Test Bank Chapter 4
Multiple Choice Questions
1. The International Federation of Accountants (IFAC) research report, Rebuilding
Public Confidence in Financial Reporting: An International Perspective, has as its
goal which of the following:
A. Creating an international CPA certificate
B. Examine ways of restoring the credibility of financial reporting and corporate
2. Each of the following were themes of the investigations of the accounting profession
during the 1970s and 1980s except for:
A. Whether low-balling to obtain audits impairs independence
B. Whether nonaudit services impair auditor independence
3. The committee that first recommended that the profession institute a voluntary program
for peer review was:
A. Metcalf committee
B. Cohen committee
4. The House Subcommittee on Oversight and Investigations made its recommendations
after looking into failures at:
A. ESM Government Securities
B. Continental Illinois National Bank and Trust
5. During the investigations by the House Subcommittee on Oversight and Investigations, a
question that was raised was:
A. Why was fraud allowed to occur at some many companies
B. Where was the board of directors in all these frauds
6. In its investigation of ZZZZ Best, the House Subcommittee on Oversight and
Investigations looked into:
A. Why the board of directors failed to uncover the fraud at ZZZZ Best
B. How the company was able to create 80% or more fictitious revenue
7. In the Lincoln Savings & Loan failure during the period of failures at savings and loan
institutions, Lincoln was charged with:
A. Stealing $300 million from shareholders
B. Causing retirees to lose their life savings
8. The cost to the public to clean up 1,043 failed savings and loan institutions during the
period of 1986-1995 was :
A. $152.9 billion including $123.8 billion of U.S. taxpayer losses
B. $300 million including $123.8 million of U.S. taxpayer losses
9. The accounting issues at failed savings and loan institutions included:
A. The failure to provide adequate allowances for loan losses
B. The failure to disclose dubious deals between the S&Ls and some of its major customers
10. One of the Contributions of the Treadway Commission Report and the work of the
Committee of Sponsoring Organizations (COSO) was:
A. To establish a voluntary process for peer review
B. To identify red flags that might lead to fraud
11. One concern in the Armadillo Foods case in the text of the chapter is:
A. The failure of internal controls
B. Pressure to go along with the misappropriation of assets
12. James Doty, the chairman of the PCAOB, in his testimony before Congress on the financial
crisis of 2007-2008, admitted that auditors should have been more vigilant—not just at
Lehman Brothers, but across the board. Which audit areas did Doty signal out for
criticism?
A. Inventories and cash flow
B. Capital and operating expenses
13. CPAs should always adhere to the rules of conduct of the
A. State board of accountancy
B. AICPA
14. The ethics rules that applies solely to those who conduct an audit of a client entity is:
A. Independence
B. Objectivity
15. The principle of ethical behavior in the AICPA Code that asks questions directly related
to ethical courage is:
A. Independence
B. Objectivity
16. The conceptual framework for the AICPA Independence standards can best be
characterized as:
A. A model to prevent fraud from occurring
B. An approach to identify threats to independence
17. Impairments of independence can occur when:
A. A CPA owns a direct financial interest in a client
B. A CPA owns a material indirect financial interest in a client
18. In the ESM fraud discussed in this chapter, Jose Gomez violated the Independence
standard because he:
A. Had loans outstanding from the client
B. Engaged in a business relationship with the client
19. The SEC’s position on independence can best be characterized as:
A. Proscribing certain financial interests with the client
B. Proscribing certain business relationships with the client
20. Assume the external auditor of a client entity also served on the client’s board of
directors. What aspect of independence would be violated?
A. The auditor may be exposed to an intimidation threat by the client
B. The auditor is involved in a business relationship with the client
21. In the PeopleSoft case, the auditors violated what aspect of independence?
A. The auditor was exposed to an intimidation threat by the client
B. The auditor was involved in a business relationship with the client
22. To avoid violating independence when engaged in nonattest services for an audit client, a
CPA must:
A. Make all management decisions and perform all management decisions
B. Evaluate the adequacy and results of the services performed
23. Each of the following is an outright restriction on providing nonattest services for an
attest client except for:
A. Tax services
B. Financial information systems design and implementation
24. Under the Sarbanes-Oxley Act, the auditor’s responsibility with respect to internal
controls can best be stated as:
A. Develop a system of internal controls that helps to prevent and detect fraud
B. Assess whether the internal controls helps to prevent and detect fraud
25. A unique aspect of the HealthSouth case discussed in the text of this chapter is:
A. The external auditors failed to assess whether the internal controls operated as intended
B. Top management certified that the financial statements were accurate
26. The due care principle in the AICPA code:
A. Addresses the quality of the individual who performs professional services
B. Addresses the quality of services performed by the CPA
27. Which rule of professional conduct in the AICPA code does not apply both to internal and
external accountants who are CPAs and members of the Institute?
A. Independence
B. Integrity
28. The confidentiality standard in the AICPA code provides for exceptions to the rule in:
A. In response to a validly issued court summons
B. To provide information to the CPA’s peer reviewers
29. A CPA who informs management of a material misstatement in the financial statements
can go to the SEC with his/her concerns if:
A. The CPA informed the client of this matter and the client did not inform the SEC within
one business day of being informed by the CPA
B. The CPA informed the client of this matter and the client refuses to correct the financial
statements
30. In the Fund of Funds case discussed in this chapter, the external auditors violated which
rule of conduct?
A. Due care
B. The financial statements were certified as being in conformity with GAAP when that was
not the case
31. A common requirement/effect of the commissions and contingent fees rule is:
A. A CPA who accepts such a payment always violates independence
B. The CPA must disclose the acceptance of such a payment to the client
32. If a client refuses to accept an auditors’ report that has been modified, the public
accounting firm should withdraw from the engagement and give its reasons in writing to
the board of directors except when:
A. The auditor is unable to obtain sufficient appropriate evidence about a suspected illegal
act
B. The client fails to account for or disclose properly a material amount connected with an
illegal act
33. An alternative practice structure can best be described as:
A. A form of ownership where a CPA firm owns a public company and audits that company
B. A form of structure where a public company provides nonattest services for a client that
is also provided with attest services by an affiliate of the public company
34. A CPA can accept a contingent fee in providing tax services for an attest client if:
A. The CPA discloses this fact to the tax client
B. The CPA receives the permission of the client to accept such a form of payment
C. The CPA’s tax services will be reviewed by a taxing authority
D. All of the above
Answer C
35. Objectivity may be impaired when a CPA prepares a tax return for a client because:
A. The CPA violates the independence rule
B. The CPA violates the integrity rule
36. CPAs can advertise and solicit clients as long as such practices are:
A. Conducted in a professional manner
B. Informative about the CPA’s services
37. Circular 230 applies to CPAs who:
A. Audit the financial statements of a tax client
B. Practice before the IRS
38. Statement on Standards for Tax Services No. 1 establishes as a basic principle of
providing tax services that the CPA:
A. Must have a good faith belief that the tax return position can be justified if challenged
B. Must have a good faith belief that the information provided by the client is accurate
39. The requirement that there should be reasonable support for a tax return position before a
CPA recommends it to a client most directly aligns with which tax standard:
A. The tax return should not be based on a frivolous position
B. There is a realistic possibility of success if the tax position is challenged
40. The CPA firm that became involved in tax shelter controversies with the IRS was:
A. Ernst & Young
B. Deloitte & Touche
41. The PCAOB rules prohibit auditors from:
A. Providing certain aggressive tax shelters to their public company audit clients
B. Providing tax services to members of the audit client’s management who serve in
financial reporting oversight roles
42. Mintz and Morris, both of whom are CPAs, became partners in a tax preparation business
in San Marcos, Texas. Which of the following ethics standards must be followed by the
two partners?
A. Ethics laws and regulations of the Texas Board of Accountancy
B. Ethics rules of the AICPA
41. To whom does the CPA owe ultimate allegiance in carrying out professional obligations?
A. Stockholders
B. Public interest
42. Sarbanes-Oxley Act (SOX) sets new standards for governance that will ultimately impact
on which of the following?
A. Foreign companies listed on US exchanges only
B. SEC registrant companies, including foreign companies listed on US