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Docslide - Us - Chapter 4 Test Bank 3e
Docslide - Us - Chapter 4 Test Bank 3e
Answer B
Answer A
3. The committee that first recommended that the profession institute a voluntary
program for peer review was:
A. Metcalf committee
B. Cohen committee
C. The House Subcommittee on Oversight and Investigations
D. Mintz and Morris committee
Answer A
Answer D
5. During the investigations by the House Subcommittee on Oversight and
Investigations, a question that was raised was:
Answer C
A. Why the board of directors failed to uncover the fraud at ZZZZ Best
B. How the company was able to create 80% or more fictitious revenue
C. How the company was able to create cookie jar reserves
D. All of the above
Answer B
7. In the Lincoln Savings & Loan failure during the period of failures at savings and
loan institutions, Lincoln was charged with:
Answer B
8. The cost to the public to clean up 1,043 failed savings and loan institutions during
the period of 1986-1995 was :
Answer A
Answer D
10. One of the Contributions of the Treadway Commission Report and the work of
the Committee of Sponsoring Organizations (COSO) was:
Answer C
11. One concern in the Armadillo Foods case in the text of the chapter is:
Answer D
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?
Answer D
14. The ethics rules that applies solely to those who conduct an audit of a client entity
is:
A. Independence
B. Objectivity
C. Integrity
D. All of the above
Answer A
15. The principle of ethical behavior in the AICPA Code that asks questions directly
related to ethical courage is:
A. Independence
B. Objectivity
C. Integrity
D. Fraud prevention
Answer C
16. The conceptual framework for the AICPA Independence standards can best be
characterized as:
Answer B
Answer D
18. In the ESM fraud discussed in this chapter, Jose Gomez violated the
Independence standard because he:
A. Had loans outstanding from the client
B. Engaged in a business relationship with the client
C. Had family members who owned stock directly in the client
D. All of the above
Answer A
Answer D
20. Assume the external auditor of a client entity also served on the clients board of
directors. What aspect of independence would be violated?
Answer C
21. In the PeopleSoft case, the auditors violated what aspect of independence?
Answer B
22. To avoid violating independence when engaged in nonattest services for an audit
client, a CPA must:
Answer C
23. Each of the following is an outright restriction on providing nonattest services for
an attest client except for:
A. Tax services
B. Financial information systems design and implementation
C. Appraisal or valuation services
D. Internal audit outsourcing services
Answer A
24. Under the Sarbanes-Oxley Act, the auditors responsibility with respect to internal
controls can best be stated as:
A. Develop a system of internal controls that helps to prevent and detect fraud
B. Assess whether the internal controls helps to prevent and detect fraud
C. Assess managements report on internal controls
D. All of the above
Answer C
25. A unique aspect of the HealthSouth case discussed in the text of this chapter is:
A. The external auditors failed to assess whether the internal controls operated as
intended
B. Top management certified that the financial statements were accurate
C. The external auditors violated the independence standards because they were
involved in a business venture with members of top management
D. Top management hyped the stock price to increase the value of their stock options
Answer B
Answer B
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
B. Integrity
C. Objectivity
D. Due care
Answer A
28. The confidentiality standard in the AICPA code provides for exceptions to the rule
in:
Answer D
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
B. The CPA informed the client of this matter and the client refuses to correct the
financial statements
C. The CPA informs the client of this matter and the client fires the CPA
D. All of the above
Answer A
30. In the Fund of Funds case discussed in this chapter, the external auditors violated
which rule of conduct?
A. Due care
B. The financial statements were certified as being in conformity with GAAP when
that was not the case
C. The financial statements were certified as being in conformity with generally
accepted auditing standards when that was not the case
D. Confidentiality
Answer D
31. A common requirement/effect of the commissions and contingent fees rule is:
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:
Answer D
A. A form of ownership where a CPA firm owns a public company and audits that
company
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
C. A form of structure where a CPA firm provides nonattest services for a client that
is also provided with attest services by a public company
D. A form of structure other than LLP and LLC
Answer B
34. A CPA can accept a contingent fee in providing tax services for an attest client if:
Answer C
35. Objectivity may be impaired when a CPA prepares a tax return for a client
because:
36. CPAs can advertise and solicit clients as long as such practices are:
Answer C
Answer B
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
B. Must have a good faith belief that the information provided by the client is
accurate
C. Can never recommend a tax position to the client when it is frivolous
D. All of the above
Answer A
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:
Answer B
40. The CPA firm that became involved in tax shelter controversies with the IRS was:
A. Ernst & Young
B. Deloitte & Touche
C. PricewaterhouseCoopers
D. KPMG
Answer D
A. Providing certain aggressive tax shelters to their public company audit clients
B. Providing tax services to members of the audit clients management who serve in
financial reporting oversight roles
C. Providing tax preparation and planning services for public company executives
D. All of the above
Answer D
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?
Answer A
41. To whom does the CPA owe ultimate allegiance in carrying out professional
obligations?
A. Stockholders
B. Public interest
C. Client
D. Stakeholders
Answer B
42. Sarbanes-Oxley Act (SOX) sets new standards for governance that will ultimately
impact on which of the following?
44. To whom do the accounting codes of professional conduct (either the state board
of public accountancy or AICPA) apply?
Answer C
45. Integrity is measured in terms of what is right and just. What is a question that a
CPA can ask to test decisions?
Answer D
46. Why dont auditors prepare financial statements, as well as audit them?
Answer C
Answer B
Answer C
Answer D
50. Each of the following is a safeguard that helps to mitigate threats to independence
except for:
Answer C
51. Which of the following is a permitted loan to a CPA from an audit client financial
institution?
Answer A
52. Which case in the text of the chapter illustrates the danger of a CPA accepting
loans from an audit client?
A. Tyco International
B. Enron
C. Adelphia
D. ESM Government Securities
Answer D
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?
A. CPAs spouse
B. CPAs spousal equivalent
C. CPAs uncle
D. CPAs dependents
Answer C
54. Which of the following situations of a CPAs distant relatives does not impair the
CPAs independence?
Answer B
55. What is the maximum amount of time an audit manager or partner may spend on
nonattest services for an attest client?
A. 20 hours
B. 15 hours
C. 10 hours
D. 8 hours
Answer C
56. Which of the following services are allowed to be performed for an attest services
client by Sarbanes Oxley Act?
57. Which was the ethical concern exists in the PeopleSoft case?
Answer C
58. Which of the following is not part of standards for the quality of work?
Answer C
59. What is the difference on contingent fees under the PCAOB rules versus the
AICPA rules?
A. Both rules allow contingent fees for an audit client if the contingency is based
upon findings of government agencies.
B. The AICPA prohibits contingent fees to an audit client.
C. The PCAOB allows contingent fees for non-public company engagements.
D. The PCAOB prohibits contingent fees in tax engagements performed for an audit
client.
Answer D
Answer D
63. Which tax service is still permitted by the PCAOB for audit clients following the
KPMG tax shelter case?
A. Aggressive tax shelter for audit clients
B. Auditing of deferred taxes
C. Tax services to audit client management or family members
D. Tax services for a contingent fee
Answer B
64. What ethical rules are violated when a CPA auditing a client provides inside
information about the client to a friend?
Answer D
Answer A
Case Questions
66. The AOL case described in the text focused mainly on:
Answer B
67. The ethical issue raised in the Beauda Medical Center case is similar to that in:
Answer C
68. The revenue recognition issue in the Family Games case is:
Answer D
69. The question that arises in the First Community Church case is whether:
Answer B
70. In the Lee & Han, LLC case, Barbara Strom should:
Answer D
71. In the Gee Wiz case, the main ethical issue was:
Answer C
72. In the Family Outreach case, Yimei finds three accounts all using the same
documentation and amounts. Being skeptical, Yimei should consider doing all
but:
A. Report her findings to Kwami, her supervisor
B. Talk to the agencys board of directors
C. Examine more evidence to support her finding
D. Check to see if the accounts were in the prior years workpapers
Answer B
73. In the HealthSouth case, the auditors failed to meet their ethical and professional
obligations because they failed to uncover fraud in which account?
A. Inventory
B. Contractual allowance
C. Sales returns
D. All of the above
Answer B
Answer B
Answer D
Essay Questions
1. Explain how the Principles of the AICPA Code of Professional Conduct establish
standards of behavior for CPAs that are similar to those discussed in chapters 1
and 2.
2. Describe each of the investigations of the accounting profession during the 1970s
and 1980s. Given the passage of the Sarbanes-Oxley Act in 2002, do you think
these investigations helped to pave the way for SOX improvements?
3. What are the major threats to independence addressed by the AICPA Conceptual
Framework for Independence Standards and how can CPAs/CPA firms mitigate
such threats?
4. What are the similarities and differences in the application of the rules of
professional conduct in the AICPA with respect to internal accountants who are
CPAs and CPA-external auditors?
5. What steps should an auditor take when she suspects illegal acts have occurred at
a client entity?
6. Under what circumstances do you think it would be acceptable for a CPA to blow
the whistle on financial wrongdoing by a client? What steps should the CPA take
before carrying through with the whistle-blowing action?
7. Describe the steps to be taken by a staff accountant who has been told by his/her
supervisor to accelerate the recording of revenue into a period earlier than which
it should be recognized under GAAP.
8. Evaluate the ethics of tax standards in the Statements on Standards for Tax
Services with respect to the ethics standards discussed in chapters 1 and 2.
10. Rosie Mintz, CPA, has just started her own tax preparation firm. Describe the
ethics standards of behavior of the accounting profession that apply to Rosies
performance of professional services.
11. Steve Morris, CPA, performs audits for nonpublic clients. Describe the
independence obligations of Steve that apply to the performance of professional
services for audit clients.
12. A young man by the name of Mr. Hicks works at an accounting firm which has a
written ethics code of conduct. The code specifically outlines the duties and
obligations that every employee must follow without question. One of rules states
that every accountant should not lie under any circumstances.
Last week Mr. Hicks sent out a finalized tax return to the Wrong client. The
Wrong client called Mr. Hicks and informed him that he was sending the tax
return back to him overnight. Meanwhile the Right client called Mr. Hicks and
wanted to know where the tax return was. Mr. Hicks told the Right client that he
sent it to the wrong address and he will send out the return the next day. The
Right client was irritated and called the partner of the firm.
The partner scolded Mr. Hicks and wanted to know why he told the client he sent
the return to the wrong address. The partner said he should have told the client
that the return was in the 2nd partner review or some other excuse to cover up the
mistake. Mr. Hicks explained that the ethics code of conduct specifically states
that he should not lie under any circumstances and he was just following his
ethical duty. The partner grinned and told Mr. Hicks that the next time this
happens, he should consult with the partner first.
Using the ethical decision making model and ethical theories, justify the
positions of either the partner, Mr. Hicks or an alternative solution.
Ans: Hicks has attempted to be honest with the Right client but in an awkward
way. It sounds like the return was sent to an incorrect address, not another client.
Hicks should have spoken to the partner to get some advice before responding to
the Right client. He has not exercised due care in his actions. Perhaps Hicks was
trying to follow deontology and rights of the Right client. However, the way in
which he went about it was short-sighted at least from the firms point of view. In
this case the ends do not justify the means. Mistakes of this kind should be dealt
at the partner level.
Utilitarianism can be used to support the partners position in that the benefits of
deceiving the Right client for a short while, including holding on to the client and
saving the firms reputation, far outweigh the costs of deceiving the client. One
might argue this is a situation of no harm, no foul. However, this Act Utilitarian
approach fails to recognize the utilitarian rule that clients should never be
deceived.
13. Sarah is an audit senior with Childs, Maxwell and Weaver, LLP. Sarah specializes
in auditing loan loss reserve for financial institution clients. This current year she
has noticed that two of her financial institution clients in town have written loans
off to a loan customer, Mr. T (fictional name to protect the guilty). Mr. T is well
known in town as a highly successful real estate developer and businessman with
many different business dealings. As Sarah is auditing her third financial
institution client in town, she notices that the bank has loans of $3.5 million
outstanding to Mr. T. The current loan loss reserve could not cover the losses on
Mr. Ts loans. Sarah has recommended a significant increase to the loan loss
reserve account. The client will not discuss increasing the loan loss reserve. Ms.
Childs, senior partner on the audit, wants to know how the audit firm can justify
the increase loan loss reserve account. What can and should Sarah disclose about
Mr. T?
Ans: This short case is about confidentiality and particularly what is learned from
one audit that could affect another audit. In the Fund of Funds case in the chapter,
the judged ruled an auditor must use information obtained about one client in the
audit of another ostensibly to protect the public interest with regard to the second
client. Sarah should discuss the matter with Ms. Childs. The best solution would
be for Sarah to dig deeper to gather as much evidence as possible about the
collectibility of the loan to Mr. T so if it has to be written down, the evidence
supports it. There would be no reason to inform the third financial institution
client about Mr. Ts problems with the other two, and to do so would violate the
confidentiality obligation of CPAs.