1.A group of investors sued Anderson, Olds & Watershed (AOW), CPAs, for alleged damages suffered when the company they held common shares in went bankrupt. In order to avoid liability under common law, AOW must prove which of the following?

A.The investors actually suffered a loss

B.The investors relied on the financial statements audited by AOW

C.The investors' loss was a direct result of their reliance on the audited financial statements

D.The audit was conducted in accordance with generally accepted auditing standards and with due professional care

2.PA Smith is the auditor of Ajax Corporation. Her audit independence will not be considered impaired if she:

A.owns $1,000 worth of Ajax shares.

B.has a spouse who owns $2,000 worth of Ajax shares.

C.has a sister who is the financial vice-president of Ajax.

D.owns $1,000 worth of the shares of Pericles Corporation, which is controlled by Ajax as a result of Ajax's ownership of 40 percent of Pericles's shares, and Pericles contributes 3 percent of the total assets and income in Ajax's financial statements.

3.A PA's independence would not be considered impaired if he had:

A.owned common shares of the audit client but sold them before the company became a client.

B.sold short his common shares of an audit client while working on the audit engagement.

C.served as the company's treasurer for six months during the year covered by the audit but resigned before the company became a client.

D.performed the bookkeeping and financial statement preparation for the company, which had no accounting personnel, and a president with no understanding of accounting principles.

4.David Villa is a newly qualified professional accountant who has decided to set up his own public accounting firm. In order to find new clients, which of the following is permitted?

A.Handing out flyers to large audited firms. The flyers show his new firm's name, address, and services in the lobby of a large office building.

B.Putting a sign on his door saying "Basic personal tax returns...$25"

C.Sponsoring his neighborhood girls' soccer team with his firm's name shown on the team jersey.

D.Listing his company in the phone book as "AAA Excellent Accounting Services"

5.A member or firm engaged in the practice of public accounting or in a related business or practice shall NOT offer or engage to perform a professional service for a contingent fee, where the service is

A.one in respect of which independence is required in accordance with the provisions of Rule 204 (on independence).

B.a compilation engagement.

C.or preparation of an income tax return.

D.fixed by a court or other public authority, determined as a result of the finding of judicial proceedings or government agencies or based on the work's complexity or time required.