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13) Which of the following represents all of the ways a CPA firm can be organized?
A) proprietorships and partnerships
B) proprietorships, partnerships, and professional corporations
C) proprietorships, general partnerships, general corporations, professional corporations, limited
liability companies, and limited liability partnerships if permitted by state law
D) single proprietorships, partnerships, professional corporations if permitted by state law, or
regular corporations
14) In which of the following circumstances would a CPA be ethically bound to refrain from
disclosing any confidential client information?
A) The CPA is issued a summons enforceable by a court order which orders the CPA to present
confidential information.
B) A major stockholder of a client company seeks accounting information from the CPA after
management declined to disclose the requested information.
C) The confidential client information is made available as part of a quality review of the CPA's
practice by a peer review team authorized by the AICPA.
D) An inquiry by a disciplinary body of a state CPA society requests confidential client
information.
15) Which of the following fee arrangements is not a violation of the AICPA's Code of
Professional Conduct?
A) basing fees as an expert witness on the amount awarded to the plaintiff, even though the CPA
performs a compilation for client use
B) basing consulting fees on a percentage of a bond issue, even though the CPA performs a
review of the client's financial statements
C) basing fees for a tax service on the amount of the refund that the client will receive
D) basing consulting fees on a percentage of a bond issue, even though the CPA performs an
audit of the client's financial statements
16) Which of the following is not defined as an act discreditable in either the Rules or the
Interpretations of the AICPA's Code of Professional Conduct?
A) The CPA firm's partner in charge failed to file his tax return for the past year.
B) The CPA firm discriminates in its hiring practices based on the age of the applicant.
C) The CPA retains the client's books and records to enforce past-due payment of the CPA's bill,
even after the client has demanded they be returned.
D) The CPA firm's partner-in-charge was a passenger in a car driven by his wife. On the way
home from the firm's Christmas party, she was charged with "driving while intoxicated."
17) Freedom from ________ means the absence of relationships that might interfere with
objectivity or integrity.
A) independence
B) acts discreditable
C) impartiality
D) conflicts of interest
18) Membership in the AICPA can be terminated without a hearing for
A) a crime punishable by imprisonment for more than one year.
B) the filing of a fraudulent income tax return on a client's behalf.
C) the willful failure of a CPA to file their own personal tax return.
D) all of the above.
19) Which of the following activities is allowed for a CPA firm's attestation clients?
A) contingent fees fixed by a court
B) commissions for referring a review client to an insurance agency for insurance coverage
C) preparation of tax returns for which fees are based upon client refunds
D) each of the above is allowed
20) Discuss the Confidential Client Information Rule, including the four exceptions to the rule.
21) The following situations involve a possible violation of the AICPA's Code of Professional
Conduct. For each situation, (1) determine the applicable rule from the Code, (2) decide whether
or not the Code has been violated, and (3) briefly explain how the situation violates (or does not
violate) the Code.
a. In 2014, Freeman and Johnson, both CPAs, decided to form a CPA practice. In 2016, Freeman
and Johnson approached Bill Delaney, a physician and medical expert, and asked him to assist
them with their growing medical consulting practice. Delaney agreed, but only after he was
given an ownership interest in the firm. Delaney does not intend to quit his private medical
practice.
Rule: ________ Violation? Yes No
Explanation:
b. Brian DePalie has a successful dentistry practice in Charleston. Brian has recommended one
of his patients to Katie Walton, CPA. To show gratitude for the referral, Katie has agreed to pay
Brian a token gift of $50. Katie discloses the payment arrangement to her new clients.
Rule: ________ Violation? Yes No
Explanation:
c. The accounting firm of Bayer & Peng, CPAs, is negotiating a fee with a new audit client. They
agree the client will pay $50,000 if Bayer & Peng issues a clean, unmodified opinion, $40,000 if
a qualified opinion is issued, and only $20,000 if an adverse opinion is issued.
Rule: ________ Violation? Yes No
Explanation:
d. Don Smith, CPA, is a member of the engagement team that performs the audit of Shaw
Corporation. Don's five-year-old daughter, Precious, received ten shares of Shaw Corporation's
common stock for her fifth birthday. The stock was a gift from Precious's grandmother.
Rule: ________ Violation? Yes No
Explanation:
e. Jennifer Harris, CPA, is a partner in the CPA firm that audits Alltech, Inc., a closely held
corporation. Jennifer's sister-in-law is the chief financial officer at Alltech, Inc.
Rule: ________ Violation? Yes No
Explanation:
22) The following situations involve a possible violation of the AICPA's Code of Professional
Conduct. For each situation, (1) determine the applicable rule from the Code, (2) decide whether
or not the Code has been violated, and (3) briefly explain how the situation violates (or does not
violate) the Code.
a. Howard Cunningham & Co., CPAs, designates its firm as "Members of the American Institute
of Certified Public Accountants." All of the partners of the firm are CPAs. However, one of the
partners has recently chosen to allow her membership to lapse because of personal reasons.
Rule: ________ Violation? Yes No
Explanation:
b. Brad Long, CPA, was traveling from Orlando to Miami, Florida when he was pulled over by a
police officer on suspicion of driving under the influence. He was convicted in court of driving
while under the influence of alcohol. Because of past convictions, Brad was sentenced to 5 years
in prison.
Rule: ________ Violation? Yes No
Explanation:
c. Kelley Brent, CPA, is a partner in a one-office CPA firm that audits Dane, Inc., a closely held
corporation. Kelley's sister was recently appointed as the chief financial officer for Dane, Inc.
Rule: ________ Violation? Yes No
Explanation:
d. Sarah Martin, CPA, is a senior auditor in the San Francisco office of Cooper & Howell, CPAs.
Sarah's father is employed as the controller of Line Electronics, a public company in Detroit,
Michigan. Line Electronics is one of the firm's audit clients. Neither Sarah nor the San Francisco
office is involved in the audit of Line Electronics.
Rule: ________ Violation? Yes No
Explanation:
e. On August 20, 20x7, Min Lee, CPA and partner, was offered and accepted the engagement to
audit the annual financial statements of Jernigan Corporation for the year ended December 31,
20x7. Preliminary work began on the audit on September 15, 20x7 and the engagement ended on
March 7, 20x8. Jernigan is regulated by the SEC. Min served as controller of Jernigan
Corporation from December 1, 20x2, until April 10, 20x7, at which time she terminated her
employment with Jernigan.
Rule: ________ Violation? Yes No
Explanation:
41
23) The scenarios below all involve a possible violation of the AICPA's Code of Professional
Conduct.
1. Using the list below, indicate which of the Code of Conduct Rules applies to the scenario.
a. Independence
b. Integrity and Objectivity
c. Contingent Fees
d. Acts Discreditable
e. Commissions and Referral Fees
f. Form of Organization and Name
2. State if the scenario is a violation of the Code.
Scenario:
1. Margaret Henry is a partner in the Tupelo office of Jenkins & Thorn, CPAs. Margaret's
father is the controller at Markrich Sporting Supplies, Inc., a publicly held company in Tupelo.
Markrich is one of Jenkins & Thorn's audit clients. Margaret is not involved in the audit of
Markrich.
2. Jason Alexander is an audit manager with Reese & Co., CPAs. Jason owns 100 share of
common stock in one of the firm's audit clients, but he does not provide any audit or non-audit
services to the company.
3. The accounting firm of Fine & Herman, CPAs, provides bookkeeping and tax services for
Henderson Corporation, a privately held company. Mr. Herman also performs the annual audit of
Henderson Corporation.
4. Elaine Cooper, CPA, is the auditor of Paula's Pizza. Toward the end of the audit, Paula gave
Elaine her estimate of receivable collectability and Elaine accepted it without any testing.
5. Charley Ray, CPA, is a member of the engagement team that performs the audit of Desiree
Corporation. Charley's five-year-old daughter, Becky, received ten shares of Desiree common
stock for her fifth birthday in a trust fund established by Becky's grandmother.
6. Freeman and Johnson formed a successful CPA practice ten years ago. In the current year,
they approached Adam Sawtooth, a surgeon and medical expert, and asked him to assist them
with their growing medical consulting practice. Sawtooth agreed, but only after he was given an
ownership interest in the firm. Sawtooth does intend to reduce his private practice hours and
spend 40% of his working hours devoted to the Freeman & Johnson practice.
7. Sally Preen has a successful computer network consulting business. Sally has recommended
one of her clients to Sam Walton, CPA. To show gratitude for the referral, Sam has agreed to pay
Sally a token gift of $50. Sam has not disclosed the payment arrangement to his ne clients.
8. The accounting firm of Smith & Black, CPAs, is negotiating a fee with a new audit client
where the client will pay $50,000 if the client obtains the line of credit needed for working
capital purposes. Otherwise, the fee will be $40,000.
9. Brad Barns, CPA, was traveling from Las Vegas to the Grand Canyon when he was pulled
over by a police officer for suspicion of driving under the influence. He was convicted in court of
driving under the influence of alcohol and received six months' probation.
10. Manuel Lopez, CPA, is a senior in a small, local, CPA firm that audits Childress, Inc., a
closely held corporation. Manuel's sister was recently appointed as the controller for Childress,
Inc.
24) Imprisonment for a period of six months or longer will result in automatic expulsion from the
AICPA.
25) Under the Form of Organization and Name rule, a CPA firm is prohibited from practicing as
a limited liability partnership.
26) A CPA firm may use any name as long as it is not misleading.
27) A CPA firm may practice public accounting only in a form of organization permitted by
federal law or regulation.
28) Under the Confidential Client Information rule, permission is not required from the client to
use the audit documentation relating to that client during an AICPA authorized peer review
program with another CPA firm.
29) Information obtained by a CPA from a client is legally privileged in federal court.
30) Members of the AICPA in public practice are prohibited from performing comparative
advertising.
31) Under the Form of Organization and Name rule, a CPA firm may not designate itself as
"Members of the American Institute of Certified Public Accountants" unless a majority of its
owners are members of the Institute.
32) Under the AICPA's Code of Professional Conduct, CPAs are prohibited from offering audit
clients a discount for referring a prospective client even if they are disclosed.
33) All owners of a CPA firm must be CPAs who are qualified to practice.
4.8 Learning Objective 4-8
1) If the board of accountancy in the state in which a CPA firm is licensed has rules that are
different than the AICPA's rules, the CPA firm must follow
A) whichever rules are less restrictive.
B) whichever rules are more restrictive.
C) the rules of the AICPA.
D) the rules of the state's board of accountancy.
2) Which of the following is a true statement regarding the enforcement mechanism for CPA
conduct?
A) The PCAOB has the authority to investigate and discipline registered public accounting firms.
B) All disciplinary action by the AICPA must go through the Joint Trial Board.
C) Disciplinary actions taken by the AICPA are not disclosed to the public.
D) Only a few states have adopted the AICPA rules of conduct.
3) Describe the methods used by the AICPA and State Boards of Accountancy to enforce the
rules of conduct.
4) Expulsion from the AICPA for failing to follow the rules of conduct is, by itself, sufficient to
prevent a CPA from practicing public accounting.
