1. Which of the following is NOT a key element of the definition of ethics?
A. Reflective choice
B. Moral principles
C. Definitive conclusions
D. Consequences of decisions
2. Which of the following defines the imperative principle of ethics?
A. Ethic decisions cannot be resolved without evaluating all possible outcomes of all choices
B. Ethics are a function of moral rules and principles
C. All ethical decisions will have both positive and negative consequences
D. It is essential that decisions be made for the greater good of society
3. Which of the following philosophical principles in ethics places emphasis on the consequences of action, rather than on following the rules?
A. Imperative principle
B. Utilitarianism principle
C. Generalization principle
D. Moral principle
4. What agency has the ultimate authority in defining independence for publicly traded companies?
C. Department of Justice
5. Which of the following is the responsibility of the Professional Ethics Executive Committee?
A. Enforce SEC ethical standards
B. Act as an investigative body of the AICPA when ethical violations are suspected
C. Make and enforce all the rules of conduct for CPAs who are AICPA members
D. Establish minimal ethical standards for financial reporting
6. Which of the following is NOT one of the AICPA Principles of Professional Conduct?
D. Due Care
7. Dara & Co. audit Hill Corporation. Ellie is the engagement partner on the audit with an office in Buffalo Grove. Which of the following would NOT be considered a covered member?
A. Jason, who is a member of the attest engagement team with an office in Elmhurst
B. Adam, who is a tax partner and provided 50 hours of tax service to Hill Company during the year of the audit with an office in Elmhurst
C. Ben, a partner in Dara & Company, with an office in Buffalo Grove
D. Julie, a partner in Dara & Company, with an office in Elmhurst
8. Which of the following is NOT included in Rule of Conduct 102, Integrity and Objectivity?
A. Prudent assessment of facts
B. Free of conflict of interests
C. Not knowingly misrepresent facts
D. Not subordinate judgment to others
9. Based on Sarbanes-Oxley, who is responsible for auditor independence?
A. The CPA firm’s engagement partner
B. The CPA firm’s quality control partner
C. The client’s senior management
D. The audit committee
10. According to Sarbanes-Oxley, the audit committee must pre-approve all audit and non-audit services. This can be done
A. Case-by-case basis: Yes; Through established policies: No; Delegating the responsibility: Yes
B. Case-by-case basis: Yes; Through established policies: Yes; Delegating the responsibility: No
C. Case-by-case basis: No; Through established policies: Yes; Delegating the responsibility: No
D. Case-by-case basis: No; Through established policies: No; Delegating the responsibility: Yes
11. Which of the following is NOT a restriction placed on audit partners by Sarbanes-Oxley?
A. Limits engagement partners to a five-year tem as the engagement partner
B. Limits other partners associated with the engagement to a seven-year term
C. Engagement partners must review nonaudit work to insure that independence has not been compromised
D. Partners that engage in selling services, other than audit, review, and attestation services, to an audit client are not independent with respect to that client
12. Which of the following is true according to Government Independence Standards?
A. Nonaudit services cannot be provided to a government entity that is an attest client
B. Nonaudit services are allowed providing the audit organization does not perform management functions, make management decisions, or audit its own work
C. Nonaudit services are allowed as long as the nature of the service is publicly disclosed including a statement that independence has not been compromised
D. Nonaudit services are allowed if they have been approved by the executive body of the governing organization
13. Which of the following is allowed under the Government Independence Standards?
A. Personnel who provide nonaudit services are prohibited from planning, conducting or reviewing audit work related to the nonaudit service
B. The audit organization must never reduce the scope of the audit because of nonaudit services performed
C. The government entity must have established policies to assure the nonaudit services will not affect the audit firm’s ability to perform the audit
D. CPAs that perform nonaudit services are prohibited from being a member of the audit team
14. Rule 201, General Standards, requires a member to comply with standards and interpretations. Which of the following is NOT a standard covered by Rule 201?
B. Due professional care
C. Planning and supervision
D. Sufficient relevant data
15. Maralee has been approached by J. Fox Entertainment to perform an audit of her theatre company. Maralee has never audited a theatre company before. Maralee can
A. Not accept the engagement because she does not have the specialized industry knowledge
B. Recommend another auditor and receive a fee for the referral
C. Accept the engagement if she can obtain the required knowledge before the end of the engagement
D. Accept the engagement with the understanding that additional hours will be required for Maralee to learn and understand the nature of the business
16. An audit client hires a member of the audit engagement team to be its new controller. Sarbanes-Oxley rules require that:
A. The new controller sever all relations with the CPA firm, including any retirement funds
B. The new controller not take part in any discussions regarding the retention of the audit form
C. The client find a new audit firm
D. The client disclose the controller’s relationship in the notes to the financial statements
17. The SEC requires companies to disclose fees paid to independent accounting firms for audit and consulting services in the belief that:
A. Such disclosures will end the practice of auditors performing nonaudit services for audit clients
B. Financial analysts will attribute far less credibility to financial statements audited by audit firms that earn substantial nonaudit fees from audit clients
C. Audit firm consulting on client’s accounting information processing systems essentially impairs audit independence
D. Client directors and financial statement users should consider all aspects related to auditors’ independence, and information about fees is important
18. CPA Krogstad is the executive in charge of the Omaha office of the audit firm. He is responsible for the practice in all areas of audit, tax, and consulting, but he does not serve as a field audit partner or a reviewer. CPA Ward is the partner in charge of the Dodger, Inc. audit (an SEC filing). The audit firm’s independence is impaired if:
A. Krogstad owns Dodger common stock
B. Krogstad’s brother owns 10 shares of Dodger common stock
C. Ward’s sister-in-law is a sales representative with a territory in California
D. Ward’s fellow partner CPA Felix in the Omaha office has a wife who owns Dodger stock through a mutual fund held in her own employer’s employee benefit plan
19. Audit independence rules for all audits–public companies and all other organizations–are made by:
A. U.S. Securities and Exchange Commission
B. Independence Standards Board
C. AICPA Professional Ethics Executive Committee
D. All the above
20. Which of the following philosophical principles in ethics places emphasis on following rules, rather than on the consequences of the decision?
A. Imperative principle
B. Utilitarianism principle
C. Generalization principle
D. Moral principle
21. Julie and Lisa are sisters. Julie is a CPA auditing the company where Lisa works. Julies independence is impaired if
A. Lisa owns 25% of the company
B. Lisa is the Controller
C. If Lisa is the marketing manager
D. Independence is impaired in all of the situations listed above
22. Which of the following sections is not included in the AICPA Rules of Conduct?
A. Responsibilities to Clients
B. Independence, Integrity, and Objectivity
C. Responsibilities to Colleagues
D. General and Technical Standards
23. The interpretation of Independence Rule 101 allows members to
A. Hold a material indirect interest in a client
B. Have loans from a client that are collateralized by cash deposits held by the client
C. Have home mortgages with a client even if they are on the engagement
D. Be a trustee of a client pension or profit sharing trust
24. The AICPA Council has designated the following bodies to pronounce accounting principles under Rule 203, except the
A. Financial Accounting Standards Board
B. Auditing Procedures Board
C. Opinions of the Accounting Principles Board
D. Governmental Accounting Standards Board
25. The interpretation of Rule 501, Acts Discreditable to the Profession, would not include
A. Membership in an activist political party
B. Withholding a client’s books until a professional fee is paid
C. Failure to follow government audit standards in government audits
D. Permitting others to make misleading entries in records
26. According to Rule 203, Accounting Principles, requires the auditor to adhere to official pronouncements except when
A. Complying would violate client confidentiality
B. Pending legislation may change the reporting requirements of the client
C. Adherence to a pronouncement would be misleading
D. It has been established that financial statement users prefer an alternative presentation of information
27. Rule 301 has been interpreted by the AICPA to explicitly allow a CPA to divulge confidential client information to
A. The SEC
B. The U.S. Department of Justice
C. The AICPA Professional Ethics Division
D. The Federal Trade Commission
28. Perry Pinkney, CPA, is one of the general partners in a partnership, which in turn invested 70% of its assets in the common stock of Pinkney’s audit client (Darby Corporation). According to the AICPA Code of Professional Conduct, Pinkney is considered to have
A. An indirect financial interest in Darby
B. A direct financial interest in Darby
C. No financial interest in Darby
D. A partial financial interest in Darby
29. A client has omitted a significant disclosure from the financial statements. The auditor has asked the client to include the information, but the client refuses and claims the information is confidential. The position of the CPA should be that the information
A. Cannot be considered confidential if it is necessary to the completeness of the financial statements
B. Cannot be considered confidential unless it can be covered by the attorney-client privilege
C. Is confidential and will only be disclosed under subpoena or for a regulatory investigation
D. Should be discussed with the audit committee to determine if the information should be disclosed
30. Which of the following philosophical principles in ethics places emphasis on the consideration of projecting the consequences of a choice in terms of this question: “What may be the consequences of similar persons making this choice in similar circumstances?”
A. Imperative principle
B. Utilitarian principle
C. Generalization principle
D. Moral principle
31. Which of the following forms of organization would NOT be allowed under Rule 505 of the Professional Code of Conduct?
A. Limited liability partnership; all partners are CPAs
B. Limited liability partnership; 70% of partners are CPAs
C. Limited liability corporation; all shareholders are CPAs
D. Partnership; 40% of partners are CPAs
32. Red and Green, CPAs are the external auditors for Blue Corporation, a publicly-held company. Blue Corporation has outsourced its internal audit function to Red and Green. Which of the following statements is true?
A. Doing internal audit work does not impair the independence of Red and Green
B. The independence of Red and Green is impaired only if employees of Red and Green act in a management capacity or make management decisions
C. The independence of Red and Green is impaired only if a member of Red and Green’s engagement team is hired to manage an accounting function in Blue Corporation
D. Public accounting firms cannot be both the internal and external auditors for publicly-held companies and maintain independence
33. Violet, CPA, audits Big Bank, a local financial institution. Which of the following would most likely impair Violet’s independence with regard to Big Bank?
A. A home loan with the value of the house exceeding the mortgage balance
B. A car loan collateralized by the car
C. A personal loan collateralized by cash deposits at Big Bank
D. A Visa credit card issued by Big Bank with a balance of $2,500
34. According to the profession’s ethical standards, an auditor would be considered independent in which of the following instances?
A. The auditor is the officially appointed stock transfer agent of a client
B. The auditor’s checking account that is fully insured by a federal agency is held at a client financial institution
C. The client owes the auditor fees for more than two years prior to the issuance of the audit report
D. The client is the only tenant in a commercial building owned by the auditor
35. Which of the following is required for a CPA firm to designate itself as “Members of the American Institute of Certified Public Accountants” on its letterhead?
A. All owners must be members
B. The owners whose names appear in the firm name must be members
C. At least one of the owners must be a member
D. The firm must be a dues-paying member
36. In which of the following circumstances would a CPA who audits XZ Corporation lack independence?
A. The CPA and XZ’s president are both on the Board of Directors of COD Corporation
B. The CPA and XZ’s president each own 25% of FOB Corporation, a closely held company
C. The CPA has an automobile loan from XZ, a financial institution. The loan is collateralized by the automobile
D. The CPA reduced XZ’s usual audit fee by 40% prior to the audit because XZ’s financial condition was unfavorable
37. According to the ethical standards of the profession, which of the following acts is generally prohibited?
A. Purchasing a product from a third party and reselling it to a client
B. Writing a financial management newsletter promoted and sold by a publishing company
C. Accepting a commission for recommending a product to an audit client
D. Accepting engagements obtained through the efforts of third parties
38. According to the ethical standards of the profession, which of the following acts is generally prohibited?
A. Issuing a modified report explaining a failure to follow a governmental regulatory agency’s standards when conducting an attest service for a client
B. Revealing confidential client information during a quality review of a professional practice by a team from the state CPA society
C. Accepting a contingent fee for representing a client in an examination of the client’s federal tax return by an IRS agent
D. Retaining client records after an engagement is terminated prior to completion and the client has demanded their return
39. Which of the following statements include in the advertising of a CPA firm is permissible according to Rule 502, Advertising and Other Forms of Solicitation.
A. “Bob Bullet, CEO of A-One Corp, states that we are the best auditors his company has ever used.”
B. “We provide the best audit coverage of any firm in the state.”
C. “We audit the five largest manufacturing companies in the state.”
D. “We have several tax partners that work closely with Judges and IRS attorneys on high-profile legal issues.”
40. To which group can a CPA provide audit documentation without being subpoenaed and without the client’s consent?
A. The IRS
B. The FASB
C. Another CPA firm performing a peer review
D. Another CPA firm considering the purchase of the auditing firm
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