Auditing and Assurance Services, 16e (Arens/Elder/Beasley)
Chapter 4 Professional Ethics
4.1 Learning Objective 4-1
1) Ethics are
A) needed in the professions, but is not needed for society in general.
B) a set of moral principles or values.
C) not formed by life experiences.
D) always incorporated in laws.
2) ________ means that a person acts according to conscience, regardless of the situation.
A) Caring
B) Fairness
C) Integrity
D) Respect
3) Which of the following is a prescribed set of moral principles or values?
A) codes of business ethics for professional groups
B) laws and regulations
C) codes of conduct within an organization
D) all of the above
4) One of the main reasons people act unethically is that they choose to act selfishly.
5) Most people define unethical behavior as conduct that differs from what they believe is
appropriate given the circumstances.
4.2 Learning Objective 4-2
1) A six-step approach is often used to resolve an ethical dilemma. The first step in this process
is to
A) identify the alternative actions available.
B) identify the ethical issues from the facts.
C) determine who will be affected by the outcome of the dilemma.
D) obtain the relevant facts.
2) Describe an ethical dilemma that an auditor or an accountant might face in his or her business
career, then illustrate how the auditor or accountant might use the six-step approach presented in
the text to resolve that dilemma. Be specific.
3) Ethical frameworks help identify the ethical issues and will always lead to the appropriate
course of action.
4) A rationalization method that can easily result in unethical behavior is the argument that
“everybody does it.”
5) If an action is considered legal, it must also be considered ethical.
4.3 Learning Objective 4-3
1) The underlying reason for a code of professional conduct for any profession is
A) the need for public confidence in the quality of service of the profession.
B) it provides a safeguard to keep unscrupulous people out.
C) it is required by federal legislation.
D) it allows licensing agencies to have a yardstick to measure deficient behavior.
2) Which of the following statements is true when the CPA has been engaged to perform an audit
of financial statements?
A) The CPA firm is engaged and paid by the client; therefore, the firm has primary responsibility
to be an advocate for the client.
B) The CPA firm is engaged and paid by the client, but the primary beneficiaries of the audit are
those who rely on the financial statements.
C) Should a situation arise where there is no convincing authoritative standard available, and
there is a choice of actions which could impact a client’s financial statements, the CPA is free to
endorse the choice which is in the investors’ interests.
D) The CPA firm has primary responsibility to the FASB.
3) The ________ is a standard of conduct for all members of the AICPA.
A) IESBA Code of Conduct
B) SEC Code of Conduct
C) PCAOB Code of Professional Conduct
D) AICPA Code of Professional Conduct
4) Explain why there is a special need for ethical conduct in the auditing profession.
5) Professionals are expected to conduct themselves at a higher level than most other members of
society.
4.4 Learning Objective 4-4
1) Which of the following is(are) true concerning the Ethical Principles of the Code of
Professional Conduct?
I. They identify ideal conduct.
II. They are general ideals and are not enforceable.
A) I only
B) II only
C) I and II
D) Neither I nor II
2) Which of the following is not one of the major parts of the AICPA’s Code of Professional
Conduct?
A) principles
B) rules
C) interpretations
D) definitions
3) One of the AICPA’s Ethical Principles deals with the public interest. It states that members
should accept the obligation to act in a way that will
A)
Honor the public trust
Serve the client’s interest
Yes
Yes
B)
Honor the public trust
Serve the client’s interest
No
No
C)
Honor the public trust
Serve the client’s interest
Yes
No
D)
Honor the public trust
Serve the client’s interest
No
Yes
4) A CPA performs bookkeeping services for a client and then performs an audit of those
financial statements. This is an example of a ________ threat.
A) familiarity
B) self-interest
C) self-review
D) management participation
5) Since the rules cannot address all circumstances, the Code includes a conceptual framework
approach for members to use to evaluate threats to compliance. Using this framework,
A) the first step is to discuss the threat with the client’s management team.
B) all threats must be completely eliminated.
C) safeguards can be used to eliminate any threat.
D) more than one safeguard may be necessary.
6) Which part of the AICPA’s Code of Professional Conduct is enforceable?
A) ethical rulings
B) rules of conduct
C) principles
D) interpretations
7) Interpretations of the rules of conduct
A) are enforceable.
B) are finalized after being approved by the FASB.
C) are issued as exposure drafts to the profession and others for comments.
D) do not apply to members in business.
8) The AICPA’s Code of Professional Conduct requires independence for all
A) attestation engagements.
B) services performed by accountants in public practice.
C) accounting and auditing services performed.
D) professional work performed by CPAs.
9) When a member observes the profession’s technical and ethical standards and strives to
continually improve her competence and quality of services, she is exercising
A) due care.
B) integrity.
C) independence.
D) objectivity.
10) Four of the six Ethical Principles in the AICPA’s Code of Professional Conduct are equally
applicable to all members of the AICPA. Which of the following principles applies only to
members in public practice?
A) Scope and Nature of Services
B) Integrity
C) Due Care
D) The Public Interest
11) The Code of Professional Conduct is established by the membership of the AICPA, and the
Interpretations of the Rules of Conduct are prepared by the
A) Financial Accounting Standards Board.
B) Securities and Exchange Commission.
C) CPA licensing agencies within each state.
D) Professional Ethics Executive Committee of the AICPA.
12) Due to a shortage of personnel, the client asks a member firm to assist with the authorization
of accounting transactions. This is an example of which type of threat to compliance with the
rules under the AICPA Code of Professional Conduct?
A) management participation
B) self-interest
C) self-review
D) undue influence
13) Threats to compliance with the AICPA’s Code of Professional Conduct fall into seven broad
categories. List and explain three of these categories.
14) The AICPA Code of Conduct includes a conceptual framework approach for the member to
evaluate threats to compliance with the Code. List the three steps necessary to evaluate the
threats.
15) What are the six Ethical Principles stated in the Code of Professional Conduct? Briefly
discuss each principle. Are these principles enforceable?
16) An advantage of specific rules in the Code of Professional Conduct is the enforceability of
minimum behavior and performance standards.
17) It is a violation of the rules of conduct if someone does something on behalf of a member
that is a violation if the member does it.
18) An advantage of the principles of professional conduct in the Code of Professional Conduct
is that they are more easily enforced than are the specific rules of conduct.
19) Safeguards can always reduce the threat to an acceptable level.
20) Interpretations of rules of conduct in the Code of Professional Conduct are not officially
enforceable and practitioners need not justify departure from them.
21) Adverse interest is the threat that a member will not act with objectivity because their
interests are opposed to the client’s interests.
22) In the AICPA Code of Professional Conduct, the second principle of professional conduct,
entitled “The Public Interest,” applies only to members of the AICPA in public practice and not
to members who work as accountants in business, government, or education.
23) In the AICPA Code of Professional Conduct, the sixth principle of professional conduct,
entitled “Scope and Nature of Services,” applies to members of the AICPA who work in public
practice, business, government, or education.
24) The Conceptual Framework for AICPA Independence Standards can be used when making
decisions on ethical matters not explicitly addressed in the Code.
25) Each state also has rules of conduct that are required for licensing by the state.
4.5 Learning Objective 4-5
1) For which of the following professional services must CPAs be independent?
A) management advisory services
B) audits of financial statements
C) preparation of tax returns
D) all of the above
2) “Independence” in auditing means
A) maintaining an indirect financial interest.
B) not being financially dependent on a client.
C) taking an unbiased viewpoint.
D) being an advocate for a client.
3) When CPAs are able to maintain their actual independence, it is referred to as independence in
A) conduct.
B) appearance.
C) fact.
D) total.
4) The Sarbanes-Oxley Act ________ a CPA firm from doing both bookkeeping and auditing
services for the same public company client.
A) encourages
B) prohibits
C) allows
D) allows on a case-by-case basis
5) Interpretations of the independence rule of the AICPA Code prohibit covered members from
owning any stock or other direct investment in audit clients. Covered members would include
which of the following?
A)
All partners in the
engagement office even if
they have no engagement
responsibility
Individuals on the attest
engagement
The firm and its employee
benefit plans
Yes
Yes
Yes
B)
All partners in the
engagement office even if
they have no engagement
responsibility
Individuals on the attest
engagement
The firm and its employee
benefit plans
Yes
No
No
C)
All partners in the
engagement office even if
they have no engagement
responsibility
Individuals on the attest
engagement
The firm and its employee
benefit plans
No
Yes
Yes
D)
All partners in the
engagement office even if
they have no engagement
responsibility
Individuals on the attest
engagement
The firm and its employee
benefit plans
No
No
No
6) The financial interests of a CPA’s family members can affect the CPA’s independence. Which
of the following parties would not be included as a “direct financial interest” of the CPA?
A) spouse
B) dependent child
C) relative supported by the CPA
D) sibling living in the same city as the CPA
7) Interpretations of the rules regarding independence allow an auditor to serve as
A) a director or officer of an audit client.
B) an underwriter for the sale of a client’s securities.
C) a trustee of a client’s pension fund.
D) an honorary director for a not-for-profit charitable or religious organization.
8) Independence is required of a CPA when performing
A) management advisory services.
B) all attestation services.
C) all attestation and tax services.
D) all professional services.
9) CPAs may provide bookkeeping services to their private company audit clients, but there are a
number of conditions that must be met if the auditor is to maintain independence. Which of the
following conditions is not necessary?
A) The CPA must not assume a management role or function.
B) The client must hire an external CPA to approve all of the journal entries prepared by the
auditor.
C) The auditor must comply with GAAS when auditing work prepared by his/her firm.
D) The client must accept responsibility for the financial statements.
10) An example of an “indirect financial interest in a client” would be
A) ownership of less than 10% of the client’s stock by the covered members spouse.
B) an ownership of less than 10% of the client’s stock by a staff member who is not involved in
the audit.
C) the covered member’s ownership of a mutual fund that has an investment in the client.
D) All of the above are examples of an indirect financial interest in a client.
11) When determining whether independence is impaired because of an ownership interest in a
client company, materiality will affect ownership
A) in all circumstances.
B) only for direct ownership.
C) only for indirect ownership.
D) under no circumstances.
12) A direct financial interest violates independence in which of the following circumstances?
A) when close relatives such as nondependent children, brothers, and sisters have a significant
financial interest in the client
B) when close relatives such as nondependent children, brothers, and sisters have any financial
interest in the client
C) when the CPA owns shares in a mutual fund that has an ownership interest in the client
D) when close relatives such as a brother, sister, or in-laws are employed by the client in their
engineering department
13) A CPA sole practitioner purchased stock in a client corporation and placed it in a trust as an
educational fund for the CPA’s minor child. The trust securities were not material to the CPA but
were material to the child’s personal net worth. Would the independence of the CPA be
considered to be impaired with respect to the client?
A) Yes, because the stock is a direct financial interest.
B) Yes, because the stock is an indirect financial interest that is material to the CPA’s child.
C) No, because the CPA does not have a direct financial interest in the client.
D) No, because the CPA does not have a material indirect financial interest in the client.
14) Julie and Lisa are sisters. Julie is a CPA auditing the company where Lisa works. Julie’s
independence is impaired if
A) Lisa is the controller.
B) Lisa owns 2% of the company.
C) Lisa is the marketing manager.
D) all of the above.
15) Oehlers, CPA, is a staff auditor participating in the engagement of Capital Trust, Inc. Which
of the following circumstances impairs Oehlers’ independence?
A) Oehlers’ sister is an internal auditor employed by Capital Trust.
B) Oehlers’ friend, an employee of another local accounting firm, prepares the tax return of
Capital Trust’s CEO.
C) Oehlers’ and Capital Trust’s 401K plans own stock with the same corporation.
D) During the period of professional engagement, Capital Trust and Oehlers discussed business
over lunch at a first-class restaurant.
16) An auditor’s independence is considered impaired if the auditor has
A) an immaterial, indirect financial interest in a client.
B) an outstanding $8,000 balance on a credit card issued by a client.
C) an automobile loan from a client bank, collateralized by the automobile.
D) a joint, closely held business investment with the client that is material to the auditor’s net
worth.
17) According to the profession’s ethical standards, an auditor would be considered independent
in which of the following instances?
A) The auditor’s checking account, which is fully insured by a federal agency, is held at a client
financial institution.
B) The auditor is also an attorney who advises the client as its general counsel.
C) An employee of the auditor serves as treasurer of a charitable organization that is a client.
D) The client owes the auditor fees for two consecutive annual audits.
18) Which of the following loans would be prohibited between a CPA firm or its members and
an audit client?
A) automobile loans
B) loans fully collateralized by cash deposits at the same financial institution
C) new home mortgage loans
D) unpaid credit card balances not exceeding $10,000 in total
19) Under the AICPA independence rules, the auditor
A) is prohibited from performing a company’s audit and installing and designing the client’s new
information system.
B) does not need to document the understanding and willingness of the client to perform all
management functions associated with the nonaudit service.
C) is prohibited from doing any bookkeeping services for the client if performing the audit.
D) must follow the more restrictive SEC independence rules when dealing with a public
company.
20) The Code of Conduct rule on independence indicates that materiality must be considered
when
A)
Evaluating direct investments
made by the CPA
Evaluating indirect
ownership investments
Yes
Yes
B)
Evaluating direct investments
made by the CPA
Evaluating indirect
ownership investments
No
No
C)
Evaluating direct investments
made by the CPA
Evaluating indirect
ownership investments
Yes
No
D)
Evaluating direct investments
made by the CPA
Evaluating indirect
ownership investments
No
Yes
21) Which of the following instances would impair a CPA’s independence when they have been
retained as the auditor?
I. A charitable organization where the CPA serves as treasurer
II. A municipality where the CPA owns $250,000 of the $25 million outstanding bonds of the
municipality
III. A company that the CPA’s investment club owns a 10% investment interest
A) I and II
B) I and III
C) II and III
D) I, II, and III
22) Under the AICPA independence rules, independence can be considered impaired when
A) billed fees remain unpaid for professional services for more than ninety days.
B) a client in bankruptcy has unpaid fees for more than one year.
C) there is litigation by the client related to the auditor’s tax or other nonaudit services for an
immaterial amount.
D) there is a lawsuit by the client claiming deficiencies in the previous year’s audit.
23) Which of the following is least likely to impair a CPA firm’s independence with respect to an
audit client in the Oklahoma City office of a national CPA firm?
A) A partner in the Oklahoma City office owns an immaterial amount of stock in the client.
B) A partner in the Jersey City office owns 25% of the client’s stock.
C) A partner in the Oklahoma City office, who does not work on the audit engagement,
previously served as controller for the audit client.
D) A partner in the Chicago office previously served as vice president of finance for the audit
client.