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Auditing and Assurance Services, 15e, Global Edition (Arens)

Chapter 5 Ethics and the Audit Profession


Learning Objective 5-1
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$periences
%) al&ays incorporated in la&s
Ans&er: !
') (((((((( "eans that a person acts according to conscience, regardless of the situation
A) #aring
!) )airness
#) *ntegrity
%) +espect
Ans&er: #
Learning Objective 5-'
1) A si$-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: %
Learning Objective 5--
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 /eep unscrupulous people out
#) it is re.uired by federal legislation
%) it allo&s licensing agencies to have a yardstic/ to "easure deficient behavior
Ans&er: A
') 0hich of the follo&ing state"ents is true &hen the #1A has been engaged to perfor" an audit
of financial state"ents2
A) ,he #1A fir" is engaged and paid by the client3 therefore, the fir" has pri"ary responsibility
to be an advocate for the client
!) ,he #1A 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
#) 4hould a situation arise &here there is no convincing authoritative standard available, and
there is a choice of actions &hich could i"pact a client5s financial state"ents, the #1A is free to
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endorse the choice &hich is in the investors5 interests
%) ,he #1A fir" has pri"ary responsibility to the )A4!
Ans&er: !
Learning Objective 5-8
1) 0hich of the follo&ing is9are) true concerning the Ethical 1rinciples of the Code of
Professional Conduct2
* ,hey identify ideal conduct
** ,hey are general ideals and are not enforceable
A) * only
!) ** only
#) * and **
%) :either * nor **
Ans&er: #
') 0hich of the follo&ing is not one of the four parts of the A*#1A5s #ode of 1rofessional
#onduct2
A) 1rinciples
!) +ules of #onduct
#) *nterpretations
%) %efinitions
Ans&er: %
-) One of the A*#1A5s Ethical 1rinciples 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 4erve the client5s interest
<es <es
!)
;onor the public trust 4erve the client5s interest
:o :o
#)
;onor the public trust 4erve the client5s interest
<es :o
%)
;onor the public trust 4erve the client5s interest
:o <es
Ans&er: #
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8) According to the 1rinciples section of the #ode of 1rofessional #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$, and other attestation services
Ans&er: #
5) 0hich of the follo&ing state"ents best describes the enforceability of the *nterpretations of
the +ules of #onduct2
A) ,he *nterpretations are not enforceable
!) ,he *nterpretations are enforceable
#) ,he *nterpretations "ay be enforceable if they have been revie&ed and approved by the
A*#1A5s %ivision of 1rofessional Ethics
%) ,he *nterpretations are not enforceable, but a practitioner "ust justify departure fro" the"
Ans&er: %
=) Of the four parts of the A*#1A5s #ode of 1rofessional #onduct, &hich part is enforceable2
A) Ethical +ulings
!) +ules of #onduct
#) 1rinciples
%) *nterpretations
Ans&er: !
>) Ethical +ulings are:
* e$planations relating to broad hypothetical circu"stances
** not enforceable, but one "ust justify departure
*** e$planations relating to specific factual circu"stances
A) * and **
!) * and ***
#) ** and ***
%) *, **, and ***
Ans&er: #
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?) ,he A*#1A5s #ode of 1rofessional #onduct re.uires independence for all:
A) attestation engage"ents
!) services perfor"ed by accountants in public practice
#) accounting and auditing services perfor"ed
%) professional &or/ perfor"ed by #1As
Ans&er: A
@) 0hen a "e"ber observes the profession5s technical and ethical standards and strives to
continually i"prove her co"petence and .uality of services, she is e$ercising:
A) due care
!) integrity
#) independence
%) objectivity
Ans&er: A
17) )our of the si$ Ethical 1rinciples in the A*#1A5s Code of Professional Conduct are e.ually
applicable to all "e"bers of the A*#1A 0hich of the follo&ing principles applies only to
"e"bers in public practice2
A) 4cope and :ature of 4ervices
!) *ntegrity
#) %ue #are
%) ,he 1ublic *nterest
Ans&er: A
11) ,he #ode of 1rofessional #onduct is established by the "e"bership of the A*#1A, and the
*nterpretations of the +ules of #onduct are prepared by the:
A) )inancial Accounting 4tandards !oard
!) 4ecurities and E$change #o""ission
#) #1A licensing agencies &ithin each state
%) 1rofessional Ethics E$ecutive #o""ittee of the A*#1A
Ans&er: %
1') *dentify and describe each of the four parts to the A*#1A5s Code of Professional Conduct
Also discuss &hich parts are officially enforceable and &hich are not
Ans&er: ,he four parts to the Code are:
A Principles. ,hese establish ideal standards of ethical conduct stated in philosophical ter"s
,hey are not officially enforceable
A Rules of conduct. ,hese are the "ini"u" standards of ethical conduct stated as e$plicit rules
that "ust be follo&ed by every #1A in the practice of public accounting ,hey are officially
enforceable
A Interpretations. *nterpretations of rules are intended to clarify the rules of conduct &hen there
are .uestions fro" practitioners about a specific rule ,hey are not officially enforceable, but a
practitioner "ust justify any departure
A Ethical rulings. ,hese are e$planations by the e$ecutive co""ittee of the professional ethics
division of specific factual circu"stances ,hey are not enforceable, but a practitioner "ust
justify any departure
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1-) !riefly describe the advantages and disadvantages of a code of conduct based on general
state"ents of ideal conduct as opposed to specific rules that define unacceptable behavior
Ans&er: Advantages %isadvantages
Beneral state"ents E"phasis on positive %ifficult to enforce
activities encouraging
a high level of
perfor"ance
4pecific rules Enforceability of ,endency for rules to be
"ini"u" behavior and regarded as "a$i"u" rather
perfor"ance standards than "ini"u" standards
18) 0hat are the si$ Ethical 1rinciples stated in the Code of Professional Conduct2 !riefly
discuss each principle Are these principles enforceable2
Ans&er: ,he si$ Ethical 1rinciples of the Code of Professional Conduct are:
1 Responsibilities Ce"bers should e$ercise sensitive professional and "oral judg"ents
' The Public Interest. Ce"bers should de"onstrate co""it"ent to professionalis" by serving
the public interest and honoring the public trust
- Integrity. Ce"bers should perfor" all professional responsibilities &ith the highest sense of
integrity
8 Objectivity and Independence. Ce"bers should "aintain objectivity and re"ain free of
conflicts of interest A "e"ber in public practice should be independent in both fact and
appearance &hen providing auditing and other attestation services
5 Due Care Ce"bers should observe the profession5s technical and ethical standards, strive
continually to i"prove co"petence and .uality of services, and discharge professional
responsibilities to the best of their ability
= Scope and ature of Services. A "e"ber in public practice should observe the principles of
the Code of Professional Conduct in deter"ining the scope and nature of services to be provided
Learning Objective 5-5
1) )or &hich of the follo&ing professional services "ust #1As be independent2
A) Canage"ent advisory services
!) Audits of financial state"ents
#) 1reparation of ta$ returns
%) All three of the above
Ans&er: !
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') D*ndependenceD in auditing "eans:
A) "aintaining an indirect financial interest
!) not being financially dependent on a client
#) ta/ing an unbiased vie&point
%) being an advocate for a client
Ans&er: #
-) 0hen #1As are able to "aintain their actual independence, it is referred to as independence
in:
A) conduct
!) appearance
#) fact
%) total
Ans&er: #
8) ,he 4arbanes-O$ley Act (((((((( a #1A fir" fro" doing both boo//eeping and auditing
services for the sa"e public co"pany client
A) encourages
!) prohibits
#) allo&s
%) allo&s on a case-by-case basis
Ans&er: !
5) ,he 4arbanes-O$ley Act re.uires &hich e"ployees of an accounting fir" to rotate off the
engage"ent every five years2
A)
*n-#harge Auditor Lead audit partner
<es <es
!)
*n-#harge Auditor Lead audit partner
:o :o
#)
*n-#harge Auditor Lead audit partner
<es :o
%)
*n-#harge Auditor Lead audit partner
:o <es
Ans&er: %
=) 0hich of the follo&ing state"ents is true &ith respect to audit co""ittees2
A) Audit co""ittee "e"bers should consist of "e"bers of the co"pany5s "anage"ent
!) All "e"bers of the audit co""ittee "ust be financial e$perts
#) ,he audit co""ittee of a public co"pany is responsible for hiring the auditor
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%) Audit co""ittees "ust have a "ini"u" of ten "e"bers
Ans&er: #
>) ,he provisions of the 4arbanes-O$ley Act of '77' are "ost li/ely to allo& &hich of the
follo&ing non-audit services for audit clients2
A) Appraisal or valuation services 9eg, pension, post-e"ploy"ent benefit liabilities)
!) )inancial infor"ation syste"s design and i"ple"entation
#) *nternal audit outsourcing
%) ,a$ consulting
Ans&er: %
?) 0hich of the follo&ing services are allo&ed by the 4E# &henever a #1A also audits the
co"pany2
A) *nternal audit outsourcing
!) Legal services unrelated to the audit
#) Appraisal or valuation services
%) 4ervices related to assessing the effectiveness of internal control over financial reporting
Ans&er: %
@) 0hich of the follo&ing services is not prohibited by the 4E# &henever a #1A also audits the
co"pany2
A) Actuarial services
!) Assisting the co"pany in preparing certain 4E# registration state"ents 9eg, 17-E, 17-F)
#) *nvest"ent ban/er services
%) !oo//eeping services
Ans&er: !
17) ,he "e"bers of a client5s Daudit co""itteeD 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: !
11) ,he 4arbanes-O$ley Act re.uires a cooling off period of (((((((( before a "e"ber of an
audit tea" can &or/ for a client in a /ey "anage"ent position2
A) One year
!) Eighteen "onths
#) ,hree years
%) )ive years
Ans&er: A
1') *n deter"ining independence &ith respect to any audit engage"ent, the ulti"ate decision as
to &hether or not the auditor is independent "ust be "ade by the:
A) auditor
!) client
#) audit co""ittee
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%) public
Ans&er: A
1-) A #1A fir" should decline an offer to perfor" consulting services engage"ent if:
A) the proposed engage"ent is not accounting-related
!) reco""endations "ade by the #1A fir" are to be subject to revie& by the client
#) acceptance &ould re.uire the #1A fir" to "a/e "anage"ent decisions for an audit client
%) any of the above is true
Ans&er: #
18) #o"panies are re.uired to disclose in their pro$y state"ent or annual filings &ith the 4E#
the total a"ount of audit and non-audit fees paid to the audit fir" for the t&o "ost recent years
0hich of the follo&ing is not one of the categories of fees that "ust be disclosed2
A) ,a$ fees
!) #onsulting fees
#) Audit-related fees
%) All other fees
Ans&er: !
15) *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
Learning Objective 5-=
1) *nterpretations of *ndependence +ule 171 prohibit covered "e"bers fro" o&ning any stoc/
or other direct invest"ent in audit clients #overed "e"bers &ould include &hich of the
follo&ing2
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
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 :o :o
#)
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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
:o <es <es
%)
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
:o :o :o
Ans&er: A
') *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"5s independence 0hich of the
follo&ing situations &ould cause a loss of independence2
A) ,he for"er partner &or/s in the "aintenance depart"ent of an audit client of his for"er fir"
!) ,he for"er partner5s grandson &or/s 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 5G of the stoc/ of an audit client of his for"er fir"
Ans&er: #
-) ,he financial interests of a #1A5s fa"ily "e"bers can affect the #1A5s independence 0hich
of the follo&ing parties &ould not be included as a Ddirect financial interestD of the #1A2
A) 4pouse
!) %ependent child
#) +elative supported by the #1A
%) 4ibling living in the sa"e city as the #1A
Ans&er: %
8) *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 client5s securities
#) a trustee of a client5s pension fund
%) an honorary director for a not-for-profit charitable or religious organiHation
Ans&er: %
5) *ndependence is re.uired of a #1A &hen perfor"ing:
A) e$ternal audits
!) all attestation services
#) all attestation and ta$ services
%) all professional services
Ans&er: !
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=) #1As "ay provide boo//eeping 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 0hich of the
follo&ing conditions is not necessary2
A) ,he #1A "ust not assu"e a "anage"ent role or function
!) ,he client "ust hire an e$ternal #1A to approve all of the journal entries prepared by the
auditor
#) ,he auditor "ust co"ply &ith BAA4 &hen auditing &or/ prepared by hisIher fir"
%) ,he client "ust accept responsibility for the financial state"ents
Ans&er: !
>) An e$a"ple of an Dindirect o&nership interest in a clientD &ould be o&nership of a client5s
stoc/ by a "e"ber5s:
A) dependent child
!) spouse
#) non-dependent grandfather
%) All of the above are e$a"ples of indirect o&nership
Ans&er: #
?) 0hen 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: #
@) A direct financial interest violates independence in &hich of the follo&ing circu"stances2
A) 0hen close relatives such as nondependent children, brothers, and sisters have a significant
financial interest in the client
!) 0hen close relatives such as nondependent children, brothers, and sisters have any financial
interest in the client
#) 0hen the #1A o&ns shares in a "utual fund that has an o&nership interest in the client
%) 0hen close relatives such as brother, sister, or in-la&s are e"ployed by the client
Ans&er: A
17) A #1A sole practitioner purchased stoc/ in a client corporation and placed it in a trust as an
educational fund for the #1A5s "inor child ,he trust securities &ere not "aterial to the #1A but
&ere "aterial to the child5s personal net &orth 0ould the independence of the #1A be
considered to be i"paired &ith respect to the client2
A) <es, because the stoc/ is a direct financial interest
!) <es, because the stoc/ is an indirect financial interest that is "aterial to the #1A5s child
#) :o, because the #1A does not have a direct financial interest in the client
%) :o, because the #1A does not have a "aterial indirect financial interest in the client
Ans&er: A
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11) Julie and Lisa are sisters Julie is a #1A auditing the co"pany &here Lisa &or/s Julie5s
independence is i"paired if:
A) Lisa is the controller
!) Lisa o&ns '5G of the co"pany
#) Lisa is the "ar/eting "anager
%) all of the above
Ans&er: A
1') Oehlers, #1A, is a staff auditor participating in the engage"ent of #apital ,rust, *nc 0hich
of the follo&ing circu"stances i"pairs Oehlers independence2
A) Oehlers5 sister is an internal auditor e"ployed by #apital ,rust
!) Oehlers5 friend, and e"ployee of another local accounting fir", prepares the ta$ return of
#apital ,rust5s #EO
#) Oehlers and #apital ,rust5s 871F plan o&n stoc/ &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
1-) An auditor5s independence is considered i"paired if the auditor has:
A) an i""aterial, indirect financial interest in a client
!) an outstanding K?,777 balance on a credit card issued by a client
#) an auto"obile loan fro" a client ban/, collateraliHed by the auto"obile
%) a joint, closely held business invest"ent &ith the client that is "aterial to the auditor5s net
&orth
Ans&er: %
18) According to the profession5s ethical standards, an auditor &ould be considered independent
in &hich of the follo&ing instances2
A) ,he auditor5s chec/ing 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 organiHation that is a client
%) ,he client o&es the auditor fees for t&o consecutive annual audits
Ans&er: A
15) 0hich of the follo&ing loans &ould be prohibited bet&een a #1A fir" or its "e"bers and
an audit client2
A) Auto"obile loans
!) Loans fully collateraliHed by cash deposits at the sa"e financial institution
#) :e& ho"e "ortgage loans
%) Lnpaid credit card balances not e$ceeding K17,777 in total
Ans&er: #
1=) Lnder the A*#1A independence rules, the auditor:
A) is prohibited fro" perfor"ing a co"pany5s audit and installing and designing the client5s ne&
infor"ation syste"
!) does not need to docu"ent the understanding and &illingness of the client to perfor" all
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"anage"ent functions associated &ith the nonaudit service
#) is prohibited fro" doing any boo//eeping services for the client if perfor"ing the audit
%) "ust follo& the "ore restrictive 4E# independence rules &hen dealing &ith a public
co"pany
Ans&er: %
1>) ,he #ode of #onduct rule on independence indicates that "ateriality "ust be considered
&hen:
A)
Evaluating direct invest"ents
"ade by the #1A
Evaluating indirect
o&nership invest"ents
<es <es
!)
Evaluating direct invest"ents
"ade by the #1A
Evaluating indirect
o&nership invest"ents
:o :o
#)
Evaluating direct invest"ents
"ade by the #1A
Evaluating indirect
o&nership invest"ents
<es :o
%)
Evaluating direct invest"ents
"ade by the #1A
Evaluating indirect
o&nership invest"ents
:o <es
Ans&er: %
1?) 0hich of the follo&ing instances &ould i"pair a #1A5s independence &hen they have been
retained as the auditor2
* A charitable organiHation &here the #1A serves as treasurer
** A "unicipality &here the #1A o&ns K'57,777 of the K'5 "illion outstanding bonds of the
"unicipality
*** A co"pany that the #1A5s invest"ent club o&ns a 17G invest"ent interest
A) * and **
!) * and ***
#) ** and ***
%) *, **, and ***
Ans&er: %
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1@) Lnder the A*#1A independence rules, independence can be considered i"paired &hen:
A) billed fees re"ain unpaid for professional services for "ore than ninety days
!) a client in ban/ruptcy has unpaid fees for "ore than one year
#) there is litigation by the client related to the auditor5s ta$ or other nonaudit services
%) &hen there is a la&suit by the client clai"ing deficiencies in the previous year5s audit
Ans&er: %
'7) 0hich of the follo&ing is least li/ely to i"pair a CPA firm's independence &ith respect to
an audit client in the O/laho"a #ity office of a national #1A fir"2
A) A partner in the O/laho"a #ity office o&ns an i""aterial a"ount of stoc/ in the client
!) A partner in the Jersey #ity office o&ns '5G of the client5s stoc/
#) A partner in the O/laho"a #ity office, &ho does not &or/ 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: %
'1) A #1A5s financial interests in nonclients "ay have an effect on independence if the
nonclients are investors in or investees of the client 0hich situation &ould not i"pair a #1A5s
independence2
A) ,he client has an i""aterial invest"ent in a nonclient investee in &hich the #1A has an
i""aterial invest"ent
!) ,he #1A 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 #1A
has a "aterial invest"ent
%) ,he #1A has a joint closely held invest"ent &ith the client in a nonclient that is "aterial to
the client as &ell as the #1A
Ans&er: A
'') 0hich of the follo&ing state"ents is true2 ,he #1A fir" &ill lose its independence if:
A) a staff auditor providing audit services to the client ac.uires stoc/ in that client
!) a staff ta$ preparer &ho provides 15 hours of non-audit services to the client ac.uires stoc/ 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
'-) *nterpretations to the +ules of #onduct per"it a #1A fir" to do both boo//eeping and
auditing for the sa"e private co"pany client if three criteria are "et 0hich of the follo&ing is
not one of those criteria2
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
4ecurities and E$change #o""ission
#) ,he #1A "ust not assu"e the role of e"ployee or of "anager
%) ,he #1A "ust follo& applicable auditing standards
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Ans&er: !
'8) 0hich of the follo&ing circu"stances i"pairs an auditor5s independence2
* Litigation by a client against an audit fir" clai"ing a deficiency in the previous audit
** Litigation by a client against an audit fir" related to ta$ services
*** Litigation by an audit fir" against a client clai"ing "anage"ent fraud or deceit
A) * and **
!) * and ***
#) ** and ***
%) *, **, and ***
Ans&er: !
'5) 0hich of the follo&ing circu"stances i"pairs an auditor5s independence2
* 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: !
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'=) Each of the follo&ing situations involves a possible violation of the rule on independence
)or each situation, 91) decide &hether the Code of Professional Conduct has been violated, and
9') briefly e$plain ho& the situation violates 9or does not violate) the Code of Professional
Conduct
a ;arry !ro&n is a partner in the ,ope/a office of ;edley M #o, #1As ;arry5s brother is
e"ployed in an audit-sensitive position by Jensen Appliances, a publicly held co"pany in
Fansas Jensen Appliances is one of ;edley M #o5s audit clients :either ;arry nor personnel
fro" the ,ope/a office is involved in the audit of Jensen
Niolation2 <es :o
E$planation:
b John 0oods is an audit "anager &ith #alden M #o, #1As, a one-office #1A fir" John o&ns
177 shares of co""on stoc/ in one of the fir"5s audit clients, but he does not provide any audit
or non-audit services to the co"pany
Niolation2 <es :o
E$planation:
c ,he accounting fir" of )ine M ;er"an, #1As, provides boo//eeping and ta$ services for
;enderson #orporation, a privately held co"pany )ine M ;er"an also perfor"s the annual
audit of ;enderson #orporation
Niolation2 <es :o
E$planation:
d !ob 4helton #1A, is the auditor of #afe Ec/o A couple of &ee/s ago, #afe Ec/o5s
"anage"ent co""enced litigation against !ob, alleging he &as negligent in last year5s audit
Niolation2 <es :o
E$planation:
e ;a"ilton Appliance has not paid Faren Lin&ood, #1A, her audit fee for the past t&o years
Faren is starting &or/ on the current year5s audit of ;a"ilton
Niolation2 <es :o
E$planation:
Ans&er:
a :o violation Although partners in a #1A fir" are not allo&ed to have close relatives
e"ployed in a position of significant influence by a client, it is acceptable to have a close relative
e"ployed in an audit-sensitive position 9&ith no significant influence), as long as the partner
does not participate in the engage"ent and is not in an office that participates on the
engage"ent
b :o violation John is not a covered "e"ber &ith respect to the audit client as he has no
responsibility for the engage"ent and is not in a position to influence the engage"ent
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#opyright 6 '718 1earson Education
c :o violation ,he A*#1A does not prohibit #1A fir"s fro" providing boo//eeping, ta$, and
audit services to the sa"e non-public client
d Niolation 0hen there is a la&suit or intent to start a la&suit bet&een a #1A and an audit
client5s "anage"ent related to audit services, independence is i"paired
e Niolation *ndependence is i"paired if fees re"ain unpaid for services provided "ore than one
'>) %on #rosby, a partner in a national #1A fir", has just learned that his self sufficient
daughter has accepted a position as the #)O of 4unglasses, *nc, a current client &ithin the office
&ith &hich he is e"ployed E$plain the independence ra"ifications on 1) %on5s independence,
') his office, and -) the fir"5s independence
Ans&er:
1 %on5s non-dependent daughter is considered a close relative !ecause she has a /ey position
for the client, %on5s independence is i"paired
' !ecause %on is considered a covered "e"ber any office in &hich he is e"ployed cannot be
independent
- ,he fir" &ill not be considered independent ;o&ever, the fir" can "aintain its independence
if they either "ove:
a %on to an office that does not participate on the engage"ent or
b the audit engage"ent to an office in &hich %on is not e"ployed
1=
#opyright 6 '718 1earson Education
Learning Objective 5->
1) ,he #1A "ust not subordinate his or her professional judg"ent to that of others in any:
A) engage"ent
!) audit engage"ent
#) engage"ent e$cluding ta$ services
%) engage"ent &here the opinion of a specialist is used
Ans&er: A
') 0hich of the follo&ing &ould be a violation of the rule re.uiring DobjectivityD by the #1A2
* ,he auditor accepts "anage"ent5s opinion regarding the collection of accounts receivable
&ithout an independent evaluation
** *n preparing a client5s ta$ return, the #1A encourages a client to ta/e a deduction for &hich
there is no support
A) * only
!) ** only
#) * and **
%) :either * nor **
Ans&er: #
-) 4everal "onths after an un.ualified audit report &as issued, the auditor discovers the financial
state"ents &ere "aterially "isstated ,he client5s #EO agrees that there are "isstate"ents, but
refuses to correct the" 4he clai"s that DconfidentialityD prevents the #1A fro" infor"ing
anyone 0hich of the follo&ing state"ents is correct2
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: %
1>
#opyright 6 '718 1earson Education
8) A #1A 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: !
5) A "e"ber in public practice shall neither receive fro", nor pay to, a client a co""ission
&hen the "e"ber or "e"ber5s fir" also perfor"s certain services for that client Are
co""issions allo&ed if the #1A perfor"s:
A)
A co"pilation that &ill be
used by a third party
An audit of prospective
financial infor"ation
<es <es
!)
A co"pilation that &ill be
used by a third party
An audit of prospective
financial infor"ation
:o :o
#)
A co"pilation that &ill be
used by a third party
An audit of prospective
financial infor"ation
<es :o
%)
A co"pilation that &ill be
used by a third party
An audit of prospective
financial infor"ation
:o <es
Ans&er: !
1?
#opyright 6 '718 1earson Education
=) ,he A*#1A5s #ode of 1rofessional #onduct states that a #1A should "aintain integrity and
objectivity ,he ter" DobjectivityD in the #ode refers to a #1A5s 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 #1A5s revie&
Ans&er: %
>) 0hich of the follo&ing is re.uired for a fir" to designate itself DCe"ber of the A"erican
*nstitute of #ertified 1ublic AccountantsD on its letterhead2
A) At least one of the partners "ust be a "e"ber of the A*#1A
!) All partners "ust be "e"bers of the A*#1A
#) ,he partners &hose na"es appear in the fir" na"e "ust be "e"bers of the A*#1A
%) A "ajority of the partners "ust be "e"bers of the A*#1A
Ans&er: !
?) #1As are prohibited fro" &hich of the follo&ing for"s of advertising2
A) 4elf-laudatory advertising
!) #elebrity endorse"ent advertising
#) Lse of trade na"es, such as DA&eso"e AuditorsD
%) Lse of phrases, such as DBuaranteed largest ta$ refunds in to&nOD
Ans&er: %
@) 0hich of the follo&ing &ould be considered a violation of the A*#1A #ode of #onduct2
A) ,he #1A "a/es the audit files available to the client5s ban/ &ithout the per"ission of the
client
!) ,he #1A fir" charges a contingent fee for nonattestation services to a client for &ho" he
does not perfor" any attestation services
#) ,he #1A fir" ta/es a prospective client to lunch to discuss auditing services
%) A #1A fir" uses the na"e 4an %iego ,a$ 4pecialists
Ans&er: A
17) +ule -71 of the A*#1A5s #ode of 1rofessional #onduct re.uires #1As to "aintain the
confidentiality of client infor"ation ,his rule &ould be violated if a #1A disclosed infor"ation
&ithout a client5s 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 client5s largest stoc/holder
Ans&er: %
11) 0hich one of the follo&ing state"ents is false2
A) #onfidentiality is bro/en &hen an auditor is presented &ith a subpoena concerning an audit
client
!) *nfor"ation that a #1A obtains fro" a client is generally not privileged
#) 0hen a #1A fir" conducts an A*#1A-authoriHed peer revie& of the .uality controls of
another #1A fir", per"ission of the client is not needed to e$a"ine audit docu"entation
1@
#opyright 6 '718 1earson Education
%) A #1A fir" &hich observes substandard audit docu"entation of another fir" during a peer
revie& can initiate a co"plaint to the A*#1A
Ans&er: A
1') A #1A fir":
A) can sell securities to a client for &ho" they perfor" an attestation service
!) can receive a co""ission for a client that they are engaged to perfor" an attestation service
for
#) cannot receive a referral fee for reco""ending the services of another #1A
%) can receive a co""ission fro" a nonattestation client as long as the situation is disclosed
Ans&er: %
1-) 0hich of the follo&ing represents all of the &ays a #1A fir" can be organiHed under +ule
5752
A) 1roprietorships and partnerships
!) 1roprietorships, partnerships, and professional corporations
#) 1roprietorships, general partnerships, general corporations, professional corporations, li"ited
liability co"panies, and li"ited liability partnerships if per"itted by state la&
%) 4ingle proprietorships, partnerships, professional corporations if per"itted by state la&, or
regular corporations
Ans&er: #
18) *n &hich of the follo&ing circu"stances &ould a #1A be ethically bound to refrain fro"
disclosing any confidential client infor"ation2
A) ,he #1A is issued a su""ons enforceable by a court order &hich orders the #1A to present
confidential infor"ation
!) A "ajor stoc/holder of a client co"pany see/s accounting infor"ation fro" the #1A after
"anage"ent declined to disclose the re.uested infor"ation
#) #onfidential client infor"ation is "ade available as part of a .uality revie& of the #1A5s
practice by a peer revie& tea" authoriHed by the A*#1A
%) An in.uiry by a disciplinary body of a state #1A society re.uests confidential client
infor"ation
Ans&er: !
15) 0hich of the follo&ing fee arrange"ents is not a violation of the A*#1A5s #ode of
1rofessional #onduct2
A) !asing fees as an e$pert &itness on the a"ount a&arded to the plaintiff, even though the #1A
perfor"s a co"pilation for client use
!) !asing consulting fees on a percentage of a bond issue, even though the #1A perfor"s a
revie& of the client5s 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 #1A perfor"s an
audit of the client5s financial state"ents
Ans&er: A
'7
#opyright 6 '718 1earson Education
1=) 0hich of the follo&ing is not defined as an act discreditable in either the +ules or the
*nterpretations of the A*#1A5s #ode of 1rofessional #onduct2
A) ,he #1A fir"5s partner in charge failed to file his ta$ return for the past year
!) ,he #1A fir" discri"inates in its hiring practices based on the age of the applicant
#) ,he #1A retains the client5s boo/s and records to enforce past-due pay"ent of the #1A5s bill,
even after the client has de"anded they be returned
%) ,he #1A fir"5s partner-in-charge &as a passenger in a car driven by his &ife On the &ay
ho"e fro" the fir"5s #hrist"as party, she &as charged &ith Ddriving &hile into$icatedD
Ans&er: %
1>) )reedo" fro" (((((((( "eans the absence of relationships that "ight interfere &ith
objectivity or integrity
A) independence
!) acts discreditable
#) i"partiality
%) conflicts of interest
Ans&er: %
1?) +ule '71 - Beneral 4tandards re.uires "e"bers to co"ply &ith certain standards and
interpretations 0hich of the follo&ing is not a standard specifically addressed in +ule '712
A) 1rofessional integrity
!) %ue professional care
#) 1lanning and supervision
%) 4ufficient relevant data
Ans&er: A
1@) 0hich of the follo&ing activities is allo&ed for a #1A fir"5s attestation clients2
A) #ontingent fees fi$ed by a court
!) #o""issions for referring a revie& client to an insurance agency for insurance coverage
#) 1reparation of ta$ returns for &hich fees are based upon client refunds
%) Each of the above is allo&ed
Ans&er: A
'7) %iscuss +ule -71P#onfidential #lient *nfor"ation, including the four e$ceptions to the rule
Ans&er: +ule -71 prohibits a "e"ber fro" disclosing any confidential client infor"ation
&ithout the specific consent fro" the client ;o&ever, there are four conditions &hen client
per"ission is not re.uired:
A Obligations related to technical standards3 ie, &hen +ule '7' or +ule '7- re.uires the
disclosure
A *n response to a valid subpoena or su""ons and co"pliance &ith la&s and regulations
A A peer revie& is being conducted under A*#1A, state #1A 4ociety, or 4tate !oard of
Accountancy authoriHation
A ,he #1A is initiating or responding to an in.uiry fro" a recogniHed investigative body or the
professional ethics division
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#opyright 6 '718 1earson Education
'1) ,he follo&ing situations involve a possible violation of the A*#1A5s Code of Professional
Conduct )or each situation, 91) deter"ine the applicable rule fro" the Code, 9') decide &hether
or not the Code has been violated, and 9-) briefly e$plain ho& the situation violates 9or does not
violate) the Code
a *n '71-, )ree"an and Johnson, both #1As, decided to for" a #1A practice *n '715, )ree"an
and Johnson approached !ill %elaney, a physician and "edical e$pert, and as/ed hi" to assist
the" &ith their gro&ing "edical consulting practice %elaney agreed, but only after he &as
given an o&nership interest in the fir" %elaney does not intend to .uit his private "edical
practice
+ule: (((((((( Niolation2 <es :o
E$planation:
b !rian %e1alie has a successful dentistry practice in #harleston !rian has reco""ended one
of his patients to Fatie 0alton, #1A ,o sho& gratitude for the referral, Fatie has agreed to pay
!rian a to/en gift of K57 Fatie discloses the pay"ent arrange"ent to her ne& clients
+ule: (((((((( Niolation2 <es :o
E$planation:
c ,he accounting fir" of !ayer M 1eng, #1As, is negotiating a fee &ith a ne& audit client ,hey
agree the client &ill pay K57,777 if !ayer M 1eng issues a clean, un.ualified opinion, K87,777 if
a .ualified opinion is issued, and only K'7,777 if an adverse opinion is issued
+ule: (((((((( Niolation2 <es :o
E$planation:
d %on 4"ith, #1A, is a "e"ber of the engage"ent tea" that perfor"s the audit of 4ha&
#orporation %on5s five-year-old daughter, 1recious, received ten shares of 4ha& #orporation5s
co""on stoc/ for her fifth birthday ,he stoc/ &as a gift fro" 1recious5s grand"other
+ule: (((((((( Niolation2 <es :o
E$planation:
e Jennifer ;arris, #1A, is a partner in the #1A fir" that audits Alltech, *nc, a closely held
corporation Jennifer5s sister-in-la& is the chief financial officer at Alltech, *nc
+ule: (((((((( Niolation2 <es :o
E$planation:
Ans&er:
a Niolation of the rule on )or" of OrganiHation and :a"e 9+ule 575) :on-#1A o&nership of
fir"s is allo&able, ho&ever, non-#1A o&ners "ust actively provide services to the fir"5s clients
as their principal occupation
b :o violation of the #o""issions and +eferral )ees rule 9+ule 57-) A #1A "ay pay a referral
''
#opyright 6 '718 1earson Education
fee to a non-#1A as long as the pay"ent is disclosed to the client
c Niolation of the #ontingent )ees rule 9+ule -7') ,his is a contingent fee agree"ent and is
prohibited by +ule -7'
d Niolation of the *ndependence rule 9+ule 171) %on is a covered "e"ber for purposes of +ule
171 !ecause his daughter is a dependent, her o&nership interest in 4ha& is treated as a direct
financial interest of her father
e :o violation of the *ndependence rule 9+ule 171) 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
'-
#opyright 6 '718 1earson Education
'') ,he follo&ing situations involve a possible violation of the A*#1A5s Code of Professional
Conduct )or each situation, 91) deter"ine the applicable rule fro" the Code, 9') decide &hether
or not the Code has been violated, and 9-) briefly e$plain ho& the situation violates 9or does not
violate) the Code
a ;o&ard #unningha" M #o, #1As, designates its fir" as DCe"bers of the A"erican *nstitute
of #ertified 1ublic AccountantsD All of the partners of the fir" are #1As ;o&ever, one of the
partners has recently chosen to allo& her "e"bership to lapse because of personal reasons
+ule: (((((((( Niolation2 <es :o
E$planation:
b !rad Long, #1A, &as traveling fro" Orlando to Cia"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 5 years
in prison
+ule: (((((((( Niolation2 <es :o
E$planation:
c Felley !rent, #1A, is a partner in a one-office #1A fir" that audits %ane, *nc, a closely held
corporation Felley5s sister &as recently appointed as the chief financial officer for %ane, *nc
+ule: (((((((( Niolation2 <es :o
E$planation:
d 4arah Cartin, #1A, is a senior auditor in the 4an )rancisco office of #ooper M ;o&ell, #1As
4arah5s father is e"ployed as the controller of Line Electronics, a public co"pany in %etroit,
Cichigan Line Electronics is one of the fir"5s audit clients :either 4arah nor the 4an )rancisco
office is involved in the audit of Line Electronics
+ule: (((((((( Niolation2 <es :o
E$planation:
e On August '7, '7$=, ;an/ Anderson, #1A and partner, &as offered and accepted the
engage"ent to audit the annual financial state"ents of Jernigan #orporation for the year ended
%ece"ber -1, '7$= 1reli"inary &or/ began on the audit on 4epte"ber 15, '7$= and the
engage"ent ended on Carch >, '7$> Jernigan is regulated by the 4E# ;an/ served as
controller of Jernigan #orporation fro" %ece"ber 1, '7$', until April 17, '7$=, at &hich ti"e
he ter"inated his e"ploy"ent &ith Jernigan
+ule: (((((((( Niolation2 <es :o
E$planation:
Ans&er:
a Niolation of the )or" of OrganiHation and :a"e rule 9+ule 575) A fir" "ay not designate
itself as DCe"bers of the A"erican *nstitute of #ertified 1ublic AccountantsD unless all of its
o&ners are "e"bers of the *nstitute
'8
#opyright 6 '718 1earson Education
b Niolation of the Acts %iscreditable rule 9+ule 571) )elonies are considered acts discreditable
c Niolation of the *ndependence rule 9+ule 171) According to the Code, Felly5s sister is a Dclose
relativeD and she occupies a /ey position at an audit client !ecause Felly 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 9+ule 171) 0hile 4arah5s father occupies a /ey position
&ith an audit client of the fir", there is no independence violation as long as 4arah is not a
"e"ber of the engage"ent tea" ,he fir" "ay provide the audit services
e Niolation of the *ndependence rule 9+ule 171) 4ince ;an/ 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
'5
#opyright 6 '718 1earson Education
'-) ,he scenarios belo& all involve a possible violation of the A*#1A5s Cod of Professional
Conduct.
1 Lsing the list belo&, indicate &hich of the Code of Conduct +ules applies to the scenario
a 171: *ndependence
b 17': *ntegrity and Objectivity
c -7': #ontingent )ees
d 571: Acts %iscreditable
e 57-: #o""issions and +eferral )ees
f 575: )or" of OrganiHation and :a"e
' 4tate if the scenario is a violation of the Code
4cenario:
1 Cargaret ;enry is a partner in the ,upelo office of Jen/ins M ,horn, #1As Cargaret5s father
is the controller at Car/rich 4porting 4upplies, *nc, a publicly held co"pany in ,upelo
Car/rich is one of Jen/ins M ,horn5s audit clients Cargaret is not involved in the audit of
Car/rich
' Jason Ale$ander is an audit "anager &ith +eese M #o, #1As Jason o&ns 177 share of
co""on stoc/ in one of the fir"5s audit clients, but he does not provide any audit or non-audit
services to the co"pany
- ,he accounting fir" of )ine M ;er"an, #1As, provides boo//eeping and ta$ services for
;enderson #orporation, a privately held co"pany Cr ;er"an also perfor"s the annual audit of
;enderson #orporation
8 Elaine #ooper #1A, is the auditor of 1aula5s 1iHHa ,o&ard the end of the audit, 1aula gave
Elaine her esti"ate of receivable collectability and Elaine accepted it &ithout any testing
5 #harley +ay, #1A, is a "e"ber of the engage"ent tea" that perfor"s the audit of %esiree
#orporation #harley5s five-year-old daughter, !ec/y, received ten shares of %esiree co""on
stoc/ for her fifth birthday in a trust fund established by !ec/y5s grand"other
= )ree"an and Johnson for"ed a successful #1A practice ten years ago *n the current year,
they approached Ada" 4a&tooth, a surgeon and "edical e$pert, and as/ed hi" to assist the"
&ith their gro&ing "edical consulting practice 4a&tooth agreed, but only after he &as given an
o&nership interest in the fir" 4a&tooth does intend to reduce his private practice hours and
spend 87G of his &or/ing hours devoted to the )ree"an M Johnson practice
> 4ally 1reen has a successful co"puter net&or/ consulting business 4ally has reco""ended
one of her clients to 4a" 0alton, #1A ,o sho& gratitude for the referral, 4a" has agreed to pay
4ally a to/en gift of K57 4a" has not disclosed the pay"ent arrange"ent to his ne clients
? ,he accounting fir" of 4"ith M !lac/, #1As, is negotiating a fee &ith a ne& audit client
&here the client &ill pay K57,777 if the client obtains the line of credit needed for &or/ing
capital purposes Other&ise, the fee &ill be K87,777
@ !rad !arns, #1A, &as traveling fro" Las Negas to the Brand #anyon &hen he &as pulled
'=
#opyright 6 '718 1earson Education
over by a police officer for suspicion of driving under the influence ;e &as convicted in court of
driving under the influence of alcohol and received si$ "onths probation
17 Canuel LopeH, #1A, is a senior in a s"all, local, #1A fir" that audits #hildress, *nc, a
closely held corporation Canuel5s sister &as recently appointed as the controller for #hildress,
*nc
Ans&er:
1art 1: 1 a = f
' a > e
- a ? c
8 b @ d
5 a 17 a
1art ': 1 <es = <es
' :o > <es
- :o ? <es
8 <es @ :o
5 <es 17 <es
'>
#opyright 6 '718 1earson Education
Learning Objective 5-?
1) *f the board of accountancy in the state in &hich a #1A fir" is licensed has rules that are
different than the A*#1A5s rules, the #1A fir" "ust follo&:
A) &hichever rules are less restrictive
!) &hichever rules are "ore restrictive
#) the rules of the A*#1A
%) the rules of the state5s board of accountancy
Ans&er: !
') %escribe the "ethods used by the A*#1A and 4tate !oards of Accountancy to enforce the
rules of conduct
Ans&er: ,he A*#1A 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 Joint ,rial !oard ,he violator "ay be suspended or e$pelled fro" "e"bership in the
A*#1A
Niolation of a 4tate !oards5 rules of conduct is punishable by loss of the violator5s #1A
certificate and license to practice
,er"s: Cethods to enforce the rules conduct
-) E$pulsion fro" the A*#1A for failing to follo& the rules of conduct is, by itself, sufficient to
prevent a #1A fro" practicing public accounting
A) ,rue
!) )alse
Ans&er: !
'?
#opyright 6 '718 1earson Education