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AICPA ETHICS PRACTICE EXAM
Which step in the decision-making model is characterized by asking the question, "Are these opinions consistent with applicable professional ethics rules, regulations, and laws?" A. Recognize ethical issues B. Gather critical facts C. Consider the effect on stakeholders D. Consider rules, regulations, and laws - ANSWERS-D. Consider rules, regulations, and laws Step 7 asks this question. You may determine that the greatest benefit and least amount of harm would likely result if you take a particular course of action, but if that course of action is inconsistent with the profession's rules of conduct, you may not ignore those rules. Which step in the decision-making model is characterized by asking the question, "If you had to discuss your decision in public, would you be concerned about how it reflects on your ethics" A. Recognize ethical issues B. Consider your comfort level C. Consider the effect on stake holders D. Consider rules, regulations, and laws - ANSWERS-B. Consider your comfort level Step 6 asks you to consider your comfort level. Before you make a decision about the correct action when facing an ethical issue, you should ask yourself some questions.
CPAs must follow the rules and standards promulgated by which body? A. AICPA B. SEC C. PCAOB D. Your state CPA licensing board - ANSWERS-D. Your state CPA licensing board State CPA licensing boards are charged with issuing CPA licenses and overseeing the ethical conduct of CPAs in 55 jurisdictions in the United States. It is critically important for CPAs to know their state board's requirements. If you are licensed by more than one state board, you should familiarize yourself with each state's requirements. As a professional CPA, I have the greatest responsibility to serve: A. My clients B. My best interest C. The public's interest D. My superior's interest - ANSWERS-C. Your primary responsibility is to serve the public interest. As a professional CPA, I have a responsibility to maintain and broaden public confidence by performing all my responsibilities with: A. Integrity B. Speed
We need more information to determine whether this situation creates a significant threat to Bob's ability to be objective. Which factor must be in place for you to perform services in light of a potential conflict of interest? A. The affected parties have agreed to bring the matter to the BOD B. The affected parties have agreed not to sue you or your firm C. You have determined that your threats to objectivity are at an acceptable level D. You have determined that some third parties might not question your objectivity - ANSWERS-C. You have determined that your threats to objectivity are at an acceptable level To proceed with evaluating your potential conflict of interest, you must conclude that you can provide the services objectively (that is, threats to you objectivity are insignificant or have been reduced to an acceptable level). Suppose a statute exists in your state that allows you to place a lien on client records in the event of unpaid fees. Given these facts are you obligated to return the client's records? A. No, not until he pays the $5,000 he owes you B. Yes, these records should be provided upon request - ANSWERS-B. Yes, these records should be provided upon request The code requires you to return client provided records under all circumstances.
As part of your work, you prepared several schedules relating to the client's investment trading activity. He now says he needs those schedules so that he can complete his tax return himself. Are you required to return those records? A. No, these are not considered client-provided records B. Yes, schedules that you prepare are conspired client provided records - ANSWERS-A. No, these are not considered client- provided records Your work papers, including analyses and schedules prepared by the client at your request, are your property, not client provided records. You are receiving requests from all the LPs asking that they receive copies if the partnership records. They claim the GP refused to furnish these records and referred all inquiries to you. Are you required to furnish these to all LPs that ask? A. No, since they are not the client representative B. Yes, because they have a legitimate need for them - ANSWERS- A. No, since they are not the client representative The code generally requires you to return client records once to the client's representative. After you have delivered them to the GP (client's representative), you need not comply with subsequent requests to again provide this information, so that the information does not get into the wrong hands. However, if as a result of a natural disaster or act of war, the client (GP) loses records that you had previously provided to him/her, you should honor this request.
C. Hana failed to ensure that her staff was competent to make the entry D. Hana failed to consider the rules of other regulators - ANSWERS-A. Hana failed to evaluate a potential ethical issue by subordinating her judgment She is subordinating her judgement by not following up and asking her boss why he wants her to book this journal entry. This could be a material misstatement of the financial statements, especially considering the boss wants to use "other expenses" instead to a more specific account. Just because her boss tells her to do something, doesn't mean you should assume it's correct or ethical, and Hana will still be held accountable as the controller if it is improper. She should have evaluated the potential ethical issue. The other answer choices don't best describe the problem because there was no mention about her failing to use a hotline, ensuring competency of her staff, or not considering rules. Hana receives tickets to Hamilton from one of her company's largest vendors. The gift included a card that congratulated her on a recent promotion. In determining whether accepting the gift would create a significant threat to her compliance with the AICPA code, what factor should she most consider? A. Whether she disclosed the receipt of the gift to the board of directors B. Whether she truly earned the gift C. Whether the gift is reasonable in the circumstances D. Whether the tickets cost more than $100 - ANSWERS-C. Whether the gift is reasonable in the circumstances
The key thing we learned about the ethics of receiving gifts as CPAs is whether the gift was reasonable in the circumstances. By reasonable, would the gift impact our judgement in the future or cause us to give that vendor special treatment? If the vendor pays for a dinner to discuss business that's one thing (probably reasonable), but if it's something that would cause your objectivity to be impaired, then you shouldn't accept the gift. It could be a $5 or $500 gift, but if you feel like you now "owe" the vendor something in return, you should decline the gift. Which phrase is used by the Code of Professional Conduct to describe integrity? A. Forceful advocate of the client's position B. Valued. business adviser to the client C. Willing to do what it takes to achieve a proper outcome D. Candid, within the constraints of client confidentiality - ANSWERS-D. Candid, within the constraints of client confidentiality We learned in a previous lesson that integrity means being honest or "candid" - the opposite of being sneaky or misleading. Integrity is doing the right thing being honest even if no one is necessarily holding you to that standard. However, as professionals, we also need to be concerned about client confidentiality. We shouldn't be so honest that we disclose any information about our clients that is not public. So the best answer is to be candid, within the constraints of client confidentiality. The other answer choices do not necessarily describe someone with integrity.
B. Audits of financial statements C. Reviews of financial statements D. Financial planning - ANSWERS-D. Financial planning Independence is not required for financial planning engagements. On October 11, 2017, ROC Accountants signed an engagement letter to begin auditing XYZ Corp for the 12-month period ended 12/31/17. Audit planning is scheduled to commence on 11/4/17. What is the earliest date on which ROC would be required to be independent of XYZ? A. January 1, 2017 B. October 11, 2017 C. November 4, 2017 D. December 31, 2017 - ANSWERS-A. January 1, 2017 Return on Capital (ROC) should be independent for the period of profession engagement and the period covered by the financial statements. If ROC had certain business relationships during the period they will audit, their independence may be considered impaired. A new staff accountant obtains an automobile loan under normal term and conditions from an audit client to purchase a BW sports car. The car is material to his net worth; it is his net worth as is the amount borrowed. He is a covered member of the lender. Did this loan impair independence? A. No, because it is fully secured (collateralized) by the automobile
B. No, if it was used to purchase a foreign car C. Yes, because it is material to the staff's net worth D. Yes, if the sticker price exceeds $40,000 - ANSWERS-A. No, because it is fully secured (collateralized) by the automobile An auto loan does not impair independence if it is obtained under the lender's normal terms and conditions and is fully secured by the vehicle. Car loans that are fully secured (collateralized) is a permitted loan that is an exception to the independence rules (See slide 13). A manager obtained her MBA prior to joining the firm 2013. While going to school, she obtained student loans under the lenders normal terms and conditions that are not material to her net worth. She is a covered member of the lender that made the loan. Does this loan impair independence? A. No, because the money way used to obtain a student loan B. No, because the loan is not material to the managers net worth and was obtained prior to her joining the firm C. Yes, if the manager obtained it within 5 years of joining the firm D. Yes, because the manager is a covered member - ANSWERS-B. No, because the loan is not material to the manager's net worth and was obtained prior to her joining the firm A grandfathered and or covered member loan does not impair independence if the loan is immaterial to her net worth and she meets the other requirements for grandfathering. Certain grandfathered loans are an exception to the independence rules (see slide 14).
D. Yes, if the staff person does not. maintain a current balance of $10,000 or less - ANSWERS-D. Yes, if the staff person does not maintain a current balance of $10,000 or less If the stand maintains a balance of $10,000 or less on a current basis, taking in to consideration the payment due date and any available grace period, the loan does not impair independence. See slide 13 - since the amount is over $10,000 independence would be impaired When performing non attest services for clients, which of these is the CPAs (AICPA member's) responsibility? A. Evaluate the adequacy of the services performed B. Establish an understanding with the client as to the services to be performed C. Design and implement the company's internal controls D. All of these options - ANSWERS-D. Establish an understanding with the client as to the services to be performed See slide 3. The member (CPA) is required to establish an understanding with the client concerning the services to be performed. The other two choices are management's responsibility. Rogers CPA is engaged to perform bookkeeping services (a non attest service) for an attest client. Which activity will impair Roger's independence? A. Supervise the client's employees as they perform their normal activities B. Post client-approve entries to the client's trial balance
C. Advise the client on current accounting issues D. None of these would impair independence - ANSWERS-A. Supervise the client's employees as they perform their normal activities See slide 10. Supervising client employees in the performance of their normal recurring activities impairs a member's independence. Posting entries is fine as long as the client approves the entry (you're just transferring numbers to the trial balance) and advising the client on issues is a typical nonattest service that wouldn't impair independence. Which activity would be least likely to create unacceptable threats to a member's independence? A. Consummate a translation on behalf of the client with potential investors B. Prepare financial statements based on the client's trial balance C. Prepare source documents for the client - ANSWERS-B. Prepare financial statements based on the client's trial balance A member may prepare financial statements from a client's trial balance without impairing independence. It's simply taking financial statement data the client prepared and approved and organizing it into the four statements. The other two options were mentioned on previous slides as activities a member should not do, since those would impair the CPA's independence. So B would be the least likely to impair independence. Mermaid Co. engages Olsen CPAs to help improve the operating effectiveness of certain internal controls. Olsen also audits Mermaid's financial statements. Which of these creates an
Which statement about the application of SEC independence rules to the audit of an SEC registrant is true? A. If a circumstance is not specifically addressed in the rules, you must assume that independence is impaired B. The four basic principles should be considered, in addition to the specific rules C. The rules do not apply to auditors of nonpublic broker-dealers or investment advisers D. If try AICPA and state board rules apply, the SEC rules would not also apply - ANSWERS-B. The four basic principles should be considered, in addition to the specific rules You should always consider the four basic principles, in addition to the specific rules Which choice is one of the fundamental principles that the SEC may look to in evaluating independence in a particular situation? A. Whether the firm acts as an advocate of the client B. Whether the firm has a recent history of independence violations C. Whether the firm has adequate independence training for its personnel D. Whether the firm is competent to complete the work - ANSWERS-A. Whether the firm acts as an advocate of the client This is one of the four principles mentioned by the SEC. The other are whether the firm (1) has a manual or conflicting interest with the client, (2) audits its own work, or (3) acts as management or an employee.
Under the SEC rules, with relationships between a covered person and an SEC audit client are NOT prohibited? A. Joint business ventures B. Agreements to share costs or profits C. Immaterial landlord-tenant relationships D. Limited partnership agreements - ANSWERS-C. Immaterial landlord-tenant relationships See slide 8, all the other relationships would be prohibited by SEC rules except immaterial landlord-tenant relationships Deena is a covered person with respect to an SEC audit client. Is she prohibited from having a broker-dealer account with the client? A. Yes, because the client would have custody of Deena's assets B. Yes, because the SEC prohibits all financial interest with clients C. No, provided Deena does not invest in or borrow money from the client and the value of assets in the account does not exceed the insured or protected levels D. No, there should be no restrictions on this type of account - ANSWERS-No, provided Deena does not incest in or borrow money from the client and the value of assets in the account does not exceed the insured or protected levels See slide 11. As long as the account does not hold any asset other than cash or securities, the contents of the account are insured, and you comply with the SEC's loan provisions, you are generally permitted to have such an account.
The firm may advise the entity on the candidate's competence, but the firm may not recommend a specific candidate for a specific job at the SEC audit client. Can Leider Electric (an SEC registrant) engage AB, its auditor, to perform information-technology related services under the SEC's independence rules? A. Yes, if the services have nonbearing on Leider Electric's financial reporting and related systems B. No, the SEC has a strict prohibition against information technology services C. Only if Leider's audit committee approves the services D. Only if AB hires an outside consultant to perform a concurring reviews of the services before the next audit - ANSWERS-A. Yes if the services have no bearing on Leider Electric's financial reporting and related systems The SEC rules do not prohibit a firm from working on IT systems that are unrelated to the financial reporting process, as long as they are approved by the issuer's audit committee before the are performed and do not run afoul of any other SEC independence rule or principles (for example. perform management functions). Under SEC rules, which non-audit service would AB auditors most likely be permitted to provide to an SEC audit clienT? A. Business valuation services used to measure the impairment of goodwill B. Valuation services provided solely as part of a tax-planning engagement
C. Actuarial services used to determine pension costs and related liability D. Bookkeeping services while the entity ...... - ANSWERS-B. Valuation services provided solely as part of a tax-planning engagement Because these services are performed solely for tax purposes, they would generally be permitted Status Photos wants to engage Daily CPAs as their auditors for the year ended 12/31/18. What must happen under PCAOB Rule 3526? A. Daily must explicitly state that all covered persons in the firm have complied with relevant ethical requirements B. Daily must provide a list of all firm members who met be independent of client C. Daily must describe in writing all the relationships with Status Photos that may reasonably be expected to affect their independence D. Daily must provide the results of independence investigations for all persons who may work on the engagement - ANSWERS-C. Daily must describe in writing all the relationships with Status Photos that may reasonably be expected to affect their independence Auditors are required to communicate in writing with Status Photo's audit committee a description of all relationships that Daily believes may reasonably be though to affect their independence. This provides the audit committee an opportunity to prove their input on whether or not they believe the matter would impact the firm's independence
