Chapter 4

Auditing and Assurance Services, 15e (Arens)
Chapter 4 Professional Ethics

Learning Objective 4-1
1) Ethics are:
A) needed in the professions, but is not needed for society in general
!) a set of "oral principles or values
#) not for"ed by life e$periences
%) al&ays incorporated in la&s
Ans&er: !
'er"s: Ethical (rinciples
%iff: Easy
Objective: LO 4-1
AA#)!: Ethical understanding and reasoning abilities
*) ++++++++ "eans that a person acts according to conscience, regardless of the situation
A) #aring
!) ,airness
#) -ntegrity
%) .espect
Ans&er: #
'er"s: Ethical principles and integrity
%iff: /oderate
Objective: LO 4-1
0) One of the "ain reasons people act unethically is that they choose to act selfishly
A) 'rue
!) ,alse
Ans&er: A
%iff: Easy
Objective: LO 4-1
1
#opyright 1 *214 (earson Education, -nc
Learning Objective 4-*
1) A si$-step approach is often used to resolve an ethical dile""a 'he first step in this process is
to:
A) identify the alternative actions available
!) identify the ethical issues fro" the facts
#) deter"ine &ho &ill be affected by the outco"e of the dile""a
%) obtain the relevant facts
Ans&er: %
'er"s: Ethical dile""a
%iff: /oderate
Objective: LO 4-*
*) %escribe an ethical dile""a that an auditor or an accountant "ight face in his or her business
career, then illustrate ho& the auditor or accountant "ight use the si$-step approach presented in
the te$t to resolve that dile""a !e specific
Ans&er: An ethical dile""a is a situation a person faces in &hich a decision "ust be "ade
about an appropriate behavior Although students3 ans&ers &ill vary depending on the dile""a,
their ans&er should list the follo&ing si$ steps, along &ith a discussion of ho& each step relates
to their particular dile""a:
1 Obtain the relevant facts. )tudents should list the 4ey facts fro" their dile""a
* Identify the ethical issues from the facts. )tudents should identify the 4ey ethical issue5s) in
their dile""a
0 Determine who is affected by the outcome of the dilemma and how each person or group is
affected. )tudents should identify &ho is involved and ho& each person is affected by the
dile""a
4 Identify the alternatives available to the person who must resolve the dilemma )tudents
should list the alternatives available to the auditor or accountant
6 Identify the likely consequence of each alternative )tudents should identify both the short-
and long-ter" effects of each alternative
7 Decide the appropriate action
'er"s: Ethical dile""a
%iff: #hallenging
Objective: LO 4-*
0) A rationali8ation "ethod that can easily result in unethical behavior is the argu"ent that
9everybody does it9
A) 'rue
!) ,alse
Ans&er: A
%iff: Easy
Objective: LO 4-*
*
1) 'he underlying reason for a code of professional conduct for any profession is:
A) the need for public confidence in the :uality of service of the profession
!) it provides a safeguard to 4eep unscrupulous people out
#) it is re:uired by federal legislation
%) it allo&s licensing agencies to have a yardstic4 to "easure deficient behavior
Ans&er: A
'er"s: .eason for code of professional conduct
%iff: Easy
Objective: LO 4-0
AA#)!: .eflective thin4ing s4ills
*) ;hich of the follo&ing state"ents is true &hen the #(A has been engaged to perfor" an audit
of financial state"ents<
A) 'he #(A fir" is engaged and paid by the client= therefore, the fir" has pri"ary responsibility
to be an advocate for the client
!) 'he #(A fir" is engaged and paid by the client, but the pri"ary beneficiaries of the audit are
those &ho rely on the financial state"ents
#) )hould a situation arise &here there is no convincing authoritative standard available, and
there is a choice of actions &hich could i"pact a client3s financial state"ents, the #(A is free to
endorse the choice &hich is in the investors3 interests
%) 'he #(A fir" has pri"ary responsibility to the ,A)!
Ans&er: !
'er"s: #(A engaged to perfor" audit of financial state"ents
%iff: /oderate
Objective: LO 4-0
0) E$plain &hy there is a special need for ethical conduct in the auditing profession
Ans&er: 'he reason for an e$pectation of a high level of professional conduct by any profession
is the need for public confidence in the :uality of service by the profession, regardless of the
individual providing it -t is not practical for "ost custo"ers to evaluate the :uality of the
perfor"ance of professional services because of their co"ple$ity 'herefore, since the users
5eg, the general public) of services provided by an auditor generally cannot evaluate the :uality
of the auditor3s perfor"ance, it is critical to the auditing profession that the public have a high
degree of confidence in the :uality of the services provided by the auditor (ublic confidence in
the :uality of professional services is enhanced &hen the profession encourages high standards
of perfor"ance and ethical conduct by all its "e"bers -f users of auditing services &ere to lac4
confidence in the :uality of those services, then the value of #(A fir"s3 audits &ould be
di"inished, as &ould the de"and for audits -t is essential that the users regard #(A fir"s as
co"petent and unbiased
'er"s: >eed for ethical conduct in auditing profession
%iff: Easy
Objective: LO 4-0
0
1) ;hich of the follo&ing is5are) true concerning the Ethical (rinciples of the Code of
Professional Conduct<
- 'hey identify ideal conduct
-- 'hey are general ideals and are not enforceable
A) - only
!) -- only
#) - and --
%) >either - nor --
Ans&er: #
'er"s: Ethical principles of the #ode of (rofessional #onduct
%iff: Easy
Objective: LO 4-4
*) ;hich of the follo&ing is not one of the four parts of the A-#(A3s #ode of (rofessional
#onduct<
A) (rinciples
!) .ules of #onduct
#) -nterpretations
%) %efinitions
Ans&er: %
'er"s: A-#(A #ode of (rofessional #onduct
%iff: Easy
Objective: LO 4-4
4
0) One of the A-#(A3s Ethical (rinciples deals &ith the public interest -t states that "e"bers
should accept the obligation to act in a &ay that &ill:
A)
?onor the public trust )erve the client3s interest
@es @es
!)
>o >o
#)
@es >o
%)
>o @es
Ans&er: #
'er"s: Ethical (rinciples= (ublic interest= Obligations
%iff: /oderate
Objective: LO 4-4
4) According to the (rinciples section of the #ode of (rofessional #onduct, all "e"bers:
A) should be independent in fact and in appearance at all ti"es
!) in public practice should be independent in fact and in appearance at all ti"es
#) in public practice should be independent in fact and in appearance &hen providing auditing
and other attestations services
%) in public practice should be independent in fact and in appearance &hen providing auditing,
ta$, and other attestation services
Ans&er: #
'er"s: (rinciples section of the #ode of (rofessional #onduct
%iff: /oderate
Objective: LO 4-4
6
6) ;hich of the follo&ing state"ents best describes the enforceability of the -nterpretations of
the .ules of #onduct<
A) 'he -nterpretations are not enforceable
!) 'he -nterpretations are enforceable
#) 'he -nterpretations "ay be enforceable if they have been revie&ed and approved by the
A-#(A3s %ivision of (rofessional Ethics
%) 'he -nterpretations are not enforceable, but a practitioner "ust justify departure fro" the"
Ans&er: %
'er"s: Enforceability of -nterpretations of the .ules of #onduct
%iff: /oderate
Objective: LO 4-4
7) Of the four parts of the A-#(A3s #ode of (rofessional #onduct, &hich part is enforceable<
A) Ethical .ulings
!) .ules of #onduct
#) (rinciples
%) -nterpretations
Ans&er: !
'er"s: A-#(A #ode of (rofessional #onduct= Enforceable
%iff: /oderate
Objective: LO 4-4
A) Ethical .ulings are:
- e$planations relating to broad hypothetical circu"stances
-- not enforceable, but one "ust justify departure
--- e$planations relating to specific factual circu"stances
A) - and --
!) - and ---
#) -- and ---
%) -, --, and ---
Ans&er: #
'er"s: Ethical .ulings
%iff: /oderate
Objective: LO 4-4
7
B) 'he A-#(A3s #ode of (rofessional #onduct re:uires independence for all:
A) attestation engage"ents
!) services perfor"ed by accountants in public practice
#) accounting and auditing services perfor"ed
%) professional &or4 perfor"ed by #(As
Ans&er: A
'er"s: -ndependence
%iff: /oderate
Objective: LO 4-4
C) ;hen a "e"ber observes the profession3s technical and ethical standards and strives to
continually i"prove her co"petence and :uality of services, she is e$ercising:
A) due care
!) integrity
#) independence
%) objectivity
Ans&er: A
'er"s: -ndependence
%iff: /oderate
Objective: LO 4-4
12) ,our of the si$ Ethical (rinciples in the A-#(A3s Code of Professional Conduct are e:ually
applicable to all "e"bers of the A-#(A ;hich of the follo&ing principles applies only to
"e"bers in public practice<
A) )cope and >ature of )ervices
!) -ntegrity
#) %ue #are
%) 'he (ublic -nterest
Ans&er: A
'er"s: Ethical (rinciples apply only to "e"bers in public practice
%iff: #hallenging
Objective: LO 4-4
11) 'he #ode of (rofessional #onduct is established by the "e"bership of the A-#(A, and the
-nterpretations of the .ules of #onduct are prepared by the:
A) ,inancial Accounting )tandards !oard
!) )ecurities and E$change #o""ission
#) #(A licensing agencies &ithin each state
%) (rofessional Ethics E$ecutive #o""ittee of the A-#(A
Ans&er: %
'er"s: #ode of (rofessional #onduct= -nterpretations of .ules of #onduct
%iff: #hallenging
Objective: LO 4-4
A
1*) -dentify and describe each of the four parts to the A-#(A3s Code of Professional Conduct
Also discuss &hich parts are officially enforceable and &hich are not
Ans&er: 'he four parts to the Code are:
D Principles. 'hese establish ideal standards of ethical conduct stated in philosophical ter"s
'hey are not officially enforceable
D Rules of conduct. 'hese are the "ini"u" standards of ethical conduct stated as e$plicit rules
that "ust be follo&ed by every #(A in the practice of public accounting 'hey are officially
enforceable
D Interpretations. -nterpretations of rules are intended to clarify the rules of conduct &hen there
are :uestions fro" practitioners about a specific rule 'hey are not officially enforceable, but a
practitioner "ust justify any departure
D thical rulings. 'hese are e$planations by the e$ecutive co""ittee of the professional ethics
division of specific factual circu"stances 'hey are not enforceable, but a practitioner "ust
justify any departure
'er"s: ,our parts of A-#(A #ode of (rofessional #onduct
%iff: /oderate
Objective: LO 4-4
10) !riefly describe the advantages and disadvantages of a code of conduct based on general
state"ents of ideal conduct as opposed to specific rules that define unacceptable behavior
Ans&er: Advantages %isadvantages
Eeneral state"ents E"phasis on positive %ifficult to enforce
activities encouraging
a high level of
perfor"ance
)pecific rules Enforceability of 'endency for rules to be
"ini"u" behavior and regarded as "a$i"u" rather
perfor"ance standards than "ini"u" standards
'er"s: #ode of conduct general state"ents vs specific rules
%iff: /oderate
Objective: LO 4-4
B
14) ;hat are the si$ Ethical (rinciples stated in the Code of Professional Conduct< !riefly
discuss each principle Are these principles enforceable<
Ans&er: 'he si$ Ethical (rinciples of the Code of Professional Conduct are:
1 Responsibilities /e"bers should e$ercise sensitive professional and "oral judg"ents
* !he Public Interest. /e"bers should de"onstrate co""it"ent to professionalis" by serving
the public interest and honoring the public trust
0 Integrity. /e"bers should perfor" all professional responsibilities &ith the highest sense of
integrity
4 Ob"ectivity and Independence. /e"bers should "aintain objectivity and re"ain free of
conflicts of interest A "e"ber in public practice should be independent in both fact and
appearance &hen providing auditing and other attestation services
6 Due Care /e"bers should observe the profession3s technical and ethical standards, strive
continually to i"prove co"petence and :uality of services, and discharge professional
responsibilities to the best of their ability
7 #cope and $ature of #ervices. A "e"ber in public practice should observe the principles of
the Code of Professional Conduct in deter"ining the scope and nature of services to be provided
'he Ethical (rinciples are not enforceable
%iff: /oderate
Objective: LO 4-4
16) An advantage of specific rules in the Code of Professional Conduct is the enforceability of
"ini"u" behavior and perfor"ance standards
A) 'rue
!) ,alse
Ans&er: A
'er"s: #ode of (rofessional #onduct
%iff: Easy
Objective: LO 4-4
17) 'he A-#(A Code of Professional Conduct per"its the auditor to perfor" a &ide variety of
non-audit services for audit clients
A) 'rue
!) ,alse
Ans&er: !
%iff: Easy
Objective: LO 4-4
C
1A) An advantage of the principles of professional conduct in the Code of Professional Conduct
is that they are "ore easily enforced than are the specific rules of conduct
A) 'rue
!) ,alse
Ans&er: !
%iff: Easy
Objective: LO 4-4
1B) -n the %ICP% Code of Professional Conduct, ethical rulings are less specific than rules of
conduct
A) 'rue
!) ,alse
Ans&er: !
'er"s: A-#(A #ode of (rofessional #onduct= Ethical rulings
%iff: /oderate
Objective: LO 4-4
1C) -nterpretations of rules of conduct in the Code of Professional Conduct are not officially
enforceable and practitioners need not justify departure fro" the"
A) 'rue
!) ,alse
Ans&er: !
'er"s: A-#(A #ode of (rofessional #onduct= -nterpretation of rules
%iff: /oderate
Objective: LO 4-4
*2) -n the %ICP% Code of Professional Conduct, interpretations of rules are "ore specific than
ethical rulings
A) 'rue
!) ,alse
Ans&er: !
'er"s: A-#(A #ode of (rofessional #onduct= Ethical rulings= -nterpretations of rules
%iff: /oderate
Objective: LO 4-4
12
*1) -n the %ICP% Code of Professional Conduct, the second principle of professional conduct,
entitled 9'he (ublic -nterest,9 applies only to "e"bers of the A-#(A in public practice and not
to "e"bers &ho &or4 as accountants in business, govern"ent, or education
A) 'rue
!) ,alse
Ans&er: !
'er"s: A-#(A #ode of (rofessional #onduct= (ublic -nterest principle
%iff: /oderate
Objective: LO 4-4
**) -n the %ICP% Code of Professional Conduct, the si$th principle of professional conduct,
entitled 9)cope and >ature of )ervices,9 applies to "e"bers of the A-#(A &ho &or4 in public
practice, business, govern"ent, or education
A) 'rue
!) ,alse
Ans&er: !
'er"s: A-#(A #ode of (rofessional #onduct= )cope and nature of services principle
%iff: /oderate
Objective: LO 4-4
*0) 'he Conceptual &ramework for %ICP% Independence #tandards can be used &hen "a4ing
decisions on ethical "atters not e$plicitly addressed in the #ode
A) 'rue
!) ,alse
Ans&er: A
%iff: /oderate
Objective: LO 4-4
*4) Each state also has rules of conduct that are re:uired for licensing by the state
A) 'rue
!) ,alse
Ans&er: A
%iff: /oderate
Objective: LO 4-4
11
1) ,or &hich of the follo&ing professional services "ust #(As be independent<
A) /anage"ent advisory services
!) Audits of financial state"ents
#) (reparation of ta$ returns
%) All three of the above
Ans&er: !
'er"s: -ndependence
%iff: Easy
Objective: LO 4-6
*) 9-ndependence9 in auditing "eans:
A) "aintaining an indirect financial interest
!) not being financially dependent on a client
#) ta4ing an unbiased vie&point
%) being an advocate for a client
Ans&er: #
'er"s: -ndependence
%iff: Easy
Objective: LO 4-6
0) ;hen #(As are able to "aintain their actual independence, it is referred to as independence
in:
A) conduct
!) appearance
#) fact
%) total
Ans&er: #
'er"s: -ndependence
%iff: /oderate
Objective: LO 4-6
4) 'he )arbanes-O$ley Act ++++++++ a #(A fir" fro" doing both boo44eeping and auditing
services for the sa"e public co"pany client
A) encourages
!) prohibits
#) allo&s
%) allo&s on a case-by-case basis
Ans&er: !
'er"s: )arbanes-O$ley= non-audit services
%iff: Easy
Objective: LO 4-6
1*
6) 'he )arbanes-O$ley Act re:uires &hich e"ployees of an accounting fir" to rotate off the
engage"ent every five years<
A)
-n-#harge Auditor Lead audit partner
@es @es
!)
>o >o
#)
@es >o
%)
>o @es
Ans&er: %
'er"s: )arbanes-O$ley Act= (artner rotation
%iff: /oderate
Objective: LO 4-6
'opic: )OF
7) ;hich of the follo&ing state"ents is true &ith respect to audit co""ittees<
A) Audit co""ittee "e"bers should consist of "e"bers of the co"pany3s "anage"ent
!) All "e"bers of the audit co""ittee "ust be financial e$perts
#) 'he audit co""ittee of a public co"pany is responsible for hiring the auditor
%) Audit co""ittees "ust have a "ini"u" of ten "e"bers
Ans&er: #
'er"s: Audit co""ittee
%iff: /oderate
Objective: LO 4-6
A) 'he provisions of the )arbanes-O$ley Act of *22* are "ost li4ely to allo& &hich of the
follo&ing non-audit services for audit clients<
A) Appraisal or valuation services 5eg, pension, post-e"ploy"ent benefit liabilities)
!) ,inancial infor"ation syste"s design and i"ple"entation
#) -nternal audit outsourcing
%) 'a$ consulting
Ans&er: %
'er"s: )arbanes-O$ley Act of *22*= Allo&ed non-audit services
%iff: /oderate
Objective: LO 4-6
10
B) ;hich of the follo&ing services are allo&ed by the )E# &henever a #(A also audits the
co"pany<
A) -nternal audit outsourcing
!) Legal services unrelated to the audit
#) Appraisal or valuation services
%) )ervices related to assessing the effectiveness of internal control over financial reporting
Ans&er: %
'er"s: )ervices allo&ed by )E# &hen #(A audits co"pany
%iff: /oderate
Objective: LO 4-6
C) ;hich of the follo&ing services is not prohibited by the )E# &henever a #(A also audits the
co"pany<
A) Actuarial services
!) Assisting the co"pany in preparing certain )E# registration state"ents 5eg, 12-G, 12-H)
#) -nvest"ent ban4er services
%) !oo44eeping services
Ans&er: !
%iff: /oderate
Objective: LO 4-6
12) 'he "e"bers of a client3s 9audit co""ittee9 should be:
A) "e"bers of "anage"ent
!) directors &ho are not a part of co"pany "anage"ent
#) non-directors and non-"anagers
%) directors and "anagers
Ans&er: !
'er"s: /e"bers of audit co""ittee
%iff: /oderate
Objective: LO 4-6
11) 'he )arbanes-O$ley Act re:uires a cooling off period of ++++++++ before a "e"ber of an
audit tea" can &or4 for a client in a 4ey "anage"ent position<
A) One year
!) Eighteen "onths
#) 'hree years
%) ,ive years
Ans&er: A
'er"s: )arbanes-O$ley Act= #ooling off period
%iff: Easy
Objective: LO 4-6
'opic: )OF
14
1*) -n deter"ining independence &ith respect to any audit engage"ent, the ulti"ate decision as
to &hether or not the auditor is independent "ust be "ade by the:
A) auditor
!) client
#) audit co""ittee
%) public
Ans&er: A
'er"s: Auditor independence
%iff: /oderate
Objective: LO 4-6
10) A #(A fir" should decline an offer to perfor" consulting services engage"ent if:
A) the proposed engage"ent is not accounting-related
!) reco""endations "ade by the #(A fir" are to be subject to revie& by the client
#) acceptance &ould re:uire the #(A fir" to "a4e "anage"ent decisions for an audit client
%) any of the above is true
Ans&er: #
'er"s: #(A fir" should decline to perfor" consulting services
%iff: /oderate
Objective: LO 4-6
14) #o"panies are re:uired to disclose in their pro$y state"ent or annual filings &ith the )E#
the total a"ount of audit and non-audit fees paid to the audit fir" for the t&o "ost recent years
;hich of the follo&ing is not one of the categories of fees that "ust be disclosed<
A) 'a$ fees
!) #onsulting fees
#) Audit-related fees
%) All other fees
Ans&er: !
'er"s: Annual )E# filings= Audit and non-audit fees
%iff: #hallenging
Objective: LO 4-6
16) -nterpretations of the %ICP% Code of Professional Conduct are do"inated by the concept of:
A) independence
!) co"pliance &ith standards
#) accounting
%) acts discreditable to the profession
Ans&er: A
'er"s: -nterpretations of A-#(A #ode of (rofessional #onduct do"inated by
%iff: #hallenging
Objective: LO 4-6
16
17) A public co"pany "ay obtain internal audit services fro" their financial state"ent auditor if
it is approved by the co"pany3s audit co""ittee
A) 'rue
!) ,alse
Ans&er: !
'er"s: (ublic co"pany= >on-audit services purchased
%iff: Easy
Objective: LO 4-6
'opic: )OF
1A) 'he audit co""ittee of a private co"pany need not approve all non-audit services provided
by the co"pany3s financial state"ent auditor
A) 'rue
!) ,alse
Ans&er: A
'er"s: (rivate co"pany= >on-audit services purchased
%iff: /oderate
Objective: LO 4-6
1B) ,or a public co"pany, the )arbanes-O$ley Act re:uires audit co""ittee approval of all non-
audit services prior to their perfor"ance by the co"pany3s e$ternal auditor
A) 'rue
!) ,alse
Ans&er: A
'er"s: )arbanes-O$ley Act= Audit co""ittee
%iff: /oderate
Objective: LO 4-6
'opic: )OF
17
1) -nterpretations of -ndependence .ule 121 prohibit covered "e"bers fro" o&ning any stoc4
or other direct invest"ent in audit clients #overed "e"bers &ould include &hich of the
follo&ing<
A)
All partners in the
engage"ent office even if
they have no engage"ent
responsibility
-ndividuals on the attest
engage"ent
'he fir" and its e"ployee
benefit plans
@es @es @es

!)
All partners in the
responsibility
engage"ent
benefit plans
@es >o >o
#)
All partners in the
responsibility
engage"ent
benefit plans
>o @es @es
%)
All partners in the
responsibility
engage"ent
benefit plans
>o >o >o
Ans&er: A
'er"s: -ndependence .ule 121= %irect invest"ent= #overed "e"bers
%iff: Easy
Objective: LO 4-7
1A
*) -n so"e situations, the interpretations of the .ules of #onduct per"it for"er partners to have
relationships &ith a client of the fir" &ithout affecting the fir"3s independence ;hich of the
follo&ing situations &ould cause a loss of independence<
A) 'he for"er partner &or4s in the "aintenance depart"ent of an audit client of his for"er fir"
!) 'he for"er partner3s grandson &or4s in the &arehouse of an audit client of his for"er fir"
#) 'he for"er partner &as held out as an associate of the fir"
%) 'he for"er partner purchased 6I of the stoc4 of an audit client of his for"er fir"
Ans&er: #
'er"s: -ndependence ra"ifications on auditor and #(A fir"
%iff: /oderate
Objective: LO 4-7
0) 'he financial interests of a #(A3s fa"ily "e"bers can affect the #(A3s independence ;hich
of the follo&ing parties &ould not be included as a 9direct financial interest9 of the #(A<
A) )pouse
!) %ependent child
#) .elative supported by the #(A
%) )ibling living in the sa"e city as the #(A
Ans&er: %
'er"s: -ndependence= %irect financial interest
%iff: Easy
Objective: LO 4-7
4) -nterpretations of the rules regarding independence allo& an auditor to serve as:
A) a director or officer of an audit client
!) an under&riter for the sale of a client3s securities
#) a trustee of a client3s pension fund
%) an honorary director for a not-for-profit charitable or religious organi8ation
Ans&er: %
'er"s: -ndependence
%iff: Easy
Objective: LO 4-7
6) -ndependence is re:uired of a #(A &hen perfor"ing:
A) e$ternal audits
!) all attestation services
#) all attestation and ta$ services
%) all professional services
Ans&er: !
'er"s: -ndependence
%iff: Easy
Objective: LO 4-7
1B
7) #(As "ay provide boo44eeping services to their private co"pany audit clients, but there are a
nu"ber of conditions that "ust be "et if the auditor is to "aintain independence ;hich of the
follo&ing conditions is not necessary<
A) 'he #(A "ust not assu"e a "anage"ent role or function
!) 'he client "ust hire an e$ternal #(A to approve all of the journal entries prepared by the
auditor
#) 'he auditor "ust co"ply &ith EAA) &hen auditing &or4 prepared by hisJher fir"
%) 'he client "ust accept responsibility for the financial state"ents
Ans&er: !
'er"s: -ndependence
%iff: /oderate
Objective: LO 4-7
A) An e$a"ple of an 9indirect o&nership interest in a client9 &ould be o&nership of a client3s
stoc4 by a "e"ber3s:
A) dependent child
!) spouse
#) non-dependent grandfather
%) All of the above are e$a"ples of indirect o&nership
Ans&er: #
'er"s: -ndirect o&nership interest in a client
%iff: /oderate
Objective: LO 4-7
B) ;hen deter"ining &hether independence is i"paired because of an o&nership interest in a
client co"pany, "ateriality &ill affect o&nership:
A) in all circu"stances
!) only for direct o&nership
#) only for indirect o&nership
%) under no circu"stances
Ans&er: #
'er"s: -ndependence= /ateriality
%iff: /oderate
Objective: LO 4-7
1C
C) A direct financial interest violates independence in &hich of the follo&ing circu"stances<
A) ;hen close relatives such as nondependent children, brothers, and sisters have a significant
financial interest in the client
!) ;hen close relatives such as nondependent children, brothers, and sisters have any financial
interest in the client
#) ;hen the #(A o&ns shares in a "utual fund that has an o&nership interest in the client
%) ;hen close relatives such as brother, sister, or in-la&s are e"ployed by the client
Ans&er: A
'er"s: %irect financial interest, independence
%iff: /oderate
Objective: LO 4-7
12) A #(A sole practitioner purchased stoc4 in a client corporation and placed it in a trust as an
educational fund for the #(A3s "inor child 'he trust securities &ere not "aterial to the #(A but
&ere "aterial to the child3s personal net &orth ;ould the independence of the #(A be
considered to be i"paired &ith respect to the client<
A) @es, because the stoc4 is a direct financial interest
!) @es, because the stoc4 is an indirect financial interest that is "aterial to the #(A3s child
#) >o, because the #(A does not have a direct financial interest in the client
%) >o, because the #(A does not have a "aterial indirect financial interest in the client
Ans&er: A
'er"s: ,inancial interest and independence
%iff: /oderate
Objective: LO 4-7
11) Kulie and Lisa are sisters Kulie is a #(A auditing the co"pany &here Lisa &or4s Kulie3s
independence is i"paired if:
A) Lisa is the controller
!) Lisa o&ns *6I of the co"pany
#) Lisa is the "ar4eting "anager
%) all of the above
Ans&er: A
%iff: /oderate
Objective: LO 4-7
*2
1*) Oehlers, #(A, is a staff auditor participating in the engage"ent of #apital 'rust, -nc ;hich
of the follo&ing circu"stances i"pairs Oehlers independence<
A) Oehlers3 sister is an internal auditor e"ployed by #apital 'rust
!) Oehlers3 friend, and e"ployee of another local accounting fir", prepares the ta$ return of
#apital 'rust3s #EO
#) Oehlers and #apital 'rust3s 421H plan o&n stoc4 &ith the sa"e corporation
%) %uring the period of professional engage"ent, #apital 'rust and Oehlers discussed business
over lunch at a first-class restaurant
Ans&er: A
%iff: /oderate
Objective: LO 4-7
10) An auditor3s independence is considered i"paired if the auditor has:
A) an i""aterial, indirect financial interest in a client
!) an outstanding LB,222 balance on a credit card issued by a client
#) an auto"obile loan fro" a client ban4, collaterali8ed by the auto"obile
%) a joint, closely held business invest"ent &ith the client that is "aterial to the auditor3s net
&orth
Ans&er: %
%iff: /oderate
Objective: LO 4-7
14) According to the profession3s ethical standards, an auditor &ould be considered independent
in &hich of the follo&ing instances<
A) 'he auditor3s chec4ing account, &hich is fully insured by a federal agency, is held at a client
financial institution
!) 'he auditor is also an attorney &ho advises the client as its general counsel
#) An e"ployee of the auditor serves as treasurer of a charitable organi8ation that is a client
%) 'he client o&es the auditor fees for t&o consecutive annual audits
Ans&er: A
'er"s: -ndependence
%iff: /oderate
Objective: LO 4-7
*1
16) ;hich of the follo&ing loans &ould be prohibited bet&een a #(A fir" or its "e"bers and an
audit client<
A) Auto"obile loans
!) Loans fully collaterali8ed by cash deposits at the sa"e financial institution
#) >e& ho"e "ortgage loans
%) Mnpaid credit card balances not e$ceeding L12,222 in total
Ans&er: #
'er"s: -ndependence= Loan e$ceptions
%iff: #hallenging
Objective: LO 4-7
17) Mnder the A-#(A independence rules, the auditor:
A) is prohibited fro" perfor"ing a co"pany3s audit and installing and designing the client3s ne&
infor"ation syste"
!) does not need to docu"ent the understanding and &illingness of the client to perfor" all
"anage"ent functions associated &ith the nonaudit service
#) is prohibited fro" doing any boo44eeping services for the client if perfor"ing the audit
%) "ust follo& the "ore restrictive )E# independence rules &hen dealing &ith a public
co"pany
Ans&er: %
'er"s: -ndependence
%iff: /oderate
Objective: LO 4-7
**
1A) 'he #ode of #onduct rule on independence indicates that "ateriality "ust be considered
&hen:
A)
Evaluating direct invest"ents
"ade by the #(A
Evaluating indirect
o&nership invest"ents
@es @es
!)
"ade by the #(A
Evaluating indirect
>o >o
#)
"ade by the #(A
Evaluating indirect
@es >o
%)
"ade by the #(A
Evaluating indirect
>o @es
Ans&er: %
'er"s: -ndependence= %irect and indirect o&nership invest"ents
%iff: /oderate
Objective: LO 4-7
1B) ;hich of the follo&ing instances &ould i"pair a #(A3s independence &hen they have been
retained as the auditor<
- A charitable organi8ation &here the #(A serves as treasurer
-- A "unicipality &here the #(A o&ns L*62,222 of the L*6 "illion outstanding bonds of the
"unicipality
--- A co"pany that the #(A3s invest"ent club o&ns a 12I invest"ent interest
A) - and --
!) - and ---
#) -- and ---
%) -, --, and ---
Ans&er: %
'er"s: -"pair independence
%iff: #hallenging
Objective: LO 4-7
*0
1C) Mnder the A-#(A independence rules, independence can be considered i"paired &hen:
A) billed fees re"ain unpaid for professional services for "ore than ninety days
!) a client in ban4ruptcy has unpaid fees for "ore than one year
#) there is litigation by the client related to the auditor3s ta$ or other nonaudit services
%) &hen there is a la&suit by the client clai"ing deficiencies in the previous year3s audit
Ans&er: %
%iff: #hallenging
Objective: LO 4-7
*2) ;hich of the follo&ing is least li4ely to i"pair a CPA firm's independence &ith respect to
an audit client in the O4laho"a #ity office of a national #(A fir"<
A) A partner in the O4laho"a #ity office o&ns an i""aterial a"ount of stoc4 in the client
!) A partner in the Kersey #ity office o&ns *6I of the client3s stoc4
#) A partner in the O4laho"a #ity office, &ho does not &or4 on the audit engage"ent,
previously served as controller for the audit client
%) A partner in the #hicago office previously served as vice president of finance for the audit
client
Ans&er: %
'er"s: -ndependence
%iff: #hallenging
Objective: LO 4-7
*1) A #(A3s financial interests in nonclients "ay have an effect on independence if the
nonclients are investors in or investees of the client ;hich situation &ould not i"pair a #(A3s
independence<
A) 'he client has an i""aterial invest"ent in a nonclient investee in &hich the #(A has an
i""aterial invest"ent
!) 'he #(A has a "aterial indirect financial interest in a nonclient in &hich the client has a
"aterial invest"ent
#) 'he client investor has a non"aterial invest"ent in the nonclient investee in &hich the #(A
has a "aterial invest"ent
%) 'he #(A has a joint closely held invest"ent &ith the client in a nonclient that is "aterial to
the client as &ell as the #(A
Ans&er: A
'er"s: -"pair #(A independence
%iff: #hallenging
Objective: LO 4-7
*4
**) ;hich of the follo&ing state"ents is true< 'he #(A fir" &ill lose its independence if:
A) a staff auditor providing audit services to the client ac:uires stoc4 in that client
!) a staff ta$ preparer &ho provides 16 hours of non-audit services to the client ac:uires stoc4 in
that client
#) an audit "anager in an office different than the office providing audit services has a direct,
i""aterial financial interest in the audit client
%) a covered "e"ber has an indirect, i""aterial financial interest in an audit client
Ans&er: A
'er"s: -ndependence
%iff: /oderate
Objective: LO 4-7
*0) -nterpretations to the .ules of #onduct per"it a #(A fir" to do both boo44eeping and
auditing for the sa"e private co"pany client if three criteria are "et ;hich of the follo&ing is
not one of those criteria<
A) 'he client "ust accept full responsibility for the financial state"ents
!) 'he client is re:uired to file an annual report, including audited financial state"ents, &ith the
)ecurities and E$change #o""ission
#) 'he #(A "ust not assu"e the role of e"ployee or of "anager
%) 'he #(A "ust follo& applicable auditing standards
Ans&er: !
%iff: /oderate
Objective: LO 4-7
*4) ;hich of the follo&ing circu"stances i"pairs an auditor3s independence<
- Litigation by a client against an audit fir" clai"ing a deficiency in the previous audit
-- Litigation by a client against an audit fir" related to ta$ services
--- Litigation by an audit fir" against a client clai"ing "anage"ent fraud or deceit
A) - and --
!) - and ---
#) -- and ---
%) -, --, and ---
Ans&er: !
'er"s: -"pair auditor independence
%iff: #hallenging
Objective: LO 4-7
*6
*6) ;hich of the follo&ing circu"stances i"pairs an auditor3s independence<
- Litigation by a client against an audit fir" clai"ing a deficiency in the previous audit
-- Litigation by a client against an audit fir" related to ta$ services
--- Litigation by an audit fir" against a client clai"ing "anage"ent fraud or deceit
A) - and --
!) - and ---
#) -- and ---
%) -, --, and ---
Ans&er: !
'er"s: -"pair auditor independence
%iff: #hallenging
Objective: LO 4-7
*7
*7) Each of the follo&ing situations involves a possible violation of the rule on independence
,or each situation, 51) decide &hether the Code of Professional Conduct has been violated, and
5*) briefly e$plain ho& the situation violates 5or does not violate) the Code of Professional
Conduct
a ?arry !ro&n is a partner in the 'ope4a office of ?edley N #o, #(As ?arry3s brother is
e"ployed in an audit-sensitive position by Kensen Appliances, a publicly held co"pany in
Hansas Kensen Appliances is one of ?edley N #o3s audit clients >either ?arry nor personnel
fro" the 'ope4a office is involved in the audit of Kensen
Oiolation< @es >o
E$planation:
b Kohn ;oods is an audit "anager &ith #alden N #o, #(As, a one-office #(A fir" Kohn o&ns
122 shares of co""on stoc4 in one of the fir"3s audit clients, but he does not provide any audit
or non-audit services to the co"pany
Oiolation< @es >o
E$planation:
c 'he accounting fir" of ,ine N ?er"an, #(As, provides boo44eeping and ta$ services for
?enderson #orporation, a privately held co"pany ,ine N ?er"an also perfor"s the annual
audit of ?enderson #orporation
Oiolation< @es >o
E$planation:
d !ob )helton #(A, is the auditor of #afe Ec4o A couple of &ee4s ago, #afe Ec4o3s
"anage"ent co""enced litigation against !ob, alleging he &as negligent in last year3s audit
Oiolation< @es >o
E$planation:
e ?a"ilton Appliance has not paid Haren Lin&ood, #(A, her audit fee for the past t&o years
Haren is starting &or4 on the current year3s audit of ?a"ilton
Oiolation< @es >o
E$planation:
Ans&er:
a >o violation Although partners in a #(A fir" are not allo&ed to have close relatives
e"ployed in a position of significant influence by a client, it is acceptable to have a close relative
e"ployed in an audit-sensitive position 5&ith no significant influence), as long as the partner
does not participate in the engage"ent and is not in an office that participates on the engage"ent
b >o violation Kohn is not a covered "e"ber &ith respect to the audit client as he has no
responsibility for the engage"ent and is not in a position to influence the engage"ent
*A
c >o violation 'he A-#(A does not prohibit #(A fir"s fro" providing boo44eeping, ta$, and
audit services to the sa"e non-public client
d Oiolation ;hen there is a la&suit or intent to start a la&suit bet&een a #(A and an audit
client3s "anage"ent related to audit services, independence is i"paired
e Oiolation -ndependence is i"paired if fees re"ain unpaid for services provided "ore than one
year prior to the date of the report
'er"s: Oiolation of rule on independence= A-#(A #ode of (rofessional #onduct
%iff: #hallenging
Objective: LO 4-7
*A) %on #rosby, a partner in a national #(A fir", has just learned that his self sufficient daughter
has accepted a position as the #,O of )unglasses, -nc, a current client &ithin the office &ith
&hich he is e"ployed E$plain the independence ra"ifications on 1) %on3s independence, *) his
office, and 0) the fir"3s independence
Ans&er:
1 %on3s non-dependent daughter is considered a close relative !ecause she has a 4ey position
for the client, %on3s independence is i"paired
* !ecause %on is considered a covered "e"ber any office in &hich he is e"ployed cannot be
independent
0 'he fir" &ill not be considered independent ?o&ever, the fir" can "aintain its independence
if they either "ove:
a %on to an office that does not participate on the engage"ent or
b the audit engage"ent to an office in &hich %on is not e"ployed
%iff: #hallenging
Objective: LO 4-7
*B) .ule 121, -ndependence, prohibits a #(A fro" perfor"ing both audit services and
boo44eeping services for the sa"e public co"pany in the sa"e year
A) 'rue
!) ,alse
Ans&er: A
'er"s: .ule 121, -ndependence
%iff: Easy
Objective: LO 4-7
*B
*C) Mnder .ule 121, -ndependence, independence is considered to be i"paired if fees re"ain
unpaid for professional services provided "ore than si$ "onths before the date of the current
year3s report
A) 'rue
!) ,alse
Ans&er: !
%iff: Easy
Objective: LO 4-7
02) Auditors are allo&ed to have an indirect financial interest in an audit client, such as
o&nership of stoc4 in a client3s co"pany by the auditor3s brother, as long as the a"ount of the
financial interest is i""aterial to the brother
A) 'rue
!) ,alse
Ans&er: A
'er"s: -ndirect financial interest= -""aterial
%iff: /oderate
Objective: LO 4-7
01) .ule 121, -ndependence, applies to "e"bers of the A-#(A &hen perfor"ing any
professional service
A) 'rue
!) ,alse
Ans&er: !
%iff: /oderate
Objective: LO 4-7
0*) .ule 121, -ndependence, applies to covered "e"bers in a position to influence an attest
engage"ent
A) 'rue
!) ,alse
Ans&er: A
%iff: /oderate
Objective: LO 4-7
*C
Learning Objective 4-A
1) 'he #(A "ust not subordinate his or her professional judg"ent to that of others in any:
A) engage"ent
!) audit engage"ent
#) engage"ent e$cluding ta$ services
%) engage"ent &here the opinion of a specialist is used
Ans&er: A
'er"s: #(A subordinate professional judg"ent
%iff: Easy
Objective: LO 4-A
*) ;hich of the follo&ing &ould be a violation of the rule re:uiring 9objectivity9 by the #(A<
- 'he auditor accepts "anage"ent3s opinion regarding the collection of accounts receivable
&ithout an independent evaluation
-- -n preparing a client3s ta$ return, the #(A encourages a client to ta4e a deduction for &hich
there is no support
A) - only
!) -- only
#) - and --
%) >either - nor --
Ans&er: #
'er"s: Oiolation of rule re:uiring #(A objectivity
%iff: /oderate
Objective: LO 4-A
0) )everal "onths after an un:ualified audit report &as issued, the auditor discovers the financial
state"ents &ere "aterially "isstated 'he client3s #EO agrees that there are "isstate"ents, but
refuses to correct the" )he clai"s that 9confidentiality9 prevents the #(A fro" infor"ing
anyone ;hich of the follo&ing state"ents is correct<
A) 'he #EO is correct and the auditor "ust "aintain confidentiality
!) 'he #EO is incorrect, but since the audit report has been issued, it is too late to correct the
report
#) 'he #EO is correct, but to be ethically correct, the auditor should violate the confidentiality
rule and disclose the error
%) 'he #EO is incorrect, and the auditor has an obligation to issue a revised audit report, even if
the #EO &ill not correct the financial state"ents
Ans&er: %
'er"s: #onfidentiality on audit
%iff: /oderate
Objective: LO 4-A
02
4) A #(A fir" "ay charge a contingent fee for:
A) an audit
!) consulting services for a client for &hich they do not perfor" any attestation services
#) the preparation of an original ta$ return for a client for &hich they do not perfor" any
attestation services
%) the preparation of an a"ended ta$ return
Ans&er: !
'er"s: #ontingent fees
%iff: /oderate
Objective: LO 4-A
6) A "e"ber in public practice shall neither receive fro", nor pay to, a client a co""ission
&hen the "e"ber or "e"ber3s fir" also perfor"s certain services for that client Are
co""issions allo&ed if the #(A perfor"s:
A)
A co"pilation that &ill be
used by a third party
An audit of prospective
financial infor"ation
@es @es
!)
>o >o
#)
@es >o
%)
>o @es
Ans&er: !
'er"s: #o""issions
%iff: /oderate
Objective: LO 4-A
01
7) 'he A-#(A3s #ode of (rofessional #onduct states that a #(A should "aintain integrity and
objectivity 'he ter" 9objectivity9 in the #ode refers to a #(A3s ability to:
A) choose independently bet&een alternate accounting principles and auditing standards
!) distinguish bet&een accounting practices that are acceptable and those that are not
#) be unyielding in all "atters dealing &ith auditing procedures
%) "aintain an i"partial attitude on "atters that co"e under the #(A3s revie&
Ans&er: %
'er"s: A-#(A #ode of (rofessional #onduct= Objectivity
%iff: /oderate
Objective: LO 4-A
A) ;hich of the follo&ing is re:uired for a fir" to designate itself 9/e"ber of the A"erican
-nstitute of #ertified (ublic Accountants9 on its letterhead<
A) At least one of the partners "ust be a "e"ber of the A-#(A
!) All partners "ust be "e"bers of the A-#(A
#) 'he partners &hose na"es appear in the fir" na"e "ust be "e"bers of the A-#(A
%) A "ajority of the partners "ust be "e"bers of the A-#(A
Ans&er: !
'er"s: /e"bers of the A-#(A re:uire"ents
%iff: /oderate
Objective: LO 4-A
B) #(As are prohibited fro" &hich of the follo&ing for"s of advertising<
A) )elf-laudatory advertising
!) #elebrity endorse"ent advertising
#) Mse of trade na"es, such as 9A&eso"e Auditors9
%) Mse of phrases, such as 9Euaranteed largest ta$ refunds in to&nP9
Ans&er: %
'er"s: (rohibited for"s of advertising
%iff: #hallenging
Objective: LO 4-A
C) ;hich of the follo&ing &ould be considered a violation of the A-#(A #ode of #onduct<
A) 'he #(A "a4es the audit files available to the client3s ban4 &ithout the per"ission of the
client
!) 'he #(A fir" charges a contingent fee for nonattestation services to a client for &ho" he
does not perfor" any attestation services
#) 'he #(A fir" ta4es a prospective client to lunch to discuss auditing services
%) A #(A fir" uses the na"e )an %iego 'a$ )pecialists
Ans&er: A
'er"s: #ode of ethics
%iff: /oderate
Objective: LO 4-A
0*
12) .ule 021 of the A-#(A3s #ode of (rofessional #onduct re:uires #(As to "aintain the
confidentiality of client infor"ation 'his rule &ould be violated if a #(A disclosed infor"ation
&ithout a client3s consent as a result of a:
A) subpoena or su""ons
!) peer revie&
#) co"plaint filed &ith the trial board of the -nstitute
%) re:uest by a client3s largest stoc4holder
Ans&er: %
'er"s: #onfidentiality
%iff: /oderate
Objective: LO 4-A
11) ;hich one of the follo&ing state"ents is false<
A) #onfidentiality is bro4en &hen an auditor is presented &ith a subpoena concerning an audit
client
!) -nfor"ation that a #(A obtains fro" a client is generally not privileged
#) ;hen a #(A fir" conducts an A-#(A-authori8ed peer revie& of the :uality controls of
another #(A fir", per"ission of the client is not needed to e$a"ine audit docu"entation
%) A #(A fir" &hich observes substandard audit docu"entation of another fir" during a peer
revie& can initiate a co"plaint to the A-#(A
Ans&er: A
'er"s: #onfidentiality
%iff: /oderate
Objective: LO 4-A
1*) A #(A fir":
A) can sell securities to a client for &ho" they perfor" an attestation service
!) can receive a co""ission for a client that they are engaged to perfor" an attestation service
for
#) cannot receive a referral fee for reco""ending the services of another #(A
%) can receive a co""ission fro" a nonattestation client as long as the situation is disclosed
Ans&er: %
'er"s: .ule 620, #o""issions and .eferral ,ees
%iff: /oderate
Objective: LO 4-A
00
10) ;hich of the follo&ing represents all of the &ays a #(A fir" can be organi8ed under .ule
626<
A) (roprietorships and partnerships
!) (roprietorships, partnerships, and professional corporations
#) (roprietorships, general partnerships, general corporations, professional corporations, li"ited
liability co"panies, and li"ited liability partnerships if per"itted by state la&
%) )ingle proprietorships, partnerships, professional corporations if per"itted by state la&, or
regular corporations
Ans&er: #
'er"s: .ule 626, A-#(A #ode of (rofessional #onduct= #(A fir" for" of organi8ation
%iff: /oderate
Objective: LO 4-A
14) -n &hich of the follo&ing circu"stances &ould a #(A be ethically bound to refrain fro"
disclosing any confidential client infor"ation<
A) 'he #(A is issued a su""ons enforceable by a court order &hich orders the #(A to present
confidential infor"ation
!) A "ajor stoc4holder of a client co"pany see4s accounting infor"ation fro" the #(A after
"anage"ent declined to disclose the re:uested infor"ation
#) #onfidential client infor"ation is "ade available as part of a :uality revie& of the #(A3s
practice by a peer revie& tea" authori8ed by the A-#(A
%) An in:uiry by a disciplinary body of a state #(A society re:uests confidential client
infor"ation
Ans&er: !
'er"s: #onfidential client infor"ation
%iff: /oderate
Objective: LO 4-A
16) ;hich of the follo&ing fee arrange"ents is not a violation of the A-#(A3s #ode of
(rofessional #onduct<
A) !asing fees as an e$pert &itness on the a"ount a&arded to the plaintiff, even though the #(A
perfor"s a co"pilation for client use
!) !asing consulting fees on a percentage of a bond issue, even though the #(A perfor"s a
revie& of the client3s financial state"ents
#) !asing fees for a ta$ service on the a"ount of the refund that the client &ill receive
%) !asing consulting fees on a percentage of a bond issue, even though the #(A perfor"s an
audit of the client3s financial state"ents
Ans&er: A
'er"s: ,ee arrange"ents not a violation of A-#(A #ode of (rofessional #onduct
%iff: #hallenging
Objective: LO 4-A
04
17) ;hich of the follo&ing is not defined as an act discreditable in either the .ules or the
-nterpretations of the A-#(A3s #ode of (rofessional #onduct<
A) 'he #(A fir"3s partner in charge failed to file his ta$ return for the past year
!) 'he #(A fir" discri"inates in its hiring practices based on the age of the applicant
#) 'he #(A retains the client3s boo4s and records to enforce past-due pay"ent of the #(A3s bill,
even after the client has de"anded they be returned
%) 'he #(A fir"3s partner-in-charge &as a passenger in a car driven by his &ife On the &ay
ho"e fro" the fir"3s #hrist"as party, she &as charged &ith 9driving &hile into$icated9
Ans&er: %
'er"s: Act discreditable
%iff: #hallenging
Objective: LO 4-A
1A) ,reedo" fro" ++++++++ "eans the absence of relationships that "ight interfere &ith
objectivity or integrity
A) independence
!) acts discreditable
#) i"partiality
%) conflicts of interest
Ans&er: %
'er"s: #onflicts of interest
%iff: /oderate
Objective: LO 4-A
AA#)!: Analytic s4ills
1B) .ule *21 - Eeneral )tandards re:uires "e"bers to co"ply &ith certain standards and
interpretations ;hich of the follo&ing is not a standard specifically addressed in .ule *21<
A) (rofessional integrity
!) %ue professional care
#) (lanning and supervision
%) )ufficient relevant data
Ans&er: A
'er"s: .ule *21, Eeneral )tandards
%iff: #hallenging
Objective: LO 4-A
1C) ;hich of the follo&ing activities is allo&ed for a #(A fir"3s attestation clients<
A) #ontingent fees fi$ed by a court
!) #o""issions for referring a revie& client to an insurance agency for insurance coverage
#) (reparation of ta$ returns for &hich fees are based upon client refunds
%) Each of the above is allo&ed
Ans&er: A
'er"s: Activities allo&ed for #(A fir"3s attestation clients
%iff: /oderate
Objective: LO 4-A
06
*2) %iscuss .ule 021Q#onfidential #lient -nfor"ation, including the four e$ceptions to the rule
Ans&er: .ule 021 prohibits a "e"ber fro" disclosing any confidential client infor"ation
&ithout the specific consent fro" the client ?o&ever, there are four conditions &hen client
per"ission is not re:uired:
D Obligations related to technical standards= ie, &hen .ule *2* or .ule *20 re:uires the
disclosure
D -n response to a valid subpoena or su""ons and co"pliance &ith la&s and regulations
D A peer revie& is being conducted under A-#(A, state #(A )ociety, or )tate !oard of
Accountancy authori8ation
D 'he #(A is initiating or responding to an in:uiry fro" a recogni8ed investigative body or the
professional ethics division
'er"s: .ule 021, #onfidential #lient -nfor"ation and e$ceptions
%iff: #hallenging
Objective: LO 4-A
07
*1) 'he follo&ing situations involve a possible violation of the A-#(A3s Code of Professional
Conduct ,or each situation, 51) deter"ine the applicable rule fro" the Code, 5*) decide &hether
or not the Code has been violated, and 50) briefly e$plain ho& the situation violates 5or does not
violate) the Code
a -n *210, ,ree"an and Kohnson, both #(As, decided to for" a #(A practice -n *216, ,ree"an
and Kohnson approached !ill %elaney, a physician and "edical e$pert, and as4ed hi" to assist
the" &ith their gro&ing "edical consulting practice %elaney agreed, but only after he &as
given an o&nership interest in the fir" %elaney does not intend to :uit his private "edical
practice
.ule: ++++++++ Oiolation< @es >o
E$planation:
b !rian %e(alie has a successful dentistry practice in #harleston !rian has reco""ended one
of his patients to Hatie ;alton, #(A 'o sho& gratitude for the referral, Hatie has agreed to pay
!rian a to4en gift of L62 Hatie discloses the pay"ent arrange"ent to her ne& clients
E$planation:
c 'he accounting fir" of !ayer N (eng, #(As, is negotiating a fee &ith a ne& audit client 'hey
agree the client &ill pay L62,222 if !ayer N (eng issues a clean, un:ualified opinion, L42,222 if
a :ualified opinion is issued, and only L*2,222 if an adverse opinion is issued
E$planation:
d %on )"ith, #(A, is a "e"ber of the engage"ent tea" that perfor"s the audit of )ha&
#orporation %on3s five-year-old daughter, (recious, received ten shares of )ha& #orporation3s
co""on stoc4 for her fifth birthday 'he stoc4 &as a gift fro" (recious3s grand"other
E$planation:
e Kennifer ?arris, #(A, is a partner in the #(A fir" that audits Alltech, -nc, a closely held
corporation Kennifer3s sister-in-la& is the chief financial officer at Alltech, -nc
E$planation:
Ans&er:
a Oiolation of the rule on ,or" of Organi8ation and >a"e 5.ule 626) >on-#(A o&nership of
fir"s is allo&able, ho&ever, non-#(A o&ners "ust actively provide services to the fir"3s clients
as their principal occupation
b >o violation of the #o""issions and .eferral ,ees rule 5.ule 620) A #(A "ay pay a referral
fee to a non-#(A as long as the pay"ent is disclosed to the client
0A
c Oiolation of the #ontingent ,ees rule 5.ule 02*) 'his is a contingent fee agree"ent and is
prohibited by .ule 02*
d Oiolation of the -ndependence rule 5.ule 121) %on is a covered "e"ber for purposes of .ule
121 !ecause his daughter is a dependent, her o&nership interest in )ha& is treated as a direct
financial interest of her father
e >o violation of the -ndependence rule 5.ule 121) According to the Code a close relative is
defined as a parent, sibling, or nondependent child 'hus, a sister-in-la& is not considered to be a
close relative
'er"s: Oiolations of .ules of A-#(A #ode of (rofessional #onduct
%iff: #hallenging
Objective: LO 4-6, LO 4-7 and LO 4-A
0B
**) 'he follo&ing situations involve a possible violation of the A-#(A3s Code of Professional
Conduct ,or each situation, 51) deter"ine the applicable rule fro" the Code, 5*) decide &hether
or not the Code has been violated, and 50) briefly e$plain ho& the situation violates 5or does not
violate) the Code
a ?o&ard #unningha" N #o, #(As, designates its fir" as 9/e"bers of the A"erican -nstitute
of #ertified (ublic Accountants9 All of the partners of the fir" are #(As ?o&ever, one of the
partners has recently chosen to allo& her "e"bership to lapse because of personal reasons
E$planation:
b !rad Long, #(A, &as traveling fro" Orlando to /ia"i, ,lorida &hen he &as pulled over by a
police officer on suspicion of driving under the influence ?e &as convicted in court of driving
&hile under the influence of alcohol !ecause of past convictions, !rad &as sentenced to 6 years
in prison
E$planation:
c Helley !rent, #(A, is a partner in a one-office #(A fir" that audits %ane, -nc, a closely held
corporation Helley3s sister &as recently appointed as the chief financial officer for %ane, -nc
E$planation:
d )arah /artin, #(A, is a senior auditor in the )an ,rancisco office of #ooper N ?o&ell, #(As
)arah3s father is e"ployed as the controller of Line Electronics, a public co"pany in %etroit,
/ichigan Line Electronics is one of the fir"3s audit clients >either )arah nor the )an ,rancisco
office is involved in the audit of Line Electronics
E$planation:
e On August *2, *2$7, ?an4 Anderson, #(A and partner, &as offered and accepted the
engage"ent to audit the annual financial state"ents of Kernigan #orporation for the year ended
%ece"ber 01, *2$7 (reli"inary &or4 began on the audit on )epte"ber 16, *2$7 and the
engage"ent ended on /arch A, *2$A Kernigan is regulated by the )E# ?an4 served as
controller of Kernigan #orporation fro" %ece"ber 1, *2$*, until April 12, *2$7, at &hich ti"e
he ter"inated his e"ploy"ent &ith Kernigan
E$planation:
Ans&er:
a Oiolation of the ,or" of Organi8ation and >a"e rule 5.ule 626) A fir" "ay not designate
itself as 9/e"bers of the A"erican -nstitute of #ertified (ublic Accountants9 unless all of its
o&ners are "e"bers of the -nstitute
0C
b Oiolation of the Acts %iscreditable rule 5.ule 621) ,elonies are considered acts discreditable
c Oiolation of the -ndependence rule 5.ule 121) According to the Code, Helly3s sister is a 9close
relative9 and she occupies a 4ey position at an audit client !ecause Helly is a partner in the
office that provides the audit services to %ane, the fir" is not independent
d >o violation of the -ndependence rule 5.ule 121) ;hile )arah3s father occupies a 4ey position
&ith an audit client of the fir", there is no independence violation as long as )arah is not a
"e"ber of the engage"ent tea" 'he fir" "ay provide the audit services
e Oiolation of the -ndependence rule 5.ule 121) )ince ?an4 had an e"ploy"ent relationship
&ith the client during part of the period covered by the financial state"ents, his independence is
i"paired
'er"s: Oiolations of .ules of A-#(A #ode of (rofessional #onduct
%iff: #hallenging
42
*0) 'he scenarios belo& all involve a possible violation of the A-#(A3s Cod of Professional
Conduct.
1 Msing the list belo&, indicate &hich of the Code of Conduct .ules applies to the scenario
a 121: -ndependence
b 12*: -ntegrity and Objectivity
c 02*: #ontingent ,ees
d 621: Acts %iscreditable
e 620: #o""issions and .eferral ,ees
f 626: ,or" of Organi8ation and >a"e
* )tate if the scenario is a violation of the Code
)cenario:
1 /argaret ?enry is a partner in the 'upelo office of Ken4ins N 'horn, #(As /argaret3s father
is the controller at /ar4rich )porting )upplies, -nc, a publicly held co"pany in 'upelo
/ar4rich is one of Ken4ins N 'horn3s audit clients /argaret is not involved in the audit of
/ar4rich
* Kason Ale$ander is an audit "anager &ith .eese N #o, #(As Kason o&ns 122 share of
co""on stoc4 in one of the fir"3s audit clients, but he does not provide any audit or non-audit
services to the co"pany
0 'he accounting fir" of ,ine N ?er"an, #(As, provides boo44eeping and ta$ services for
?enderson #orporation, a privately held co"pany /r ?er"an also perfor"s the annual audit of
?enderson #orporation
4 Elaine #ooper #(A, is the auditor of (aula3s (i88a 'o&ard the end of the audit, (aula gave
Elaine her esti"ate of receivable collectability and Elaine accepted it &ithout any testing
6 #harley .ay, #(A, is a "e"ber of the engage"ent tea" that perfor"s the audit of %esiree
#orporation #harley3s five-year-old daughter, !ec4y, received ten shares of %esiree co""on
stoc4 for her fifth birthday in a trust fund established by !ec4y3s grand"other
7 ,ree"an and Kohnson for"ed a successful #(A practice ten years ago -n the current year,
they approached Ada" )a&tooth, a surgeon and "edical e$pert, and as4ed hi" to assist the"
&ith their gro&ing "edical consulting practice )a&tooth agreed, but only after he &as given an
o&nership interest in the fir" )a&tooth does intend to reduce his private practice hours and
spend 42I of his &or4ing hours devoted to the ,ree"an N Kohnson practice
A )ally (reen has a successful co"puter net&or4 consulting business )ally has reco""ended
one of her clients to )a" ;alton, #(A 'o sho& gratitude for the referral, )a" has agreed to pay
)ally a to4en gift of L62 )a" has not disclosed the pay"ent arrange"ent to his ne clients
B 'he accounting fir" of )"ith N !lac4, #(As, is negotiating a fee &ith a ne& audit client
&here the client &ill pay L62,222 if the client obtains the line of credit needed for &or4ing
capital purposes Other&ise, the fee &ill be L42,222
C !rad !arns, #(A, &as traveling fro" Las Oegas to the Erand #anyon &hen he &as pulled
41
over by a police officer for suspicion of driving under the influence ?e &as convicted in court of
driving under the influence of alcohol and received si$ "onths probation
12 /anuel Lope8, #(A, is a senior in a s"all, local, #(A fir" that audits #hildress, -nc, a
closely held corporation /anuel3s sister &as recently appointed as the controller for #hildress,
-nc
Ans&er:
(art 1: 1 a 7 f
* a A e
0 a B c
4 b C d
6 a 12 a
(art *: 1 @es 7 @es
* >o A @es
0 >o B @es
4 @es C >o
6 @es 12 @es
'er"s: A-#(A #ode of (rofessional #onduct= Ethical rulings= -nterpretations of rules
%iff: #hallenging
*4) -"prison"ent for a period of si$ "onths or longer &ill result in auto"atic e$pulsion fro" the
A-#(A
A) 'rue
!) ,alse
Ans&er: !
'er"s: -"prison"ent= E$pulsion
%iff: Easy
Objective: LO 4-A
*6) .ule 626, ,or" of Organi8ation and >a"e, prohibits #(A fir"s fro" practicing as li"ited
liability partnerships
A) 'rue
!) ,alse
Ans&er: !
'er"s: .ule 626, ,or" of Organi8ation and >a"e
%iff: Easy
Objective: LO 4-A
4*
*7) Mnder .ule 626, ,or" of Organi8ation and >a"e, a #(A fir" "ay use any na"e as long as
it is not "isleading
A) 'rue
!) ,alse
Ans&er: A
%iff: Easy
Objective: LO 4-A
*A) A #(A fir" "ay practice public accounting only in a for" of organi8ation per"itted by
federal la& or regulation
A) 'rue
!) ,alse
Ans&er: !
'er"s: ,or" of Organi8ation
%iff: /oderate
Objective: LO 4-A
*B) Mnder .ule 021, #onfidential #lient -nfor"ation, per"ission is not re:uired fro" the client
to use the audit docu"entation relating to that client during an A-#(A-authori8ed peer revie&
progra" &ith another #(A fir"
A) 'rue
!) ,alse
Ans&er: A
'er"s: .ule 021, #onfidential #lient -nfor"ation
%iff: /oderate
Objective: LO 4-A
*C) -nfor"ation obtained by a #(A fro" a client is legally privileged in federal court
A) 'rue
!) ,alse
Ans&er: !
'er"s: Legally privileged infor"ation
%iff: /oderate
Objective: LO 4-A
40
02) .ule 62*, Advertising and Other ,or"s of )olicitation, prohibits "e"bers of the A-#(A in
public practice fro" perfor"ing co"parative advertising
A) 'rue
!) ,alse
Ans&er: !
'er"s: .ule 62*, Advertising and Other ,or"s of )olicitation
%iff: /oderate
Objective: LO 4-A
01) Mnder .ule 626, ,or" of Organi8ation and >a"e, a #(A fir" "ay not designate itself as
9/e"bers of the A"erican -nstitute of #ertified (ublic Accountants9 unless a "ajority of its
o&ners are "e"bers of the -nstitute
A) 'rue
!) ,alse
Ans&er: !
%iff: /oderate
Objective: LO 4-A
0*) Mnder the %ICP%'s Code of Professional Conduct, #(As are prohibited fro" offering audit
clients a discount for referring a prospective client even if they are disclosed
A) 'rue
!) ,alse
Ans&er: !
'er"s: A-#(A #ode of (rofessional #onduct= Offer audit clients a discount
%iff: /oderate
Objective: LO 4-A
00) All o&ners of a #(A fir" "ust be #(As &ho are :ualified to practice
A) 'rue
!) ,alse
Ans&er: !
'er"s: #(A :ualified to practice
%iff: /oderate
Objective: LO 4-A
44
Learning Objective 4-B
1) -f the board of accountancy in the state in &hich a #(A fir" is licensed has rules that are
different than the A-#(A3s rules, the #(A fir" "ust follo&:
A) &hichever rules are less restrictive
!) &hichever rules are "ore restrictive
#) the rules of the A-#(A
%) the rules of the state3s board of accountancy
Ans&er: !
'er"s: )tate rules &hich differ fro" A-#(A rules
%iff: /oderate
Objective: LO 4-B
*) %escribe the "ethods used by the A-#(A and )tate !oards of Accountancy to enforce the
rules of conduct
Ans&er: 'he A-#(A uses t&o levels of disciplinary action ,or less serious, and probably
unintentional violations of .ules of #onduct, the division li"its the discipline to a re:uire"ent
of re"edial or corrective action ,or "ore serious violations, the level of disciplinary action goes
before the Koint 'rial !oard 'he violator "ay be suspended or e$pelled fro" "e"bership in the
A-#(A
Oiolation of a )tate !oards3 rules of conduct is punishable by loss of the violator3s #(A
certificate and license to practice
'er"s: /ethods to enforce the rules conduct
%iff: /oderate
Objective: LO 4-B
0) E$pulsion fro" the A-#(A for failing to follo& the rules of conduct is, by itself, sufficient to
prevent a #(A fro" practicing public accounting
A) 'rue
!) ,alse
Ans&er: !
'er"s: E$pulsion fro" A-#(A for failing to follo& rules of conduct
%iff: /oderate
Objective: LO 4-B
46

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Auditing and Assurance Services, 15e (Arens)

Chapter 4 Professional Ethics

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