Chapter 4 – Professional Liability, auditor Judgment Frameworks, and Professional Responsibilities
1. Under Common Law, liability concepts are developed through court decisions based on negligence, gross
negligence, or fraud.
a.
True
b.
False
True
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AICPA Code of Professional Conduct
2. 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.
a.
True
b.
False
True
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3. An individual does not need to agree to uphold the code of professional conduct in order to become licensed
as a CPA.
a.
True
b.
False
False
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AICPA Code of Professional Conduct
4. A covered member’s investment in a mutual fund which owns stock in a firm being audited by the covered
member is a direct financial interest resulting in the impairment of independence.
a.
True
b.
False
False
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Chapter 4 – Professional Liability, auditor Judgment Frameworks, and Professional Responsibilities
5. Liability concepts developed through court decisions are referred to as statutory law.
a.
True
b.
False
False
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Applicable Laws and Causes of Legal Action
6. In federal lawsuits, Congress has limited the extent of joint and several liability damages to the actual
percentage of responsibility if auditors are found liable for less than 75% of damages.
a.
True
b.
False
7. Class action lawsuits are designed to encourage multiple lawsuits arising from the same claim.
a.
True
b.
False
8. The expectations gap related to shareholders’ beliefs about recovery of losses on investments serves as a
deterrent to lawsuits filed against audit firms.
a.
True
b.
False
AICPA Code of Professional Conduct
9. The Principles of the AICPA Code of Professional Conduct provide a very detailed set of rules that represent
a low level of actions.
a.
True
b.
False
False
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10. The Rules of Conduct govern the performance of CPAs in carrying out their public responsibilities.
a.
True
b.
False
True
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AICPA Code of Professional Conduct
11. Confidentiality is the cornerstone of the auditing profession.
a.
True
b.
False
False
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AICPA Code of Professional Conduct
12. Negligence is the failure to exercise minimal care.
a.
True
b.
False
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13. The AICPA’s Code of Professional Conduct defines an indirect financial interest as an investment of one
percent or less of a client’s organization, and because the amount is so small it is considered immaterial
a.
True
b.
False
False
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AICPA Code of Professional Conduct
14. Gross negligence is a failure to use even minimal care or evidence of activities that show a recklessness or
careless disregard for the truth.
a.
True
b.
False
True
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AICPA Code of Professional Conduct
15. Auditors are permitted to perform for a contingent fee an audit of the financial statements if the audit
committee approves the agreement in advance of the services being provided.
a.
True
b.
False
False
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16. The confidentiality between auditor and client is legally equivalent as the confidentiality shared between
attorney and client.
a.
True
b.
False
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Chapter 4 – Professional Liability, auditor Judgment Frameworks, and Professional Responsibilities
False
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AICPA Code of Professional Conduct
17. Contingent fees are prohibited for tax professionals when preparing tax returns for clients
a.
True
b.
False
True
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18. Contingent fees are prohibited for any client for which the auditor performs audit services, but are otherwise
permitted.
a.
True
b.
False
False
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19. Commissions and referral fees are allowed to audit firms as long as the audit client is informed of the fees.
a.
True
b.
False
False
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20. According to the framework for professional decision making, the first step in decision-making is to
structure the audit problem
a.
True
b.
False
True
21. According to Rights Theory, the highest-order rights include rights granted by the government, such as civil
rights, legal rights, rights to own property, and license privileges.
a.
True
b.
False
False
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A Framework for Ethical Decision Making
22. A CPA firm may include the name of only one past owner in the firm name.
a.
True
b.
False
False
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AICPA Code of Professional Conduct
23. An ethical dilemma occurs in a situation in which moral duties or obligations conflict.
a.
True
b.
False
True
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24. An ethical dilemma occurs an ethically correct action may conflict with an individual’s immediate self-
interest.
a.
True
b.
False
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Chapter 4 – Professional Liability, auditor Judgment Frameworks, and Professional Responsibilities
True
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25. The expectations gap represents a misunderstanding whereby shareholders mistakenly believe that they are
entitled to recover losses on investments for which the auditor provided an unqualified opinion on the financial
statements.
a.
True
b.
False
True
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26. The deep pocket theory represents a misunderstanding whereby shareholders mistakenly believe that they
are entitled to recover losses on investments for which the auditor provided an unqualified opinion on the
financial statements.
a.
True
b.
False
False
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27. Rights theory focuses on evaluating actions in terms of the fundamental rights of the parties involved.
a.
True
b.
False
True
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28. There is a hierarchy of rights to consider when applying rights theory.
a.
True
Chapter 4 – Professional Liability, auditor Judgment Frameworks, and Professional Responsibilities
b.
False
True
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29. On an audit, only CPAs are required to comply with the AICPA’s independence rules.
a.
True
b.
False
False
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AICPA Code of Professional Conduct
30. A covered member under the AICPA’s 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.
a.
True
b.
False
False
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AICPA Code of Professional Conduct
31. The Principles of the AICPA Code of Professional Conduct express the accounting profession’s recognition
of its responsibilities to client management.
a.
True
b.
False
False
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AICPA Code of Professional Conduct
32. Rule 102 on integrity and objectivity only applies to covered members as defined by the AICPA.
Chapter 4 – Professional Liability, auditor Judgment Frameworks, and Professional Responsibilities
a.
True
b.
False
False
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AICPA Code of Professional Conduct
33. The AICPA may revoke a member’s CPA license for violations of its Code of Professional Conduct.
a.
True
b.
False
False
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AICPA Code of Professional Conduct
34. A new staff member on an audit engagement may own stock in that client until the audit report is issued.
a.
True
b.
False
False
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AICPA Code of Professional Conduct
35. A contingency fee is a situation in which no fee will be charged unless a specified finding or result is
attained.
a.
True
b.
False
True
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36. Utilitarian theory is an approach for addressing ethical problems by identifying a hierarchy of rights that
should be considered in solving ethical dilemmas.
a.
True
b.
False
False
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Ethical Theories
37. Communication between an auditor and an audit client is deemed to be privileged communication in most
states.
a.
True
b.
False
False
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AICPA Code of Professional Conduct
38. Rule 102, Integrity and Objectivity,of the AICPA Professional Code of Conduct, does not apply to a CPA
who is a corporate CFO.
a.
True
b.
False
False
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AICPA Professional Code of Conduct
39. Loans between the auditor and the client are permitted in some circumstances.
a.
True
b.
False
True
1
40. The auditor is permitted to violate the confidentiality rule in providing relevant information to an inquiry by
a major shareholder of the client.
a.
True
b.
False
False
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AICPA Code of Professional Conduct
41. Which of the following is not one of the reasons for increased litigation related to audits?
a.
Class action lawsuit.
b.
Increased complexity of accounting standards.
c.
Contingent-fee-based compensation for law firms.
d.
Joint and several liability doctrines.
42. 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 what is Pulley considered to have?
a.
An immaterial indirect financial interest in McBurgers Corporation.
b.
A material indirect financial interest in the McBurgers Corporation.
c.
A loophole for claiming independence from McBurgers Corporation.
d.
An direct financial interest in McBurgers Corporation.
d
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AICPA Code of Professional Conduct
43. Which of the following employment positions could an auditor’s spouse hold in a client without violating
the independence requirements?
a.
Controller.
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AICPA Code of Professional Conduct
Chapter 4 – Professional Liability, auditor Judgment Frameworks, and Professional Responsibilities
b.
Treasurer.
c.
Order entry staff.
d.
Internal audit director.
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44. Liability based on federal securities law is known as which type of law?
a.
Common Law
b.
Contract Law
c.
Commercial Law
d.
Statutory Law
d
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Applicable Laws and Causes of Legal Action
45. 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.
Which of the following best describes Julie’s independence status?
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.
d
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AICPA Code of Professional Conduct
46. 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.
Chapter 4 – Professional Liability, auditor Judgment Frameworks, and Professional Responsibilities
According to the AICPA, why is Julie is considered a covered member for FNBW independence purposes?
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.
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AICPA Code of Professional Conduct
47. Which of the following is a principle of the Code of Ethics of the International Ethics Standards Board for
Accountants but not a principle found in the AICPA Professional Code of Conduct?
a.
Integrity
b.
Professional Behavior
c.
Confidentiality
d.
Objectivity
b
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AICPA Code of Professional Conduct
48. Which of the following represents a situation in which an auditor is independent of its client?
a.
The audit fee paid by the client represents 10% of the auditor’s annual gross revenue.
b.
The auditor takes a personal loan from the president of the company.
c.
The auditor’s dependent son holds 25 shares of the client’s common stock.
d.
The auditor has not received payment for the previous audit services.
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AICPA Professional Code of Conduct
49. For which of the following engagements are members of the AICPA required to act with integrity and
objectivity?
a.
Tax preparation.
Chapter 4 – Professional Liability, auditor Judgment Frameworks, and Professional Responsibilities
b.
Financial statement review services.
c.
Financial statement audits.
d.
All engagements.
d
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AICPA Code of Professional Conduct
50. The concept of the Third-Party Beneficiary Test was established by which court case?
a.
Credit Alliance Corp. v. Arthur Andersen & Co..
b.
Ultramares Corp. v. Touche.
c.
Citizens State Bank v. Timm, Schmidt, & Co..
d.
Rosenblum v. Adler.
b
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Auditor Liability under Common Law and Contract Law
51. 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.
d
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AICPA Code of Professional Conduct
52. Under common law, which standard may a client sue an auditor for failure to demonstrate due care?
a.
Negligence
b.
Gross Negligence
c.
Fraud
d.
All of the above.