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$periences %) al&ays incorporated in la&s Ans&er: ! 'er"s: 'er"s: Ethical (rinciples %iff: Easy Objective: LO 4-1 AA#!: Ethical understanding and reasoning abilities abilities *) ++++++++ "eans that a person acts according to conscience, regardless of the situation A) #aring !) airness #) ntegrity %) .espect Ans&er: # 'er"s: 'er"s: Ethical principles and integrity %iff: /oderate Objective: LO 4-1 AA#!: Ethical understanding and reasoning abilities abilities 0) One of the "ain reasons people p eople act unethically is that they choose choo se to act selfishly A) 'rue !) alse Ans&er: A 'er"s: 'er"s: Ethical (rinciples %iff: Easy Objective: LO 4-1 AA#!: Ethical understanding and reasoning abilities abilities
1
Learning Objective 4-* 1) A si$-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 outco "e of the dile""a %) obtain the relevant facts Ans&er: % 'er"s: Ethical dile""a %iff: /oderate Objective: LO 4-* AA#!: Ethical understanding and reasoning abilities abilities *) %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 situation a person faces in &hich a decision "ust be "ade about an appropriate behavior Although 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 ey facts fro" their dile""a * Identify the ethical issues from from the facts. tudents should identify the ey 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 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 shortand long-ter" effects of each alternative 7 Decide the appropriate action 'er"s: Ethical dile""a %iff: #hallenging Objective: LO 4-* AA#!: Ethical understanding and reasoning abilities abilities 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 'er"s: 'er"s: Ethical (rinciples %iff: Easy Objective: LO 4-* AA#!: Ethical understanding and reasoning abilities abilities
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Learning Objective 4-* 1) A si$-step approach is often used to resolve an ethical dile""a 'he first step in this process is to: A) identify the alternative actions available !) identify the ethical issues fro" the facts #) deter"ine &ho &ill be affected by the outco"e outco "e of the dile""a %) obtain the relevant facts Ans&er: % 'er"s: Ethical dile""a %iff: /oderate Objective: LO 4-* AA#!: Ethical understanding and reasoning abilities abilities *) %escribe an ethical dile""a that an auditor or an accountant "ight face in his or her business career, then illustrate ho& the auditor or accountant "ight use the si$-step approach presented in the te$t to resolve that dile""a !e specific Ans&er: An ethical dile""a is a situation situation a person faces in &hich a decision "ust be "ade about an appropriate behavior Although Although students3 ans&ers &ill vary depending on the dile""a, their ans&er should list the follo&ing si$ steps, along &ith a discussion of ho& each step relates to their particular dile""a: 1 Obtain the relevant facts. tudents should list the ey facts fro" their dile""a * Identify the ethical issues from from the facts. tudents should identify the ey 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 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 shortand long-ter" effects of each alternative 7 Decide the appropriate action 'er"s: Ethical dile""a %iff: #hallenging Objective: LO 4-* AA#!: Ethical understanding and reasoning abilities abilities 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 'er"s: 'er"s: Ethical (rinciples %iff: Easy Objective: LO 4-* AA#!: Ethical understanding and reasoning abilities abilities
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Learning Objective 4-0 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 reuired by federal legislation %) it allo&s licensing agencies to have a yardstic to "easure deficient behavior Ans&er: A 'er"s: 'er"s: .eason for code of professional conduct %iff: Easy Objective: LO 4-0 AA#!: .eflective thining thining sills sills *) ;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 ben eficiaries 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: 'er"s: #(A engaged to perfor" audit of financial state"ents %iff: /oderate Objective: LO 4-0 AA#!: .eflective thining thining sills sills 0) E$plain &hy there is a special need for ethical conduct in the auditing profession Ans&er: 'he reason for an e$pectation e$pectation of a high level of professional professional conduct by any profession is the need for public confidence in the uality of service by the profession, regardless of the individual providing it t is not practical for "ost custo"ers to evaluate the uality of the perfor"ance of professional services because of their co"ple$ity 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 conduc t by all its "e"bers f users of auditing services &ere to lac 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: 'er"s: >eed for ethical conduct in auditing auditing profession %iff: Easy Objective: LO 4-0 AA#!: Ethical understanding and reasoning abilities abilities
0
Learning Objective 4-4 1) ;hich of the follo&ing is5are) true concerning the Ethical (rinciples of the Code of Professional Professional Conduct < 'h 'hey ey iden identi tify fy idea ideall condu conduct ct 'hey are general general ideals ideals and are not enforceab enforceable le A) only !) only #) and %) >either nor Ans&er: # 'er"s: 'er"s: Ethical principles of the #ode of (rofessional #onduct %iff: Easy Objective: LO 4-4 AA#!: Ethical understanding and reasoning abilities abilities *) ;hich of the follo&ing is not one of o f the four parts of the A#(A3s A#(A3s #ode of (rofessional #onduct< A) (rinciples !) .ules of #onduct #) nterpretations %) %efinitions Ans&er: % 'er"s: A#(A #ode of (rofessional #onduct #onduc t %iff: Easy Objective: LO 4-4 AA#!: Ethical understanding and reasoning abilities abilities
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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 !) ?onor the public trust >o
erve the client3s interest >o
?onor the public trust @es
erve the client3s interest >o
?onor the public trust >o
erve the client3s interest @es
#)
%)
Ans&er: # 'er"s: Ethical (rinciples= (ublic interest= Obligations %iff: /oderate Objective: LO 4-4 AA#!: Ethical understanding and reasoning abilities 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 AA#!: Ethical understanding and reasoning abilities
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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 AA#!: Ethical understanding and reasoning abilities 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 AA#!: Ethical understanding and reasoning abilities ) 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 AA#!: Ethical understanding and reasoning abilities
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B) 'he A#(A3s #ode of (rofessional #onduct reuires 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 #(As Ans&er: A 'er"s: ndependence %iff: /oderate Objective: LO 4-4 AA#!: Ethical understanding and reasoning abilities 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$ercising: A) due care !) integrity #) independence %) objectivity Ans&er: A 'er"s: ndependence %iff: /oderate Objective: LO 4-4 AA#!: Ethical understanding and reasoning abilities 12) our of the si$ Ethical (rinciples in the A#(A3s Code of Professional Conduct are eually 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 AA#!: Ethical understanding and reasoning abilities 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 AA#!: Ethical understanding and reasoning abilities
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$ecutive co""ittee of the professional ethics division of specific factual circu"stances 'hey are not enforceable, but a practitioner "ust justify any departure 'er"s: our parts of A#(A #ode of (rofessional #onduct %iff: /oderate Objective: LO 4-4 AA#!: Ethical understanding and reasoning abilities 10) !riefly describe the advantages and disadvantages of a code of conduct based on general state"ents of ideal conduct as opposed to specific rules that define unacceptable behavior Ans&er: Advantages %isadvantages eneral state"ents
E"phasis on positive activities encouraging a high level of perfor"ance
%ifficult to enforce
pecific rules
Enforceability of 'endency for rules to be "ini"u" behavior and regarded as "a$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 AA#!: Ethical understanding and reasoning abilities
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 'er"s: Ethical (rinciples %iff: /oderate Objective: LO 4-4 AA#!: Ethical understanding and reasoning abilities 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 AA#!: Ethical understanding and reasoning abilities 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: ! 'er"s: #ode of (rofessional #onduct %iff: Easy Objective: LO 4-4 AA#!: Ethical understanding and reasoning abilities
C
1) 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: ! 'er"s: #ode of (rofessional #onduct %iff: Easy Objective: LO 4-4 AA#!: Ethical understanding and reasoning abilities 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 AA#!: Ethical understanding and reasoning abilities 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 AA#!: Ethical understanding and reasoning abilities *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 AA#!: Ethical understanding and reasoning abilities
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*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 &or 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 AA#!: Ethical understanding and reasoning abilities **) n the %ICP% Code of Professional Conduct , the si$th principle of professional conduct, entitled 9cope and >ature of ervices,9 applies to "e"bers of the A#(A &ho &or 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 AA#!: Ethical understanding and reasoning abilities *0) 'he Conceptual &ramework for %ICP% Independence #tandards can be used &hen "aing decisions on ethical "atters not e$plicitly addressed in the #ode A) 'rue !) alse Ans&er: A 'er"s: A#(A #ode of (rofessional #onduct %iff: /oderate Objective: LO 4-4 AA#!: Ethical understanding and reasoning abilities *4) Each state also has rules of conduct that are reuired for licensing by the state A) 'rue !) alse Ans&er: A 'er"s: A#(A #ode of (rofessional #onduct %iff: /oderate Objective: LO 4-4 AA#!: Ethical understanding and reasoning abilities
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Learning Objective 4-6 1) or &hich of the follo&ing professional services "ust #(As be independent< A) /anage"ent advisory services !) Audits of financial state"ents #) (reparation of ta$ returns %) All three of the above Ans&er: ! 'er"s: ndependence %iff: Easy Objective: LO 4-6 AA#!: Ethical understanding and reasoning abilities *) 9ndependence9 in auditing "eans: A) "aintaining an indirect financial interest !) not being financially dependent on a client #) taing an unbiased vie&point %) being an advocate for a client Ans&er: # 'er"s: ndependence %iff: Easy Objective: LO 4-6 AA#!: Ethical understanding and reasoning abilities 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 AA#!: Ethical understanding and reasoning abilities 4) 'he arbanes-O$ley Act ++++++++ a #(A fir" fro" doing both booeeping and auditing services for the sa"e public co"pany client A) encourages !) prohibits #) allo&s %) allo&s on a case-by-case basis Ans&er: ! 'er"s: arbanes-O$ley= non-audit services %iff: Easy Objective: LO 4-6 AA#!: Ethical understanding and reasoning abilities 1*
6) 'he arbanes-O$ley Act reuires &hich e"ployees of an accounting fir" to rotate off the engage"ent every five years< A) n-#harge Auditor Lead audit partner @es @es !) n-#harge Auditor >o
Lead audit partner >o
n-#harge Auditor @es
Lead audit partner >o
n-#harge Auditor >o
Lead audit partner @es
#)
%)
Ans&er: % 'er"s: arbanes-O$ley Act= (artner rotation %iff: /oderate Objective: LO 4-6 AA#!: Ethical understanding and reasoning abilities '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$perts #) 'he audit co""ittee of a public co"pany is responsible for hiring the auditor %) Audit co""ittees "ust have a "ini"u" of ten "e"bers Ans&er: # 'er"s: Audit co""ittee %iff: /oderate Objective: LO 4-6 AA#!: Ethical understanding and reasoning abilities ) 'he provisions of the arbanes-O$ley Act of *22* are "ost liely 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$ley Act of *22*= Allo&ed non-audit services %iff: /oderate Objective: LO 4-6 AA#!: Ethical understanding and reasoning abilities 10
B) ;hich of the follo&ing services are allo&ed by the E# &henever a #(A also audits the co"pany< A) nternal audit outsourcing !) Legal services unrelated to the audit #) Appraisal or valuation services %) ervices related to assessing the effectiveness of internal control over financial reporting Ans&er: % 'er"s: ervices allo&ed by E# &hen #(A audits co"pany %iff: /oderate Objective: LO 4-6 AA#!: Ethical understanding and reasoning abilities C) ;hich of the follo&ing services is not prohibited by the E# &henever a #(A also audits the co"pany< A) Actuarial services !) Assisting the co"pany in preparing certain E# registration state"ents 5eg, 12-G, 12-H) #) nvest"ent baner services %) !ooeeping services Ans&er: ! 'er"s: ervices allo&ed by E# &hen #(A audits co"pany %iff: /oderate Objective: LO 4-6 AA#!: Ethical understanding and reasoning abilities 12) 'he "e"bers of a client3s 9audit co""ittee9 should be: A) "e"bers of "anage"ent !) directors &ho are not a part of co"pany "anage"ent #) non-directors and non-"anagers %) directors and "anagers Ans&er: ! 'er"s: /e"bers of audit co""ittee %iff: /oderate Objective: LO 4-6 AA#!: Ethical understanding and reasoning abilities 11) 'he arbanes-O$ley Act reuires a cooling off period of ++++++++ before a "e"ber of an audit tea" can &or for a client in a ey "anage"ent position< A) One year !) Eighteen "onths #) 'hree years %) ive years Ans&er: A 'er"s: arbanes-O$ley Act= #ooling off period %iff: Easy Objective: LO 4-6 AA#!: Ethical understanding and reasoning abilities 'opic: OF 14
1*) n deter"ining independence &ith respect to any audit engage"ent, the ulti"ate decision as to &hether or not the auditor is independent "ust be "ade by the: A) auditor !) client #) audit co""ittee %) public Ans&er: A 'er"s: Auditor independence %iff: /oderate Objective: LO 4-6 AA#!: Ethical understanding and reasoning abilities 10) A #(A fir" should decline an offer to perfor" consulting services engage"ent if: A) the proposed engage"ent is not accounting-related !) reco""endations "ade by the #(A fir" are to be subject to revie& by the client #) acceptance &ould reuire the #(A fir" to "ae "anage"ent decisions for an audit client %) any of the above is true Ans&er: # 'er"s: #(A fir" should decline to perfor" consulting services %iff: /oderate Objective: LO 4-6 AA#!: Ethical understanding and reasoning abilities 14) #o"panies are reuired to disclose in their pro$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 AA#!: Ethical understanding and reasoning abilities 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 AA#!: Ethical understanding and reasoning abilities 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 AA#!: Ethical understanding and reasoning abilities 'opic: OF 1) '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 AA#!: Ethical understanding and reasoning abilities 1B) or a public co"pany, the arbanes-O$ley Act reuires audit co""ittee approval of all nonaudit services prior to their perfor"ance by the co"pany3s e$ternal auditor A) 'rue !) alse Ans&er: A 'er"s: arbanes-O$ley Act= Audit co""ittee %iff: /oderate Objective: LO 4-6 AA#!: .eflective thining sills 'opic: OF
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Learning Objective 4-7 1) nterpretations of ndependence .ule 121 prohibit covered "e"bers fro" o&ning any stoc or other direct invest"ent in audit clients #overed "e"bers &ou ld include &hich of the follo&ing< A) All partners in the engage"ent office even if they have no engage"ent ndividuals on the attest 'he fir" and its e"ployee responsibility engage"ent benefit plans @es @es @es !) All partners in the engage"ent office even if they have no engage"ent responsibility @es
ndividuals on the attest engage"ent >o
'he fir" and its e"ployee benefit plans >o
ndividuals on the attest engage"ent @es
'he fir" and its e"ployee benefit plans @es
ndividuals on the attest engage"ent >o
'he fir" and its e"ployee benefit plans >o
#) All partners in the engage"ent office even if they have no engage"ent responsibility >o %) All partners in the engage"ent office even if they have no engage"ent responsibility >o
Ans&er: A 'er"s: ndependence .ule 121= %irect invest"ent= #overed "e"bers %iff: Easy Objective: LO 4-7 AA#!: Ethical understanding and reasoning abilities
1
*) 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 &ors in the "aintenance depart"ent of an audit client of his for"er fir" !) 'he for"er partner3s grandson &ors 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 stoc 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 AA#!: Ethical understanding and reasoning abilities 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 AA#!: Ethical understanding and reasoning abilities 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 AA#!: Ethical understanding and reasoning abilities 6) ndependence is reuired 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 AA#!: Ethical understanding and reasoning abilities
1B
7) #(As "ay provide booeeping 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$ternal #(A to approve all of the journal entries prepared by the auditor #) 'he auditor "ust co"ply &ith AA &hen auditing &or prepared by hisJher fir" %) 'he client "ust accept responsibility for the financial state"ents Ans&er: ! 'er"s: ndependence %iff: /oderate Objective: LO 4-7 AA#!: Ethical understanding and reasoning abilities ) An e$a"ple of an 9indirect o&nership interest in a client9 &ould be o&nership of a client3s stoc 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 AA#!: Ethical understanding and reasoning abilities 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 AA#!: Ethical understanding and reasoning abilities
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 AA#!: Ethical understanding and reasoning abilities 12) A #(A sole practitioner purchased stoc 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 stoc is a direct financial interest !) @es, because the stoc 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 AA#!: Ethical understanding and reasoning abilities 11) Kulie and Lisa are sisters Kulie is a #(A auditing the co"pany &here Lisa &ors Kulie3s independence is i"paired if: A) Lisa is the controller !) Lisa o&ns *6I of the co"pany #) Lisa is the "areting "anager %) all of the above Ans&er: A 'er"s: inancial interest and independence %iff: /oderate Objective: LO 4-7 AA#!: Ethical understanding and reasoning abilities
*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 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 'er"s: inancial interest and independence %iff: /oderate Objective: LO 4-7 AA#!: Ethical understanding and reasoning abilities 10) An auditor3s independence is considered i"paired if the auditor has: A) an i""aterial, indirect financial interest in a client !) an outstanding B,222 balance on a credit card issued by a client #) an auto"obile loan fro" a client ban, 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: % 'er"s: inancial interest and independence %iff: /oderate Objective: LO 4-7 AA#!: Ethical understanding and reasoning abilities 14) According to the profession3s ethical standards, an auditor &ould be considered independent in &hich of the follo&ing instances< A) 'he auditor3s checing 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 AA#!: Ethical understanding and reasoning abilities
*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$ceeding 12,222 in total Ans&er: # 'er"s: ndependence= Loan e$ceptions %iff: #hallenging Objective: LO 4-7 AA#!: Ethical understanding and reasoning abilities 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 booeeping 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 AA#!: Ethical understanding and reasoning abilities
**
1) 'he #ode of #onduct rule on independence indicates that "ateriality "ust be considered &hen: A) Evaluating direct invest"ents Evaluating indirect "ade by the #(A o&nership invest"ents @es @es !) Evaluating direct invest"ents "ade by the #(A >o
Evaluating indirect o&nership invest"ents >o
#) Evaluating direct invest"ents "ade by the #(A @es
Evaluating indirect o&nership invest"ents >o
%) Evaluating direct invest"ents "ade by the #(A >o
Evaluating indirect o&nership invest"ents @es
Ans&er: % 'er"s: ndependence= %irect and indirect o&nership invest"ents %iff: /oderate Objective: LO 4-7 AA#!: Ethical understanding and reasoning abilities 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 *62,222 of the *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 AA#!: Ethical understanding and reasoning abilities
*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 banruptcy 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: % 'er"s: ndependence ra"ifications on auditor and #(A fir" %iff: #hallenging Objective: LO 4-7 AA#!: Ethical understanding and reasoning abilities *2) ;hich of the follo&ing is least liely to i"pair a CPA firm's independence &ith respect to an audit client in the Olaho"a #ity office of a national #(A fir"< A) A partner in the Olaho"a #ity office o&ns an i""aterial a"ount of stoc in the client !) A partner in the Kersey #ity office o&ns *6I of the client3s stoc #) A partner in the Olaho"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: % 'er"s: ndependence %iff: #hallenging Objective: LO 4-7 AA#!: Ethical understanding and reasoning abilities *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 AA#!: Ethical understanding and reasoning abilities
*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 acuires stoc in that client !) a staff ta$ preparer &ho provides 16 hours of non-audit services to the client acuires 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 'er"s: ndependence %iff: /oderate Objective: LO 4-7 AA#!: Ethical understanding and reasoning abilities *0) nterpretations to the .ules of #onduct per"it a #(A fir" to do both booeeping 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 reuired to file an annual report, including audited financial state"ents, &ith the ecurities and E$change #o""ission #) 'he #(A "ust not assu"e the role of e"ployee or of "anager %) 'he #(A "ust follo& applicable auditing standards Ans&er: ! 'er"s: ervices allo&ed by E# &hen #(A audits co"pany %iff: /oderate Objective: LO 4-7 AA#!: Ethical understanding and reasoning abilities *4) ;hich of the follo&ing circu"stances i"pairs an auditor3s independence< Litigation by a client against an audit fir" clai"ing a deficiency in the previous audit Litigation by a client against an audit fir" related to ta$ 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 AA#!: .eflective thining sills
*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 AA#!: .eflective thining sills
*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$plain ho& the situation violates 5or does not violate) the Code of Professional Conduct a ?arry !ro&n is a partner in the 'opea office of ?edley N #o, #(As ?arry3s brother is e"ployed in an audit-sensitive position by Kensen Appliances, a publicly held co"pany in Hansas Kensen Appliances is one of ?edley N #o3s audit clients >either ?arry nor personnel fro" the 'opea office is involved in the audit of Kensen iolation< @es >o E$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 stoc in one of the fir"3s audit clients, but he does not provide any audit or non-audit services to the co"pany iolation< @es >o E$planation: c 'he accounting fir" of ine N ?er"an, #(As, provides booeeping and ta$ services for ?enderson #orporation, a privately held co"pany ine N ?er"an also perfor"s the annual audit of ?enderson #orporation iolation< @es >o E$planation: d !ob helton #(A, is the auditor of #afe Eco A couple of &ees ago, #afe Eco3s "anage"ent co""enced litigation against !ob, alleging he &as negligent in last year3s audit iolation< @es >o E$planation: e ?a"ilton Appliance has not paid Haren Lin&ood, #(A, her audit fee for the past t&o years Haren is starting &or on the current year3s audit of ?a"ilton iolation< @es >o E$planation: Ans&er: a >o violation Although partners in a #(A fir" are not allo&ed to have close relatives e"ployed in a position of significant influence by a client, it is acceptable to have a close relative e"ployed in an audit-sensitive position 5&ith no significant influence), as long as the partner does not participate in the engage"ent and is not in an office that participates on the engage"ent b >o violation Kohn is not a covered "e"ber &ith respect to the audit client as he has no responsibility for the engage"ent and is not in a position to influence the engage"ent *
c >o violation 'he A#(A does not prohibit #(A fir"s fro" providing booeeping, ta$, and audit services to the sa"e non-public client d iolation ;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 iolation 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: iolation of rule on independence= A#(A #ode of (rofessional #onduct %iff: #hallenging Objective: LO 4-7 AA#!: Ethical understanding and reasoning abilities *) %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$plain the independence ra"ifications on 1) %on3s independence, *) his office, and 0) the fir"3s independence Ans&er: 1 %on3s non-dependent daughter is considered a close relative !ecause she has a ey position for the client, %on3s independence is i"paired * !ecause %on is considered a covered "e"ber any office in &hich he is e"ployed cannot be independent 0 'he fir" &ill not be considered independent ?o&ever, the fir" can "aintain its independence if they either "ove: a %on to an office that does not participate on the engage"ent or b the audit engage"ent to an office in &hich %on is not e"ployed 'er"s: ndependence ra"ifications on auditor and #(A fir" %iff: #hallenging Objective: LO 4-7 AA#!: Ethical understanding and reasoning abilities *B) .ule 121, ndependence, prohibits a #(A fro" perfor"ing both audit services and booeeping services for the sa"e public co"pany in the sa"e year A) 'rue !) alse Ans&er: A 'er"s: .ule 121, ndependence %iff: Easy Objective: LO 4-7 AA#!: Ethical understanding and reasoning abilities
*B
*C) Mnder .ule 121, ndependence, independence is considered to be i"paired if fees re"ain unpaid for professional services provided "ore than si$ "onths before the date of the current year3s report A) 'rue !) alse Ans&er: ! 'er"s: .ule 121, ndependence %iff: Easy Objective: LO 4-7 AA#!: Ethical understanding and reasoning abilities 02) Auditors are allo&ed to have an indirect financial interest in an audit client, such as o&nership of stoc 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 AA#!: Ethical understanding and reasoning abilities 01) .ule 121, ndependence, applies to "e"bers of the A#(A &hen perfor"ing any professional service A) 'rue !) alse Ans&er: ! 'er"s: .ule 121, ndependence %iff: /oderate Objective: LO 4-7 AA#!: Ethical understanding and reasoning abilities 0*) .ule 121, ndependence, applies to covered "e"bers in a position to influence an attest engage"ent A) 'rue !) alse Ans&er: A 'er"s: .ule 121, ndependence %iff: /oderate Objective: LO 4-7 AA#!: Ethical understanding and reasoning abilities
*C
Learning Objective 4- 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- AA#!: Ethical understanding and reasoning abilities *) ;hich of the follo&ing &ould be a violation of the rule reuiring 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 tae a deduction for &hich there is no support A) only !) only #) and %) >either nor Ans&er: # 'er"s: iolation of rule reuiring #(A objectivity %iff: /oderate Objective: LO 4- AA#!: Ethical understanding and reasoning abilities 0) everal "onths after an unualified 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- AA#!: Ethical understanding and reasoning abilities
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- AA#!: Ethical understanding and reasoning abilities 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 An audit of prospective used by a third party financial infor"ation @es @es !) A co"pilation that &ill be used by a third party >o
An audit of prospective financial infor"ation >o
#) A co"pilation that &ill be used by a third party @es
An audit of prospective financial infor"ation >o
%) A co"pilation that &ill be used by a third party >o
An audit of prospective financial infor"ation @es
Ans&er: ! 'er"s: #o""issions %iff: /oderate Objective: LO 4- AA#!: Ethical understanding and reasoning abilities
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- AA#!: Ethical understanding and reasoning abilities ) ;hich of the follo&ing is reuired 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 reuire"ents %iff: /oderate Objective: LO 4- AA#!: Ethical understanding and reasoning abilities 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 9uaranteed largest ta$ refunds in to&nP9 Ans&er: % 'er"s: (rohibited for"s of advertising %iff: #hallenging Objective: LO 4- AA#!: Ethical understanding and reasoning abilities C) ;hich of the follo&ing &ould be considered a violation of the A#(A #ode of #onduct< A) 'he #(A "aes the audit files available to the client3s ban &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" taes 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- AA#!: Ethical understanding and reasoning abilities 0*
12) .ule 021 of the A#(A3s #ode of (rofessional #onduct reuires #(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 %) reuest by a client3s largest stocholder Ans&er: % 'er"s: #onfidentiality %iff: /oderate Objective: LO 4- AA#!: Ethical understanding and reasoning abilities 11) ;hich one of the follo&ing state"ents is false< A) #onfidentiality is broen &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- AA#!: Ethical understanding and reasoning abilities 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- AA#!: Ethical understanding and reasoning abilities
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- AA#!: .eflective thining sills 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 stocholder of a client co"pany sees accounting infor"ation fro" the #(A after "anage"ent declined to disclose the reuested 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 inuiry by a disciplinary body of a state #(A society reuests confidential client infor"ation Ans&er: ! 'er"s: #onfidential client infor"ation %iff: /oderate Objective: LO 4- AA#!: Ethical understanding and reasoning abilities 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- AA#!: .eflective thining sills
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 boos 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$icated9 Ans&er: % 'er"s: Act discreditable %iff: #hallenging Objective: LO 4- AA#!: .eflective thining sills 1) reedo" fro" ++++++++ "eans the absence of relationships that "ight interfere &ith objectivity or integrity A) independence !) acts discreditable #) i"partiality %) conflicts of interest Ans&er: % 'er"s: #onflicts of interest %iff: /oderate Objective: LO 4- AA#!: Analytic sills 1B) .ule *21 - eneral tandards reuires "e"bers to co"ply &ith certain standards and interpretations ;hich of the follo&ing is not a standard specifically addressed in .ule *21< A) (rofessional integrity !) %ue professional care #) (lanning and supervision %) ufficient relevant data Ans&er: A 'er"s: .ule *21, eneral tandards %iff: #hallenging Objective: LO 4- AA#!: .eflective thining sills 1C) ;hich of the follo&ing activities is allo&ed for a #(A fir"3s attestation clients< A) #ontingent fees fi$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- AA#!: .eflective thining sills 06
*2) %iscuss .ule 021Q#onfidential #lient nfor"ation, including the four e$ceptions to the rule Ans&er: .ule 021 prohibits a "e"ber fro" disclosing any confidential client infor"ation &ithout the specific consent fro" the client ?o&ever, there are four conditions &hen client per"ission is not reuired: D Obligations related to technical standards= ie, &hen .ule *2* or .ule *20 reuires the disclosure D n response to a valid subpoena or su""ons and co"pliance &ith la&s and regulations D A peer revie& is being conducted under A#(A, state #(A ociety, or tate !oard of Accountancy authori8ation D 'he #(A is initiating or responding to an inuiry fro" a recogni8ed investigative body or the professional ethics division 'er"s: .ule 021, #onfidential #lient nfor"ation and e$ceptions %iff: #hallenging Objective: LO 4- AA#!: .eflective thining sills
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 ased 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: ++++++++ E$planation:
iolation< @es >o
b !rian %e(alie has a successful dentistry practice in #harleston !rian has reco""ended one of his patients to Hatie ;alton, #(A 'o sho& gratitude for the referral, Hatie has agreed to pay !rian a toen gift of 62 Hatie discloses the pay"ent arrange"ent to her ne& clients .ule: ++++++++ E$planation:
iolation< @es >o
c 'he accounting fir" of !ayer N (eng, #(As, is negotiating a fee &ith a ne& audit client 'hey agree the client &ill pay 62,222 if !ayer N (eng issues a clean, unualified opinion, 42,222 if a ualified opinion is issued, and only *2,222 if an adverse opinion is issued .ule: ++++++++ E$planation:
iolation< @es >o
d %on "ith, #(A, is a "e"ber of the engage"ent tea" that perfor"s the audit o f ha& #orporation %on3s five-year-old daughter, (recious, received ten shares of ha& #orporation3s co""on stoc for her fifth birthday 'he stoc &as a gift fro" (recious3s grand"other .ule: ++++++++ E$planation:
iolation< @es >o
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 .ule: ++++++++ iolation< @es >o E$planation: Ans&er: a iolation of the rule on or" of Organi8ation and >a"e 5.ule 626) >on-#(A o&nership of fir"s is allo&able, ho&ever, non-#(A o&ners "ust actively provide services to the fir"3s clients as their principal occupation b >o violation of the #o""issions and .eferral ees rule 5.ule 620) A #(A "ay pay a referral fee to a non-#(A as long as the pay"ent is disclosed to the client 0
c iolation of the #ontingent ees rule 5.ule 02*) 'his is a contingent fee agree"ent and is prohibited by .ule 02* d iolation of the ndependence rule 5.ule 121) %on is a covered "e"ber for purposes of .ule 121 !ecause his daughter is a dependent, her o&nership interest in ha& is treated as a direct financial interest of her father e >o violation of the ndependence rule 5.ule 121) According to the Code a close relative is defined as a parent, sibling, or nondependent child 'hus, a sister-in-la& is not considered to be a close relative 'er"s: iolations of .ules of A#(A #ode of (rofessional #onduct %iff: #hallenging Objective: LO 4-6, LO 4-7 and LO 4- AA#!: Analytic sills
0B
**) 'he follo&ing situations involve a possible violation of the A#(A3s Code of Professional Conduct or each situation, 51) deter"ine the applicable rule fro" the Code, 5*) decide &hether or not the Code has been violated, and 50) briefly e$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 .ule: ++++++++ E$planation:
iolation< @es >o
b !rad Long, #(A, &as traveling fro" Orlando to /ia"i, lorida &hen he &as pulled over by a police officer on suspicion of driving under the influence ?e &as convicted in court of driving &hile under the influence of alcohol !ecause of past convictions, !rad &as sentenced to 6 years in prison .ule: ++++++++ E$planation:
iolation< @es >o
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 .ule: ++++++++ E$planation:
iolation< @es >o
d arah /artin, #(A, is a senior auditor in the an rancisco office of #ooper N ?o&ell, #(As arah3s father is e"ployed as the controller of Line Electronics, a public co"pany in %etroit, /ichigan Line Electronics is one of the fir"3s audit clients >either arah nor the an rancisco office is involved in the audit of Line Electronics .ule: ++++++++ E$planation:
iolation< @es >o
e On August *2, *2$7, ?an 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 &or began on the audit on epte"ber 16, *2$7 and the engage"ent ended on /arch , *2$ Kernigan is regulated by the E# ?an served as controller of Kernigan #orporation fro" %ece"ber 1, *2$*, until April 12, *2$7, at &hich ti"e he ter"inated his e"ploy"ent &ith Kernigan .ule: ++++++++ iolation< @es >o E$planation: Ans&er: a iolation 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 iolation of the Acts %iscreditable rule 5.ule 621) elonies are considered acts discreditable c iolation of the ndependence rule 5.ule 121) According to the Code, Helly3s sister is a 9close relative9 and she occupies a ey position at an audit client !ecause Helly is a partner in the office that provides the audit services to %ane, the fir" is not indep endent d >o violation of the ndependence rule 5.ule 121) ;hile arah3s father occupies a ey 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 iolation of the ndependence rule 5.ule 121) ince ?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 'er"s: iolations of .ules of A#(A #ode of (rofessional #onduct %iff: #hallenging Objective: LO 4-6, LO 4-7 and LO 4- AA#!: Analytic sills
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 Kenins N 'horn, #(As /argaret3s father is the controller at /arrich porting upplies, nc, a publicly held co"pany in 'upelo /arrich is one of Kenins N 'horn3s audit clients /argaret is not involved in the audit of /arrich * Kason Ale$ander is an audit "anager &ith .eese N #o, #(As Kason o&ns 122 share of co""on stoc in one of the fir"3s audit clients, but he does not provide any audit or non-audit services to the co"pany 0 'he accounting fir" of ine N ?er"an, #(As, provides booeeping and ta$ 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, !ecy, received ten shares of %esiree co""on stoc for her fifth birthday in a trust fund established by !ecy3s 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$pert, and ased hi" to assist the" &ith their gro&ing "edical consulting practice a&tooth agreed, but only after he &as given an o&nership interest in the fir" a&tooth does intend to reduce his private practice hours and spend 42I of his &oring hours devoted to the ree"an N Kohnson practice ally (reen has a successful co"puter net&or consulting business ally has reco""ended one of her clients to a" ;alton, #(A 'o sho& gratitude for the referral, a" has agreed to pay ally a toen gift of 62 a" has not disclosed the pay"ent arrange"ent to his ne clients B 'he accounting fir" of "ith N !lac, #(As, is negotiating a fee &ith a ne& audit client &here the client &ill pay 62,222 if the client obtains the line of credit needed for &oring capital purposes Other&ise, the fee &ill be 42,222 C !rad !arns, #(A, &as traveling fro" Las egas to the rand #anyon &hen he &as pulled 41
over by a police officer for suspicion of driving under the influence ?e &as convicted in court of driving under the influence of alcohol and received si$ "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 e 0 a B c 4 b C d 6 a 12 a (art *: 1 @es 7 @es * >o @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 Objective: LO 4-6, LO 4-7 and LO 4- AA#!: Ethical understanding and reasoning abilities *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- AA#!: .eflective thining sills *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- AA#!: .eflective thining sills
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 'er"s: .ule 626, or" of Organi8ation and >a"e %iff: Easy Objective: LO 4- AA#!: .eflective thining sills *) 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- AA#!: .eflective thining sills *B) Mnder .ule 021, #onfidential #lient nfor"ation, per"ission is not reuired 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- AA#!: .eflective thining sills *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- AA#!: .eflective thining sills
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- AA#!: .eflective thining sills 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: ! 'er"s: .ule 626, or" of Organi8ation and >a"e %iff: /oderate Objective: LO 4- AA#!: .eflective thining sills 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- AA#!: .eflective thining sills 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- AA#!: .eflective thining sills
44