Chapter 4 – Professional Liability, auditor Judgment Frameworks, and Professional Responsibilities
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Applicable Law and Causes of Legal Action
53. A member of the AICPA must safeguard the confidentiality of client information. Which of the following is
not a valid reason to disclose information to non-clients?
a.
To discuss information relating to inadequate disclosure in an audit report.
b.
To comply with a validly issued and enforceable subpoena or summons.
c.
To accommodate the review of client audit work papers under AICPA, PCAOB, or State Board of
Accountancy authority.
d.
To explain to members of the press whether a client is likely to miss payroll in the forthcoming
periods.
d
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AICPA Code of Professional Conduct
54. Which of the following may an auditor use as a defense under the Securities Act of 1933?
a.
b.
c.
d.
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Applicable Laws and Causes of Legal Action
55. Compliance with GAAP was an unsuccessful defense in which of the following court cases?
a.
Credit Alliance v. Arthur Andersen & Co..
b.
Ultramares Corp. v. Touche.
c.
Ernst and Ernst v. Hochfelder.
d.
Herzfeld v. Laventhol, Krekstein, Horwath & Horwath
56. From whom should a CPA not accept a commission for recommending a product or service?
a.
A tax client.
b.
An audit client.
c.
A financial-planning client.
d.
A management-services client.
e.
Any of the above.
b
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AICPA Code of Professional Conduct
57. What is information about a client that cannot be subpoenaed by a court of law called?
a.
Confidential information.
b.
Privileged communication.
c.
Contingent information.
d.
Audit communication.
b
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AICPA Code of Professional Conduct
58. 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, while accepting that documents are to be
considered genuine unless there is reason to believe the contrary.
d.
All of the above.
d
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59. Which term best 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.
b
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An Ethical Decision-Making Framework
60. Which of the following would be the first form filed with the SEC describing a major change in corporate
governance?
a.
8-K
b.
8-Q
c.
10-K
d.
10-Q
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Auditor Liability under Statutory Law
61. Which of the following concepts represents the most expansive aspect of liability for auditors?
a.
Third-Party Beneficiary.
b.
Identified User.
c.
Foreseen Party.
d.
Foreseeable Party.
d
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FrameworkProfessional Skepticism
62. In which of the following situations would a CPA be considered independent?
a.
A CPA has obtained an auto loan from a banking client.
b.
A CPA has obtained a 90-day signature loan from a client.
c.
A CPA has obtained a loan for investment purposes from a client.
d.
A CPA has obtained an interest-free loan from a banking client.
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AICPA Code of Professional Conduct
63. In which of the following situations would a CPA be considered independent?
a.
A CPA’s brother is the Vice-President of Sales at the CPA’s audit client.
b.
A CPA’s father was a salesman at the CPA’s audit client and now a major portion of the father’s
pension fund is invested in the audit client.
c.
A CPA’s cousin works as a web-site designer at the audit client.
d.
A CPA’s son works summers at the audit client and has earned 10 shares of stock in the audit client.
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AICPA Code of Professional Conduct
64. Which of the following represents a situation in which 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 client’s 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.
b
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65. Which of following is not part of the ethical framework derived from utilitarianism and rights theories?
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.
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An Ethical Framework
66. What is the 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.
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An Ethical Framework
67. The auditor is normally not permitted to divulge confidential information obtained from a client. Which of
the following situations would be a violation of this standard?
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 AICPA’s ethics division.
d.
To ensure adequate disclosure in accordance with GAAP.
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AICPA Code of Professional Conduct
68. 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.
Chapter 4 – Professional Liability, auditor Judgment Frameworks, and Professional Responsibilities
d
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AICPA Code of Professional Conduct
69. Rule 201 – General Standards, of the AICPA Code of Professional Conduct does not include which of the
following factors?
a.
Due professional care.
b.
Integrity and objectivity.
c.
Planning and supervision.
d.
Sufficient relevant data.
b
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AICPA Code of Professional Conduct
70. Independence is required for which of the following types of services?
a.
Audit work.
b.
Tax work.
c.
Consulting.
d.
Independence is always required of the CPA.
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AICPA Code of Professional Conduct
71. According to the Sarbanes-Oxley Act, which of the following services may an auditor perform without
impairing their independence?
a.
Actuarial services.
b.
Appraisal services.
c.
Internal audit services.
d.
Tax Services
72. Independence in mental attitude is required of auditor on all audit engagements. Which statement best
describes the highest goal for independence?
a.
To comply with the AICPA Professional Code of Conduct.
b.
To be independent in fact and appearance.
c.
To be an advocate for shareholders.
d.
To be in compliance with SEC regulations.
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AICPA Code of Professional Conduct
73. According to the framework for ethical decision making, which of the following should the decision maker
consider?
a.
All possible alternative courses of action.
b.
The consequences associated with possible actions.
c.
Whether the rights framework would cause any course of action to be added.
d.
All of the above.
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AICPA Code of Professional Conduct
74. Under Rule 201, what best describes how an AIPCA member should act?
a.
With professional competence.
b.
With due professional care.
c.
After adequate planning and with appropriate supervision.
d.
All of the above
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AICPA Code of Professional Conduct
75. Commissions and referral fees are not permitted for which types of services?
a.
Tax.
b.
Reviews.
c.
Audits.
d.
Both B and C.
d
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AICPA Code of Professional Conduct
76. Among immediate family members, whose ownership of client’s stock is not considered the same as the
covered member’s ownership?
a.
Spouse.
b.
14 year-old daughter living at home.
c.
19 year-old son away at college.
d.
Grandfather.
d
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AICPA Code of Professional Conduct
77. Which is the best definition of scienter?
a.
Fraudulent conduct in the purchase of a security.
b.
A causal connection between a misstatement and a material loss.
c.
A material omission of facts.
d.
A wrongful state of mind when making a misrepresentation.
d
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78. What does utilitarian theory hold?
AICPA Code of Professional Conduct
Chapter 4 – Professional Liability, auditor Judgment Frameworks, and Professional Responsibilities
a.
There is a decision that exists that is optimal for all people.
b.
What is ethical is the action that achieves the least bad for the greatest number of people.
c.
What is ethical is the action that achieves the greatest good for the greatest number of people.
d.
What is ethical is the action that achieves the greatest good for all people.
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79. Which of the following is a cause of action against the auditor for breach of contract?
a.
Violating client confidentiality.
b.
Providing the audit report on time.
c.
Failing to discover an immaterial error or employee fraud.
d.
Withdrawing from an audit engagement with justification.
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AICPA Code of Professional Conduct
80. Which of following is not an action required by Utilitarian Theory?
a.
Identify the potential problem.
b.
Identify the potential impact of actions on each affected party.
c.
Identify the rights of the affected parties.
d.
Identify the desirability of each action.
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A Framework for Ethical Decision Making
81. The importance of independence
Why is “independence” referred to as the cornerstone of auditing?
auditor’s report is used by many different users with different purposes, the reports
82. 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.
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.
attestation services. The acceptance of a contingent fee would destroy the public
confidence in the profession when performing attest services.
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AICPA Code of Professional Conduct
83. 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.
Discuss the types of services that Harry Rawlins CPAs will not be able to
perform for DK under the Sarbanes-Oxley Act of 2002.
B.
Under what circumstances may Harry Rawlins CPAs perform certain non-audit
services for DK, Inc. under Sarbanes-Oxley Act of 2002?
1934 prohibiting an auditor from performing any of the following services for a
public 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
Actuarial services,
Internal audit outsourcing services,
Management functions or human resources,
must be judged by all to be unbiased and free from favoritism for any party.
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AICPA Code of Professional Conduct
84. AICPA Code of Professional Conduct, Rule 101
Livingston and Associates is a audit 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.
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.
B.
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.
C.
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.
D.
Smith Plastics has paid all but $5,000 of the previous years audit fees.
E.
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.
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.
B.
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
Lucy has a direct financial interest in Smith Plastics. It is considered direct
B.
Tax preparation and other tax related services may be performed for DK by
Harry Rawlins, CPA only if the services are approved by the audit committee
and the board of directors. Harry Rawlins may also be engaged to perform
audits on DK’s internal controls and other attestation engagements.
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Independence Rules of the SEC and the PCAOB
85. 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.
Explain the rule on confidentiality.
B.
Identify the circumstances in which the rule of confidentiality does not apply.
the auditor will not communicate confidential information to outside parties.
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AICPA Code of Professional Conduct
86. Expectations Gap
What is the expectations gap?
relationship impairs Firm independence of Smith Plastics.
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AICPA Code of Professional Conduct
87. 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?
88. Professional Skepticism
Explain why professional skepticism is important in making professional judgments. What are the types of
actions that a professionally skeptical auditor will take?