Professionalism and Professional – Complete Test Bank – Ch.2

Chapter 2

Professionalism and Professional Responsibilities

Question Type: True or False

The cornerstone of the public accounting profession is evidenced by the work done in the public interest by CPAs.

A. True

B. False

Both licensed tax preparers and CPA professionals have the right to sign tax returns.

A. True

B. False

A professional concerned for the public interest (CPI) is defined by their professional line of work or occupation.

A. True

B. False

The rules of AICPA Code of Professional Conduct are applicable to members in public practice only.

A. True

B. False

The rules of conduct of the AICPA Code of Professional Conduct establish minimum standards of ethical conduct in the performance of professional services.

A. True

B. False

CPAs must obtain their license from State Boards of Accountancy.

A. True

B. False

An adverse interest threat is a threat that a CPA will not act with objectivity because the CPA’s interests are opposed to the client’s interests.

A. True

B. False

Of the three basic types of safeguards, the first is the safeguards implemented by a client.

A. True

B. False

CPAs should evaluate identified threats individually only.

A. True

B. False

According to the integrity and objectivity rule, a member need not be free of conflict of interest.

A. True

B. False

The rule on integrity and objectivity applies to all services performed by CPAs.

A. True

B. False

Independence in appearance is avoiding potential conflicts of interest that can be observed by others.

A. True

B. False

Partners and managers with consultation, oversight, or review responsibilities related to the engagement are covered members.

A. True

B. False

A covered member can be a trustee of a trust or an executor of an estate who invests in an attest client.

A. True

B. False

The general standards of the AICPA Code of Professional Conduct can help study and understand the ethical behavior of CPAs.

A. True

B. False

The general standards of the AICPA Code of Professional Conduct apply only to CPAs performing attest engagements.

A. True

B. False

If a CPA is unable to gain sufficient competence, a CPA should suggest the engagement of a competent person to perform the needed professional service.

A. True

B. False

It is important for a client who is considering purchasing accounting software to know that their CPA is being paid a commission if the business purchases the software.

A. True

B. False

Rule 1.500 of the AICPA pertains to confidential information.

A. True

B. False

The auditor generally uses the due care defense in breach of contract suits involving negligence.

A. True

B. False

In the case of an embezzlement, the bonding company can bring suits against the CPA for failing to discover the fraud.

A. True

B. False

A due care defense is a primary defense against tort actions just as it constitutes a contributory negligence defense.

A. True

B. False

In legal defense, the defendant must establish that the plaintiff’s loss resulted in whole or in part from causes other than the false or misleading statements.

A. True

B. False

The defendant in a Section 18 suit must prove that he or she had knowledge of the false or misleading statement.

A. True

B. False

Only smaller class action lawsuits, which involve less than 50 people, can still be filed in a state court.

A. True

B. False

Question Type: Multiple choice

In defining a profession or professional, one common characteristic is _______.

• 1. concern for the public interest
  2. self-promotion
  3. effective marketing skills
  4. effective communication skills

Which group licenses CPAs?

• 1. The FASB
  2. The SEC
  3. The AICPA
  4. The State Boards of Accountancy

What must CPAs complete to achieve licensure?

• 1. An application, required education, and pass the CPA Exam.
  2. Required education, pass the CPA Exam, and requisite experience requirement.
  3. An application, finger prints, and pass the CPA Exam.
  4. A background check, drug test, and pass the CPA Exam.

Answer B, Taxonomy: Comprehensive, Difficulty: Easy, AICPA PC: Professional Behavior, AACSB: Ethics, Learning Objective: LO2.1, Solution: CPAs must have the required education, pass the exam, and possess the requisite experience.

There was public concern about professional auditing in the late 1990s and the 21^st century when about _______ of all public companies had to restate their earnings.

A. 8 percent

B. 2 percent

C. 15 percent

D. 30 percent

According to Chapter 2 regarding professionalism and professional responsibilities, CPI stands for _______.

• 1. commitment to professional integrity
  2. concern for public interest
  3. continuing professional interest
  4. classified professional intelligence

Interpretations provide additional guidance regarding the scope and applicability of the _______.

A. rules of conduct

B. standards

C. conceptual framework

D. principles

Which of the following components of the AICPA are enforceable?

A. Rules of conduct

B. Principles

C. Interpretations

D. None of the options is correct

The structure of the AICPA _______________ includes four major sections: preface, rules for members in public practice, rules for members in business, and rules for other members.

A. Code of Professional Conduct

B. Conceptual Framework

C. Independence Rules

D. Rules of Conduct

Which of the following provides guidance to all members of the AICPA with respect to performance of their professional responsibilities?

A. Code of Professional Conduct

B. Rules of Conduct

C. Principles

D. Interpretations

Which component of the AICPA’s Code of Professional Conduct expresses the basic tenets of ethical conduct and provides the framework for the rules that govern the performance of a member’s professional responsibilities?

• 1. Principles
  2. Rules of Conduct
  3. Interpretations
  4. General standards

Which component of the AICPA’s Code of Professional Conduct establishes minimum standards of acceptable conduct in the performance of professional services?

1. Principles
2. Rules of Conduct
3. Interpretations
4. General standards

Which component of the AICPA’s Code of Professional Conduct provides additional guidance regarding the scope and applicability of the rules of conduct?

• 1. Principles
  2. Rules of Conduct
  3. Interpretations
  4. General standards

The AICPA Code of Professional Conduct can be found online and is organized in four sections. Which section is first?

• 1. Part I on ethical rules.
  2. Preface applicable to all members.
  3. Introduction to the History of the Code of Conduct.
  4. Foreword about AICPA membership.

In the online version of the AICPA Code of Professional Conduct, what are used to make it easy to find related topics?

• 1. Summaries
  2. A series of hyperlinks
  3. Outlines
  4. Interpretations

Which section of the AICPA Code of Professional Conduct includes ethical rules for members in business?

• 1. Part I
  2. Part II
  3. Part III
  4. Some other section

Which section of the AICPA Code of Professional Conduct includes ethical rules for other members, like non-CPA members of the AICPA?

• 1. Part I
  2. Part II
  3. Part III
  4. Some other section

Answer C, Taxonomy: Knowledge, Difficulty: Hard, AICPA PC: Professional Behavior, AACSB: Ethics, Learning Objective: LO2.2, Solution: Part III of The Code includes ethical rules for other members.

Which section of the AICPA Code of Professional Conduct includes ethical rules for members in public practice?

• 1. Part I
  2. Part II
  3. Part III
  4. Some other section

Answer A, Taxonomy: Knowledge, Difficulty: Hard, AICPA PC: Professional Behavior, AACSB: Ethics, Learning Objective: LO2.2, Solution: Part I includes ethical rules for members in public practice.

Which component of the AICPA’s Code of Professional Conduct is enforceable wherein members must be prepared to justify departures?

• 1. Principles
  2. Rules of Conduct
  3. Commitments
  4. Standards

Which component of the AICPA’s Code of Professional Conduct requires that a member who departs from it shall have the burden of justifying the departure in a disciplinary hearing?

• 1. Principles
  2. Standards
  3. Commitments
  4. Interpretations

Answer D, Taxonomy: Comprehension, Difficulty: Easy, AICPA PC: Professional Behavior, AACSB: Ethics, Learning Objective: LO2.2, Solution: A member who departs from the interpretations shall have the burden of justifying the departure.

The AICPA is an accounting organization representing the profession and membership is _______.

• 1. non-voluntary
  2. voluntary
  3. free
  4. required

State Boards of Accountancy typically _______.

• 1. work separately from the AICPA on many professional issues
  2. work together with the AICPA on many professional issues
  3. have separate codes of conduct from the AICPA
  4. leave the task of licensure to the AICPA

When you pass the CPA exam and then seek licensure, you would apply to _______.

• 1. AICPA
  2. your university
  3. NASBA
  4. your State Board of Accountancy

What is a key element that best separates recognized professions from other occupations?

• 1. Large application fees
  2. A commitment to ethical behavior
  3. Certifications
  4. Specific schooling requirements

Although codes of ethics may be designed in part to encourage ideal behavior, they must also be _______.

• 1. practical and enforceable
  2. idealistic and above the law
  3. easy to remember and basic
  4. balanced and confidential

If a CFO of a company is dealing with an ethical situation, which section of the AICPA’s Code of Professional Ethics might he/she refer?

• 1. Part I
  2. Part II
  3. Part III
  4. Some other section

If a public practice CPA firm is concerned about the ethical nature of the firm’s advertising, which section of the AICPA’s Code of Professional Ethics would provide guidance?

• 1. Part I
  2. Part II
  3. Part III
  4. Some other section

To be meaningful, a code of ethics must strike a balance between being _______.

• 1. above the law but below the ideal
  2. below the law but above the ideal
  3. above the law but below practical
  4. below the law but above practical

In which section of the AICPA Code of Professional Conduct could you find the definitions to concepts mentioned in the Code?

• 1. Part I
  2. Part II
  3. Part III
  4. Preface applicable to all members

Which of the following is the threat that, due to a long or close relationship with a client, a CPA will become too sympathetic to the client’s interests or too accepting of the client’s work or product?

A. Familiarity threat

B. Adverse interest threat

C. Advocacy threat

D. Self-review threat

An advocacy threat is the threat that a CPA will ______.

A. promote a client’s interests

B. take on the role of client management

C. become too sympathetic to a client’s interests

D. not act with objectivity

A/an ________ threat exists if a CPA performs bookkeeping services for a private company client and that work needs to be evaluated by the same firm in the course of an attest engagement.

A. self-review

B. undue influence

C. adverse interest

D. advocacy

If a CPA is unable to implement effective safeguards, what should the CPA do?

A. Decline the engagement.

B. Proceed with the professional service.

C. Document the identified threats.

D. Evaluate the significance of the threat.

Rules of Professional Conduct and related interpretations are specifically written for _______.

• 1. FASB members
  2. Accountants in public practice
  3. Accountants in private practice
  4. SEC personnel

In the absence of a rule or an interpretation, a CPA could use which of the following to apply to the accounting for a certain situation?

• 1. The SEC rulings
  2. The Conceptual Framework
  3. An auditing textbook
  4. The IRS Code

A threat that is due to a long or close relationship is a(n) _______.

• 1. familiarity threat
  2. management participation threat
  3. self-interest threat
  4. self-review threat

A threat that a CPA will take on the role of client decision making or assume associated responsibilities is a(n) _______.

• 1. familiarity threat
  2. management participation threat
  3. self-interest threat
  4. self-review threat

A threat that a CPA will promote a client’s interests or position to the point that his or her objectivity is compromised is a(n) _______.

• 1. familiarity threat
  2. advocacy threat
  3. self-interest threat
  4. self-review threat

A threat that a CPA will not act with objectivity because the CPA’s interests are opposed to the client’s interests is a(n) _______.

• 1. familiarity threat
  2. advocacy threat
  3. self-interest threat
  4. adverse Interest Threat

A threat that a CPA could benefit, financially or otherwise, from an interest in, or relationship with, a client or persons associated with the client is a(n) _______.

• 1. familiarity threat
  2. management participation threat
  3. self-interest threat
  4. self-review threat

A threat that a CPA will not appropriately evaluate the results of a previous judgment made by, or service performed by, an individual in the CPA’s firm is a(n) _______.

• 1. familiarity threat
  2. advocacy threat
  3. self-interest threat
  4. self-review threat

A threat that a CPA will allow a third party to coerce his/her judgment about a client is known as a(n):

• 1. familiarity threat
  2. advocacy threat
  3. self-interest threat
  4. undue influence threat

The first step in the process to assist the CPA in making an ethical judgment is _______.

• 1. identify threats to compliance with rules
  2. evaluate the significance of the threat
  3. identify and apply safeguards
  4. evaluate the effectiveness of the safeguards

The last step in the process to assist the CPA in making an ethical judgment is _______.

• 1. document the threats and safeguards
  2. evaluate the significance of the threat
  3. identify and apply safeguards
  4. evaluate the effectiveness of the safeguards

The second step in the process to assist the CPA in making an ethical judgment is _______.

• 1. identify threats to compliance with rules
  2. evaluate the significance of the threat
  3. identify and apply safeguards
  4. evaluate the effectiveness of the safeguards

The third step in the process to assist the CPA in making an ethical judgment is _______.

• 1. identify threats to compliance with rules
  2. evaluate the significance of the threat
  3. identify and apply safeguards
  4. evaluate the effectiveness of the safeguards

The fourth step in the process to assist the CPA in making an ethical judgment is _______.

• 1. identify threats to compliance with rules
  2. evaluate the significance of the threat
  3. identify and apply safeguards
  4. evaluate the effectiveness of the safeguards

A CPA should judge his or her ethical conduct from the perspective of a _______.

• 1. reasonable and informed third party
  2. circuit court judge
  3. high school graduate
  4. IRS agent

What are the three types of safeguards against threats to a CPA’s compliance with the ethical rules of the profession?

• 1. Independence, legal liability, and accounting standards
  2. Self-control, internal compass, and future goals
  3. Safeguard of regulation, client implemented controls, and CPA firm policies
  4. Safeguard of standards, Acts of Congress, certification

Which of the following statements is true?

• 1. It is possible for a CPA firm to rely solely on safeguards implemented by the client to eliminate or reduce significant threats to an acceptable level.
  2. There are five basic safeguards to assist CPAs with threats to compliance with the accounting profession’s ethical rules.
  3. If a CPA concludes that threats are at an acceptable level after applying the identified safeguards, then the CPA may proceed with the professional service.
  4. To evaluate the significance of a threat, CPAs should evaluate identified threats in aggregate.

If the CPA is unable to implement effective safeguard to a threat of compliance with the accounting profession’s ethical rules, he/she should _______.

• 1. proceed with the professional service
  2. decline or terminate the engagement
  3. limit the engagement to all non-audit areas
  4. limit the engagement to only Federal taxation

At step 5 when a CPA confronts threats to ethical decision-making and the safeguards applied to reduce the threat, what is the suggested best practice?

• 1. Document the identified threats, document the safeguards applied, and document the CPA’s evaluation of the effectiveness of the safeguards.
  2. Immediately decline the engagement, terminate the contract, and contact the AICPA.
  3. Contact the FBI, tape all conversations with the client, then offer the engagement to a competitor.
  4. Increase the fee charged to absorb any risk, immediately conclude that the threats are at an acceptable level and proceed with an internal control audit.

A CPA works at a firm and also maintains a private practice as an expert witness for intellectual property cases. While at an audit client’s office, he overhears a telephone conversation about a patent dispute and offers his services. When he takes the expert witness job, this position creates what type of threat to his professional ethics?

• 1. Familiarity threat
  2. Advocacy threat
  3. Self-interest threat
  4. Self-review threat

According to the integrity and objectivity rule, in the performance of any professional service, a member shall not knowingly _______.

A. misrepresent facts

B. decentralize work to subordinates

C. omit a material fact

D. none of the above is correct

How does a small firm resolve the conflict of interest issue in a divorce case?

A. Provide tax services to only one of the two parties.

B. Using separate engagement teams in providing tax services to both parties.

C. Resign from the engagement.

D. They do not need to resolve the conflict of interest in the case of a divorce.

Which of the following issues arises when taxes are not properly distributed to the parties involved in a divorce case?

A. Conflict of interest

B. Misrepresentation of fact

C. Legal liability

D. Gross negligence

What should a CPA do if he/she concludes a difference of opinion with an audit supervisor regarding an on-going audit engagement may result in a material misrepresentation of fact or a violation of professional standards?

• 1. Quit the job.
  2. Discuss his or her concerns with the supervisor.
  3. Obtain more training.
  4. Search for a certification that focuses on material misrepresentations.

The rule on integrity and objectivity applies to _______.

• 1. all services performed by CPAs
  2. some services performed by CPAs
  3. only audit, services performed by CPAs
  4. only non-audit services performed by CPAs

What are the two common issues that arise and are related to integrity and objectivity?

• 1. Conflicts of interest and subordination of judgment.
  2. Ethical judgment and subjectivity.
  3. Independence and compliance
  4. Efficiency and effectiveness.

The subordination of judgment threat is at an acceptable level when _______.

• 1. the CPA concludes the position taken by the firm does not result in a material misrepresentation of fact or a violation of applicable standards, laws, or regulations
  2. the CPA does not have a difference of opinion related to the application of accounting principles, auditing standards, or other relevant professional standards
  3. the CPA safeguards the position by also providing tax services
  4. the CPA agrees to maintain confidentiality about the matter

When might self-interest, familiarity, and undue influence most likely threaten a CPA’s compliance with integrity and objectivity?

• 1. When a CPA and his or her supervisor, or another person within the CPA firm, have a difference of opinion related to the application of accounting principles
  2. When a CPA mistakenly applies the wrong auditing standard
  3. When a CPA pads his or her expense account
  4. When a CPA takes concerns about an engagement to another partner

A conflict of interest occurs when a CPA _______.

• 1. performs both tax and bookkeeping services for the same client
  2. performs a professional service related to a particular matter involving two or more clients whose interests, with respect to that matter, are in conflict
  3. represents a client in a divorce tax matter
  4. represents a client in any legal dispute

What safeguards do most CPA firms have against conflicts of interest and subordination of judgment?

• 1. Specific policies to prevent the firm from violating professional standards and to protect the CPA.
  2. Monetary settlements for severance pay to the CPA involved.
  3. Whistleblower rules and regulations.
  4. Human resource counseling and tip hotlines.

If after discussing a potential subordination of judgment threat with a supervisor, a CPA does not feel that the matter is resolved, what should he or she do?

• 1. Discuss his or her concerns with the appropriate higher level(s) of management within the CPA’s firm.
  2. Contact the AICPA about the problem.
  3. Immediately ask HR to reassign him or her.
  4. Start looking for a new position at another firm.

In a small CPA firm, if the firm provides tax services to both parties who subsequently begin divorce proceedings, it is customary to do what?

• 1. Resign providing tax services to one of the two parties in a divorce to remain free of any conflict of interest.
  2. Use separate engagement teams in providing tax services to the husband and to the wife, who are provided clear policies and procedures on maintaining confidentiality.
  3. Engage in a background check on both parties.
  4. Provide only consulting services to both parties.

A committee of the board of directors responsible for oversight of internal controls, financial reporting and disclosure in the financial statements, regulatory compliance, and the company’s independent auditors is/are called (a/an) ________.

A. audit committee

B. covered members

C. executors

D. dependents

Interpretation 1.295 indicates that before performing nonattest services, the CPA should establish and document in writing an understanding with the client regarding ______.

A. any limitations of the engagement, only

B. the objectives of the engagement and the services to be performed, only

C. the services to be performed, only

D. the objectives of the engagement, the services to be performed, and any limitations of the engagement

As a general rule, professional employees in a CPA firm who are not covered members and their immediate family members cannot ______.

A. be a trustee, director, or officer of an attest client or of the client’s pension or profit-sharing trust

B. have a direct investment of more than 1% in an attest client

C. hold a non-key position with an attest client

D. have an indirect investment of more than 5% in an attest client

A ___________ is someone who prepares or supervises others involved in preparing the financial statements or material accounting records or someone who is involved in accounting decision making.

A. key person

B. covered member

C. trustee

D. immediate family member

SEC rules prohibit an audit firm from providing which of the following nonattest services to an audit client?

A. Actuarial services, only

B. Internal audit outsourcing and bookkeeping services, only

C. Bookkeeping and actuarial services, only

D. Internal audit outsourcing, bookkeeping, and actuarial services

Attest services do not include _______.

• 1. audits
  2. reviews under SSARs
  3. examinations, reviews and agreed-upon procedures under SSAE
  4. compilation reports of financial statements

Answer D, Taxonomy: Knowledge, Difficulty: Easy, AICPA PC: Professional Behavior, AACSB: Ethics, Learning Objective: LO2.5, Solution: Attest services do not include compilations.

“Independent in fact” is best defined as _______.

• 1. addressing potential conflicts of interest that can be observed or factually determined by others
  2. acting with integrity and objectivity
  3. acting in a way that is observable under the Rules of Conduct
  4. acting with independence and integrity

Being independent in appearance is best defined as _______.

• 1. addressing potential conflicts of interest that can be observed or factually determined by others
  2. acting with integrity and objectivity
  3. acting with independence and integrity
  4. disclosing some of the common threats that he or she faces to acting independently

Section 1.200 of the AICPA Code of Professional Conduct specifies a number of circumstances that can impair _______.

• 1. the appearance of independence to guide CPAs in observable aspects of ethical conduct
  2. the appearance of integrity regarding ethical conduct
  3. safeguards that prevent a lack of independence
  4. how to evaluate threats as an independent third-party

A covered member, under the independence rules in the AICPA Code of Professional Conduct, is best defined as a person in a position to _______.

• 1. potentially influence attest decisions or the outcome of an attest engagement
  2. potentially influence decisions or outcomes in non-audit services
  3. take on or influence a third-party position
  4. perform tax services that is both independent in fact and appearance

Which of the following statements is true?

• 1. A covered member can own one share of an attest client because it is immaterial.
  2. A covered member cannot own a mutual fund which contains attest client shares, as long as the investment in the mutual fund is not material to the covered member.
  3. A covered member can be an executor of an estate, which invests in an attest client, as long as the investment is not material.
  4. A CPA firm as an entity is prohibited from the same activities as a covered member of the firm.

Which of the following activities is not a prohibited activity that impairs independence?

• 1. A direct investment in the attest client
  2. A joint, closely held investment with an attest client that is material to the covered member
  3. A material indirect investment in the attest client
  4. Having a home mortgage from a bank who is an attest client

When can a spouse that works for an attestation client still participate in an employee benefit plan that includes employee stock ownership plans or employee stock option plans?

• 1. There are no restrictions.
  2. when the benefits are offered equitably to all similar employees
  3. When the benefits are offered equitably to a majority of similar employees
  4. As long as the CPA firm approves every stock-related plan

Which of the following standards refers to undertaking professional services that can be completed with the appropriate level of professional skill?

A. Professional Competence

B. Due Professional Care

C. Sufficient Relevant Data

D. Planning and Supervision

According to the due professional care standard, CPAs should exercise professional care expected of _______ in the performance of professional services.

A. other CPAs

B. covered members

C. CPAs involved in consulting services

D. a reasonable person

Which of the following general standards refers to adequately preparing for the engagement and providing the appropriate management oversight to the performance of professional services?

A. Planning and Supervision

B. Sufficient Relevant Data

C. Due Care

D. Audit Planning

The general standards in the AICPA Code of Professional Conduct do NOT include _______.

• 1. professional competence
  2. due professional care
  3. planning for materiality
  4. sufficient relevant data

The definition for professional competence is _______.

• 1. undertake only those professional services that the member or the member's firm can reasonably expect to be completed with professional competence
  2. exercise due professional care in the performance of professional services
  3. adequately plan and supervise the performance of professional services
  4. obtain sufficient relevant data to afford a reasonable basis for conclusions or recommendations in relation to any professional services performed

Which of the following standards is used for preparing financial statements with other accounting principles?

A. GAAP

B. GAAS

C. Rule 1.320 on Accounting Principles

D. Principles of the Code of Professional Conduct

Which of the following should auditors know in regard to potential lawsuits against them?

A. People who can sue them

B. Allegations made in lawsuits

C. Defenses they can use in court

D. All the options are correct.

What should CPAs clarify while preparing financial statements for small businesses?

A. The financial reporting framework

B. The conceptual framework

C. Their role in nonattest services

D. Their part in an engagement

The rule on fees and other types of remuneration address how many circumstances that are extremely important?

• 1. 1
  2. 2
  3. 3
  4. 4

What is the other name of the Securities Act of 1933?

A. The Truth in Securities Act

B. The Antifraud Provisions Act

C. The Foreign Corrupt Practices Act

D. The Private Securities Litigation Reform Act

_______ subjects auditors to penalties of fines or imprisonment or both.

A. Criminal liability

B. Proportionate liability

C. Diligence defense

D. Bookkeeping

Under Section 18(a) of the Securities Act of 1934, the plaintiff ______.

A. may be any person buying or selling the securities

B. does not have to prove the existence of a materially false or misleading statement

C. does not have to prove reliance on such a statement and damage resulting from such reliance

D. had no knowledge of the false or misleading statement

What is a due diligence defense?

• 1. An audit firm must show that it made a reasonable investigation, that the firm followed auditing standards, and accordingly had reasonable grounds to believe, and did believe, that the statements certified were true at the date of the statements and as of the time the registration statement became effective.
  2. Not having to prove reliance on the false or misleading statement or that the loss suffered was the proximate result of the statement if purchase was made before the issuance of an income statement covering a period of at least 12 months following the effective date of the registration statement.
  3. Basing a claim on an alleged materially false or misleading financial statement contained in the registration statement.
  4. Concluding that subsequent events review was in conformity with generally accepted auditing standards.

Question Type: Text Entry

The _______ was the act passed in 2002 after the public was dissatisfied with the quality of audits of public companies.

A. Sarbanes-Oxley Act

The _______ government grants a CPA license to those who pass the CPA exam and earn prescribed work experience.

A. state

A/an _______ is valued by the high level of skill rather than the concern for the public interest.

A. Expert Competitor | [EC Professional]

_______ are accountancy bodies involved in the licensing of CPAs.

A. State Boards of Accountancy

_______ are often referred to as “pros” because of their skill and level of expertise.

A. Professional athletes

Auditors try to achieve independence in appearance in order to _______.

A. maintain public confidence in the profession

_______ govern the performance of a member’s professional responsibilities.

A. Principles

_______ may be designed in part to encourage ideal behavior, they must also be both practical and enforceable.

A. Codes of ethics

A/an _______ threat is the threat that a CPA will take on the role of client management or otherwise assume management responsibilities.

A. management participation

If a CPA concludes that the threat is not at an acceptable level, the CPA should _______.

A. identify and apply safeguards

If a CPA concludes that threats are at an acceptable level after applying the identified safeguards, then the CPA may proceed with the________.

A. professional service

In a _______ CPA firm, appropriate safeguards might include the involvement of another firm.

A. small

The two common issues related to integrity and objectivity are _______and _______.

A. conflicts of interest

B. subordination of judgment

A _______ firm may safeguard conflict of interest using separate engagement teams in providing tax services to both parties in a divorce.

A. large

The subordination of judgment threat is at an acceptable level if the CPA concludes that the position taken by the firm does not result in a _______.

A. material misrepresentation of fact

If the investment in the mutual fund is material to the covered member, and the mutual fund owns any shares in an attest client, _______ is impaired.

A. independence

A ________ is in a position to potentially influence attest decisions or the outcome of an attest engagement.

A. covered member

An important issue for many spouses is their ability to participate in _______.

A. stock compensation plans

According to the general standards of the AICPA Code, a member shall comply with the standards of professional services and any interpretations thereof by bodies designated by _______.

A. council

If a tax practitioner does not have experience performing audits or reviews, he/she should refer the engagement to a _______.

A. qualified CPA

The general standards of the AICPA Code of Professional Conduct apply only to _______ in public practice.

A. CPA firms

A CPA should obtain _______ to afford a reasonable basis for conclusions or recommendations in relation to any professional services performed.

A. sufficient relevant data

Auditors have liability under _______ for addressing client requirements.

A. common law

Auditors have liability under _______ for addressing the requirements of third-party users of financial statements.

A. statutory law

The _______ rule does not preclude a CPA from initiating a complaint with the professional ethics division of the AICPA.

A. confidential client information

An individual or collective group who is not in privity with the parties to a contract is called a _______.

A. third party

The auditor’s _______ is vital in refuting charges for breach of contract and breach of duty in a tort action.

A. documentation

Anyone identified to the auditor by name prior to the audit who is a recipient of the auditor’s report is called a _______.

A. primary beneficiary

_______ refer(s) to unnamed third parties, such as creditors, stockholders, and potential investors, who use the auditor’s report.

A. Other beneficiaries

_______ arises when defendants who are not found to have “knowingly committed a violation” of the securities law are liable based on the defendant’s percentage of responsibility.

A. Proportionate liability

_______ is established by the state and federal legislative bodies and specifically addresses the auditor’s liability under certain circumstances.

A. Statutory law

A _______ is the defense wherein an audit firm shows that it had made a reasonable investigation, had followed auditing standards, and accordingly had reasonable grounds to believe that the statements certified were true at the date of the statements and true of the time the registration statement became effective.

A. due diligence defense

Question Type: Multiple choice multi select

Identify two possible threats that occur when a CPA and his or her supervisor have a difference of opinion related to the application of accounting principles, auditing standards, or other relevant professional standards?

A. Self-interest

B. Advocacy

C. Familiarity

D. Self-review

Question Type: Drop down

Match each of the threats below with the appropriate description.

A. Undue influence threat

||The threat that a CPA will subordinate his or her judgment to an individual associated with the client or a relevant third party.

B. Self-interest threat

||The threat that a CPA could benefit from an interest in, or relationship with, a client or persons associated with a client.

C. Management participation threat

||The threat that a CPA will take on the role of client leadership or assume such responsibilities.

D. Adverse interest threat

||The threat that a CPA will not act with objectivity because the CPA's interests are opposed to client interests.

Self-interest threat—the threat that a CPA could benefit from an interest in, or relationship with, a client or persons associated with a client.

Management participation threat—the threat that a CPA will take on the role of client leadership or assume such responsibilities.

Adverse interest threat—the threat that a CPA will not act with objectivity because the CPA's interests are opposed to client interests.

Match the following entities with the appropriate categories.

A. covered member

||member of the engagement team

B. executor of an estate

||key management position

C. nondependent children

||close relative

D. dependent member

||immediate family member

Question Type: Short Answer

Why do auditors try to achieve independence in appearance?

A. Auditors try to achieve independence in appearance in order to maintain public confidence in the profession.

Can a CPA who has never audited a commercial bank, audit the bank?

A. The CPA may accept the engagement to audit the commercial bank after attaining a suitable level of understanding of the transactions and accounting practices unique to commercial banking.

What is the conceptual difference between attestation standards and generally accepted auditing standards? 

A. Attestation standards provide a framework for the attest function beyond historical financial statements.

Darla Barker, CPA owns a small tax practice located in Ann Arbor, MI. Darla's family friend, Stephen Grey, owns a small security firm in Livonia, MI. Stephen's banker has decided that Stephen's company needs to submit audited financial statements in order to maintain Stephen's line of credit with the bank. Stephen emails Darla asking if she would be interested in performing the audit of his company. Stephen is on a tight deadline from the bank and would like the audited statements within 6 weeks. Darla's tax practice has never performed an audit for any client previously. Draft an email response from Darla to Stephen, referencing the appropriate section of the AICPA Code of Professional Conduct.

Solution: Students will submit different content here but the key points of their email responses should be to (1) thank Stephen for considering our firm, (2) respectively and politely decline the engagement, (3) explain why the engagement must be declined – we simply do not have the experience and knowledge necessary to complete the engagement within the required time frame, and (4) suggest another CPA who may be able to help Stephen.

The email response should reference the general standards: “A member shall comply with the following standards and with any interpretations thereof by bodies designated by Council:

• 1. Professional Competence. Undertake only those professional services that the member or the member's firm can reasonably expect to be completed with professional competence.
  2. Due Professional Care. Exercise due professional care in the performance of professional services.
  3. Planning and Supervision. Adequately plan and supervise the performance of professional services.
  4. Sufficient Relevant Data. Obtain sufficient relevant data to afford a reasonable basis for conclusions or recommendations in relation to any professional services performed.”
  • Issues a standard audit report when he or she has not made an audit in accordance with generally accepted auditing standards (GAAS).
  • Does not deliver the audit report by the agreed-upon date.
  • Violates the client’s confidential relationship.
  • Ordinary negligence - Failure to exercise the degree of care a person of ordinary prudence (a reasonable person) would exercise under the same circumstances.
  • Gross negligence - Failure to use even slight care in the circumstances.
  • Fraud -. Intentional deception, such as misrepresentation, concealment, or nondisclosure of a material fact, that results in injury to another. In some cases a distinction has been made between fraud and constructive fraud. Constructive fraud may be inferred from gross negligence or reckless disregard for the truth.
  • Ordinary negligence - Failure to exercise the degree of care a person of ordinary prudence (a reasonable person) would exercise under the same circumstances.
  • Gross negligence - Failure to use even slight care in the circumstances.
  • Fraud -. Intentional deception, such as misrepresentation, concealment, or nondisclosure of a material fact, that results in injury to another. In some cases a distinction has been made between fraud and constructive fraud. Constructive fraud may be inferred from gross negligence or reckless disregard for the truth.
  • May be any person acquiring securities described in the registration statement, whether or not he or she is a client of the auditor.
  • Must base the claim on an alleged materially false or misleading financial statement contained in the registration statement.
  • Does not have to prove reliance on the false or misleading statement or that the loss suffered was the proximate result of the statement if purchase was made before the issuance of an income statement covering a period of at least 12 months following the effective date of the registration statement.
  • Does not have to prove that the auditors were negligent or fraudulent in certifying the financial statements involved.
  • 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 reports
  • Actuarial services
  • Internal audit outsourcing services
  • Management functions or human resources
  • Broker or dealer, investment adviser, or investment banking services
  • Legal services and expert services unrelated to the audit
  • Any other service that the PCAOB determines, by regulation, is impermissible

Tim O'Neal, CEO of a public company, explains to you, his auditor, that he does not believe he is responsible for the fair presentation of his company's financial statements. Afterall, isn't that what he hired you for? Draft a response to Mr. O'Neal.

Solution: Specific student answers will vary but should address that management is responsible for the fair presentation of the financial statements and that the auditor is responsible for following GAAS and issuing an opinion on the fair presentation of the financial statements. Section 302 requires a public company’s CEO and CFO to prepare a statement to accompany the audit report to certify the “appropriateness of the financial statements and disclosures contained in the periodic report, and that those financial statements and disclosures fairly present, in all material respects, the operations and financial condition of the issuer.” It also creates a liability for the CEO and CFO who knowingly and intentionally make false certifications.