non-audit service by the auditor, including tax services not specifically prohibited. FALSE 41. Major threats to the independence of the auditor includes compensation schemes, familiarity with the client and time pressures. TRUE 42. Loans between the auditor and the client are permitted in some circumstances. TRUE 43. The auditor is permitted to violate the confidentiality rule in providing relevant information to an inquiry by a major shareholder of the client. FALSE 44. An auditor that exercises adequate professional skepticism will be less likely to overlook unusual circumstances, to over-generalize from limited audit evidence, or to use inappropriate assumptions in determining the nature, timing, and extent of audit procedures. TRUE 45. Professional skepticism is important because without it auditors are susceptible to accepting weak or inaccurate audit evidence. TRUE 46. Audit committees should consider all factors that might affect the independence of the external auditor and should not approve nonaudit services that they believe might impair independence. TRUE 47. When using a general framework for making high-quality professional decisions, the auditor would typically take all of the following steps except which one of the following: A. the auditor structures the problem. B. the auditor assesses the consequences of the potential alternatives. C. the auditor assesses the risk of potentially losing the client and the impact of the lost fee on the firm. D. all of the above are steps that would be taken. 48. Audit committees should consider all factors that might affect the independence of which of the following: A. chief executive officer B. chief financial officer C. external auditors D. all of the above. 49. Mark Pulley is an auditor at Pulley and Hurst, LLC. If Pulley's five-year-old daughter owns shares of stock in McBurgers Corporation, then Pulley is considered to have what type of interest in McBurgers Corporation? A. immaterial indirect interest in McBurgers Corporation. B. material indirect interest in the McBurgers Corporation. C. a loophole for claiming independence from McBurgers Corporation. D. direct interest in McBurgers Corporation. 50. Brenda Hursch, an auditor, would be considered independent for purposes of an audit of Microship Company even though her spouse worked for Microship Company in which of the following positions? A. controller. B. treasurer. C. order entry staff. D. none of the above, all roles would impair independence 51. A CPA firm is not considered independent when it performs which of the following services for a publicly traded audit client? A. tax return preparation as approved by the board of directors B. basic accounting recordkeeping and financial statement preparation C. accounting information system design and implementation D. both B and C E. none of the above 52. Julie Webb, CPA takes out an automobile loan with First National Bank of Wellville (FNBW) while attending the University of Wellville. Julie graduates one year later and is hired as an auditor by Best and Driftwood, LLP. Her first assigned audit engagement is with First National Bank of Wellville, a client of Best and Driftwood. As a new audit assistant, Julie continues to pay her automobile loan payments each month. According to the AICPA, Julie's independence would be considered A. impaired because Julie has a direct financial interest in FNBW. B. impaired because Julie has a material indirect financial interest in FNBW. C. not impaired because Julie has an immaterial indirect financial interest in FNBW. D. not impaired because Julie is permitted to take normal loans from FNBW. 53. Julie Webb, CPA takes out an automobile loan with First national Bank of Wellville (FNBW) while attending the University of Wellville. Julie graduates one year later and is hired as an auditor by Best and Driftwood, LLP. Her first assigned audit engagement is with First national Bank of Wellville, a client of Best and Driftwood. As a new audit assistant, Julie continues to pay her automobile loan payments each month. According to the AICPA, Julie is considered a covered member for FNBW independence purposes because of which of the following conditions? A. she will be working on the engagement. B. she has a direct financial interest in FNBW. C. she graduated in the same area as the client is operating. D. she has an immaterial direct financial interest in FNBW. 54. In determining the types of activities, engagements and interactions an auditor should have with a client, the CPA and the audit firm must do which of the following? A. only assess the relationships of clients that pay audit fees that are material to their firm. B. assess all of their relationships with every client to ensure that independence is intact. C. focus on client satisfaction above all other considerations. D. realize that ethics are only guidelines and a matter of personal judgment. 55. Which of the following represents a situation in which an auditor is independent of the client? A. The auditor is paid by the client organization rather than the SEC. B. The auditor takes a personal loan from the president of the company. C. The auditors dependent son holds 25 shares of the clients common stock. D. The auditor has not received payment for the previous audit services. 56. Members of the AICPA are required to act with integrity and objectivity for which of the following engagements? A. tax preparation B. financial statement review services C. financial statement audits D. all engagements 57. Which one of the following is an example of a conflict of interest for a CPA? A. performing tax services and a compilation engagement for a client B. serving as legal counsel and an auditor for a client C. providing an audit on internal financial controls and financial statements for a client D. being employed as a chief financial officer while serving as a member of the board of directors for the same company 58. Which of the following is not an aspect of Rule 201 of the General Standards of the Code of Professional Conduct? A. a member must not take on an engagement that is beyond the member's professional competence B. a member must exercise duties prudently and professionally C. a member must adequately plan and supervise the performance of professional services D. a member firm must not advertise services to competing clients 59. Rule 201 of the General Standards of the Code of Professional Conduct defines professional competence in which of the following ways? A. sufficient collegiate and continuing professional education. B. accepting only those engagements that the firm's members can competently perform. C. adequate planning and supervision of professional performance. D. none of the above. 60. A member of the AICPA must safeguard the confidentiality of client information. Auditors, however, must disclose information to non-clients for the following reasons except to: A. discuss information relating to inadequate disclosure in an audit report. B. comply with a validly issued and enforceable subpoena or summons. C. accommodate the review of client audit workpapers under AICPA, PCAOB, or State Board of Accountancy authority. D. explain to members of the press the financial viability of a client. 61. A CPA firm is considered independent when it performs which of the following services for a publicly traded audit client? A. Serving as a member of the clients board of directors. B. Determining which accounting policies will be adopted by the client as approved by the board of directors. C. Accounting information system design and implementation as approved by the board of directors. D. Tax return preparation as approved by the board of directors. 62. A CPA may only practice public accounting in which of the following forms? A. a partnership. B. a professional corporation. C. a sole proprietorship. D. an organization permitted by state law or regulation. 63. William Tyler, CPA, may not accept a commission for recommending a product or service to which type of client? A. a tax client. B. an attestation client. C. a financial-planning client. D. a management-services client. E. all of the above. 64. Information about a client that cannot be subpoenaed by a court of law is referred to as what type of information? A. confidential information. B. privileged communication. C. contingent information. D. audit communication 65. Which of the following describes a situation in which moral duties or obligations conflict and one action is not necessarily the correct action? A. an ethical dilemma. B. an ethical problem. C. an ethical theory. D. none of the above. 66. Which of the following describes a situation in which an individual is morally or ethically required to do something that conflicts with his or her immediate self-interest? A. an ethical dilemma. B. an ethical problem. C. an ethical theory. D. none of the above. 67. Which of the following is included in the AICPA Code of Professional Conduct? A. Principles, Rules of Conduct and Ethics Rulings. B. Rules of Conduct, Interpretations and Principles. C. Principles, Rules of Conduct and Ethics Rulings. D. Principles, Rules of Conduct, Interpretations and Ethics Rulings. 68. The AICPA Principles of Professional Conduct include which of the following? A. public interest, objectivity and independence. B. due professional care and supervision. C. scope and nature of services and adequate training. D. integrity and confidentiality 69. In which of the following situations would a CPA not be considered independent? A. where a CPA has obtained an auto loan from a banking client in the current year. B. where a CPA has obtained an automobile lease term from a client in the current year. C. where a CPA has obtained a $4,000 retainer for services from a banking client in the current year. D. where a CPA has obtained a home mortgage loan from a client in the current year. 70. In which of the following situations would a CPA not be considered independent? A. where a CPA has obtained an auto loan from a banking client in a prior year. B. where a CPA has obtained a home mortgage loan in 1988 from a client. C. where a CPA has obtained an auto lease from a banking client in the current year. D. where the spouse of a CPA has obtained a home mortgage loan in the current year. 71. Which of the following represents a situation in which the auditors may disclose client information to outside parties? A. Bringing working papers to a professional CPA workshop as an example of quality work. B. Complying with a validly issued and enforceable subpoena or summons. C. Showing the clients bank statement to a neighbor who is a shareholder to emphasize its cash position. D. Explaining to the local television news station why the client is likely to miss payroll in the forthcoming periods. 72. The ethical framework derived from utilitarianism and rights theories indicates all of the following steps except A. identification of the legal issues. B. determination of affected parties and their rights. C. determination of the most important rights. D. development of alternative courses of action. 73. Which of the following is a purpose of an ethical framework? A. to provide a defined methodology to solve the ethical problem. B. to provide a defined methodology to aid the user in making complex ethical decisions. C. to provide a defined program to solve ethical dilemmas. D. to provide all of the above. 74. Normally the auditor is not permitted to divulge confidential information obtained from a client. Which of the following situations would be a violation of this requirement? A. to respond to the information request of a shareholder. B. to respond to a quality review request of the state board of accountancy. C. to initiate a complaint with the AICPAs ethics division. D. to ensure adequate disclosure in accordance with GAAP. 75. Under the AICPA definition, who among the following would not be considered a covered member? A. an individual on the attest engagement team. B. an individual in a position to influence the attest engagement. C. a partner in the office of the lead engagement partner. D. all would be considered covered members. 76. Rule 201, dealing with General Standards that are applicable to all CPAs no matter the type of services that are rendered, does not include which factor? A. Due professional care. B. Integrity and objectivity. C. Planning and supervision. D. Sufficient relevant data. 77. Independence is required for which of the following types of services? A. audits. B. tax work. C. consulting. D. always required of the CPA. 78. Independence is not required for which of the following types of services? A. audits. B. reviews. C. consulting. D. attestation. 79. Commissions and referral fees are not permitted in which types of situations? A. Tax. B. Reviews. C. Audits. D. Both B and C. 80. Among close relative of the covered member, e.g., brothers, sisters, mother, father, and cousins, when is ownership of the clients stock by them considered the same as ownership by the covered member? A. Key financial position. B. Immaterial financial interest in the client with covered members knowledge. C. Material financial interest in the client without the covered members knowledge. D. All are considered part of the covered members close relatives and so would affect the covered members independence. 81. A covered member may not have a loan to or from the client, except for permitted and grandfathered loans. When would nonpayment of tax fees due to the auditor by the client be converted to a loan classification? A. After 90 days. B. After six months. C. After one year. D. After two years. 82. The General Standards of Rule 201 are required of all members of the AICPA. They include all of the following except A. professional competency. B. integrity and objectivity. C. planning and supervision. D. sufficient relevant data. 83. An auditor that has an attitude that includes a questioning mind and a critical assessment of audit evidence is considered which of the following? A. Professionally Skeptical. B. Professionally Independent. C. Professionally Competent. D. Professionally Efficient. 84. An auditor who is professionally skeptical will do which of the following? A. Critically question contradictory audit evidence. B. Carefully evaluate the reliability of audit evidence, especially in situations in which fraud risk is high. C. Reasonably question the authenticity of documentation. D. All of the above. 85. According to international auditing standards, professional skepticism includes being alert to all of the following except: A. Audit evidence that contradicts other audit evidence obtained. B. Long-standing relationships with management that should be used as a basis to trust the information they provide. C. Information that brings into question the reliability of documents and responses to inquiries to be used as audit evidence. D. Conditions that may indicate possible fraud. 86. The importance of independence Why is "independence" referred to as the cornerstone of auditing? Independence is referred to as the cornerstone of auditing because without independence, the value of the auditor's attestation function would be decreased in the eyes of a third party who relies on the auditor's communication. Because the auditor's report is used by many different users with different purposes, the reports must be judged by all to be unbiased and free from favoritism for any party. 87. Understanding contingent fees A. Define the term "contingent fee." B. Explain the circumstances under which a CPA may and may not accept a contingent fee. A. A contingent fee is defined as a fee established for the performance of any service in which no fee will be charged unless a specified finding or result is obtained and any fee charged would depend upon the results. B. Contingent fees are prohibited for any client in which the auditor performs attestation services. The acceptance of a contingent fee would destroy the public confidence in the profession when performing attest services. 88. Non-audit services prohibited or permitted under Sarbanes-Oxley Harry Rawlins CPAs, are engaged by DK, Inc., a public company to perform the year-end audit. A. B. Discuss the types of services that Harry Rawlins CPAs will not be able to perform for DK under the Sarbanes-Oxley Act of 2002. Under what circumstances may Harry Rawlins CPAs perform certain non-audit services for DK, Inc. under Sarbanes-Oxley Act of 2002? A. The Sarba nesOxley Act of 2002 amen ded the Secur ities and Exch ange Act of 1934 prohi biting an audit or from perfor ming any of the follo wing servic es for a publi c audit client : Bookkeeping or other services related to the accounting records or financial statements of the audit client, Financial information systems design and implementation, Appraisal or valuation services, fairness opinions, or contribution-in-kind reports, Actuarial services, Internal audit outsourcing services, Management functions or human resources, Broker or dealer, investment adviser, or investment banking services, and Legal services and expert services unrelated to the audit. B. Tax prepa ration and other tax relate d servic es may be perfor med for DK by Harry Rawli ns, CPA only if the servic es are appro ved by the audit com mitte e and the board of direct ors. Harry Rawli ns may also be engag ed to perfor m audits on DK's intern al contr ols and other attest ation engag ement s. 89. AICPA Code of Professional Conduct, Rule 101 Livingston and Associates is a CPA firm in Las Vegas, Nevada and it performs the financial statement audit for Smith Plastics, Inc. For each non-related situation below, determine if each individual represented is independent of Smith Plastics and if Livingston and Associates (the Firm) is independent of Smith Plastics: A. B. C. D. E. A. B. C. D. E. Sam Livingston, an audit partner, meets Jill Warner, CFO of Smith Plastics after the engagement begins and they fall in love. Sam and Jill marry in Lake Tahoe, California a short time later. Sam Livingston will not be on the audit engagement team of Smith Plastics. The Firm hires Billy Messer as a staff auditor. Billy is aware that his father has a material investment in Smith Plastics. Billy will not work on the Smith Plastics audit. Lucy Brown is an audit manager at the Firm. Bob, her high school aged son, owns 1% of the equity of Smith Plastics. The investment is not material to Bob or Lucy's net worth. Lucy is assigned as the audit manager for the Smith Plastics engagement. Smith Plastics has paid all but $5,000 of the previous years audit fees. Julie Simpson, tax partner at the Firm has a 401k plan with multiple securities making up the balance. One of the securities in the plan is that of Smith Plastics which comprises .05% of the total balance of Julie's 401k. Julie does not have a significant portion of her retirement or savings in this particular plan. Sam's newly found family relationship with a person of significant influence over Smith Plastics will impair his independence. Sam is a partner in the office of the firm performing audit services and he is considered a covered member. As a covered member who is not independent of Smith Plastics, the Firm would not be independent of Smith Plastics. Because Billy's immediate family member has a material investment and he is aware of this fact, he is not independent of Smith Plastics. Billy is not on the Smith Plastics engagement, therefore, he is not a covered member and the firm is independent. Lucy has a direct financial interest in Smith Plastics. It is considered direct even though it is in the name of her dependant, Bob. As an audit manager of the Smith Plastics engagement, Lucy is a covered member and her ownership will impair the Firm's independence as well. Because Smith Plastics has an outstanding balance due to the Firm from previous audit engagements, there is a essentially a debtorcreditor relationship between client and auditor. The previous years audit fees must be paid or this relationship impairs Firm independence of Smith Plastics. The component of Julie's 401k that is represented by shares of Smith Plastics is small. The investment in Smith Plastics by the 401k is considered an indirect interest to Julie. Additionally, the 401k is not material to her net worth. As an immaterial, indirect financial interest, the investment does not impair Julie's independence of Smith Plastics. Julie's status as a covered member is somewhat unclear. However, as Julie is independent it becomes irrelevant. The Firm will also be independent of Smith Plastics. 90. Keeping client information confidential The rule on confidentiality is intended to protect the client's information. The rule, however, does not apply in certain circumstances. A. B. Explain the rule on confidentiality. Identify the circumstances in which the rule of confidentiality does not apply. A) The rule on confidentiality exists to ensure a free flow and sharing of information between the client and the auditor. The client must be assured that the auditor will not communicate confidential information to outside parties. B) The rule shall not be construed (1) to relieve members of their professional obligations to make disclosures required by GAAP, (2) to affect members' obligation to comply with subpoenas or summonses, (3) to prohibit review of a member's professional practice under AICPA or state CPA society authorization, or (4) to preclude members from initiating a complaint or responding to any inquiry made by a recognized investigative or regulatory body. 91. Engagement fees Jonathan Tubb, CPA, agrees to prepare a 2009 tax return for Don Brogan. Tubb agrees to accept 30 percent of the refund obtained as his fee. Discuss the ethics of this situation using the ethical framework. Rule 302 on contingent fees expressly prohibits the preparation of an original or amended tax return or a claim for refund for a contingent fee for any client. It is important to recognize all of the stakeholders in this situation. The client, the IRS, the CPA, and society are all stakeholders in the performance of this service by the CPA. It is important that the stakeholders be able to rely on the objectivity of the CPA in the performance of this task. 92. Independence Discuss what audit independence is and why it is important to the audit firm and the profession. What are some major threats to audit firm independence and what are some of the steps that audit firms and the profession have taken in addressing those threats? There are two types of audit independence, i.e., independence in fact and independence in appearance. Independence in fact deals with the mental state that the auditor brings to the engagement. Auditors should be objective and unbiased in their judgments and exercise sufficient professional skepticism. Independence in appearance deals with their relationships with clients. Auditors should avoid those relationships with clients that would give the appearance of a lack of independence. Both independence in appearance and in fact are important to the audit firm and the profession since the only value that an audit adds to the client is to enhance the credibility of their financial statements. Without independence the audit can add no value for the client. Independence is the cornerstone of the audit profession because it is the basis upon which the usefulness of the audit function is based. Some major threats to the audit firms independence include: Compensation schemes of partners. Understanding who the client is. Over familiarity with the client. Time pressures in performing the audit. Ability to rationalize actions. Providing Nonaudit Services. Some ways in which the audit profession and audit firms have dealt with these threats include: Establishing and monitoring codes of conduct. Balancing compensation schemes. Implementing high-level reviews of decisions to accept or retain clients. Separating consulting activities from audit activities. Performing within-firm reviews of audit work and audit documentation. Performing reviews and inspections within the profession. ... View Full Document

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