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(Answered) 0ROFESSIONAL%THICS4HE !gS#OMPREHENSIVE #OURSE PROFESSIONAL ETHICS: THE AICPA\'S COMPREHENSIVE COURSE BY CATHERINE R. ALLEN, CPA Notice to Readers...

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COMPREHENSIVE COURSE

 

 

 


BY CATHERINE R. ALLEN, CPA Notice to Readers
Professional Ethics: The AICPA’s Comprehensive Course is intended solely for use in
continuing professional education and not as a reference. It does not represent an official position
of the American Institute of Certified Public Accountants, and it is distributed with the
understanding that the author and publisher are not rendering legal, accounting, or other
professional services in the publication. This course is intended to be an overview of the topics
discussed within, and the author has made every attempt to verify the completeness and accuracy
of the information herein. However, neither the author nor publisher can guarantee the
applicability of the information found herein. If legal advice or other expert assistance is
required, the services of a competent professional should be sought.
You can qualify to earn free CPE through our pilot testing program.
If interested, please visit aicpa.org at http://apps.aicpa.org/secure/CPESurvey.aspx. © 2015–2016 American Institute of Certified Public Accountants, Inc. All rights reserved.
This work may not be copied or otherwise distributed without the express written permission of
the AICPA. For information about the procedure for requesting permission to make copies of
any part of this work, please email [email protected] with your request. Otherwise, written
requests should be mailed to the Permissions Department, AICPA, 220 Leigh Farm Road,
Durham, NC 27707-8110.
Course Code: 732319
PECOMP GS-0415-0B
Revised: August 2015 Use of Materials
This course manual accompanies all formats in which the course is offered, including self-study
text, self-study online, group study, in-firm, and other formats, as applicable. Specific
instructions for users of the various formats are included in this section.
Continuing Professional Education (CPE) is required for CPAs to maintain their professional
competence and provide quality professional services. CPAs are responsible for complying with
all applicable CPE requirements, rules, and regulations of state licensing bodies, other
governmental entities, membership associations, and other professional organizations or bodies.
Professional standards for CPE programs are issued jointly by the American Institute of Certified
Public Accountants (AICPA) and the National Association of State Boards of Accountancy
(NASBA) to provide a framework for the development, presentation, measurement, and
reporting of CPE programs. These standards are entitled Joint AICPA/NASBA Statement on
Standards for Continuing Professional Education Programs (CPE standards), and are available
as part of the AICPA’s Professional Standards three-volume set, either in paperback or as on
online subscription through the AICPA’s Online Professional Library.
Review Questions for Self-Study Participants
The CPE standards require that self-study programs include review questions (also known as
knowledge check questions) that provide feedback to both correct and incorrect responses. Note
that these questions are provided only as learning aids and do not constitute a final examination.
Requirements for Claiming and Receiving CPE Credit
CPE standards place responsibility on both the individual participant and the program sponsor to
maintain a record of attendance at a CPE program. CPAs who participate in only part of a CPE
program should only claim CPE credit for the portion that they attended or completed.
CPE participants must document their claims of CPE credit. Examples of acceptable evidence of
completion include:
x for group and independent study programs, a certificate or other verification supplied by
the CPE program sponsor.
x for self-study programs, a certificate supplied by the CPE program sponsor after
satisfactory completion of an examination.
Participants in group study and other live presentations will receive a completion certificate from
the program sponsor. CPE program sponsors are required to keep documentation on programs
for five years, including records of participation.
All self-study participants must complete the exam within one year of date of course purchase in
order to receive a certificate indicating satisfactory completion of the CPE program.
¾ When purchased as a self-study course in text format, the exam is located in the
Examination section at the end of the course manual. ¾ The course code number for both the self-study exam and the self-study evaluation can be
found in the Examination’s introductory material.
¾ Participants may either complete the self-study exam and evaluation online at
https://cpegrading.aicpa.org or use the paper answer sheet and evaluation forms
included with the course materials. Participants must provide the unique serial number
printed on the examination answer sheet. If using the paper forms, participants should
mail the original answer sheet and course evaluation form in the pre-addressed envelope.
Photocopies or faxes of the original forms are not acceptable. The paper grading process
averages five to seven business days from date of receipt. During peak reporting periods
(June, September, and December), the processing time may be 10 to 15 business days.
Self-study participants must achieve a minimum passing grade of at least 70 percent to
qualify for CPE credit.
o Upon achieving a passing grade, participants receive a certificate displaying the
number of CPE credits earned based on a 50-minute hour, in compliance with CPE
standards.
? If the exam is completed online, the completion certificate is provided online,
which may be printed or saved in .pdf format. Also, the grading system
maintains a transcript of the participants’ completed courses.
? If the answer key is mailed in, participants receive the completion certificate
in the mail.
o If a passing grade is not achieved, the participants are notified.
? If a passing grade is not achieved and the participant completed the exam
online, the grading system provides immediate online notification of the
score as well as instructions on how to re-take the exam. Participants who do
not pass the online exam within three attempts must mail in the examination
answer key.
? If a passing grade is not achieved and the participant mailed in the exam, the
participant is mailed a notification of the exam score and an answer sheet so
that the exam may be re-taken. Program Evaluations
The information accumulated from participant evaluation forms is an important element in our
continual efforts to provide high quality continuing education for the profession. Participants in
group study and other live presentations should return their evaluation forms prior to departing
their program sessions. Self-study participants should either mail the completed evaluation
form along with the examination answer sheet in the envelope provided, or complete the course
evaluation online. Your comments are very important to us.
Customer Service
For help and support, including information on refund claims and complaint resolutions, please
call AICPA Member Service at 1-888-777-7077, or visit the online Help page of the AICPA
Store at www.cpa2biz.com. TABLE OF CONTENTS
Overview ................................................................................................................Overview 1
Appendix ..............................................................................................................Overview 13
AICPA Code of Professional Conduct Principles of Professional Conduct .........Overview 13
Chapter 1 ............................................................................................................................. 1-1
Professional Ethics............................................................................................................... 1-1
The AICPA Code of Professional Conduct .................................................................................... 1-2
Structure of the Code..................................................................................................................... 1-3
Principles ........................................................................................................................................ 1-4
Rules of Conduct ............................................................................................................................ 1-6
Interpretations ................................................................................................................................ 1-7
Professional Conduct: Integrity ...................................................................................................... 1-8
Helping Hands Case Study ............................................................................................................. 1-9
Conceptual Framework ................................................................................................................ 1-16
Conflicts of Interest ...................................................................................................................... 1-17
Conflict of Interests Case Study ................................................................................................... 1-19
Professional Conduct: Competence and Due Care ..................................................................... 1-22
Competence and Due Care: The Promotion Case Study ............................................................ 1-24
Confidential Client Information .................................................................................................... 1-27
Acts Discreditable to the Profession ............................................................................................ 1-33
CPAs in Public Practice ................................................................................................................ 1-39
CPAs in Public Practice: Case Study ............................................................................................ 1-40
Questions to Consider and Lessons Learned............................................................................... 1-45
Copyright 2015–2016 AICPA • Unauthorized Copying Prohibited Table of Contents 1 Appendix A ........................................................................................................................ 1-47
Conceptual Framework for Members in Public Practice .................................................. 1-47
Appendix A ................................................................................................................................... 1-49 Appendix B ........................................................................................................................ 1-57
Conceptual Framework for Members in Business ............................................................ 1-57
Appendix B ................................................................................................................................... 1-59 Chapter 2 ............................................................................................................................. 2-1
Independence ...................................................................................................................... 2-1
AICPA Independence Standards and the Conceptual Framework................................................ 2-2
Definition of a Covered Member ................................................................................................... 2-4
Family Relationships........................................................................................................................ 2-9
Key Positions ................................................................................................................................. 2-10
Close Relatives .............................................................................................................................. 2-12
Attest Engagements ..................................................................................................................... 2-13
Financial Interests ......................................................................................................................... 2-15
Former Association With a Client ................................................................................................. 2-17
Affiliates of Attest Clients ............................................................................................................. 2-19
Loans To and From Clients ........................................................................................................... 2-20
Joint Closely Held Investments .................................................................................................... 2-23
Networks and Network Firms ....................................................................................................... 2-24
Nonattest Services ........................................................................................................................ 2-25
Other Relationships With Attest Clients....................................................................................... 2-34
Employment or Business Relationships ........................................................................................ 2-36
Fee Arrangements ........................................................................................................................ 2-38
Questions to Consider and Lessons Learned ............................................................................... 2-42 2 Table of Contents Copyright 2015–2016 AICPA • Unauthorized Copying Prohibited Appendix ........................................................................................................................... 2-43
Conceptual Framework for Independence ....................................................................... 2-43
Chapter 3 ............................................................................................................................. 3-1
SEC and PCAOB Independence Rules ................................................................................ 3-1
Overview of SEC and PCAOB Independence Rules ...................................................................... 3-2
Employment Relationships ............................................................................................................. 3-5
Affiliate of an Audit Client .............................................................................................................. 3-6
Financial Relationships ................................................................................................................... 3-7
Non-Audit Services ......................................................................................................................... 3-8
Business Relationships .................................................................................................................. 3-13
Other Rules ................................................................................................................................... 3-14
Other Matters ............................................................................................................................... 3-15
Communicating Independence Matters ...................................................................................... 3-17
Maintain Your Independence ....................................................................................................... 3-18
Questions to Consider and Lessons Learned............................................................................... 3-19 Chapter 4 ............................................................................................................................. 4-1
Independence Rules of Other Regulators........................................................................... 4-1
GAO Independence Rules.............................................................................................................. 4-2
DOL Independence Rules ............................................................................................................ 4-11
Banking, Insurance and Other Regulators ................................................................................... 4-12
International Ethics Standards...................................................................................................... 4-14
Questions to Consider and Lessons Learned............................................................................... 4-17 Chapter 5 ............................................................................................................................. 5-1
Ethics Rules for Tax Practice ............................................................................................... 5-1
Standard-Setting Bodies and Regulators ....................................................................................... 5-2
Competence and Due Professional Care ....................................................................................... 5-5
Statements on Standards for Tax Services................................................................................... 5-11 Copyright 2015–2016 AICPA • Unauthorized Copying Prohibited Table of Contents 3 Training Session: Preparer Penalties ............................................................................................ 5-15
Training Session: Professional Judgment and Firm Resources .................................................... 5-18
Client Records Requests ............................................................................................................... 5-23
Discovery of Client Errors or Omissions ....................................................................................... 5-26
Questions to Consider and Lessons Learned ............................................................................... 5-33 Glossary ................................................................................................................... Glossary 1
Index ............................................................................................................................. Index 1
Solutions ................................................................................................................. Solutions 1
Overview ........................................................................................................................... Solutions 1
Chapter 1 ........................................................................................................................... Solutions 2
Chapter 2 ........................................................................................................................... Solutions 4
Chapter 3 ........................................................................................................................... Solutions 8
Chapter 4 ......................................................................................................................... Solutions 11
Chapter 5 ......................................................................................................................... Solutions 11 Users of this course material are encouraged to visit the AICPA website at
www.aicpa.org/CPESupplements to access supplemental learning material reflecting
recent developments that may be applicable to this course. The AICPA anticipates
that supplemental materials will be made available on a quarterly basis. 4 Table of Contents Copyright 2015–2016 AICPA • Unauthorized Copying Prohibited Overview INTRODUCTION
This course will teach you about the basic ethical requirements applicable to CPAs, including a
methodology for analyzing ethical matters. COURSE OBJECTIVES
After completing this course, you will be able to:
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? Recognize the structure and content of the AICPA Ethics Codification, including the underlying principles.
Recall the conceptual framework approach embedded in the codification.
Apply AICPA rule interpretations on integrity, objectivity, confidentiality, and advertising, including
where applicable, using the conceptual framework approach.
Identify acts discreditable to the profession.
Recall the obligations to exercise due professional care, comply with professional standards, and be
competent in performing professional services.
Recognize the importance of independence, when independence is required, and why you must be
independent of an attest client both in fact and in appearance.
Apply the independence rules to personal matters by identifying the financial, family, and
employment relationships that threaten compliance with the independence rule.
Analyze the nonattest services and business relationships, and other matters that threaten a firm’s
independence.
Analyze fee issues and their effect on independence and objectivity.
Recall the additional independence provisions applicable to attest clients subject to the SEC, the
PCAOB, the U.S. Government Accountability Office (GAO), the U.S. Department of Labor (DOL).
Recall the AICPA requirements applicable to tax services, including the Statements on Standards for
Tax Practice (SSTS), IRS Circular No. 230, and IRS preparer penalty provisions. Copyright 2015–2016 AICPA • Unauthorized Copying Prohibited Overview 1 Because this is an introductory course, the content is general, but there is additional information available
to you throughout the course, which should provide a comprehensive foundation for further research
and inquiry. A BRIEF STORY
Imagine you are the controller of Apex Corporation, a troubled company, whose one hope is a possible
acquisition by Fire Corporation of America (FCA). Here is the background.
Apex is a telecommunications company and is in serious trouble with less than six months of cash left
and liabilities mounting. FCA is completing the final stages of its due diligence to acquire 100 percent of
the stock of Apex and infuse $30 million in cash to keep the operations going. Surprisingly enough, FCA
is very bullish on the prospects for Apex and seems ready to move ahead with the transaction and save
Apex from certain bankruptcy.
There is only one problem: FCA’s consultants, Implus Partners, prepared and submitted pro forma
financial projections to FCA based on information your boss provided to them . . . and you believe the
revenues to be overstated. Something seems wrong.
You remember your boss telling you and the other staff that should the acquisition go through, FCA
would keep everyone at Apex on the staff.
“We must make the best possible impression on FCA,” she said. “Be optimistic, friendly, and supportive
over the next few weeks. This is our last chance to avoid bankruptcy and save our jobs.”
What should you do?
You want to be fair to FCA, but you also want to be fair to your employer and your colleagues, not to
mention the company stockholders and lenders, who will surely suffer if the acquisition does not go
through and the company is forced into bankruptcy.
In matters of ethics, we often we do not have all the facts and must probe to uncover the “right” or best
way to respond to a dilemma. Ethical dilemmas involve competing values—for example, fairness, loyalty,
or keeping a confidence—which force us to make a choice.
Some values may be addressed in the profession’s codes of conduct; others may not.
There may be more than one “right” answer. As a professional, you cannot shy away from these gray
areas, but instead must learn to work through them to determine the best possible answer in the situation.
In this course, we will introduce you to an ethics decision-making model, which is a series of evaluative
questions to help you analyze and determine the best possible solution to an ethical dilemma. Then we
will apply the model to the short case study we just reviewed.
However, before we get into the ethics decision-making model, we will discuss some key points about
recognizing and handling an ethical matter. Overview 2 Copyright 2015–2016 AICPA • Unauthorized Copying Prohibited RECOGNIZING ETHICAL MATTERS AND MAKING GOOD DECISIONS
To address an ethical matter and make good judgments, you must first be able to recognize issues when they
arise. This means being familiar with the profession’s body of rules and regulations from the AICPA and
your local state accountancy board, which issues your license to practice, among others. This also means
staying attuned to potential ethical “warning signs.”
You should understand the relevant rules, which may change over time. You can accomplish this by
paying attention to rule-making initiatives and making ethics part of your...

 

 

 

 

 

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1. Sarah, the controller of a large beverage supplier, supervises two employees.
Her boss, Vladimir, instructs her to increase the company’s inventory balance
for an amount that is material to the financial statements by crediting several
small “miscellaneous” expense accounts. She does not understand why he
wants her to make these entries but immediately directs one of her staff to
make them because she has been instructed to do so. Which of the following
statements best describes Sarah’s actions?
1. Sarah failed to evaluate a potential ethical issue.
2. SarahfailedtoreferthemattertotheAICPAethicshotline.
3. Sarah failed to ensure that her staff was competent to make the
entries.
4. Sarahfailedtoconsidertherulesofotherregulators.
2. Josie, an accounting supervisor in Monk & Sons Realty, instructs Maria, her
employee, to make certain accounting entries in the company’s books that
will increase revenue. Maria researches the matter, confirming her concern
that these entries would overstate revenue, and informs Josie that
recognizing revenue in this manner would be premature and not consistent
with generally accepted accounting principles (GAAP) but Josie disagrees and
insists that Maria record the entries. The amount of revenue is material to
Monk’s financial statements. According to the AICPA rules, what should Maria
do first?
1. Resign her position quietly.
2. Reportthemattertotheseniorpartnerinthefirm.
3. Take out a professional liability policy.
4. Discuss her concerns with Josie’s boss. 3. The AICPA Code of Professional Conduct includes the following sections:
1. Preface, rules, and interpretations applicable to members in tax
practice and members in business.
2. Preface,rules,andinterpretationsapplicabletomembersinpublicpractice
andmembersin business.
3. Preface, rules, and interpretations applicable to members in tax
practice and members in audit practice. 4. Preface,rules,andinterpretationsapplicabletomembersinauditpracticea
ndmembersin business. 4. Which of the following statements best describes how the International
Federation of Accountants’ (IFAC’s) rules and standards impact the U.S.
accounting profession?
1. Individual CPAs practicing in the United States are required to stay
aware of IFAC rules and standards and adopt them immediately.
2. StateboardsofaccountancyarerequiredtoadopttheIFAC’sruleswithin90
daysoftheIFAC rule change.
3. As a member body of IFAC, the AICPA is required to change its bylaws
whenever the IFAC changes its rules.
4. TheAICPAisrequiredtoadoptethicsandotherprofessionalstandardsthata
reatleastas restrictive as IFAC’s.
5. Which of the following phrases is used by the Code of Professional Conduct to
describe integrity?
1. Candid, within the constraints of client confidentiality.
2. Forcefuladvocateoftheclient’sposition.
3. Valued business advisor to the client.
4. Willing to subordinate judgment to achieve a proper outcome.
6. Sophie, the CFO of Slolum Ski Supplies, received a watch from one of her
company’s largest vendors, Colorado Ski Shoppe. She received the gift with a
card congratulating her on Slolum’s recent merger with another company. In
determining whether accepting the gift would create a significant threat to
her compliance with the AICPA code, which of the following factors should
Sophie consider?
1. Whether she disclosed receipt of the gift to the board of directors.
2. Whethershetrulyearnedthegift.
3. Whether the gift was reasonable in the circumstances.
4. Whetherthegiftcostmorethan$100.
7. Which of the following best describes competence as defined in the AICPA
Code of Professional Conduct? a. Infallible judgment that cannot subsequently be called into question.
B.Theapplicationofskillandknowledgewithreasonablecareanddiligence.
c. Possessing an advanced college degree in the relevant subject matter.
D. Rigidadherencetotheprofessionalstandardsofengagementperformance. 8. A former client of Charlie Hayes, CPA, filed a lawsuit in state court alleging
that Charlie failed to exercise due care in the performance of tax and
compilation services performed in 2011. Charlie firmly believes that he
performed his services with competence and diligence. In his defense, he
plans to admit to making one minor error which he says was inadvertent and
did not have a material effect on the client’s taxes or financial position. In
light of his admission, has Charlie complied with the AICPA code’s standard of
due care and why?
1. No. He obviously did not discharge his professional responsibilities
with competence and diligence.
2. No.Hedidnotperformprofessionalservicestothebestofhisabilities.
3. Yes. He has chosen to be honest in reporting that he made an error.
4. Yes.TheAICPAstandardforduecaredoesnotrequireCPAstobeinfallible. 9. In which of the following situations may you disclose confidential client
information without violating the AICPA Code of Professional Conduct?
1. In response to a validly issued and enforceable subpoena.
2. Attherequestofanotherclientthatneedstheinformationtofileitstaxreturn.
3. As an example in a seminar given for CPE credit.
4. In a proposal to a potential client.
10.Terry Industries engages Rose & Co., CPAs, to prepare its annual financial
statements and tax returns. Before either of these engagements is
completed, Terry terminates the relationship and asks the firm to provide all
records that they provided to the firm, the firm’s working papers, and its
partially completed work product. Terry has not paid Rose & Co. for either
service. Under the AICPA rule on client records requests, which records, if
any, may Rose & Co. withhold from the client?
1. Records Terry provided Rose & Co. 2. Rose’s working papers and its partially completed work product.
3. Any records the firm chooses to withhold.
4. Norecordsmaybewithheldfromtheclient. 11.Which of the following statements best describes the AICPA ethics rules
relating to a member’s failure to file his or her personal tax return in a timely
manner?
1. The member is strongly encouraged to file his or her personal tax
returns in a timely manner.
2. Thefailuretofileapersonaltaxreturninatimelymannermustbedisclosedto
allclientsand
potential clients.
3. The failure to file a personal tax return in a timely manner is usually
considered an act
discreditable to the profession.
4. Thememberisnotinviolationofanyethicsrulesaslongasthefailuretofileap
ersonaltax
return in a timely manner was due to a heavy workload. 12.Sympatico Accountants engages ABC Tax Preparers to prepare routine tax
returns during the busy season. Under the AICPA code, which of the following
should Sympatico do prior to sharing its clients’ information with ABC?
1. Inform its tax clients that the firm may be using an outside service
when providing professional services.
2. Listanoticeinthelocalnewspaperthatthefirmmaybeusinganoutsideservi
cewhenproviding professional services.
3. Ask clients to sign a waiver limiting Sympatico’s liability in the event
ABC makes errors in Sympatico’s tax returns.
4. Sympatico would not be required to take any particular action in this
situation. 13.Which of the following statements best describes the AICPA ethics rules
relating to advertising?
1. Advertising through the use of banner ads over the Internet is
considered over-reaching and is prohibited.
2. Mass e-mail advertising is not allowed because it is considered a form
of harassment.
3. Advertising is permitted as long as it is not false or misleading.
4. Advertisingoveranyformofmassmediaisprohibited. 14.Bob Martino is sanctioned by his state board of accountancy for his
association with false and misleading financial statements of his employer,
Jones Consulting, LLC, a private company. Which of the following situations is
the least likely result of the state board’s action?
1. The state board could suspend or revoke Bob’s CPA license.
2. Bob could lose his membership in the AICPA or a state CPA society.
3. Bob could become subject to significant legal liabilities.
4. TheSECcouldfineBob.
15. Members should use the AICPA Conceptual Framework for Independence to
1. Come to different conclusions than the interpretations of the Code of
Professional Conduct.
2. EvaluateindependencemattersnotaddressedintheCodeofProfessionalConduct
.
3. Understand the rules on confidential client information and acts
discreditable to the profession.
4. Moreeasilyinterpretconflictsofinterestandsubordinationofjudgmentbyamemb
er.
16. Dorothy (an audit manager) has been assigned to the audit of Tandem Electric,
Inc. Dorothy is concerned that Joanne, a friend from her college days, is on the
internal audit staff of Tandem Electric. Dorothy believes she could provide services
to this client in an objective manner. Which of the following statements best describes how Dorothy should apply the AICPA conceptual framework approach in
this situation?
a.Dorothy should refuse to provide services to Tandem Electric because no
safeguards would be effective in mitigating the threat(s) to her independence.
b.Dorothy should not participate in the audit of Tandem Electric before obtaining a
written waiver from her firm’s general counsel.
c.Dorothy should consider the threats to her independence and whether
safeguards may be applied that reduce the threat(s) to an acceptable level.
d.Dorothyshoulddocumentherassessmentofindependence,whichshouldincludeaswor
n statement from Joanne. 17. A two-office firm, one in Chippewa Falls and another in Fargo, has an audit client
that sells medical equipment. The lead audit partner for this client conducts the
engagement in the Fargo office. Stockholdings in the client by which of the following
persons would not impair the firm’s independence under the AICPA code?
1. A manager in Chippewa Falls who will provide 26 hours of non-attest
services to the client this year.
2. AChippewaFallsstaffpersonwhoprovidesnoservicestotheclient.
3. A tax partner in the Fargo office who provides no services to the client.
4. AFargostaffpersonworkingontheauditengagement.
18. An example of a spousal equivalent as defined in AICPA independence rules is
1. A person in a domestic partnership with a covered member.
2. Aroommateandlong-timeplatonicfriendofacoveredmember.
3. A cousin who lives with and is supported by the covered member.
4. Aformerspouseofacoveredmemberwhoisfinanciallyindependentofthecovered
member.
19.Under AICPA rules, the employment of your spousal equivalent at a clothing
retailer that is an audit client would generally impair your independence if he
or she was employed as a
1. Controller.
2. Cashier. 3. Warehouse supervisor.
4. Buyer.
20.Under AICPA rules, which of the following statements best describes the
period of the professional engagement as it applies to a three-year
engagement to audit a client’s financial statements?
1. It begins each year when fieldwork commences and ceases when
fieldwork ends.
2. Itbeginswhenfieldworkcommencesandceaseswhenthereportisissued,re
commencingwhen
fieldwork begins again for the next period.
3. It begins when the engagement letter is signed and ceases each year
when the report is issued.
4. Itbeginswhentheengagementletterissignedandcontinuesuntilthereport
forthethirdyearis
issued unless the relationship is terminated sooner.
21.Jane, a partner in a CPA firm, borrows $100,000 on a secured note from one
of the firm’s bank audit clients to build a new dormer on her house. The
amount of the loan is material to Jane. Jane will not provide any services to
the bank and she is unable to influence the engagement. Jane practices in
the same office as the lead partner on the bank’s audit. Is Jane’s
independence impaired under the AICPA code?
1. Yes, because Jane obtained a loan from an audit client when she was a
covered member.
2. Yes, because the loan is material to Jane’s net worth.
3. No, because the note is secured and is related to Jane’s primary
residence.
4. No,becauseJaneisnotontheattestteamorabletoinfluencetheengagement
.
22.When a member performs non-attest services for an attest client,
management is required to designate an individual to oversee those services.
Which of the following best describes the qualities that are required of that
person under AICPA rules?
1. He or she must possess the same level of expertise as the CPA. 2. Heorshemustbeabletoperformtheserviceshimselforherself.
3. He or she must have suitable skill, knowledge, and/or experience.
4. HeorshemustbeabletosupervisetheCPAintheday-todayrenderingoftheservices.
23.A member has been asked to co-sign checks with a client employee while the
company president is on vacation. Which of the following statements about
the application of the AICPA independence rules to this situation is true?
1. Because the member will only be cosigning checks, independence is
not threatened.
2. Becausethememberisacosignerforashorttime,independenceisnotthreat
ened.
3. Because the member has entered into a joint venture with the client,
independence is impaired.
4. Becausechecksigningisamanagementfunction,independenceisimpaired.
24.Jones, a consulting manager of Miller & Co., is considering membership on an
audit client’s board of directors. Jones does not provide any services to this
client. Which of the following statements describing this situation is true
under AICPA rules?
1. Jones may join the board because he is not an auditor.
2. Jones may join the board because he is not a partner.
3. Jones may not join the board because the rules prohibit all firm
professionals from serving as a director of a client.
4. Jonesmaynotjointheboardbecauseonlynonmanagerialemployeesofthefir
mmayserveas
client management.
25.Anthony is a member of the engagement team performing an audit of XYZ.
During the engagement, the president of XYZ approaches Anthony and offers
him the position of CFO at the company. Anthony is considering the offer.
What safeguards do the independence rules require Anthony to apply?
1. Remove himself from the engagement team until the offer is rejected
or he is no longer seeking employment with XYZ. 2. ObtainthepermissionoftheXYZauditcommitteetoremainontheengageme
ntteam.
3. Resign from the firm.
4. Declinetheoffer.
26.Becker & Smith, CPAs, and its client, Troper Lighting, are discussing a possible
advisory engagement in which the firm would review Troper’s account
receivable (A/R) system and recommend changes that would expedite the
company’s collection process. Troper will pay Becker & Smith a fee based on
improved performance in A/R collections. Would such an arrangement raise
any ethical concerns under the profession’s rules?
a.No, but only if Troper is a publicly traded company subject to SEC and PCAOB
rules.
b.No, provided Becker & Smith documents the arrangement clearly in the
engagement letter.
c.Yes, but only if Becker & Smith was performing other services for Troper.
d.Yes, if Becker & Smith also performed a review engagement for Troper.
27.Feld & Company, CPAs, has provided annual audit and tax advisory services
to Maris Corporation for several years. Last year, Maris experienced severe
cash flow problems and was unable to pay Feld in full, leaving a significant
balance unpaid. Feld is ready to begin fieldwork for the upcoming audit. What
options are available to Feld and Maris under the AICPA code?
1. Feld may set up a payment plan with Maris to settle the unpaid fees
over the next two years.
2. Feldmayperformtheauditaslongastheunpaidfeesrelatingtotheprioryear
arepaidinfull
before the current year report is issued.
3. Maris may give Feld a note with a maturity date no later than one
year after the date of the
current year report.
4. MarismayhaveanotherfirmperformthefieldworkandFeldwillreviewtheot
herfirm’swork
papers and issue the report.
28.Under SEC rules, all of the following are prohibited relationships between a
covered person and an SEC audit client except: 1. Joint business ventures.
2. Agreementstosharecostsorprofits.
3. Immaterial landlord-tenant relationships.
4. Limited partnership agreements.
29.Under the SEC rules, a one-year “cooling-off” period applies to which of the
following scenarios?
1. A tax manager working on a client’s tax engagement is offered a
managerial position at the client.
2. Aclientwantstohireitsfirm’sleadauditpartnertotakeoverasCFO.
3. A technology consulting senior manager in the firm is seeking an
executive role with the client.
4. Aprofessionalstaffpersononanauditappliesforapositionassenioraccount
antattheclient.
30.Which of the following statements best describes the SEC rules relating to
bookkeeping services?
1. Bookkeeping services are permitted, as long as the individuals
performing these services are not the same individuals performing the
audit.
2. Bookkeepingservicesarepermittedifthefeesfromtheseservicesareinsign
ificantrelativetothe audit fees.
3. Bookkeeping services are permitted if the client agrees in writing to
accept responsibility for the adequacy of these services.
4. An accountant generally cannot provide bookkeeping services to an
SEC audit client.
31.Which of the following best describes a significant similarity between the
AICPA and IESBA codes?
1. Both codes incorporate the conceptual framework approach for
evaluating threats when specific rules on a matter do not exist.
2. Bothcodescontainspecificethicsandindependenceprovisionsrelatedtop
ublicinterestentities.
3. The codes combine the rules for members in business and public
practice in one section. 4. Thecodescontaintheexactsameprovisionsforcorporateaccountants.
32.The SEC has historically raised questions regarding the independence of firms
that derive a significant portion of their total revenues from one audit client
or group of clients because the SEC staff believes this situation causes CPA
firms to
1. Profit excessively from a client or group of clients.
2. Dependtooheavilyonthefeesgeneratedbytheclientorclients.
3. Have a mutuality of interests with the client or group of clients.
4. Placetooheavyaburdenontheclient’sfinancialposition.
33.The GAO’s Yellow Book stresses five ethical principles, including all of the
following except:
1. The public interest.
2. Professionalbehavior.
3. The proper use of government information, resources and position.
4. Thepropersafeguardingofclientinformation.
34. One of the GAO’s ethical principles described in the Yellow Book stresses that
1. Government employees may not accept gifts under any circumstances.
2. Governmentinformation,resources,andpositionsshouldnotbeusedfortheaudito
r’spersonal
gain.
3. Auditors may use government resources if the proper requisition forms are
completed
beforehand.
4. Auditorsshouldnotusepersonale-mailaccountsforgovernmentrelatedcommunications.
35. Department of Labor (DOL) independence rules apply to
1. All services provided to employee benefit plans.
2. Accountingservicesprovidedtoemployeebenefitplans’sponsors. 3. Audit services provided to employee benefit plans subject to ERISA
requirements.
4. All governmental audit and accounting engagements.
36. In which way do DOL independence rules differ from the AICPA rules?
1. The DOL rules on nonattest services are more comprehensive than the
AICPA independence rules.
2. TheDOLrulesbanauditorsfromprovidingactuarialservicestobenefitplansthatth
eyaudit.
3. The DOL defines member much more broadly than the AICPA’s covered
member.
4. TheDOLpermitsauditorstoperformrecordkeeping,whereastheAICPAruleswoul
dnot.
37. Which of the following statements most accurately describes the Federal
Deposit Insurance Corporation’s (FDIC) auditor independence requirements?
a. b. c. d.
a.FDIC independence requirements incorporate requirements for attorneys and
actuaries.
b.FDIC independence requirements mirror the AICPA and DOL independence
rules.
c.Certain FDIC policy statements address auditor independence.
d.The FDIC has not adopted regulations that incorporate SEC independence rules.
38. Tax return preparers may generally rely on a client’s representations without
verification unless
1. The client is incompetent.
2. The tax matter is complex.
3. The information seems incorrect, inconsistent, or incomplete.
4. The client is new to the preparer.
39. Violating an AICPA or IRS rule may result in the following:
1. Suspension of AICPA membership or the ability to practice before the IRS. 2. ImpositionofamonetarypenaltybytheIRS.
3. Publication of an admonishment by the AICPA.
4. Alloftheabove.
40.Technical qualifications necessary to supervise the work of others in
completing a professional assignment is a characteristic of
1. Due professional care.
2. Independence.
3. Competence.
4. Costbenefit.
41.A practitioner is engaged to prepare a client’s federal income tax return for
2013 and 2014. The practitioner files the 2013 return on the client’s behalf.
After the 2014 return is prepared, the client disputes the fees for the 2014 tax
engagement, terminates the relationship, and requests all tax returns and
related records. The client has not yet paid for preparation of the 2014 return.
Under IRS Circular No. 230, which records must the practitioner return to the
client?
1. Schedules the practitioner prepared, which the client needs to file in
its 2014 federal income tax return.
2. Theengagementletterexecutedbytheclientforpreparationofthe2014fed
eralincometax return.
3. An appraisal the practitioner prepared in connection with the 2013
federal income tax return.
4. Notes the practitioner took when meeting with the client about the
2013 and 2014 tax returns.
42.Sam Burke, CPA, finds a material error in his client’s tax return and advises
the client on how to correct it. Under AICPA rules, what should Sam do if the
client does not agree to correct the error?
1. Document the consultation with the client, including the client’s
rationale for not amending the return, but nothing further.
2. Makethecorrectionwithouttheclient’sknowledgeandfilethereturn.
3. Consider whether the client’s decision not to correct the error may
predict future behavior that warrants termination of the client relationship.
4. DisclosethemattertotheAICPAProfessionalEthicsdivision.
43.A CPA firm performs the annual audit of The Leahy Group, a private company.
The client has asked the firm to perform a study to determine whether the
company would qualify for certain municipal tax credits and prepare the
request. The firm will receive 15 percent of any tax credits that Leahy obtains
for the client as a result of the request but no fees if the request is denied.
City officials do not perform a substantive review of each request for tax
credits. Would this fee arrangement be permitted under the AICPA Code of
Professional Conduct?
1. Yes, because the services are tax-related.
2. Yes,iftheprojectedfeeswouldbeimmaterialtothefirm.
3. No, because the fee arrangement is a prohibited contingent fee.
4. No,becausetheservicewouldbeconsideredtobeamanagementfunction.
44.The clientele of Black & Company’s audit practice consists primarily of
privately- owned small and middle market companies. Recently the firm won
two audits of public companies, including one issuer. From an independence
perspective, what impact will these new client engagements have on Black &
Company?
1. Black & Co. will have to comply with SEC and PCAOB independence
rules.
2. Black & Co. will have to comply with DOL and GAO independence
rules.
3. Black & Co. will have to apply the IESBA’s conceptual framework
approach.
4. Black & Co. will need an annual peer review and PCAOB inspection.
45.Rocky Point Brewery (RPB) filed an initial public offering in January 2015. RPB
engaged Olsen & Alain, CPAs in 2012 to keep the books and prepare monthly
and annual financial statement (while the company was privately-held), and
terminated those services in December 2014. Could RPB engage Olsen &
Alain to be their auditors now that they are a public company?
a.Yes, because the prohibited non-audit services were performed before the period
of professional engagement.
b.Yes,butonlyifO&Arescindsanyindemnificationlanguageexistingintheirnon-audit
engagement letters. c.No, because the prohibited non-audit services were performed during the period
covered by the financial statements.
d.No,butonlyifthefeesO&Areceivedfromtheseengagementsexceededfivepercentofth
e firm’s overall annual revenues.

 







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