CHAPTER 19 MULTIPLE CHOICE c A client company has not paid its 2004 audit fees According to the AICPA Code of Professional Conduct, for the auditor to be considered independent with respect to the 2005 audit, the 2004 audit fees must be paid before the a 2004 report is issued b 2005 fieldwork is started c 2005 report is issued d 2006 fieldwork is started (AICPA ADAPTED) d Inclusion of which of the following in a promotional brochure published by a public accounting firm would be most likely to result in a violation of the AICPA rules of conduct? a Reprints of newspaper articles that praise the firm's expertise b Services offered and fees for such services, including hourly rates and fixed fees c Educational and professional attainments of partners d Testimonials and endorsements (AICPA ADAPTED) a According to the AICPA Code of Professional Conduct, a member who has a financial interest in a partnership that invests in a potential client is considered to have a An indirect financial interest in the client b A direct financial interest in the client c No financial interest in the client d A partial financial interest in the client (AICPA ADAPTED) a The AICPA Rules of Conduct will ordinarily be considered to have been violated when the member represents that specific consulting services will be performed for a stated fee and it is apparent at the time of the representation that the a Actual fee would be substantially higher b Actual fee would be substantially lower than the fees charged by other members for comparable services c Fee was a competitive bid d Member would not be independent (AICPA ADAPTED) d In which of the following instances would the independence of the CPA not be considered to be impaired? The CPA has been retained as the auditor of a brokerage firm Which owes the CPA audit fees for more than one year In which the CPA has a large active margin account In which the CPA's brother is the controller Which owes the CPA audit fees for services in the current year and has just filed a petition for bankruptcy (AICPA ADAPTED) a Pursuant to the AICPA rules of conduct, the auditor's responsibility to the profession is defined by The AICPA Code of Professional Conduct Federal laws governing licensed professionals who are involved in interstate commerce Statements on Auditing Standards The Bylaws of the AICPA (AICPA ADAPTED) 133 a In performing an audit, Jackson, CPA, discovers that the professional competence necessary for the engagement is lacking Jackson informs management of the situation and recommends another local firm, and management engages this other firm Under these circumstances a Jackson may request compensation from the other firm for any professional services rendered to it in connection with the engagement b Jackson may accept a referral fee from the other firm c Jackson has violated the AICPA Code of Professional Conduct because of nonfulfillment of the duty of performance d Jackson's lack of competence should be construed to be a violation of generally accepted auditing standards (AICPA ADAPTED) c In which of the following instances would the independence of the CPA not be considered to be impaired? The CPA has been retained as the auditor of a a Charitable organization in which an employee of the CPA serves as treasurer b Municipality in which the CPA owns $25,000 of the $2,500,000 indebtedness of the municipality c Cooperative apartment house in which the CPA owns an apartment and is not part of the management d Company in which the CPA's investment club owns a one-tenth interest (AICPA ADAPTED) d The AICPA Code of Professional Conduct recognizes that the reliance of the public, the government, and the financial community on sound financial reporting imposes particular obligations on CPAs The Code derives its authority from a Public laws enacted over the years b General acceptance of the Code by the financial community c Requirements of governmental regulatory agencies, such as the SEC d Bylaws of the AICPA (AICPA ADAPTED) c 10 Which of the following most completely describes how independence has been defined by the profession? a Performing an audit from the viewpoint of the public b Avoiding the appearance of significant interests in the affairs of an audit client c Possessing the ability to act with integrity and objectivity d Accepting responsibility to act professionally and in accordance with a professional code of ethics (AICPA ADAPTED) c 11 The appearance of independence of a CPA, or that CPA's firm, could be impaired if the CPA a Owns a unit in a cooperative apartment house where each unit has a vote in the cooperative, and the CPA, who does not participate in the management, has been retained as the auditor for the cooperative b Joins a trade association that is a client and serves in a nonmanagement capacity c Accepts a gift from a client d None of the above (AICPA ADAPTED) 134 c 12 An audit independence issue might be raised by the auditor's participation in management advisory services engagements Which of the following statements is most consistent with the profession's attitude toward this issue? a Information obtained as a result of a consulting engagement is confidential to that engagement and should not influence performance of the attest function b The decision as to loss of independence must be made by the client based on the facts of the particular case c The auditor should not make management decisions for an audit client d The auditor who is asked to review management decisions is also competent to make these decisions and can so without loss of independence (AICPA ADAPTED) a 13 The AICPA Code of Professional Conduct states, in part, that a CPA should maintain integrity and objectivity Objectivity in the Code refers to a CPA's ability a To maintain an impartial attitude on all matters that come under the CPA's review b To independently distinguish between accounting practices that are acceptable and those that are not c To be unyielding in all matters dealing with auditing procedures d To independently choose between alternate accounting principles and auditing standards (AICPA ADAPTED) c 14 The AICPA Code of Professional Conduct states that a CPA shall not disclose any confidential information obtained in the course of a professional engagement except with the consent of his or her client In which of the situations that follow would disclosure by a CPA be in violation of the Code? a Disclosing confidential information to properly discharge the CPA's responsibilities in accordance with the profession's standards b Disclosing confidential information in compliance with a subpoena issued by a court c Disclosing confidential information to another accountant interested in purchasing the CPA's practice d Disclosing confidential information in a review of the CPA's professional practice by a peer review team (AICPA ADAPTED) a 15 Which of the following fee arrangements is in violation of the AICPA Code of Professional Conduct? a A fee based on whether the CPA's report on the client's financial statements results in the approval of a bank loan b A fee based on the outcome of a bankruptcy proceeding c A fee based on the nature of the service rendered and the CPA's particular expertise instead of the actual time spent on the engagement d A fee based on the fee charged by the prior auditor (AICPA ADAPTED) a 16 a b c Which of the following is prohibited by the AICPA Code of Professional Conduct? Use of a firm name that indicates specialization Practice of public accounting in the form of a professional corporation Use of the partnership name for a limited period by one of the partners in a public accounting firm after the death or withdrawal of all other partners d Holding 10 of 1,000 outstanding shares as an investment in a commercial corporation that performs bookkeeping services (AICPA ADAPTED) 135 b 17 a b c d Which organizations operate to enforce ethical conduct among certified public accountants? The SEC and state boards of accountancy The AICPA, state societies of CPAs, and state boards of accountancy The AICPA, state societies of CPAs, and the SEC The National Association of State Boards of Accountancy a 18 Cases involving ethical misconduct reach the Joint Trial Board if a Both the AICPA or state society of CPAs concur on their findings, but not issue a joint administrative reprimand b The AICPA refers the case owing to its own backlog of ethics cases c The state board of accountancy disagrees with a ruling by either the AICPA or the state society of CPAs d The case has national implications d 19 a b c d The Principles of the AICPA's Code of Professional Conduct Are enforceable on AICPA members Derive their authority from state boards of accountancy Include the Code's Rules of Conduct Express each member's responsibilities to the public, to clients, and to colleagues in the profession d 20 a b c d Which of the following describes most completely how the profession defines independence? Performing an audit from the public's point of view Avoiding the appearance of a significant interest in an audit client's interests Resisting a client’s reluctance to reveal evidence Accepting responsibility to act professionally and in accordance with a professional Code of Conduct b 21 Which of the following publications does not qualify as a statement of generally accepted accounting principles under the Code of Professional Conduct? a Accounting interpretations issued by the FASB b Accounting interpretations issued by the AICPA c AICPA Accounting Research Bulletins d Statements of Financial Accounting Standards issued by the FASB c 22 Which of the following is required for a firm's letterhead to include “Member of the American Institute of Certified Public Accountants?” a At least one of the partners must be a member b The partners whose names appear in the firm name must be members c All partners must be members d The firm must be a dues paying member b 23 In which of the following circumstances would a CPA be bound to refrain from disclosing confidential information obtained during a professional engagement? a The CPA is issued a summons enforceable by a court order that orders the CPA to present confidential information b A major stockholder of a client company seeks accounting information from the CPA after management declined to disclose the information c Confidential client information is made available as part of a quality review of the CPA's practice by a review team authorized by the AICPA d An inquiry by a disciplinary body of a state CPA society requests confidential client information 136 b 24 Richard, CPA, performs accounting services for Norton Corporation Norton wishes to offer shares to the public and asks Richard to audit the financial statements Richard refers Norton to Cruz, CPA, who is more competent in the area of registration statements Cruz performs the audit of Norton's financial statements and subsequently thanks Richard for the referral by giving Richard a portion of the audit fee Richard accepts the fee Who, if anyone, has violated professional ethics? a Only Richard b Both Richard and Cruz c Only Cruz d Neither Richard nor Cruz d 25 The AICPA Code of Professional Conduct would be violated if a member accepted a fee for services and the fee was a Fixed by a public authority b Based on a price quotation submitted in competitive bidding c Based on the result of judicial proceedings d Payable after a specified finding was attained d 26 Inclusion of which of the following statements in a CPA's advertisement is not acceptable under the AICPA Code of Professional Conduct? a Paul Fall Certified Public Accountant Fluency in Spanish and French b Paul Fall Certified Public Accountant Tax Specialist c Paul Fall Certified Public Accountant Free Consultation d Paul Fall Certified Public Accountant Endorsed by the AICPA a 27 Which of the following is prohibited by the AICPA Code of Professional Conduct? a A firm that designates itself “Members of the AICPA” when one partner has been expelled from the AICPA b Practice of public accounting in the form of a professional corporation c Use of the partnership name for a limited period by one of the partners in a public accounting firm after the death or withdrawal of all other partners d Holding as an investment 10 of 1,000 outstanding shares in a commercial corporation that performs bookkeeping services SHORT ANSWER Name the four instances in which litigation would impair auditor independence Answer:  Litigation by management alleging deficiencies in audit work  Litigation by the auditor alleging management fraud or deceit 137  An expressed intent by management to commence litigation alleging deficiencies in audit work  Litigation unrelated to audit work but material nevertheless either to the firm’s or to the client’s financial statements Address the ways that the SEC judges independence in a relationship or service Answer: To judge independence, the SEC considers four general issues Whether a relationship or a service:  Creates a mutual or conflicting interest  Places the auditor in the position of auditing his or her own work  Results in the auditor acting as a client’s management or employee  Places the auditor in the position of acting as the client’s advocate Describe the purpose of Rule 302 as it pertains to AICPA members Answer: Rule 302 prohibits fee arrangements with audit and attest clients whereby no fee is paid unless a particular outcome is attained or the fee is contingent upon a particular outcome, the intent being to remove AICPA members from potentially compromising conflicts of interest Rule 302 offers several opportunities for AICPA members to enter into contingent fee arrangements with nonattest service clients Compare and contrast the successor auditor and the predecessor auditor Answer: A successor auditor is one who has accepted an engagement or been invited to submit a proposal, and places the burden on the successor to initiate communication with the predecessor auditor, the auditor precedes the successor auditor Describe the two methods of self-regulation that is used to monitor public accounting firm’s standards of quality control and quality review Answer: Today, self-regulation is achieved through two means:  Quality control – the internal policies and procedures a firm designs to assure consistent performance and achievement across engagements  Peer review/Quality review – an independent outside review of a firm’s quality control performed by practitioners not otherwise employed by the firm reviewed PROBLEMS For each of the following five elements of quality control you are required to define the element of quality control and also to give one example of quality control policies a Independence, Integrity, and Objectivity b Personnel Management 138 c Acceptance and Continuance of Clients d Engagement Performance e Monitoring Answer: Note - examples may vary among students Independence, Integrity, and Objectivity – Establish policies to provide reasonable assurance that all staff are independent of attest clients to the extent required by the AICPA Code of Professional Conduct  Example – Require that all staff identify attest clients in which they own securities Personnel Management – Establish policies for hiring, advancement, assigning personnel to engagements, and professional development  Example – Designate a staff member to assign personnel to engagements Base assignments on engagement needs and on staff career development Acceptance and Continuance of Clients – Establish policies to preclude accepting or continuing services for managements that lack integrity  Example – Outsource background checks for all proposed clients’ management Engagement Performance – Establish polices for planning, performing, supervising, reviewing, documenting, and communicating the results of each engagement  Example – Assign staff to review planning memos, working papers, and reports, and designate a consulting partner for each industry the firm serves Monitoring – Establish policies for monitoring compliance with the firm’s quality control policies and procedures  Example – Assign an assessment director to document quality control compliance Name and define the six Principles of Professional Conduct Answer: Responsibilities – In carrying out their responsibilities as professional, members should exercise sensitive professional and moral judgment in all other activities b The Public Interest – Members should accept the obligation to act in a way that will serve the public interest, honor the public trust, and demonstrate commitment to professionalism c Integrity – To maintain and broaden public confidence, members should perform all professional responsibilities with the highest sense of integrity d Objectivity and Independence – A member should maintain objectivity and be free of conflicts of interest in discharging professional responsibilities A member in public practice should be independent in fact and appearance when providing auditing and other attestation services e Due Care – A member should observe the profession’s technical and ethical standards, strive continually to improve competence and the quality of services, and discharge professional responsibility to the best of the member’s ability f Scope and Nature of Services – A member in public practice should observe the Code of Professional Conduct in determining the scope and nature of services to be provided a 139 140 ... acceptable and those that are not c To be unyielding in all matters dealing with auditing procedures d To independently choose between alternate accounting principles and auditing standards (AICPA... other attestation services e Due Care – A member should observe the profession’s technical and ethical standards, strive continually to improve competence and the quality of services, and discharge... Independence, Integrity, and Objectivity – Establish policies to provide reasonable assurance that all staff are independent of attest clients to the extent required by the AICPA Code of Professional