24) A CPA’s financial interests in nonclients may have an effect on independence if the
nonclients are investors in or investees of the client. Which situation would not impair a CPA’s
independence?
A) The client has an immaterial investment in a nonclient investee in which the CPA has an
immaterial investment.
B) The CPA has a material indirect financial interest in a nonclient in which the client has a
material investment.
C) The client investor has a nonmaterial investment in the nonclient investee in which the CPA
has a material investment.
D) The CPA has a joint closely held investment with the client in a nonclient that is material to
the client as well as the CPA.
25) The CPA firm will lose its independence if
A) a staff auditor providing audit services to the client acquires stock in that client.
B) a staff tax preparer who provides 15 hours of non-audit services to the client acquires stock in
that client.
C) an audit manager in an office different than the office providing audit services has a direct,
immaterial financial interest in the audit client.
D) a covered member has an indirect, immaterial financial interest in an audit client.
26) Interpretations to the Rules of Conduct permit a CPA firm to do both bookkeeping and
auditing for the same private company client if three criteria are met. Which of the following is
not one of those criteria?
A) The client must accept full responsibility for the financial statements.
B) The client is required to file an annual report, including audited financial statements, with the
Securities and Exchange Commission.
C) The CPA must not assume the role of employee or of manager.
D) The CPA must follow applicable auditing standards.
27) Which of the following circumstances impairs an auditor’s independence?
I. Litigation by a client against an audit firm claiming a deficiency in the previous audit
II. Litigation by a client against an audit firm related to tax services
III. Litigation by an audit firm against a client claiming management fraud or deceit
A) I and II
B) I and III
C) II and III
D) I, II, and III
28) A CPA firm should decline an offer to perform consulting services engagement if
A) the proposed engagement is not accounting related.
B) recommendations made by the CPA firm are to be subject to review by the client.
C) acceptance would require the CPA firm to make management decisions for an audit client.
D) any of the above is true.
29) Interpretations of the AICPA Code of Professional Conduct are dominated by the concept of
A) independence.
B) compliance with standards.
C) accounting.
D) acts discreditable to the profession.
30) Each of the following situations involves a possible violation of the rule on independence.
For each situation, (1) decide whether the Code of Professional Conduct has been violated, and
(2) briefly explain how the situation violates (or does not violate) the Code of Professional
Conduct.
a. Harry Brown is a partner in the Topeka office of Hedley & Co., CPAs. Harry’s brother is
employed in an audit-sensitive position by Jensen Appliances, a publicly held company in
Kansas. Jensen Appliances is one of Hedley & Co.’s audit clients. Neither Harry nor personnel
from the Topeka office is involved in the audit of Jensen.
Violation? Yes No
Explanation:
b. John Woods is an audit manager with Calden & Co., CPAs, a one-office CPA firm. John owns
100 shares 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.
Violation? Yes No
Explanation:
c. The accounting firm of Fine & Herman, CPAs, provides bookkeeping and tax services for
Henderson Corporation, a privately held company. Fine & Herman also performs the annual
audit of Henderson Corporation.
Violation? Yes No
Explanation:
d. Bob Shelton, CPA, is the auditor of Cafe Ecko. A couple of weeks ago, Cafe Ecko’s
management commenced litigation against Bob, alleging he was negligent in last year’s audit.
Violation? Yes No
Explanation:
e. Hamilton Appliance has not paid Karen Linwood, CPA, her audit fee for the past two years.
Karen is starting work on the current year’s audit of Hamilton.
Violation? Yes No
Explanation:
31) Don Crosby, a partner in a national CPA firm, has just learned that his self-sufficient
daughter has accepted a position as the CFO of Sunglasses, Inc., a current client within the office
with which he is employed. Explain the independence ramifications on 1) Don’s independence,
2) his office, and 3) the firm’s independence.
32) Both SEC rules and the Sarbanes-Oxley Act prohibit auditors from providing bookkeeping
services to their public company audit clients.
33) Under the interpretations to the AICPA Code, independence is considered to be impaired if
fees remain unpaid for professional services provided more than six months before the date of
the current year’s report.
34) Auditors are allowed to have an indirect financial interest in an audit client, such as
ownership of stock in a client’s company by the auditor’s brother, as long as the amount of the
financial interest is immaterial to the brother.
35) CPA firms are required to be independent when performing any professional service.
36) The prohibition on direct financial interests applies to covered members in a position to
influence an engagement.
37) All litigation by a client related to tax or other nonaudit services will impair independence.
4.6 Learning Objective 4-6
1) Under Sarbanes-Oxley, the audit committee of a public company
A) must meet on a monthly basis.
B) must be comprised entirely of financial experts.
C) is responsible for the oversight of the work of the independent auditor.
D) should have at least one independent member.
2) The Sarbanes-Oxley Act requires which employees of an accounting firm to rotate off the
engagement every five years?
A)
In-Charge Auditor
Lead audit partner
Yes
Yes
B)
In-Charge Auditor
Lead audit partner
No
No
C)
In-Charge Auditor
Lead audit partner
Yes
No
D)
In-Charge Auditor
Lead audit partner
No
Yes
3) Which of the following statements is true with respect to audit committees?
A) Audit committee members should consist of members of the company’s management.
B) All members of the audit committee must be financial experts.
C) The audit committee of a public company is responsible for hiring the auditor.
D) Audit committees must have a minimum of ten members.
4) The provisions of the Sarbanes-Oxley Act are most likely to allow which of the following
non-audit services for audit clients?
A) appraisal or valuation services (e.g., pension, post-employment benefit liabilities)
B) financial information systems design and implementation
C) internal audit outsourcing
D) tax consulting
5) Which of the following services are allowed by the SEC whenever a CPA also audits the
company?
A) internal audit outsourcing
B) legal services unrelated to the audit
C) appraisal or valuation services
D) services related to assessing the effectiveness of internal control over financial reporting
6) Which of the following services is not prohibited by the SEC whenever a CPA also audits the
company?
A) actuarial services
B) assisting the company in preparing certain SEC registration statements (e.g., 10-Q, 10-K)
C) investment banker services
D) bookkeeping services
7) The members of a client’s “audit committee” should be
A) members of management.
B) directors who are not a part of company management.
C) non-directors and non-managers.
D) directors and managers.
8) The Sarbanes-Oxley Act requires a cooling off period of ________ before a member of an
audit team can work for a client in a key management position?
A) one year
B) eighteen months
C) three years
D) five years
9) Which of the following is an accurate statement?
A) Auditing standards detail the requirements that a CPA firm must follow when it is requested
to provide an opinion on the application of accounting principles for a client of another CPA
firm.
B) SEC rules prohibit ownership in audit clients by those persons who can influence the audit.
C) PCAOB rules require a CPA firm, before its selection as the company’s auditor to document
all relationships between the firm and the company.
D) All of the above are accurate statements.
10) Companies are required to disclose in their proxy statement or annual filings with the SEC
the total amount of audit and non-audit fees paid to the audit firm for the two most recent years.
Which of the following is not one of the categories of fees that must be disclosed?
A) tax fees
B) consulting fees
C) audit-related fees
D) all other fees
11) A public company may obtain internal audit services from their financial statement auditor if
it is approved by the company’s audit committee.
12) For a public company, the Sarbanes-Oxley Act requires audit committee approval of all
nonaudit services prior to their performance by the company’s external auditor.
4.7 Learning Objective 4-7
1) The CPA must not subordinate his or her professional judgment to that of others in any
A) engagement.
B) audit engagement.
C) engagement excluding tax services.
D) engagement where the opinion of a specialist is used.
2) Under the rules and interpretations of the AICPA Code,
A) a CPA can be a client advocate during an audit, but not while performing tax or management
services.
B) staff auditors should always defer to the judgment of their immediate supervisor.
C) a conflict of interest is a relationship that might interfere with objectivity or integrity.
D) even if a conflict of interest is disclosed to the member’s client or employer, it is still
considered a violation of the rules of conduct.
3) Several months after an unqualified audit report was issued, the auditor discovers the financial
statements were materially misstated. The client’s CEO agrees that there are misstatements, but
refuses to correct them. She claims that “confidentiality” prevents the CPA from informing
anyone. Which of the following statements is correct?
A) The CEO is correct and the auditor must maintain confidentiality.
B) The CEO is incorrect, but since the audit report has been issued, it is too late to correct the
report.
C) The CEO is correct, but to be ethically correct, the auditor should violate the confidentiality
rule and disclose the error.
D) The CEO is incorrect, and the auditor has an obligation to issue a revised audit report, even if
the CEO will not correct the financial statements.
4) A CPA firm may charge a contingent fee for
A) an audit.
B) consulting services for a client for which they do not perform any attestation services.
C) the preparation of an original tax return for a client for which they do not perform any
attestation services.
D) the preparation of an amended tax return.
5) A member in public practice shall neither receive from, nor pay to, a client a commission
when the member or member’s firm also performs certain services for that client. Are
commissions allowed if the CPA performs
A)
A compilation that will be
used by a third party
An audit of prospective
financial information
Yes
Yes
B)
A compilation that will be
used by a third party
An audit of prospective
financial information
No
No
C)
A compilation that will be
used by a third party
An audit of prospective
financial information
Yes
No
D)
A compilation that will be
used by a third party
An audit of prospective
financial information
No
Yes
6) The AICPA’s Code of Professional Conduct states that a CPA should maintain integrity and
objectivity. The term “objectivity” in the Code refers to a CPA’s ability to
A) choose independently between alternate accounting principles and auditing standards.
B) distinguish between accounting practices that are acceptable and those that are not.
C) be unyielding in all matters dealing with auditing procedures.
D) maintain an impartial attitude on matters that come under the CPA’s review.
7) Which of the following is required for a firm to designate itself “Member of the American
Institute of Certified Public Accountants” on its letterhead?
A) At least one of the owners must be a member of the AICPA.
B) All CPA owners must be members of the AICPA.
C) The CPA owners whose names appear in the firm name must be members of the AICPA.
D) A majority of the owners must be members of the AICPA.
8) CPAs are prohibited from which of the following forms of advertising?
A) self-laudatory advertising
B) celebrity endorsement advertising
C) use of trade names, such as “Awesome Auditors”
D) use of phrases, such as “Guaranteed largest tax refunds in town!”
9) Which of the following would be considered a violation of the AICPA Code of Conduct?
A) The CPA makes the audit files available to the client’s bank without the permission of the
client.
B) The CPA firm charges a contingent fee for nonattestation services to a client for whom he
does not perform any attestation services.
C) The CPA firm takes a prospective client to lunch to discuss auditing services.
D) A CPA firm uses the name San Diego Tax Specialists.
10) The AICPA’s Code of Professional Conduct requires CPAs to maintain the confidentiality of
client information. This rule would be violated if a CPA disclosed information without a client’s
consent as a result of a
A) subpoena or summons.
B) peer review.
C) complaint filed with the trial board of the Institute.
D) request by a client’s largest stockholder.
11) Which one of the following statements is false?
A) Confidentiality is broken when an auditor is presented with a subpoena concerning an audit
client.
B) Information that a CPA obtains from a client is generally not privileged.
C) When a CPA firm conducts an AICPA-authorized peer review of the quality controls of
another CPA firm, permission of the client is not needed to examine audit documentation.
D) A CPA firm which observes substandard audit documentation of another firm during a peer
review can initiate a complaint to the AICPA.
12) A CPA firm
A) can sell securities to a client for whom they perform an attestation service.
B) can receive a commission for a client that they are engaged to perform an attestation service
for.
C) cannot receive a referral fee for recommending the services of another CPA.
D) can receive a commission from a nonattestation client as long as the situation is disclosed.