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Auditing And Assurance Services 9th Edition Test Bank Messier
Test Bank Auditing and Assurance Services A Systematic Approach 9th
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Chapter 19
Professional Conduct, Independence, and Quality Control
True / False Questions
1. The term "ethics" refers to a person's propensity to follow the laws of the land.
True False
19-2
2. Professionalism refers to the conduct, aims, or qualities that characterize or mark a given
profession.
True False
3. When auditing a public company, a CPA must follow the auditing standards and Code of
Professional Conduct of the PCAOB.
True False
4. The AICPA Code of Professional Conduct deals mainly with behavior and actions of individual
auditors.
True False
5. The Principles of Professional Conduct set forth the minimum standards.
True False
6. Rules of Conduct are enforceable.
True False
7. Ethical rulings are enforceable.
True False
8. Principles are stated at a conceptual level, not a detailed level.
True False
9. The rules contained in Section 100 cover issues relating to independence, integrity, and auditing
standards.
True False
19-3
10. If an auditor is not independent of the client, it is unlikely that a user of financial statements will
place much reliance on the CPA's work.
True False
11. As per the Conceptual Framework for AICPA Independence Standards made effective in 2006, a
CPA is required to identify and assess the extent to which a threat to independence exists.
True False
12. An indirect financial interest is defined as a financial interest that is owned or is under the control
of an individual or entity.
True False
13. A financial interest is "beneficially owned" when an individual or entity is NOT the recorded owner
of the interest but has a right to some or all of the underlying benefits of ownership.
True False
14. If a CPA owns an insurance policy issued by an attest client, independence would be considered
impaired, even if the policy was purchased under the insurance company's normal terms and
procedures and does not offer an investment option.
True False
15. The independence standards issued by the PCAOB do not prohibit the provision of tax services to
an attest client.
True False
16. PCAOB rules require tax services provided by a public company auditor to be considered and
approved by the company's audit committee.
True False
19-4
Multiple Choice Questions
17. With respect to ethics, the rights-based approach
A. Suggests that auditors should always verify ownership of a client's material tangible assets.
B. Is primarily concerned with equity and impartiality.
C. Suggests that an individual's actions should not violate the rights of any individual.
D. Recognizes that decisions involve trade-offs between costs and benefits.
18. With respect to ethics, the utilitarian theory
A. Suggests that auditors should always verify ownership of a client's material tangible assets.
B. Is primarily concerned with equity and impartiality.
C. Suggests that an individual's actions should not violate the rights of any individual.
D. Recognizes that decisions involve trade-offs between costs and benefits.
19. With respect to ethics, the justice-based approach
A. Suggests that auditors should always verify ownership of a client's material tangible assets.
B. Is primarily concerned with equity and impartiality.
C. Suggests that an individual's actions should not violate the rights of any individual.
D. Recognizes that decisions involve trade-offs between costs and benefits.
20. In auditing a privately held entity, an auditor must follow the professional standards established by
all of the following except:
A. The AICPA's Auditing Standards Board.
B. The Professional Code of Conduct.
C. The Independence Standards Board.
D. The PCAOB.
19-5
21. Which of the following is not a Principle of Professional Conduct as defined by the Code of
Professional Conduct?
A. Integrity.
B. Due care.
C. Reporting.
D. Scope and nature of services.
22. What is meant by the Code of Professional Conduct's definition of "holding out"?
A. Informing a client about one's status as a CPA.
B. Withholding an audit report until the fee is paid.
C. Not sharing audit documentation with a successor auditor.
D. Not suggesting that management make an adjusting entry that is deemed immaterial.
23. For private companies, accounting firms are prohibited from providing
A. Outsourced internal audit services.
B. Audit services.
C. Review services.
D. None of these.
24. A violation of the profession's ethical standards would most likely have occurred when a CPA
A. Purchased a bookkeeping firm's practice of monthly write-ups for a percentage of fees received
over a three-year period.
B. Made arrangements with a bank to collect notes issued by a client in payment of fees due.
C. Named Smith formed a partnership with two other CPAs and used "Smith & Co." as the firm
name.
D. Issued an unqualified opinion on the 2011 financial statements when fees for the 2010 audit
were unpaid.
19-6
25. Which of the following is required for a firm to designate itself as a "Member of the American
Institute of Certified Public Accountants" on its letterhead?
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.
26. A violation of the profession's ethical standards would least likely have occurred when a CPA in
public practice
A. Used a records-retention agency to store the CPA's working papers and client records.
B. Served as an expert witness in a damage suit and received compensation based on the
amount awarded to the plaintiff.
C. Referred life insurance assignments to the CPA's spouse, who is a life insurance agent.
D. Failed to file his personal tax return.
27. According to the Code of Professional Conduct, which of the following individuals is not in a
position to influence an attest engagement (i.e., not a covered member)?
A. The office's managing partner who determines the compensation of the attest engagement
partner.
B. The office's IT expert, who consulted with the engagement partner regarding the client's IT
system.
C. The partner in another office in a nearby city who regularly plays golf with the engagement
partner.
D. The office's partner who monitors quality control over the attest engagement.
19-7
28. A CPA, while performing an audit, strives to achieve independence in appearance in order to
A. Reduce risk and liability.
B. Comply with the generally accepted standards of fieldwork.
C. Become independent in fact.
D. Maintain public confidence in the profession.
29. 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
A. Which owes the CPA audit fees for more than one year.
B. In which the CPA has a large active margin account.
C. In which the CPA's brother is the controller.
D. Which owes the CPA audit fees for current year services and has just filed a petition for
bankruptcy.
30. The SEC has issued independence rules that differ from the AICPA's in all of the following areas
except:
A. Working paper documentation.
B. Provision of other professional services.
C. Human resource and compensation-related issues.
D. Required communication.
31. Which of the following is not an element of quality control as defined by Statement of Quality
Control Standards No. 8?
A. Monitoring.
B. Independence.
C. Human resources.
D. Relevant ethical requirements.
19-8
32. A basic objective of a CPA firm is to provide professional services that conform to professional
standards. Reasonable assurance of achieving this basic objective is provided through
A. Compliance with generally accepted reporting standards.
B. A system of quality control.
C. A system of peer review.
D. Continuing professional education.
33. The quality control standards are concerned primarily with
A. Actions of individual auditors.
B. A firm's monitoring of its practice.
C. Disciplinary actions against individual auditors.
D. Preventing legal action.
34. Which of the following bodies ordinarily would have the authority to suspend or revoke a CPA's
license to practice public accounting?
A. The SEC.
B. The AICPA.
C. A state CPA society.
D. A state board of accountancy.
19-9
35. Which of the following statements best describes why the profession of certified public
accountants has deemed it essential to promulgate a code of conduct and to establish a
mechanism for enforcing observance of the code?
A. Ethical standards are established so that users of accounting services know what to expect, the
professionals know what behaviors are acceptable, and overseers can take disciplinary action
when appropriate.
B. A prerequisite to success is the establishment of an ethical code that stresses primarily the
professional's responsibility to clients and colleagues.
C. A requirement of most state laws calls for the profession to establish a code of conduct.
D. An essential means of self-protection for the profession is the establishment of flexible ethical
standards by the profession.
36. A CPA's license to practice will ordinarily be suspended or revoked automatically for
A. Controlling the bookkeeping for a compilation client.
B. Conviction of willful failure to file personal income tax return.
C. Refusing to respond to an inquiry by the AICPA practice review committee.
D. Accepting compensation while honoring a subpoena to appear as an expert witness.
37. A CPA's retention of client records as a means of enforcing payment of an overdue audit fee is an
action that is
A. Considered acceptable by the AICPA Code of Professional Conduct.
B. Ill-advised because it would impair the CPA's independence with respect to the client.
C. Considered discreditable to the profession.
D. A violation of generally accepted auditing standards.
19-10
38. Which of the following is allowable for a CPA?
A. A used car loan from a banking client where the client has a lien on the car.
B. An uncollateralized signature loan from a client.
C. Owning more than five percent of the outstanding shares of client stock in a retirement account.
D. The audit engagement partner serves on the client's audit committee.
39. 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 CPA firm and management engages this other firm. Under these circumstances
A. Jackson may request compensation from the other CPA firm for any professional services
rendered to it in connection with the engagement.
B. Jackson may accept a referral fee from the other CPA firm.
C. Jackson has violated the AICPA Code of Professional Conduct because of non-fulfillment of the
duty of performance.
D. Jackson's lack of competence should be construed to be a violation of generally accepted
auditing standards.
40. In which one of the following situations would a CPA be in violation of the AICPA Code of
Professional Conduct in determining a fee?
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 an estimate of the number of hours needed to complete the engagement by
auditors of various levels of experience.
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.
19-11
41. In connection with a lawsuit, a third party attempts to gain access to the auditor's working papers.
The client's defense of privileged communication will be successful only to the extent it is
protected by the
A. Auditor's acquiescence in use of this defense.
B. Common law.
C. AICPA Code of Professional Conduct.
D. State law.
42. The profession's ethical standards would most likely be considered to have been violated when
the CPA 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. CPA would not be independent.
B. Fee was a competitive bid.
C. Actual fee would be substantially higher.
D. Actual fee would be substantially lower than the fees charged by other CPAs for comparable
services.
43. According to the ethical standards of the profession, which of the following acts is generally
prohibited?
A. Issuing a modified report explaining a failure to follow a governmental regulatory agency's
standards when conducting an attest service for a client.
B. Revealing confidential client information during a quality review of a professional practice by a
team from the state CPA society.
C. Accepting a contingent fee for representing a client in an examination of the client's federal tax
return by an IRS agent.
D. Retaining client records after an engagement is terminated prior to completion and the client
has demanded its return.
19-12
44. According to the ethical standards of the profession, which of the following acts is generally
prohibited?
A. Purchasing a product from a third party and reselling it to a client.
B. Writing a financial management newsletter promoted and sold by a publishing company.
C. Accepting a commission for recommending a product to an audit client.
D. Accepting engagements obtained through the efforts of third parties.
45. In which of the following circumstances would a CPA who audits XM Corporation lack
independence?
A. The CPA and XM's president are both on the board of directors of COD Corporation.
B. The CPA and XM's president each owns 25 percent of FOB Corporation, a closely-held
company.
C. The CPA has an automobile loan from XM, which is a savings and loan organization and the
loan is collateralized by the automobile.
D. The CPA reduced XM's usual audit fee by 40 percent because XM's financial condition was
unfavorable.
46. Mavis, CPA, has audited the financial statements of South Bay Sales Incorporated for several
years and had always been paid promptly for services rendered. Last year's audit invoices have
not been paid because South Bay is experiencing cash flow difficulties and the current year's audit
is scheduled to commence in one week. With respect to the past due audit fees, Mavis should
A. Perform the scheduled audit and allow South Bay to pay when the cash flow difficulties are
alleviated.
B. Perform the scheduled audit only after arranging a definite payment schedule and securing
notes signed by South Bay.
C. Inform South Bay's management that the past due audit fees are considered an impairment of
auditor independence.
D. Inform South Bay's management that the past due audit fees may be considered a loan on
which interest must be imputed for financial statement purposes.
19-13
47. 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. Restaurant where the CPA dines frequently.
D. Company in which the CPA's private investment club owns a one-tenth interest.
48. A CPA firm's personnel partner periodically studies the CPA firm's personnel advancement
experience to ascertain whether the individuals who were assigned increased degrees of
responsibility met predetermined criteria. This is evidence of the CPA firm's adherence to
prescribed standards of
A. Quality control.
B. Due professional care.
C. Supervision and review.
D. Fieldwork.
49. A CPA firm would be reasonably assured of meeting its overall responsibility to provide services
that conform with professional standards by
A. Adhering to generally accepted accounting principles.
B. Implementing an appropriate system of quality control.
C. Joining professional societies that enforce ethical conduct.
D. Maintaining an attitude of independence in its engagements.
19-14
50. Which of the following is an element of a CPA firm's quality control system that should be
considered in establishing its quality control policies and procedures?
A. Using the audit risk model.
B. Using statistical sampling techniques.
C. Assigning personnel to engagements.
D. Considering audit risk and materiality.
51. What is the primary purpose of the acceptance and continuance of client relationships and specific
engagements element of quality control?
A. Guarantee that firms do not associate with clients whose management lacks integrity.
B. Provide reasonable assurance that firms do not associate with clients whose management
lacks integrity.
C. Guarantee that firms will not be sued as a result of association with a client.
D. Provide reasonable assurance that firms will not be sued as a result of association with a client.
52. In order to achieve effective quality control, a firm of independent auditors should establish
policies and procedures for
A. Determining the minimum procedures necessary for unaudited financial statements.
B. Setting the scope of audit work.
C. Deciding whether to accept or continue a client.
D. Setting the scope of internal control study and evaluation.
53. Within the context of quality control, the primary purpose of continuing professional education and
training activities is to enable a CPA firm to provide personnel within the firm with
A. Technical training that ensures proficiency as an auditor.
B. Opportunities for career advancement outside the accounting firm.
C. Knowledge required to fulfill assigned responsibilities.
D. Knowledge required to perform a peer review.
19-15
54. A CPA firm evaluates its personnel advancement experience to ascertain whether individuals
assigned to increased degrees of responsibility meet predetermined criteria. This policy is
evidence of the firm's adherence to which of the following prescribed standards?
A. Professional ethics.
B. Supervision and review.
C. Accounting and review services.
D. Quality control.
55. The primary purpose of establishing quality control policies and procedures for deciding whether
to accept a new client is to
A. Enable the CPA firm to attest to the reliability of the client.
B. Satisfy the CPA firm's duty to the public concerning the acceptance of new clients.
C. Minimize the likelihood of association with clients whose management lacks integrity.
D. Anticipate before performing any fieldwork whether an unqualified opinion can be expressed.
56. Following the issuance of a PCAOB draft report, how many days does the CPA firm have to
respond to accusations?
A. 10 days.
B. 30 days.
C. 50 days.
D. 90 days.
19-16
57. A violation of the profession's ethical standards would most likely occur when a CPA who
A. Is also admitted to the Bar represents on letterhead to be both an attorney and a CPA.
B. Writes a newsletter on financial management also permits a publishing company to solicit
subscriptions by direct mail.
C. Is controller of a bank permits the bank to use the controller's CPA title in the listing of officers
in its publications.
D. Refused to hire a new employee does so because the CPA deemed the candidate to be "too
old."
58. In determining estimates of fees, an auditor may take into account each of the following, except
the:
A. Value of the service to the client.
B. Degree of responsibility assumed by undertaking the engagement.
C. Skills required to perform the service.
D. Attainment of specific findings.
59. An auditor is about to commence a recurring annual audit engagement. The continuing auditor's
independence would ordinarily be considered to be impaired if the prior year's audit fee
A. Was unusually large.
B. Has not been paid and will not be paid for at least twelve months.
C. Has not been paid and the client has filed a voluntary petition for bankruptcy.
D. Was renegotiated during the prior year audit based on the need for expanded testing.
19-17
60. In which of the following circumstances would a CPA be bound by ethics to refrain from disclosing
any confidential information obtained during the course of 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 requested information.
C. Confidential client information is requested 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.
61. Under which of the following circumstances would the independence of a CPA be considered
impaired if the CPA, who also is an attorney, serves as auditor and provides legal services to the
same client?
A. When the CPA, as legal agent, consummates a business acquisition for the client.
B. When the CPA's audit fees and legal fees are not billed separately.
C. When the CPA uses legal expertise to research a question of income tax law.
D. When the legal services consist of an analysis of the terms of an existing lease agreement.
62. According to the profession's ethical standards, a CPA would be considered independent in which
of the following instances?
A. A client leases part of an office building from the CPA, resulting in a material indirect financial
interest to the CPA.
B. The CPA has a material direct financial interest in a client, but transfers the interest into a blind
trust.
C. The CPA owns an office building and the mortgage on the building is guaranteed by a client.
D. The CPA belongs to a country club client in which membership requires an annual fee.
19-18
63. When auditing a public company, which of the following impairs an auditor's independence?
A. Offering audit services as well as preparing the tax return for the same client.
B. The auditor's spouse works in the assembly line of an audit client.
C. Lack of fee disclosure in the client's annual report.
D. The auditor has been a partner on the engagement for ten years.
Short Answer Questions
64. Why do professions establish codes of conduct that define ethical behaviors for members of the
profession?
65. Distinguish between the following theories of ethical behavior: utilitarianism, a rights-based
approach, and a justice-based approach.
19-19
66. Which professional and regulatory bodies establish the ethical and professional rules for auditors
of: (1) public companies and (2) private companies?
67. Listed below are definitions of the six Principles of Professional Conduct. For each, identify the
principle being defined.
a. 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.
b. Members should exercise sensitive professional and moral judgments in all their activities.
c. A member should be free of conflicts of interest in discharging professional responsibilities.
d. A member in public practice should observe the Principles of the Code of Professional Conduct
in determining the type and extent of services to be provided.
e. Members should accept the obligation to act in a way that will honor the public trust and
demonstrate commitment to professionalism.
f. To maintain and broaden public confidence, members should perform all professional
responsibilities with the highest sense of _____________.
19-20
68. Ms. Lembke is a partner for DTS, a CPA firm. She is the lead partner for the firm's largest client,
The Grey Elephant. Ms. Zadina, who works in the same office as Ms. Lembke, has a sister who is
the controller for The Grey Elephant. Because of potential independence issues, Ms. Zadina does
no work for The Grey Elephant. Ms. Zadina is being considered for promotion to partner. What
independence issues should Ms. Lembke consider before promoting Ms. Zadina?
69. The SEC's rules with respect to services provided by auditors are predicated on three basic
principles of auditor objectivity and independence. What are the three basic principles?
70. Identify the primary purposes of Rules 201-203 of the Rules of Conduct.
19-21
71. When can a CPA disclose confidential information without the client's consent?
Matching Questions
19-22
72. Match each term below with its definition as provided by the AICPA Rules of Conduct.
1. Partner
A proprietor, part owner, or any individual who
assumes the risks and benefits of firm ownership
or who is otherwise held out by the firm to be the
equivalent of any of the aforementioned ____
2. Practice of
public
accounting
All services performed by member while
holding out as a CPA ____
3. Attest
engagement
The performance for a client by a member or a
member's firm while holding out as CPA(s) of the
professional services of accounting, tax, personal
financial planning, litigation support services, and
those professional services for which standards
are promulgated by bodies designated by
Council ____
4. Professional
services
Any person or entity, other than the member's
employer, that engages a member or a member's
firm to perform professional services ____
5. Holding out
Examples include financial statement audits,
reviews, and examinations of prospective
financial information ____
6. Client
Any action initiated by a member that informs
others of his or her status as a CPA or AICPA-
accredited specialist ____
19-23
Chapter 19 Professional Conduct, Independence, and Quality Control
Answer Key
True / False Questions
1. The term "ethics" refers to a person's propensity to follow the laws of the land.
FALSE
AACSB: Ethics
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-01 Know the definitions and general importance of ethics and professionalism.
Topic: Ethics and Professional Conduct
2. Professionalism refers to the conduct, aims, or qualities that characterize or mark a given
profession.
TRUE
AACSB: Ethics
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-01 Know the definitions and general importance of ethics and professionalism.
Topic: Ethics and Professional Conduct
19-24
3. When auditing a public company, a CPA must follow the auditing standards and Code of
Professional Conduct of the PCAOB.
TRUE
AACSB: Ethics
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-03 Know how professional ethics standards for auditors have developed over time and the entities
involved.
Topic: Standards for Auditor Professionalism
4. The AICPA Code of Professional Conduct deals mainly with behavior and actions of individual
auditors.
TRUE
AACSB: Ethics
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-04 Understand the framework for the Code of Professional Conduct; including principles; rules; and
interpretations.
Topic: The AICPA Code of Professional Conduct: A Comprehensive Framework for Auditors
5. The Principles of Professional Conduct set forth the minimum standards.
FALSE
AACSB: Ethics
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-04 Understand the framework for the Code of Professional Conduct; including principles; rules; and
interpretations.
Topic: The AICPA Code of Professional Conduct: A Comprehensive Framework for Auditors
19-25
6. Rules of Conduct are enforceable.
TRUE
AACSB: Ethics
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-04 Understand the framework for the Code of Professional Conduct; including principles; rules; and
interpretations.
Topic: The AICPA Code of Professional Conduct: A Comprehensive Framework for Auditors
7. Ethical rulings are enforceable.
FALSE
AACSB: Ethics
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-04 Understand the framework for the Code of Professional Conduct; including principles; rules; and
interpretations.
Topic: The AICPA Code of Professional Conduct: A Comprehensive Framework for Auditors
8. Principles are stated at a conceptual level, not a detailed level.
TRUE
AACSB: Ethics
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-04 Understand the framework for the Code of Professional Conduct; including principles; rules; and
interpretations.
Topic: Principles of Professional Conduct
19-26
9. The rules contained in Section 100 cover issues relating to independence, integrity, and
auditing standards.
FALSE
AACSB: Ethics
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-04 Understand the framework for the Code of Professional Conduct; including principles; rules; and
interpretations.
Topic: Rules of Conduct
10. If an auditor is not independent of the client, it is unlikely that a user of financial statements will
place much reliance on the CPA's work.
TRUE
AACSB: Ethics
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 19-05 Acquire a working knowledge of the rules of conduct that apply to independence; integrity; and
objectivity.
Topic: Independence, Integrity, and Objectivity
11. As per the Conceptual Framework for AICPA Independence Standards made effective in 2006,
a CPA is required to identify and assess the extent to which a threat to independence exists.
TRUE
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-05 Acquire a working knowledge of the rules of conduct that apply to independence; integrity; and
objectivity.
Topic: Independence, Integrity, and Objectivity
19-27
12. An indirect financial interest is defined as a financial interest that is owned or is under the
control of an individual or entity.
FALSE
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-05 Acquire a working knowledge of the rules of conduct that apply to independence; integrity; and
objectivity.
Topic: Independence, Integrity, and Objectivity
13. A financial interest is "beneficially owned" when an individual or entity is NOT the recorded
owner of the interest but has a right to some or all of the underlying benefits of ownership.
TRUE
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Decision Making
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 19-05 Acquire a working knowledge of the rules of conduct that apply to independence; integrity; and
objectivity.
Topic: Independence, Integrity, and Objectivity
19-28
14. If a CPA owns an insurance policy issued by an attest client, independence would be
considered impaired, even if the policy was purchased under the insurance company's normal
terms and procedures and does not offer an investment option.
FALSE
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Decision Making
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 19-05 Acquire a working knowledge of the rules of conduct that apply to independence; integrity; and
objectivity.
Topic: Independence, Integrity, and Objectivity
15. The independence standards issued by the PCAOB do not prohibit the provision of tax services
to an attest client.
TRUE
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-06 Know the basic differences between the SEC's independence rules for public company auditors and
AICPA standards for audits of nonpublic entities.
Topic: SEC and PCAOB Independence Requirements for Audits of Public Companies
19-29
16. PCAOB rules require tax services provided by a public company auditor to be considered and
approved by the company's audit committee.
TRUE
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Decision Making
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-06 Know the basic differences between the SEC's independence rules for public company auditors and
AICPA standards for audits of nonpublic entities.
Topic: SEC and PCAOB Independence Requirements for Audits of Public Companies
Multiple Choice Questions
17. With respect to ethics, the rights-based approach
A. Suggests that auditors should always verify ownership of a client's material tangible assets.
B. Is primarily concerned with equity and impartiality.
C. Suggests that an individual's actions should not violate the rights of any individual.
D. Recognizes that decisions involve trade-offs between costs and benefits.
AACSB: Ethics
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-02 Be able to explain three basic theories of ethical behavior and understand how to deal with ethical
challenges through an example situation.
Topic: Theories of Ethical Behavior
19-30
18. With respect to ethics, the utilitarian theory
A. Suggests that auditors should always verify ownership of a client's material tangible assets.
B. Is primarily concerned with equity and impartiality.
C. Suggests that an individual's actions should not violate the rights of any individual.
D. Recognizes that decisions involve trade-offs between costs and benefits.
AACSB: Ethics
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-02 Be able to explain three basic theories of ethical behavior and understand how to deal with ethical
challenges through an example situation.
Topic: Theories of Ethical Behavior
19. With respect to ethics, the justice-based approach
A. Suggests that auditors should always verify ownership of a client's material tangible assets.
B. Is primarily concerned with equity and impartiality.
C. Suggests that an individual's actions should not violate the rights of any individual.
D. Recognizes that decisions involve trade-offs between costs and benefits.
AACSB: Ethics
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-02 Be able to explain three basic theories of ethical behavior and understand how to deal with ethical
challenges through an example situation.
Topic: Theories of Ethical Behavior
19-31
20. In auditing a privately held entity, an auditor must follow the professional standards established
by all of the following except:
A. The AICPA's Auditing Standards Board.
B. The Professional Code of Conduct.
C. The Independence Standards Board.
D. The PCAOB.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-03 Know how professional ethics standards for auditors have developed over time and the entities
involved.
Topic: Standards for Auditor Professionalism
21. Which of the following is not a Principle of Professional Conduct as defined by the Code of
Professional Conduct?
A. Integrity.
B. Due care.
C. Reporting.
D. Scope and nature of services.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-04 Understand the framework for the Code of Professional Conduct; including principles; rules; and
interpretations.
Topic: Principles of Professional Conduct
19-32
22. What is meant by the Code of Professional Conduct's definition of "holding out"?
A. Informing a client about one's status as a CPA.
B. Withholding an audit report until the fee is paid.
C. Not sharing audit documentation with a successor auditor.
D. Not suggesting that management make an adjusting entry that is deemed immaterial.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-04 Understand the framework for the Code of Professional Conduct; including principles; rules; and
interpretations.
Topic: Rules of Conduct
Topic: The AICPA Code of Professional Conduct: A Comprehensive Framework for Auditors
23. For private companies, accounting firms are prohibited from providing
A. Outsourced internal audit services.
B. Audit services.
C. Review services.
D. None of these.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Decision Making
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 19-05 Acquire a working knowledge of the rules of conduct that apply to independence; integrity; and
objectivity.
Topic: Independence, Integrity, and Objectivity
19-33
24. A violation of the profession's ethical standards would most likely have occurred when a CPA
A. Purchased a bookkeeping firm's practice of monthly write-ups for a percentage of fees
received over a three-year period.
B. Made arrangements with a bank to collect notes issued by a client in payment of fees due.
C. Named Smith formed a partnership with two other CPAs and used "Smith & Co." as the firm
name.
D. Issued an unqualified opinion on the 2011 financial statements when fees for the 2010 audit
were unpaid.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Decision Making
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 19-05 Acquire a working knowledge of the rules of conduct that apply to independence; integrity; and
objectivity.
Learning Objective: 19-07 Know the rules of conduct that apply to general standards and accounting principles; responsibilities
to clients; and other responsibilities and practices.
Topic: Independence, Integrity, and Objectivity
Topic: Responsibilities to Clients
19-34
25. Which of the following is required for a firm to designate itself as a "Member of the American
Institute of Certified Public Accountants" on its letterhead?
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.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-04 Understand the framework for the Code of Professional Conduct; including principles; rules; and
interpretations.
Learning Objective: 19-07 Know the rules of conduct that apply to general standards and accounting principles; responsibilities
to clients; and other responsibilities and practices.
Topic: Other Responsibilities and Practices
Topic: Principles of Professional Conduct
19-35
26. A violation of the profession's ethical standards would least likely have occurred when a CPA in
public practice
A. Used a records-retention agency to store the CPA's working papers and client records.
B. Served as an expert witness in a damage suit and received compensation based on the
amount awarded to the plaintiff.
C. Referred life insurance assignments to the CPA's spouse, who is a life insurance agent.
D. Failed to file his personal tax return.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Decision Making
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 19-04 Understand the framework for the Code of Professional Conduct; including principles; rules; and
interpretations.
Learning Objective: 19-07 Know the rules of conduct that apply to general standards and accounting principles; responsibilities
to clients; and other responsibilities and practices.
Topic: Other Responsibilities and Practices
Topic: Principles of Professional Conduct
19-36
27. According to the Code of Professional Conduct, which of the following individuals is not in a
position to influence an attest engagement (i.e., not a covered member)?
A. The office's managing partner who determines the compensation of the attest engagement
partner.
B. The office's IT expert, who consulted with the engagement partner regarding the client's IT
system.
C. The partner in another office in a nearby city who regularly plays golf with the engagement
partner.
D. The office's partner who monitors quality control over the attest engagement.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Decision Making
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 19-04 Understand the framework for the Code of Professional Conduct; including principles; rules; and
interpretations.
Topic: The AICPA Code of Professional Conduct: A Comprehensive Framework for Auditors
28. A CPA, while performing an audit, strives to achieve independence in appearance in order to
A. Reduce risk and liability.
B. Comply with the generally accepted standards of fieldwork.
C. Become independent in fact.
D. Maintain public confidence in the profession.
AACSB: Ethics
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 19-05 Acquire a working knowledge of the rules of conduct that apply to independence; integrity; and
objectivity.
Topic: Independence, Integrity, and Objectivity
19-37
29. 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
A. Which owes the CPA audit fees for more than one year.
B. In which the CPA has a large active margin account.
C. In which the CPA's brother is the controller.
D. Which owes the CPA audit fees for current year services and has just filed a petition for
bankruptcy.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Decision Making
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 19-05 Acquire a working knowledge of the rules of conduct that apply to independence; integrity; and
objectivity.
Topic: Independence, Integrity, and Objectivity
30. The SEC has issued independence rules that differ from the AICPA's in all of the following
areas except:
A. Working paper documentation.
B. Provision of other professional services.
C. Human resource and compensation-related issues.
D. Required communication.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-06 Know the basic differences between the SEC's independence rules for public company auditors and
AICPA standards for audits of nonpublic entities.
Topic: SEC and PCAOB Independence Requirements for Audits of Public Companies
19-38
31. Which of the following is not an element of quality control as defined by Statement of Quality
Control Standards No. 8?
A. Monitoring.
B. Independence.
C. Human resources.
D. Relevant ethical requirements.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-08 Be able to explain the definition and elements of a system of quality control and how the AICPA's
peer review program relates to quality control.
Topic: Elements of Quality Control
32. A basic objective of a CPA firm is to provide professional services that conform to professional
standards. Reasonable assurance of achieving this basic objective is provided through
A. Compliance with generally accepted reporting standards.
B. A system of quality control.
C. A system of peer review.
D. Continuing professional education.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-08 Be able to explain the definition and elements of a system of quality control and how the AICPA's
peer review program relates to quality control.
Topic: Quality Control Standards
19-39
33. The quality control standards are concerned primarily with
A. Actions of individual auditors.
B. A firm's monitoring of its practice.
C. Disciplinary actions against individual auditors.
D. Preventing legal action.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-08 Be able to explain the definition and elements of a system of quality control and how the AICPA's
peer review program relates to quality control.
Topic: Elements of Quality Control
Topic: Quality Control Standards
34. Which of the following bodies ordinarily would have the authority to suspend or revoke a CPA's
license to practice public accounting?
A. The SEC.
B. The AICPA.
C. A state CPA society.
D. A state board of accountancy.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 3 Hard
Learning Objective: 19-07 Know the rules of conduct that apply to general standards and accounting principles; responsibilities
to clients; and other responsibilities and practices.
Topic: Other Responsibilities and Practices
19-40
35. Which of the following statements best describes why the profession of certified public
accountants has deemed it essential to promulgate a code of conduct and to establish a
mechanism for enforcing observance of the code?
A. Ethical standards are established so that users of accounting services know what to expect,
the professionals know what behaviors are acceptable, and overseers can take disciplinary
action when appropriate.
B. A prerequisite to success is the establishment of an ethical code that stresses primarily the
professional's responsibility to clients and colleagues.
C. A requirement of most state laws calls for the profession to establish a code of conduct.
D. An essential means of self-protection for the profession is the establishment of flexible
ethical standards by the profession.
AACSB: Ethics
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 19-01 Know the definitions and general importance of ethics and professionalism.
Topic: Ethics and Professional Conduct
19-41
36. A CPA's license to practice will ordinarily be suspended or revoked automatically for
A. Controlling the bookkeeping for a compilation client.
B. Conviction of willful failure to file personal income tax return.
C. Refusing to respond to an inquiry by the AICPA practice review committee.
D. Accepting compensation while honoring a subpoena to appear as an expert witness.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Decision Making
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 19-04 Understand the framework for the Code of Professional Conduct; including principles; rules; and
interpretations.
Learning Objective: 19-07 Know the rules of conduct that apply to general standards and accounting principles; responsibilities
to clients; and other responsibilities and practices.
Topic: Other Responsibilities and Practices
Topic: Principles of Professional Conduct
Topic: Rules of Conduct
37. A CPA's retention of client records as a means of enforcing payment of an overdue audit fee is
an action that is
A. Considered acceptable by the AICPA Code of Professional Conduct.
B. Ill-advised because it would impair the CPA's independence with respect to the client.
C. Considered discreditable to the profession.
D. A violation of generally accepted auditing standards.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Decision Making
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 19-07 Know the rules of conduct that apply to general standards and accounting principles; responsibilities
to clients; and other responsibilities and practices.
Topic: Other Responsibilities and Practices
19-42
38. Which of the following is allowable for a CPA?
A. A used car loan from a banking client where the client has a lien on the car.
B. An uncollateralized signature loan from a client.
C. Owning more than five percent of the outstanding shares of client stock in a retirement
account.
D. The audit engagement partner serves on the client's audit committee.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Decision Making
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 19-04 Understand the framework for the Code of Professional Conduct; including principles; rules; and
interpretations.
Learning Objective: 19-05 Acquire a working knowledge of the rules of conduct that apply to independence; integrity; and
objectivity.
Topic: Independence, Integrity, and Objectivity
Topic: Principles of Professional Conduct
19-43
39. 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 CPA firm and management engages this other firm. Under these circumstances
A. Jackson may request compensation from the other CPA firm for any professional services
rendered to it in connection with the engagement.
B. Jackson may accept a referral fee from the other CPA firm.
C. Jackson has violated the AICPA Code of Professional Conduct because of non-fulfillment of
the duty of performance.
D. Jackson's lack of competence should be construed to be a violation of generally accepted
auditing standards.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Decision Making
Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 19-04 Understand the framework for the Code of Professional Conduct; including principles; rules; and
interpretations.
Learning Objective: 19-07 Know the rules of conduct that apply to general standards and accounting principles; responsibilities
to clients; and other responsibilities and practices.
Topic: General Standards and Accounting Principles
Topic: Principles of Professional Conduct
19-44
40. In which one of the following situations would a CPA be in violation of the AICPA Code of
Professional Conduct in determining a fee?
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 an estimate of the number of hours needed to complete the engagement by
auditors of various levels of experience.
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.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Decision Making
Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 19-07 Know the rules of conduct that apply to general standards and accounting principles; responsibilities
to clients; and other responsibilities and practices.
Topic: Responsibilities to Clients
19-45
41. In connection with a lawsuit, a third party attempts to gain access to the auditor's working
papers. The client's defense of privileged communication will be successful only to the extent it
is protected by the
A. Auditor's acquiescence in use of this defense.
B. Common law.
C. AICPA Code of Professional Conduct.
D. State law.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Decision Making
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-04 Understand the framework for the Code of Professional Conduct; including principles; rules; and
interpretations.
Learning Objective: 19-07 Know the rules of conduct that apply to general standards and accounting principles; responsibilities
to clients; and other responsibilities and practices.
Topic: Principles of Professional Conduct
Topic: Responsibilities to Clients
19-46
42. The profession's ethical standards would most likely be considered to have been violated when
the CPA 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. CPA would not be independent.
B. Fee was a competitive bid.
C. Actual fee would be substantially higher.
D. Actual fee would be substantially lower than the fees charged by other CPAs for
comparable services.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 19-04 Understand the framework for the Code of Professional Conduct; including principles; rules; and
interpretations.
Learning Objective: 19-07 Know the rules of conduct that apply to general standards and accounting principles; responsibilities
to clients; and other responsibilities and practices.
Topic: Principles of Professional Conduct
Topic: Responsibilities to Clients
19-47
43. According to the ethical standards of the profession, which of the following acts is generally
prohibited?
A. Issuing a modified report explaining a failure to follow a governmental regulatory agency's
standards when conducting an attest service for a client.
B. Revealing confidential client information during a quality review of a professional practice by
a team from the state CPA society.
C. Accepting a contingent fee for representing a client in an examination of the client's federal
tax return by an IRS agent.
D. Retaining client records after an engagement is terminated prior to completion and the
client has demanded its return.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Decision Making
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 19-04 Understand the framework for the Code of Professional Conduct; including principles; rules; and
interpretations.
Learning Objective: 19-07 Know the rules of conduct that apply to general standards and accounting principles; responsibilities
to clients; and other responsibilities and practices.
Topic: Other Responsibilities and Practices
Topic: Principles of Professional Conduct
Topic: Responsibilities to Clients
19-48
44. According to the ethical standards of the profession, which of the following acts is generally
prohibited?
A. Purchasing a product from a third party and reselling it to a client.
B. Writing a financial management newsletter promoted and sold by a publishing company.
C. Accepting a commission for recommending a product to an audit client.
D. Accepting engagements obtained through the efforts of third parties.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Decision Making
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 19-04 Understand the framework for the Code of Professional Conduct; including principles; rules; and
interpretations.
Learning Objective: 19-07 Know the rules of conduct that apply to general standards and accounting principles; responsibilities
to clients; and other responsibilities and practices.
Topic: Other Responsibilities and Practices
Topic: Principles of Professional Conduct
19-49
45. In which of the following circumstances would a CPA who audits XM Corporation lack
independence?
A. The CPA and XM's president are both on the board of directors of COD Corporation.
B. The CPA and XM's president each owns 25 percent of FOB Corporation, a closely-held
company.
C. The CPA has an automobile loan from XM, which is a savings and loan organization and
the loan is collateralized by the automobile.
D. The CPA reduced XM's usual audit fee by 40 percent because XM's financial condition was
unfavorable.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Decision Making
Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 19-05 Acquire a working knowledge of the rules of conduct that apply to independence; integrity; and
objectivity.
Topic: Independence, Integrity, and Objectivity
19-50
46. Mavis, CPA, has audited the financial statements of South Bay Sales Incorporated for several
years and had always been paid promptly for services rendered. Last year's audit invoices
have not been paid because South Bay is experiencing cash flow difficulties and the current
year's audit is scheduled to commence in one week. With respect to the past due audit fees,
Mavis should
A. Perform the scheduled audit and allow South Bay to pay when the cash flow difficulties are
alleviated.
B. Perform the scheduled audit only after arranging a definite payment schedule and securing
notes signed by South Bay.
C. Inform South Bay's management that the past due audit fees are considered an impairment
of auditor independence.
D. Inform South Bay's management that the past due audit fees may be considered a loan on
which interest must be imputed for financial statement purposes.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Decision Making
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 19-05 Acquire a working knowledge of the rules of conduct that apply to independence; integrity; and
objectivity.
Topic: Independence, Integrity, and Objectivity
19-51
47. 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. Restaurant where the CPA dines frequently.
D. Company in which the CPA's private investment club owns a one-tenth interest.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Decision Making
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 19-05 Acquire a working knowledge of the rules of conduct that apply to independence; integrity; and
objectivity.
Topic: Independence, Integrity, and Objectivity
48. A CPA firm's personnel partner periodically studies the CPA firm's personnel advancement
experience to ascertain whether the individuals who were assigned increased degrees of
responsibility met predetermined criteria. This is evidence of the CPA firm's adherence to
prescribed standards of
A. Quality control.
B. Due professional care.
C. Supervision and review.
D. Fieldwork.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Decision Making
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 19-08 Be able to explain the definition and elements of a system of quality control and how the AICPA's
peer review program relates to quality control.
Topic: Elements of Quality Control
19-52
49. A CPA firm would be reasonably assured of meeting its overall responsibility to provide
services that conform with professional standards by
A. Adhering to generally accepted accounting principles.
B. Implementing an appropriate system of quality control.
C. Joining professional societies that enforce ethical conduct.
D. Maintaining an attitude of independence in its engagements.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Decision Making
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 19-08 Be able to explain the definition and elements of a system of quality control and how the AICPA's
peer review program relates to quality control.
Topic: Elements of Quality Control
50. Which of the following is an element of a CPA firm's quality control system that should be
considered in establishing its quality control policies and procedures?
A. Using the audit risk model.
B. Using statistical sampling techniques.
C. Assigning personnel to engagements.
D. Considering audit risk and materiality.
AACSB: Ethics
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 19-08 Be able to explain the definition and elements of a system of quality control and how the AICPA's
peer review program relates to quality control.
Topic: Elements of Quality Control
19-53
51. What is the primary purpose of the acceptance and continuance of client relationships and
specific engagements element of quality control?
A. Guarantee that firms do not associate with clients whose management lacks integrity.
B. Provide reasonable assurance that firms do not associate with clients whose management
lacks integrity.
C. Guarantee that firms will not be sued as a result of association with a client.
D. Provide reasonable assurance that firms will not be sued as a result of association with a
client.
AACSB: Ethics
AICPA BB: Industry
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 19-08 Be able to explain the definition and elements of a system of quality control and how the AICPA's
peer review program relates to quality control.
Topic: Elements of Quality Control
52. In order to achieve effective quality control, a firm of independent auditors should establish
policies and procedures for
A. Determining the minimum procedures necessary for unaudited financial statements.
B. Setting the scope of audit work.
C. Deciding whether to accept or continue a client.
D. Setting the scope of internal control study and evaluation.
AACSB: Ethics
AICPA BB: Industry
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 19-08 Be able to explain the definition and elements of a system of quality control and how the AICPA's
peer review program relates to quality control.
Topic: Elements of Quality Control
19-54
53. Within the context of quality control, the primary purpose of continuing professional education
and training activities is to enable a CPA firm to provide personnel within the firm with
A. Technical training that ensures proficiency as an auditor.
B. Opportunities for career advancement outside the accounting firm.
C. Knowledge required to fulfill assigned responsibilities.
D. Knowledge required to perform a peer review.
AACSB: Ethics
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 19-08 Be able to explain the definition and elements of a system of quality control and how the AICPA's
peer review program relates to quality control.
Topic: Elements of Quality Control
54. A CPA firm evaluates its personnel advancement experience to ascertain whether individuals
assigned to increased degrees of responsibility meet predetermined criteria. This policy is
evidence of the firm's adherence to which of the following prescribed standards?
A. Professional ethics.
B. Supervision and review.
C. Accounting and review services.
D. Quality control.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Decision Making
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 19-08 Be able to explain the definition and elements of a system of quality control and how the AICPA's
peer review program relates to quality control.
Topic: Elements of Quality Control
19-55
55. The primary purpose of establishing quality control policies and procedures for deciding
whether to accept a new client is to
A. Enable the CPA firm to attest to the reliability of the client.
B. Satisfy the CPA firm's duty to the public concerning the acceptance of new clients.
C. Minimize the likelihood of association with clients whose management lacks integrity.
D. Anticipate before performing any fieldwork whether an unqualified opinion can be
expressed.
AACSB: Ethics
AICPA BB: Industry
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 19-08 Be able to explain the definition and elements of a system of quality control and how the AICPA's
peer review program relates to quality control.
Topic: Elements of Quality Control
56. Following the issuance of a PCAOB draft report, how many days does the CPA firm have to
respond to accusations?
A. 10 days.
B. 30 days.
C. 50 days.
D. 90 days.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 19-09 Be familiar with the PCAOB inspection program for accounting firms that audit public companies.
Topic: PCAOB Inspections of Registered Public Accounting Firms
19-56
57. A violation of the profession's ethical standards would most likely occur when a CPA who
A. Is also admitted to the Bar represents on letterhead to be both an attorney and a CPA.
B. Writes a newsletter on financial management also permits a publishing company to solicit
subscriptions by direct mail.
C. Is controller of a bank permits the bank to use the controller's CPA title in the listing of
officers in its publications.
D. Refused to hire a new employee does so because the CPA deemed the candidate to be
"too old."
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Decision Making
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 19-04 Understand the framework for the Code of Professional Conduct; including principles; rules; and
interpretations.
Learning Objective: 19-07 Know the rules of conduct that apply to general standards and accounting principles; responsibilities
to clients; and other responsibilities and practices.
Topic: Other Responsibilities and Practices
Topic: Principles of Professional Conduct
58. In determining estimates of fees, an auditor may take into account each of the following, except
the:
A. Value of the service to the client.
B. Degree of responsibility assumed by undertaking the engagement.
C. Skills required to perform the service.
D. Attainment of specific findings.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Decision Making
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 19-07 Know the rules of conduct that apply to general standards and accounting principles; responsibilities
to clients; and other responsibilities and practices.
Topic: Responsibilities to Clients
19-57
59. An auditor is about to commence a recurring annual audit engagement. The continuing
auditor's independence would ordinarily be considered to be impaired if the prior year's audit
fee
A. Was unusually large.
B. Has not been paid and will not be paid for at least twelve months.
C. Has not been paid and the client has filed a voluntary petition for bankruptcy.
D. Was renegotiated during the prior year audit based on the need for expanded testing.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Decision Making
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 19-04 Understand the framework for the Code of Professional Conduct; including principles; rules; and
interpretations.
Learning Objective: 19-05 Acquire a working knowledge of the rules of conduct that apply to independence; integrity; and
objectivity.
Topic: Independence, Integrity, and Objectivity
Topic: Principles of Professional Conduct
19-58
60. In which of the following circumstances would a CPA be bound by ethics to refrain from
disclosing any confidential information obtained during the course of 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 requested information.
C. Confidential client information is requested 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.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Decision Making
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 19-04 Understand the framework for the Code of Professional Conduct; including principles; rules; and
interpretations.
Learning Objective: 19-07 Know the rules of conduct that apply to general standards and accounting principles; responsibilities
to clients; and other responsibilities and practices.
Topic: Principles of Professional Conduct
Topic: Responsibilities to Clients
19-59
61. Under which of the following circumstances would the independence of a CPA be considered
impaired if the CPA, who also is an attorney, serves as auditor and provides legal services to
the same client?
A. When the CPA, as legal agent, consummates a business acquisition for the client.
B. When the CPA's audit fees and legal fees are not billed separately.
C. When the CPA uses legal expertise to research a question of income tax law.
D. When the legal services consist of an analysis of the terms of an existing lease agreement.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Decision Making
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-05 Acquire a working knowledge of the rules of conduct that apply to independence; integrity; and
objectivity.
Topic: Independence, Integrity, and Objectivity
62. According to the profession's ethical standards, a CPA would be considered independent in
which of the following instances?
A. A client leases part of an office building from the CPA, resulting in a material indirect
financial interest to the CPA.
B. The CPA has a material direct financial interest in a client, but transfers the interest into a
blind trust.
C. The CPA owns an office building and the mortgage on the building is guaranteed by a
client.
D. The CPA belongs to a country club client in which membership requires an annual fee.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Decision Making
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-05 Acquire a working knowledge of the rules of conduct that apply to independence; integrity; and
objectivity.
Topic: Independence, Integrity, and Objectivity
19-60
63. When auditing a public company, which of the following impairs an auditor's independence?
A. Offering audit services as well as preparing the tax return for the same client.
B. The auditor's spouse works in the assembly line of an audit client.
C. Lack of fee disclosure in the client's annual report.
D. The auditor has been a partner on the engagement for ten years.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Decision Making
Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 19-06 Know the basic differences between the SEC's independence rules for public company auditors and
AICPA standards for audits of nonpublic entities.
Topic: SEC and PCAOB Independence Requirements for Audits of Public Companies
Short Answer Questions
64. Why do professions establish codes of conduct that define ethical behaviors for members of
the profession?
These rules are established so that users of the professional services know what to expect
when they purchase such services. The rules also let members of the profession know what
behavior is acceptable and allow the profession to monitor the actions of its members and
apply discipline where appropriate.
AACSB: Ethics
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-01 Know the definitions and general importance of ethics and professionalism.
Topic: Ethics and Professional Conduct
19-61
65. Distinguish between the following theories of ethical behavior: utilitarianism, a rights-based
approach, and a justice-based approach.
Utilitarianism focuses on the consequences of a decision on all individuals involved, and not
just the decision maker. The ethical choice is the choice that provides the greatest good to the
greatest number of people. A rights-based approach focuses on respecting the rights of
individuals. The ethical choice is the choice that avoids violating the rights of any involved
individual. The justice-based approach is concerned with equity, fairness, and impartiality to all
involved. The ethical choice is the choice that fairly and equitably distributes resources among
the individuals or groups affected.
AACSB: Ethics
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 19-02 Be able to explain three basic theories of ethical behavior and understand how to deal with ethical
challenges through an example situation.
Topic: Theories of Ethical Behavior
19-62
66. Which professional and regulatory bodies establish the ethical and professional rules for
auditors of: (1) public companies and (2) private companies?
(1) The principles, rules, and regulations that govern ethics and professionalism for auditors of
public companies are established by the PCAOB (which were adopted from the AICPA), the
SEC, and the ISB.
(2) The rules for private companies are established by the AICPA and the ISB. Note that the
rules governing public company audits are more stringent in nature.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 19-03 Know how professional ethics standards for auditors have developed over time and the entities
involved.
Topic: Standards for Auditor Professionalism
19-63
67. Listed below are definitions of the six Principles of Professional Conduct. For each, identify the
principle being defined.
a. 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.
b. Members should exercise sensitive professional and moral judgments in all their activities.
c. A member should be free of conflicts of interest in discharging professional responsibilities.
d. A member in public practice should observe the Principles of the Code of Professional
Conduct in determining the type and extent of services to be provided.
e. Members should accept the obligation to act in a way that will honor the public trust and
demonstrate commitment to professionalism.
f. To maintain and broaden public confidence, members should perform all professional
responsibilities with the highest sense of _____________.
a. Due care.
b. Responsibilities.
c. Objectivity and Independence.
d. Scope and nature of services.
e. Public interest.
f. Integrity
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Decision Making
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 19-04 Understand the framework for the Code of Professional Conduct; including principles; rules; and
interpretations.
Topic: Principles of Professional Conduct
19-64
68. Ms. Lembke is a partner for DTS, a CPA firm. She is the lead partner for the firm's largest
client, The Grey Elephant. Ms. Zadina, who works in the same office as Ms. Lembke, has a
sister who is the controller for The Grey Elephant. Because of potential independence issues,
Ms. Zadina does no work for The Grey Elephant. Ms. Zadina is being considered for promotion
to partner. What independence issues should Ms. Lembke consider before promoting Ms.
Zadina?
Interpretation 101-1 of the AICPA Rules of Conduct states that all partners of a firm must be
independent of any attestation clients of the firm. Therefore, if Ms. Zadina is promoted to
partner, DTS would no longer be able to provide attestation services for The Grey Elephant. If
Ms. Zadina is promoted, she will have to move to another office or DTS will have to give up its
largest client.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Decision Making
Blooms: Analyze
Difficulty: 1 Easy
Learning Objective: 19-04 Understand the framework for the Code of Professional Conduct; including principles; rules; and
interpretations.
Learning Objective: 19-05 Acquire a working knowledge of the rules of conduct that apply to independence; integrity; and
objectivity.
Topic: Independence, Integrity, and Objectivity
Topic: Rules of Conduct
19-65
69. The SEC's rules with respect to services provided by auditors are predicated on three basic
principles of auditor objectivity and independence. What are the three basic principles?
The three basic principles are: (1) an auditor should not audit his or her own work, (2) an
auditor should not function in the role of management, and (3) an auditor should not serve in an
advocacy role for his or her client.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-06 Know the basic differences between the SEC's independence rules for public company auditors and
AICPA standards for audits of nonpublic entities.
Topic: SEC and PCAOB Independence Requirements for Audits of Public Companies
70. Identify the primary purposes of Rules 201-203 of the Rules of Conduct.
Rule 201 captures much of what is contained in the 10 generally accepted auditing standards
and codifies it as part of the Code. Rule 202 requires that members of the AICPA comply with
professional standards when performing professional services, whether or not they are
practicing in public accounting. Rule 203 was adopted to require compliance by CPAs with
GAAP.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 3 Hard
Learning Objective: 19-07 Know the rules of conduct that apply to general standards and accounting principles; responsibilities
to clients; and other responsibilities and practices.
Topic: General Standards and Accounting Principles
19-66
71. When can a CPA disclose confidential information without the client's consent?
A CPA can disclose confidential information without the client's consent (1) to meet disclosure
requirements for GAAP or GAAS; (2) to comply with a valid subpoena; (3) to allow a review of
a member's professional practice under the authority of the AICPA, a state CPA society, or a
statement board of accountancy; (4) to comply with an investigative or disciplinary proceeding;
and (5) to allow a review of a CPA's professional practice in conjunction with the purchase,
sale, or merger of the practice.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Decision Making
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 19-07 Know the rules of conduct that apply to general standards and accounting principles; responsibilities
to clients; and other responsibilities and practices.
Topic: Responsibilities to Clients
Matching Questions
19-67
72. Match each term below with its definition as provided by the AICPA Rules of Conduct.
1. Partner
A proprietor, part owner, or any individual who
assumes the risks and benefits of firm ownership
or who is otherwise held out by the firm to be the
equivalent of any of the aforementioned 1
2. Practice of
public
accounting
All services performed by member while
holding out as a CPA 4
3. Attest
engagement
The performance for a client by a member or a
member's firm while holding out as CPA(s) of the
professional services of accounting, tax, personal
financial planning, litigation support services, and
those professional services for which standards
are promulgated by bodies designated by Council 2
4. Professional
services
Any person or entity, other than the member's
employer, that engages a member or a member's
firm to perform professional services 6
5. Holding out
Examples include financial statement audits,
reviews, and examinations of prospective financial
information 3
6. Client
Any action initiated by a member that informs
others of his or her status as a CPA or AICPA-
accredited specialist 5
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Decision Making
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 19-04 Understand the framework for the Code of Professional Conduct; including principles; rules; and
interpretations.
Topic: Rules of Conduct
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