Ethics in Accounting A

Decision-Making Approach 1st Edition

Klein Test Bank
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 INSTRUCTOR TEST BANK – CHAPTER 8

MULTIPLE CHOICE

1. A CPA observed another CPA engaging in an act that was undeniably

discreditable to the profession. The Acts Discreditable Rule of the AICPA:
a. Requires the observing CPA to report this violation to a designated officer of
the AICPA
b. Requires the observing CPA to report this violation to a designated officer of
the applicable state’s accountancy licensing board
c. Expressly states that a CPA has no duty to report the observed misconduct
d. Does not express an opinion on whether the observing CPA does, or does
not, have a reporting duty
SOLUTION: D
2. Under the Advertising and Other Forms of Solicitation Rule of the AICPA’s Code
of Professional Conduct, a CPA may not engage in advertising that is:
a. Undignified
b. Unprofessional
c. Deceptive
d. All of the above
SOLUTION: C

3. The name of a CPA firm may:

a. Include the name of a founder who is retired, as long as he or she remains an
active member of the AICPA
b. Include the name of a founder who is deceased
c. Not include the name of a CPA unless that CPA is a member in good
standing of the AICPA
d. May include the name of a non-CPA without needing to identify the non-CPA
as being, in fact, a non-CPA
SOLUTION: B
4. The Acts Discreditable Rule states that the following acts are discreditable:
a. An accountant’s failure to file her own tax return by April 15, even if the
accountant obtains a permitted extension of time from the taxing authority
b. The late filing of a tax return for a partnership client that results in at least one
of the client’s partners incurring late filing penalties
c. A CPA’s nonpayment of taxes due and owed to a taxing authority
d. A CPA firm’s failure to file its partnership tax return, even if all of its partners
individually have filed their tax returns on time
SOLUTION: D

Copyright ©2016 John Wiley & Sons, Inc. Klein, Ethics in Accounting, 1/e (For Instructor Use Only) 8-1
 5. In some jurisdictions, laborers, including accountants, are given a lien over client
records. (A lien is a priority legal and economic right that is created when a client
fails to pay agreed-upon fees.) This lien customarily entitles an accountant to
retain possession of client records until outstanding fees are paid in full. When
such a lien right arises, the AICPA Code of Professional Conduct states that:
a. State law is given priority over the CPA profession’s rules of ethical conduct
b. The CPA profession’s rules of ethical conduct are given priority over state law
c. The CPA is allowed to select the set of rules that are most favorable to the
CPA
d. The CPA is obligated to abide by the set of rules that is most favorable to the
client

SOLUTION: D

6. An accountant generally has an obligation to prepare statements for a publicly-

traded corporation in “accordance with GAAP.” What does this mean?
a. An accountant must always follow the mandates of rules established by the
FASB and not apply international accounting standards
b. An accountant may follow either the rules of the FASB or the rules of IFRS,
depending on the jurisdiction in which the intended readers of the financial
statements are located
c. An American accountant must follow both the rules of the FASB and the rules
of the AICPA’s Code of Professional Conduct
d. Any well-recognized, systematic framework of accounting may be applied, as
long as the framework is prominently disclosed

SOLUTION: B

7. Preparing financial statements for an unincorporated business on a basis that

does not comply with GAAP usually will result in:
a. A CPA being suspended from membership in the AICPA
b. A professional accountant suffering adverse professional consequences if the
accountant practices in a country that has adopted IFRS
c. A CPA being permanently disqualified from continuing membership in the
AICPA
d. No professional discipline as long as the noncompliance with GAAP is
adequately disclosed

SOLUTION: D

Copyright ©2016 John Wiley & Sons, Inc. Klein, Ethics in Accounting, 1/e (For Instructor Use Only) 8-2
 8. Winkelberg, a CPA, has been retained to prepare unaudited financial statements
for a company, on an income tax reporting basis, for a privately-held company
owned by her best friend, Stinkelberg. WInkelberg has a professional obligation
to:
a. Withdraw from this engagement because of her friendship with Stinkelberg
b. Withdraw from this engagement because of the basis on which these financial
statements are presented
c. Use due care in preparing these statements
d. Inform her client that this basis of reporting violates SEC filing requirements,
but she does not necessarily have a duty to withdraw from this engagement

SOLUTION: C
9. When unaudited financial statements prepared on a basis that does not conform
to GAAP are disseminated by a CPA, the CPA should:
a. Directly contact intended recipients of these statements to inform them about
the nonconformity with GAAP
b. Mark the statements as “Unaudited” and state that they are “Not prepared in
accordance with GAAP”
c. Not be involved in the physical or digital transmission of these statements
d. Not sign any reports or statements indicating her status as a CPA

SOLUTION: B
10. Which of the following acts is clearly discreditable?
a. Creating and posting a youtube video in which a CPA berates the IRS for
incompetence
b. Refusing to return client records, even if a CPA is owed unpaid fees, if these
records are needed by the client to prepare its tax return
c. Commenting on “how graceful” an administrative assistant is when she wears
high-heeled shoes
d. Mentioning on your CPA firm’s website that you formerly worked for the IRS,
if a reader might conclude from this statement that you are better able to
negotiate favorable settlements with the IRS for clients

SOLUTION: B
11. A CPA prepared financial statements that reflect a company’s expected financial
position, operating results, and cash flows and were based on one or more
hypothetical assumptions: This CPA has:
a. Violated the ethical standards of the accounting profession, as reflected in the
IFAC Code of Conduct
b. Violated the ethical standards of the accounting profession, as reflected in
both the AICPA’s and IFAC’s standards of conduct
c. Prepared financial projections, which is not an ethical violation
d. Prepared financial forecasts, which is not an ethical violation

SOLUTION: C

Copyright ©2016 John Wiley & Sons, Inc. Klein, Ethics in Accounting, 1/e (For Instructor Use Only) 8-3
 12. Financial statements prepared on the cash basis:
a. Comply with GAAP but are complex to prepare
b. Comply with GAAP and are relatively easy to prepare
c. Do not comply with GAAP and are relatively easy to prepare
d. Do not comply with GAAP and, therefore, are not subject to being audited

SOLUTION: C

13. A CPA is in partnership with three non-CPAs. The CPA wants to sign a report.
Her signature will appear at the bottom of the report and the signature block will
mention that she is a CPA and is affiliated with this partnership. This CPA:
a. May do so as long as the non-CPAs comply with the standards set forth in the
AICPA’s Code of Professional Conduct
b. May do so as long as the report would not lead a reasonable reader to
believe that the entire partnership is comprised solely of CPAs
c. May not do so because the use of the entire firm’s name would imply to a
reasonable reader that all partners in the firm participated in the submission
and preparation of the report
d. May not do so because a CPA who is in partnership with non-CPAs may not
use the entire partnership’s name in connection with reports submitted to
clients or third parties

SOLUTION: B

14. The Accounting Principles Rule states that financial statements:

a. Always must comply with GAAP
b. Never should contain a departure from GAAP
c. May contain a departure from GAAP for administrative reasons, as long as
the departure is clearly disclosed
d. May contain a departure from GAAP if adherence to GAAP would result in the
statements being misleading

SOLUTION: D

15. If financial statements contain a departure from GAAP, a CPA is:

a. Not allowed to issue an audit report concerning the statements
b. Required to disclose an estimate of the approximate financial impact that the
departure from GAAP had on the financial statements
c. Allowed to complete the current-year engagement only if the financial
statements are utilized by company management for internal decision-making
d. Required to withdraw from future-year engagements, but may complete the
current-year assignment as long as the departure from GAAP is adequately
disclosed

SOLUTION: B

Copyright ©2016 John Wiley & Sons, Inc. Klein, Ethics in Accounting, 1/e (For Instructor Use Only) 8-4
 16. The “Continental Vending Machine” court decision was a landmark ruling
because:
a. It authorized CPA firms to both prepare a client’s financial statements and then
audit these same financial statements
b. It held that, for consistency, all financial statements must comply with GAAP,
regardless of the industry in which a company operates
c. Auditors can be held liable for misconduct, even if financial statements comply
with GAAP
d. Auditors may recoup from an audit client all of the litigation losses that the
auditor sustains from certifying misleading financial statements if the audit client
solely was responsible for the statement presentation being misleading

SOLUTION: C

17. The judge’s decision in the “Continental Vending” court case:

a. Made GAAP mandatory for all financial statements
b. Held that compliance with international accounting standards, rather than
American accounting standards, was acceptable in the presentation of
audited financial statements if the statements would predominantly be
distributed to readers outside the United States
c. Held that compliance with international accounting standards, rather than
American accounting standards, was acceptable in the presentation of
audited financial statements if the statements would exclusively be distributed
to readers outside the United States
d. Made deviation from GAAP-based presentations mandatory if the application
of GAAP would be misleading

SOLUTION: D

18. A CPA has been hired to audit a bank that is regulated by the federal banking
authorities. This audit will be submitted by the bank to numerous readers,
including federal regulators. The CPA’s audit agreement with the bank provides
that the bank will “reimburse and indemnify it for all losses it incurs if the bank’s
financial statements were prepared by the bank in a manner that was misleading
or fraudulent.” This provision:

a. Definitely is a violation of the Acts Discreditable Rule

b. Definitely is not a violation of the Acts Discreditable Rule because it provides
for a limitation on the CPA’s liability only in cases where the client solely is at
fault
c. Definitely is not a violation of the Acts Discreditable Rule because the CPA
firm’s agreement is reasonable and appropriate
d. Potentially is a violation of the Acts Discreditable Rule

SOLUTION: D

Copyright ©2016 John Wiley & Sons, Inc. Klein, Ethics in Accounting, 1/e (For Instructor Use Only) 8-5
 19. The “moral character” requirement, as expressed in the Uniform Accountancy
Act’s Model Rules:
a. Is limited to acts of dishonesty or deceit that evidence unfitness to carry out
the duties of the accounting profession
b. Is limited to acts of misconduct that constitute misdemeanors
c. Is limited to acts of misconduct that constitute felonies
d. Includes all acts of dishonesty or deceit that evidence unfitness to practice
accounting and any felony, whether or not it relates to the practice of
accounting

SOLUTION: A

20. Which of the following is most likely to be considered “material,” even if the
amounts involved are small?
a. Amounts that cause an upward earnings trend to become even larger
b. Amounts that cause an earnings trend to swing from slightly positive to
slightly negative
c. Amounts that cause reported Gross Profit to be larger than Net Income
d. Amounts that mask a retailer’s inability to control its Cost of Goods Sold

SOLUTION: B

Copyright ©2016 John Wiley & Sons, Inc. Klein, Ethics in Accounting, 1/e (For Instructor Use Only) 8-6
ESSAYS/SHORT ANSWER

1. What acts are expressly identified as discreditable by the AICPA’s Code of

Professional Conduct?

2. What acts, if any, are expressly identified as discreditable by the IFAC Code of
Conduct?

SOLUTION: None

3. An accountant provides bookkeeping services for a small Limited Liability

Partnership client. The client provided the accountant with its general ledger on a
password-protected site and the accountant changed the password to one of its
own selection for security reasons. From information contained in the general
ledger, the accountant developed various tax planning strategies that it created in
a password-protected Word document. The CPA has not been paid by the client
for its services, but the client nonetheless has demanded that the CPA “turn over
control” of the password-protected documents. What are the CPA’s obligations?

SOLUTION: The CPA must return access to the general ledger because it is a “client
record.” It does not have to relinquish the tax strategy plan, which is “workproduct.”

4. Is there a difference between an act being “discreditable to the profession” of

accounting and an act that is merely “discreditable?” Explain.

5. Outside the United States, what constitutes GAAP?

6. Under what circumstances are departures from GAAP permitted?

7. A CPA was convicted of a crime and sentenced to jail for intentionally harming an
animal. In most states, does this CPA satisfy the “moral character” standard for
continuing to practice as a CPA? Should this CPA be allowed to continue to
practice accounting?

8. Under what circumstances are business enterprises allowed to present financial

statements that do not conform to GAAP?

9. What are the advantages of preparing financial statements in accordance with

GAAP? What are the disadvantages?

10. When can a minor dollar amount nonetheless be considered to be “material” in

financial accounting reporting?

Copyright ©2016 John Wiley & Sons, Inc. Klein, Ethics in Accounting, 1/e (For Instructor Use Only) 8-7