Ethics Chapter 4 – Correct Answers only

1. The International Federation of Accountants (IFAC) research report, Rebuilding Public Confidence in Financial Reporting: An International Perspective, has as its goal which of the following:
B. Examine ways of restoring the credibility of financial reporting and corporate disclosure from an international perspective.
2. Each of the following were themes of the investigations of the accounting profession during the 1970s and 1980s except for:
A. Whether low-balling to obtain audits impairs independence
3. The committee that first recommended that the profession institute a voluntary program for peer review was:
A. Metcalf committee
4. The House Subcommittee on Oversight and Investigations made its recommendations after looking into failures at:
A. ESM Government Securities
B. Continental Illinois National Bank and Trust
C. Penn Square Bank
D. All of the above
D. All of the above
5. During the investigations by the House Subcommittee on Oversight and Investigations, a question that was raised was:
C. Where were the auditors
6. In its investigation of ZZZZ Best, the House Subcommittee on Oversight and Investigations looked into:
B. How the company was able to create 80% or more fictitious revenue
7. In the Lincoln Savings & Loan failure during the period of failures at savings and loan institutions, Lincoln was charged with:
B. Causing retirees to lose their life savings
8. The cost to the public to clean up 1,043 failed savings and loan institutions during the period of 1986-1995 was :
A. $152.9 billion including $123.8 billion of U.S. taxpayer losses
9. The accounting issues at failed savings and loan institutions included:
A. The failure to provide adequate allowances for loan losses
B. The failure to disclose dubious deals between the S&Ls and some of its major customers
C. The existence of inadequate controls to prevent inadequate allowances and control for dubious deals
D. All of the above
D. All of the above
10. One of the Contributions of the Treadway Commission Report and the work of the Committee of Sponsoring Organizations (COSO) was:
C. To identify the tone at the top for management to create an ethical culture
11. One concern in the Armadillo Foods case in the text of the chapter is:
D. Pressure to meet financial analysts’ earnings estimates
12. James Doty, the chairman of the PCAOB, in his testimony before Congress on the financial crisis of 2007-2008, admitted that auditors should have been more vigilant—not just at Lehman Brothers, but across the board. Which audit areas did Doty signal out for criticism?
D. Valuations and end-of-period transactions
13. CPAs should always adhere to the rules of conduct of the
A. State board of accountancy
14. The ethics rules that applies solely to those who conduct an audit of a client entity is:
A. Independence
15. The principle of ethical behavior in the AICPA Code that asks questions directly related to ethical courage is:
C. Integrity
16. The conceptual framework for the AICPA Independence standards can best be characterized as:
B. An approach to identify threats to independence
17. Impairments of independence can occur when:
A. A CPA owns a direct financial interest in a client
B. A CPA owns a material indirect financial interest in a client
C. Immediate family members of the CPA are in violation of the independence rules
D. All of the above
D. All of the above
18. In the ESM fraud discussed in this chapter, Jose Gomez violated the Independence standard because he:
A. Had loans outstanding from the client
19. The SEC’s position on independence can best be characterized as:
A. Proscribing certain financial interests with the client
B. Proscribing certain business relationships with the client
C. Restricting the provision of certain nonaudit services to audit clients
D. All of the above
D. All of the above
20. Assume the external auditor of a client entity also served on the client’s board of directors. What aspect of independence would be violated?
C. The auditor serves in a management decision making position with the client
21. In the PeopleSoft case, the auditors violated what aspect of independence?
B. The auditor was involved in a business relationship with the client
22. To avoid violating independence when engaged in nonattest services for an audit client, a CPA must:
C. Avoid being biased when providing nonattest services for the audit client
23. Each of the following is an outright restriction on providing nonattest services for an attest client except for:
A. Tax services
24. Under the Sarbanes-Oxley Act, the auditor’s responsibility with respect to internal controls can best be stated as:
C. Assess management’s report on internal controls
25. A unique aspect of the HealthSouth case discussed in the text of this chapter is:
B. Top management certified that the financial statements were accurate
26. The due care principle in the AICPA code:
B. Addresses the quality of services performed by the CPA
27. Which rule of professional conduct in the AICPA code does not apply both to internal and external accountants who are CPAs and members of the Institute?
A. Independence
28. The confidentiality standard in the AICPA code provides for exceptions to the rule in:
A. In response to a validly issued court summons
B. To provide information to the CPA’s peer reviewers
C. To defend oneself in an ethics investigation
D. All of the above
D. All of the above
29. A CPA who informs management of a material misstatement in the financial statements can go to the SEC with his/her concerns if:
A. The CPA informed the client of this matter and the client did not inform the SEC within one business day of being informed by the CPA
30. In the Fund of Funds case discussed in this chapter, the external auditors violated which rule of conduct?
D. Confidentiality
31. A common requirement/effect of the commissions and contingent fees rule is:
C. A CPA is prohibited from accepting such a form of payment when engaged in attest services for a client
32. If a client refuses to accept an auditors’ report that has been modified, the public accounting firm should withdraw from the engagement and give its reasons in writing to the board of directors except when:
D. The auditor is unable to observe the physical inventory
33. An alternative practice structure can best be described as:
B. A form of structure where a public company provides nonattest services for a client that is also provided with attest services by an affiliate of the public company
34. A CPA can accept a contingent fee in providing tax services for an attest client if:
C. The CPA’s tax services will be reviewed by a taxing authority
35. Objectivity may be impaired when a CPA prepares a tax return for a client because:
C. The CPA serves in a tax advocacy position for the client
36. CPAs can advertise and solicit clients as long as such practices are:
C. Not conducted in a misleading or deceptive manner
37. Circular 230 applies to CPAs who:
B. Practice before the IRS
38. Statement on Standards for Tax Services No. 1 establishes as a basic principle of providing tax services that the CPA:
A. Must have a good faith belief that the tax return position can be justified if challenged
39. The requirement that there should be reasonable support for a tax return position before a CPA recommends it to a client most directly aligns with which tax standard:
B. There is a realistic possibility of success if the tax position is challenged
40. The CPA firm that became involved in tax shelter controversies with the IRS was:
D. KPMG
41. The PCAOB rules prohibit auditors from:
A. Providing certain aggressive tax shelters to their public company audit clients
B. Providing tax services to members of the audit client’s management who serve in financial reporting oversight roles
C. Providing tax preparation and planning services for public company executives
D. All of the above
D. All of the above
42. Mintz and Morris, both of whom are CPAs, became partners in a tax preparation business in San Marcos, Texas. Which of the following ethics standards must be followed by the two partners?
A. Ethics laws and regulations of the Texas Board of Accountancy
41. To whom does the CPA owe ultimate allegiance in carrying out professional obligations?
B. Public interest
42. Sarbanes-Oxley Act (SOX) sets new standards for governance that will ultimately impact on which of the following?
B. SEC registrant companies, including foreign companies listed on US
44. To whom do the accounting codes of professional conduct (either the state board of public accountancy or AICPA) apply?
C. Those CPAs in public accounting, industry, government, and education.
45. Integrity is measured in terms of what is right and just. What is a question that a CPA can ask to test decisions?
D. Have I retained my integrity?
46. Why don’t auditors prepare financial statements, as well as audit them?
C. It would be a conflict of interest and violates ethical standards.
47. In which of the following is a CPA independent in fact and appearance?
b. The CPA serves on the board of a non-profit with the CFO of the company being audited.
48. Which of the following would be an example of due care?
C. Audit documentation obtained by the auditor with reviews by supervisory personnel
49. Which of the following relationships do not impair CPA-auditor independence?
D. Relationships where a best friend serves in a financial reporting oversight role with the client
50. Each of the following is a safeguard that helps to mitigate threats to independence except for:
C. Safeguards developed to ensure independence when performing nonattest services
51. Which of the following is a permitted loan to a CPA from an audit client financial institution?
A. Car loan collateralized by the car
52. Which case in the text of the chapter illustrates the danger of a CPA accepting loans from an audit client?
D. ESM Government Securities
53. Which of the following immediate family members or close relatives would not have to follow the independence rules that apply to the CPA according to Interpretation 101-1?
C. CPA’s uncle
54. Which of the following situations of a CPA’s distant relatives does not impair the CPA’s independence?
B. CPA’s nephew is starting as a salesperson with an audit client.
55. What is the maximum amount of time an audit manager or partner may spend on nonattest services for an attest client?
C. 10 hours
56. Which of the following services are allowed to be performed for an attest services client by Sarbanes Oxley Act?
D. Pension plan audits
57. Which was the ethical concern exists in the PeopleSoft case?
C. Independence in appearance and fact of EY in providing services to PeopleSoft
58. Which of the following is not part of standards for the quality of work?
C. Professional data
59. What is the difference on contingent fees under the PCAOB rules versus the AICPA rules?
D. The PCAOB prohibits contingent fees in tax engagements performed for an audit client.
60. Which is not a permitted form of organization for a CPA practice?
D. Corporation
61. Which tax service is still permitted by the PCAOB for audit clients following the KPMG tax shelter case?
B. Auditing of deferred taxes
62. What ethical rules are violated when a CPA auditing a client provides inside information about the client to a friend?
D. Confidentiality and integrity
63. Which statement is correct with respect to a CPA’s ethical obligation to return client books and records and CPA work papers:
A. Client-provided records in the custody or control of the CPA should be returned to the client at the client’s request.
64. The AOL case described in the text focused mainly on:
B. Proper accounting for advertising costs
65. The ethical issue raised in the Beauda Medical Center case is similar to that in:
C. Fund of Funds
66. The revenue recognition issue in the Family Games case is:
A. Whether a company can record revenue before it is signed-off by the lawyers
B. Whether a company can record revenue before it is shipped to the customer
C. Whether a company can record revenue before the revenue recognition rules are met
D. All of the above
D. All of the above
67. The question that arises in the First Community Church case is whether:
B. There has been a misappropriation of assets
68. In the Lee & Han, LLC case, Barbara Strom should:
D. Report the situation to the firm’s oversight or similar committee.
69. In the Gee Wiz case, the main ethical issue was:
C. Integrity in providing tax services to an audit client through her own entity
70. In the Family Outreach case, Yimei finds three accounts all using the same documentation and amounts. Being skeptical, Yimei should consider doing all but:
B. Talk to the agency’s board of directors
71. In the HealthSouth case, the auditors failed to meet their ethical and professional obligations because they failed to uncover fraud in which account?
B. Contractual allowance
72. The main ethical issue in Healthcare Fraud case is:
B. Inflating healthcare costs submitted to Medicare.
73. PricewaterhouseCoopers was investigated by the SEC for independence violations due to:
D. All of the above