44. To whom do the accounting codes of professional conduct (either the state board
of public accountancy or AICPA) apply?
A. Those CPAs in public accounting only.
B. Those CPAs in industry, government, and education.
45. Integrity is measured in terms of what is right and just. What is a question that a
CPA can ask to test decisions?
A. Am I doing what another CPA would do?
B. Am I serving the interests of my client?
46. Why don’t auditors prepare financial statements, as well as audit them?
A. It would take away a job from the controller of the company.
B. It would not eliminate errors in the financial statements.
46. In which of the following is a CPA independent in fact and appearance?
a. The CPA’s brother is the controller of the company being audited.
b. The CPA serves on the board of a non-profit with the CFO of the company being
audited.
47. Which of the following would be an example of due care?
A. Audit documentation only supplied by the client.
B. Audit documentation is a copy of last year’s workpapers.
49. Which of the following relationships do not impair CPA-auditor independence?
A. Financial relationships with the client
B. Business relationships with the client
50. Each of the following is a safeguard that helps to mitigate threats to independence
except for:
A. Safeguards created by the profession, legislation, or regulation
B. Safeguards implemented by the attest client, such as a tone at
the top.
51. Which of the following is a permitted loan to a CPA from an audit client financial
institution?
A. Car loan collateralized by the car
B. Credit cards with a limit greater than $25,000
52. Which case in the text of the chapter illustrates the danger of a CPA accepting
loans from an audit client?
A. Tyco International
B. Enron
53. Which of the following immediate family members or close relatives would not
have to follow the independence rules that apply to the CPA according to
Interpretation 101-1?
A. CPA’s spouse
B. CPA’s spousal equivalent
54. Which of the following situations of a CPA’s distant relatives does not impair the
CPA’s independence?
A. CPA’s parent holds a key position with an audit client.
B. CPA’s nephew is starting as a salesperson with an audit client.
55. What is the maximum amount of time an audit manager or partner may spend on
nonattest services for an attest client?
A. 20 hours
B. 15 hours
56. Which of the following services are allowed to be performed for an attest services
client by Sarbanes Oxley Act?
A. Financial information systems design and implementation
B. Management functions or human resources
57. Which was the ethical concern exists in the PeopleSoft case?
A. Family relationships between PeopleSoft top managers and EY
B. Tax services provided for PeopleSoft top management by EY
58. Which of the following is not part of standards for the quality of work?
A. Planning and supervision
B. Professional competence
59. What is the difference on contingent fees under the PCAOB rules versus the
AICPA rules?
A. Both rules allow contingent fees for an audit client if the contingency is based
upon findings of government agencies.
B. The AICPA prohibits contingent fees to an audit client.
61. Which is not a permitted form of organization for a CPA practice?
A. Sole proprietorship with name of sole proprietor
B. Limited liability partnership
63. Which tax service is still permitted by the PCAOB for audit clients following the
KPMG tax shelter case?
A. Aggressive tax shelter for audit clients
B. Auditing of deferred taxes
64. What ethical rules are violated when a CPA auditing a client provides inside
information about the client to a friend?
A. Independence and objectivity
B. Objectivity and due care
65. Which statement is correct with respect to a CPA’s ethical obligation
to return client books and records and CPA work papers:
A. Client-provided records in the custody or control of the CPA
should be returned to the client at the client’s request.
B. CPA work papers should be given to the client at the end of each
audit.
Case Questions
66. The AOL case described in the text focused mainly on:
A. Proper accounting for line costs
B. Proper accounting for advertising costs
67. The ethical issue raised in the Beauda Medical Center case is similar to that in:
A. ESM Government Securities
B. PeopleSoft
68. The revenue recognition issue in the Family Games case is:
A. Whether a company can record revenue before it is signed-off by the lawyers
B. Whether a company can record revenue before it is shipped to the customer
69. The question that arises in the First Community Church case is whether:
A. The financial statements have been materially misstated
B. There has been a misappropriation of assets
70. In the Lee & Han, LLC case, Barbara Strom should:
A. Report the situation to SEC under the Dodd-Frank Act.
B. Change the audit workpapers to not reflect the market decline in inventory
71. In the Gee Wiz case, the main ethical issue was:
A. Independence of David in providing tax services to an audit client
B. Confidentiality in disclosing sensitive information about a client of the CPA firm
72. In the Family Outreach case, Yimei finds three accounts all using the same
documentation and amounts. Being skeptical, Yimei should consider doing all
but:
A. Report her findings to Kwami, her supervisor
B. Talk to the agency’s board of directors
73. In the HealthSouth case, the auditors failed to meet their ethical and professional
obligations because they failed to uncover fraud in which account?
A. Inventory
B. Contractual allowance
74. The main ethical issue in Healthcare Fraud case is:
A. Maintaining two sets of accounting books.
B. Inflating healthcare costs submitted to Medicare.
75. PricewaterhouseCoopers was investigated by the SEC for independence violations
due to:
A. Reporting systems that relied on self-reporting of violations
B. Ownership of client stock
Essay Questions
1. Explain how the Principles of the AICPA Code of Professional Conduct establish
standards of behavior for CPAs that are similar to those discussed in chapters 1
and 2.
2. Describe each of the investigations of the accounting profession during the 1970s
and 1980s. Given the passage of the Sarbanes-Oxley Act in 2002, do you think
these investigations helped to pave the way for SOX improvements?
3. What are the major threats to independence addressed by the AICPA Conceptual
Framework for Independence Standards and how can CPAs/CPA firms mitigate
such threats?
4. What are the similarities and differences in the application of the rules of
professional conduct in the AICPA with respect to internal accountants who are
CPAs and CPA-external auditors?
5. What steps should an auditor take when she suspects illegal acts have occurred at
a client entity?
6. Under what circumstances do you think it would be acceptable for a CPA to blow
the whistle on financial wrongdoing by a client? What steps should the CPA take
before carrying through with the whistle-blowing action?
7. Describe the steps to be taken by a staff accountant who has been told by his/her
supervisor to accelerate the recording of revenue into a period earlier than which
it should be recognized under GAAP.
8. Evaluate the ethics of tax standards in the Statements on Standards for Tax
Services with respect to the ethics standards discussed in chapters 1 and 2.
9. How do the PCAOB rules attempt to strengthen the obligations of a CPA to be
independent of clients and perform services objectively?
10. Rosie Mintz, CPA, has just started her own tax preparation firm. Describe the
ethics standards of behavior of the accounting profession that apply to Rosie’s
performance of professional services.
11. Steve Morris, CPA, performs audits for nonpublic clients. Describe the
independence obligations of Steve that apply to the performance of professional
services for audit clients.
12. A young man by the name of Mr. Hicks works at an accounting firm which has a
written ethics code of conduct. The code specifically outlines the duties and
obligations that every employee must follow without question. One of rules states
that every accountant should not lie under any circumstances.
Last week Mr. Hicks sent out a finalized tax return to the Wrong client. The
Wrong client called Mr. Hicks and informed him that he was sending the tax
return back to him overnight. Meanwhile the Right client called Mr. Hicks and
wanted to know where the tax return was. Mr. Hicks told the Right client that he
sent it to the wrong address and he will send out the return the next day. The
Right client was irritated and called the partner of the firm.
The partner scolded Mr. Hicks and wanted to know why he told the client he sent
the return to the wrong address. The partner said he should have told the client
that the return was in the 2nd partner review or some other excuse to cover up the
mistake. Mr. Hicks explained that the ethics code of conduct specifically states
that he should not lie under any circumstances and he was just following his
ethical duty. The partner grinned and told Mr. Hicks that the next time this
happens, he should consult with the partner first.
Using the ethical decision making model and ethical theories, justify the
positions of either the partner, Mr. Hicks or an alternative solution.
Ans: Hicks has attempted to be honest with the Right client but in an awkward
way. It sounds like the return was sent to an incorrect address, not another client.
Hicks should have spoken to the partner to get some advice before responding to
the Right client. He has not exercised due care in his actions. Perhaps Hicks was
Utilitarianism can be used to support the partner’s position in that the benefits of
deceiving the Right client for a short while, including holding on to the client and
13. Sarah is an audit senior with Childs, Maxwell and Weaver, LLP. Sarah specializes
in auditing loan loss reserve for financial institution clients. This current year she
has noticed that two of her financial institution clients in town have written loans
off to a loan customer, Mr. T (fictional name to protect the guilty). Mr. T is well
known in town as a highly successful real estate developer and businessman with
many different business dealings. As Sarah is auditing her third financial
institution client in town, she notices that the bank has loans of $3.5 million
outstanding to Mr. T. The current loan loss reserve could not cover the losses on
Mr. T’s loans. Sarah has recommended a significant increase to the loan loss
reserve account. The client will not discuss increasing the loan loss reserve. Ms.
Childs, senior partner on the audit, wants to know how the audit firm can justify
the increase loan loss reserve account. What can and should Sarah disclose about
Mr. T?
Ans: This short case is about confidentiality and particularly what is learned from
one audit that could affect another audit. In the Fund of Funds case in the chapter,
the judged ruled an auditor must use information obtained about one client in the
