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Actg 470 Take Home Final Exam December 6, 2016 1. The AICPA Ethics Codification includes the following sections: a. Preface, rules, and interpretations applicable to members in tax practice and rules and interpretations applicable to members in business. b. Preface, rules, and interpretations applicable to members in public practice and rules and interpretations applicable to members in business. c. Preface, rules, and interpretations applicable to members in tax practice and rules and interpretations applicable to members in audit practice. d. Preface, rules, and interpretations applicable to members in audit practice and rules and interpretations applicable to members in business. 2. What is the specific citation in the rules for guidance on whether or not membership in a country club which is an audit client impairs independence? a. Section 1.280.010 of the AICPA Code of Conduct. b. Section 1.298.010 of the AICPA Code of Conduct. c. Section 1.510.005 of the AICPA Code of Conduct. d. Section 10.35 of IRS Circular 230. e. None of the above; resolution of this issue requires use and compliance with the Conceptual Framework for Independence. 3. Which of the following phrases is used by the Code of Professional Conduct to describe integrity? a. Candid, within the constraints of client confidentiality. b. Forceful advocate of the client's position. c. Valued business advisor to the client. d. Willing to subordinate judgment to achieve a proper outcome. 4. Which section of rules applicable to tax accountants covers the duty to recognize possible conflicts caused by the representation of multiple clients before the Internal Revenue Service? a. Section 10.29 of IRS Circular 230. b. Section 10.35 of IRS Circular 230. c. Title 31 of the Code of Federal Regulation, Section 10.35. d. Section 10.21 of IRS Circular 230. 5. What is the specific citation in the applicable rules for guidance on corrective action to be taken by an accountant if there has been an inadvertent breach of independence? a. Section 10.29 of IRS Circular 230. b. Section 1.298.010 of the AICPA Code of Conduct. c. Title 31 of the Code of Federal Regulation, Section 10.35. d. Section 1.310.005 of the AICPA Code of Conduct. e. None of the above; there is no corrective action that can be taken for a breach of independence. 6. Which of the following best describes competence as defined in the AICPA Code of Professional Conduct? a. Infallible judgment that cannot subsequently be called into question. b. The application of skill and knowledge with reasonable care and diligence. c. Possessing an advanced college degree in the relevant subject matter. d. Rigid adherence to the professional standards of engagement performance. Actg 470 AICPA Final 7. In which of the following situations may you disclose confidential client information without violating the AICPA Code of Professional Conduct? a. In response to a validly issued and enforceable subpoena. b. At the request of another client that needs the information to file its tax return. c. As an example in a seminar given for CPE credit. d. In a proposal to a potential client. 8. Wanda Y. Thaddis is a CPA working for Starlight Publishing in the accounting department. Wanda's supervisor, Candace B. Wright, instructs Wanda to make certain accounting entries in the company's books that will increase revenue. Wanda researches the matter, confirming her concern that these entries would overstate revenue, and informs Kay that recognizing revenue in this manner would be premature and not consistent with generally accepted accounting principles (GAAP) but Candace disagrees and insists that Wanda record the entries. The amount of revenue is material to Starlight Publishing's financial statements. According to the AICPA rules, what should Wanda do first? a. Resign her position quietly. b. Report the matter to the senior partner in the firm. c. Take out a professional liability policy. d. Discuss her concerns with the boss of Candace B. Wright. 9. Wanda chose to resign from Starlight. Fortunately, she was soon hired as the controller of Premium Sausage Co., a midsize processed meat packing company, supervising two employees. Her boss, Donatella Nobodi, instructs her to increase the company's inventory balance for an amount that is material to the financial statements by crediting several small "miscellaneous" expense accounts. She does not understand why he wants her to make these entries but immediately directs one of her staff to make them because she has been instructed to do so. Which of the following statements best describes Wanda's actions? a. Wanda failed to evaluate a potential ethical issue. b. Wanda failed to refer the matter to the AICPA ethics hotline. c. Wanda failed to ensure that her staff was competent to make the entries. d. Wanda failed to consider the rules of other regulators. 10. Ethical problems seem to follow Wanda wherever she goes. Wanda is a vegetarian, so she has some serious ethical disagreements the basic business plan at Premium Sausage. Wanda leaves to become the CFO of Otto's Auto Parts, Inc. Wanda, received a watch from one of her company's largest vendors, Bender's Fenders Company. She received the gift with a card congratulating her on Otto's Auto's recent merger with another company. In determining whether accepting the gift would create a significant threat to her compliance with the AICPA Code, which of the following factors should Wanda consider? a. Whether she disclosed receipt of the gift to the board of directors. b. Whether she truly earned the gift. c. Whether the value of the gift is financially material to either Otto's Autos or Bender's Fenders. d. Whether the gift was reasonable in the circumstances. e. Whether the gift cost more than $100. 11. A former client of Wanda filed a lawsuit in state court alleging that Wanda failed to exercise due care in the performance of tax and compilation services performed in 2011. Wanda firmly believes that she performed her services with competence and diligence. In her defense, she plans to admit to making one minor error which she says was inadvertent and did not have a material effect on the client's taxes or financial position. In light of her admission, has Wanda complied with the AICPA Code's standard of due care and why? a. No. She obviously did not discharge her professional responsibilities with competence and diligence. b. No. She did not perform professional services to the best of her abilities. Actg 470 AICPA Final c. Yes. She has chosen to be honest in reporting that she made an error. d. Yes. The AICPA standard for due care does not require CPAs to be infallible. 12. Terry Industries engages Rose & Co., CPAs, to prepare its annual financial statements and tax returns. Before either of these engagements is completed, Terry terminates the relationship and asks the firm to provide all records that they provided to the firm, the firm's working papers, and its partially completed work product. Terry has not paid Rose & Co. for either service. Under the AICPA rule on client records requests, which records, if any, may Rose & Co. withhold from the client? a. Records Terry provided Rose & Co. b. Rose's working papers and its partially completed work product. c. Any records the firm chooses to withhold. d. No records may be withheld from the client. 13. Which of the following statements best describes the AICPA ethics rules relating to a member's failure to file his or her personal tax return in a timely manner? a. The member is strongly encouraged to file his or her personal tax returns in a timely manner. b. The failure to file a personal tax return in a timely manner must be disclosed to all clients and potential clients. c. d. The failure to file a personal tax return in a timely manner is usually considered an act discreditable to the profession. e. The member is not in violation of any ethics rules as long as the failure to file a personal tax return in a timely manner was due to a heavy workload. 14. Sympatico Accountants engages ABC Tax Preparers to prepare routine tax returns during the busy season. Under the AICPA Code, which of the following should Sympatico do prior to sharing its clients' information with ABC? a. Inform its tax clients that the firm may be using an outside service when providing professional services. b. List a notice in the local newspaper that the firm may be using an outside service when providing professional services. c. Ask clients to sign a waiver limiting Sympatico's liability in the event ABC makes errors in Sympatico's tax returns. d. Sympatico would not be required to take any particular action in this situation. 15. Which of the following statements best describes the AICPA ethics rules relating to advertising? a. Advertising through the use of banner ads over the Internet is considered overreaching and is prohibited. b. Mass email advertising is not allowed because it is considered a form of harassment. c. Advertising is permitted as long as it is not false or misleading. d. Advertising over any form of mass media is prohibited. 16. Bob Martino is sanctioned by his state board of accountancy for his association with false and misleading financial statements of his employer, Jones Consulting, LLC, a private company. Which of the following situations is the least likely result of the state board's action? a. The state board could suspend or revoke Bob's CPA license. b. Bob could lose his membership in the AICPA or a state CPA society. c. Bob could become subject to significant legal liabilities. d. The SEC could fine Bob. 17. Members should use the AICPA Conceptual Framework for Independence to Actg 470 AICPA Final a. b. c. d. Come to different conclusions than the interpretations of the Code of Professional Conduct. Evaluate independence matters not addressed in the Code of Professional Conduct. Understand the rules on confidential client information and acts discreditable to the profession. More easily interpret conflicts of interest and subordination of judgment by a member. 18. I am sure you remember Wanda from earlier questions. Wanda keeps changing jobs. Now, Wanda works for a public accounting firm, and is an audit manager, assigned to the audit of Terry Industries, Inc. You might recall from an earlier question that Terry Industries fired the last CPA firm, Rose & Co. Wanda is concerned that Joanne, a friend from her college days at UIC, is on the internal audit staff of Terry Industries. Wanda believes she could provide services to this client in an objective manner. Which of the following statements best describes how Wanda should apply the AICPA conceptual framework approach in this situation? a. Wanda should refuse to provide services to Terry Industries because no safeguards would be effective in mitigating the threat(s) to her independence. b. Wanda should not participate in the audit of Terry Industries before obtaining a written waiver from her firm's general counsel. c. Wanda should consider the threats to her independence and whether safeguards may be applied that reduce the threat(s) to an acceptable level. d. e. Wanda should document her assessment of independence, which should include a sworn statement from Joanne. 19. Wanda's employer is a CPA firm with two offices, one in Aurora and another in Joliet. The firm has an audit client that sells medical equipment. The lead audit partner for this client conducts the engagement in the Joliet office. Stockholdings in the client by which of the following persons would not impair the firm's independence under the AICPA Code? a. A manager in the Aurora office who will provide 26 hours of nonattest services to the client this year. b. A staff person in the Aurora office who provides no services to the client. c. A tax partner in the Joliet office who provides no services to the client. d. A Joliet staff person working on the audit engagement. 20. An example of a spousal equivalent as defined in AICPA independence rules is a. A person in a domestic partnership with a covered member. b. A roommate and longtime platonic friend of a covered member. c. A cousin who lives with and is supported by the covered member. d. A former spouse of a covered member who is financially independent of the covered member. 21. Under AICPA rules, the employment of your spousal equivalent at a clothing retailer that is an audit client would generally impair your independence if he or she was employed as a. Controller. b. Cashier. c. Warehouse supervisor. d. Buyer. 22. Under AICPA rules, which of the following statements best describes the period of the professional engagement as it applies to a threeyear engagement to audit a client's financial statements? a. It begins each year when fieldwork commences and ceases when fieldwork ends. b. It begins when fieldwork commences and ceases when the report is issued, recommencing when fieldwork begins again for the next period. c. It begins when the engagement letter is signed and ceases each year when the report is issued. d. It begins when the engagement letter is signed and continues until the report for the third year is issued Actg 470 AICPA Final unless the relationship is terminated sooner. 23. Ethical issues continue to follow Wanda, who is now a partner with the CPA firm. Wanda borrows $100,000 on a secured note from one of the firm's bank audit clients to buy a new house. The amount of the loan is material to Wanda. Wanda will not provide any services to the bank and she is unable to influence the engagement. Wanda practices in the same office as the lead partner on the bank's audit. Is Wanda's independence impaired under the AICPA Code? a. Yes, because Wanda obtained a loan from an audit client when she was a covered member. b. Yes, because the loan is material to Wanda's net worth. c. No, because the note is secured and is related to Wanda's primary residence. d. No, because Wanda is not on the attest team or able to influence the engagement. 24. When a member performs nonattest services for an attest client, management is required to designate an individual to oversee those services. Which of the following best describes the qualities that are required of that person under AICPA rules? a. He or she must possess the same level of expertise as the CPA. b. He or she must be able to perform the services himself or herself. c. He or she must have suitable skill, knowledge, and or experience. d. e. He or she must be able to supervise the CPA in the daytoday rendering of the services. 25. Getting back to our CPA friend, Wanda, she has been asked to cosign checks with an audit client employee while the company president is on vacation. Which of the following statements about the application of the AICPA independence rules to this situation is true? a. Because Wanda will only be cosigning checks, independence is not threatened. b. Because Wanda is a cosigner for a short time, independence is not threatened. c. Because Wanda has entered into a joint venture with the client, independence is impaired. d. Because checksigning is a management function, independence is impaired. 26. Jones, a consulting manager of Miller & Co., is considering membership on an audit client's board of directors. Jones does not provide any services to this client. Which of the following statements describing this situation is true under AICPA rules? a. Jones may join the board because he is not an auditor. b. Jones may join the board because he is not a partner. c. Jones may not join the board because the rules prohibit all firm professionals from serving as a director of a client. d. Jones may not join the board because only nonmanagerial employees of the firm may serve as client management. 27. Wanda is a member of the engagement team performing an audit of XYZ. During the engagement, the president of XYZ approaches Wanda and offers her the position of CFO at the company. Wanda is very flattered, anxious to get out of auditing (too many ethical problems), and seriously considering the offer. What safeguards do the independence rules require Wanda to apply? a. Remove herself from the engagement team until the offer is rejected or she is no longer seeking employment with XYZ. b. Obtain the permission of the XYZ audit committee to remain on the engagement team. c. Resign from the firm. d. Decline the offer. 28. Gladys, Overwith & Dunne, CPAs, and its client, Troper Lighting, are discussing a possible advisory engagement in which the firm would review Troper's account receivable (A/R) system and recommend Actg 470 AICPA Final changes that would expedite the company's collection process. Troper will pay Gladys, Overwith a fee based on improved performance in A/R collections. Would such an arrangement raise any ethical concerns under the profession's rules? a. No, but only if Troper is a publicly traded company subject to SEC and PCAOB rules. b. No, provided Gladys, Overwith documents the arrangement clearly in the engagement letter. c. Yes, but only if Gladys, Overwith was performing other services for Troper. d. Yes, if Gladys, Overwith also performed a review engagement for Troper. 29. Feld & Company, CPAs, has provided annual audit and tax advisory services to Maris Corporation for several years. Last year, Maris experienced severe cash flow problems and was unable to pay Feld in full, leaving a significant balance unpaid. Feld is ready to begin fieldwork for the upcoming audit. What options are available to Feld and Maris under the AICPA Code? a. Feld may set up a payment plan with Maris to settle the unpaid fees over the next two years. b. Feld may perform the audit as long as the unpaid fees relating to the prior year are paid in full before the current year report is issued. c. Maris may give Feld a note with a maturity date no later than one year after the date of the current year report. d. e. Maris may have another firm perform the fieldwork and Feld will review the other firm's work papers and issue the report. 30. Under SEC rules, all of the following are prohibited relationships between a covered person and an SEC audit client except: a. Joint business ventures. b. Agreements to share costs or profits. c. Immaterial landlordtenant relationships. d. Limited partnership agreements. 31. Under the SEC rules, a oneyear "coolingoff" period applies to which of the following scenarios? a. A tax manager working on a client's tax engagement is offered a managerial position at the client. b. A client wants to hire its firm's lead audit partner to take over as CFO. c. A technology consulting senior manager in the firm is seeking an executive role with the client. d. A professional staff person on an audit applies for a position as senior accountant at the client. 32. Which of the following best describes a significant similarity between the AICPA and IESBA Codes? a. Both Codes incorporate the conceptual framework approach for evaluating threats when specific rules on a matter do not exist. b. Both Codes contain specific ethics and independence provisions related to public interest entities. c. The Codes combine the rules for members in business and public practice in one section. d. The Codes contain the exact same provisions for corporate accountants. 33. The SEC has historically raised questions regarding the independence of firms that derive a significant portion of their total revenues from one audit client or group of clients because the SEC staff believes this situation causes CPA firms to a. Profit excessively from a client or group of clients. b. Depend too heavily on the fees generated by the client or clients. c. Have a mutuality of interests with the client or group of clients. d. Place too heavy a burden on the client's financial position. 34. The GAO's Yellow Book stresses five ethical principles, including all of the following except: a. The public interest. Actg 470 AICPA Final b. Professional behavior. c. The proper use of government information, resources and position. d. The proper safeguarding of client information. 35. One of the GAO's ethical principles described in the Yellow Book stresses that a. Government employees may not accept gifts under any circumstances. b. c. Government information, resources, and positions should not be used for the auditor's personal gain. d. Auditors may use government resources if the proper requisition forms are completed beforehand. e. Auditors should not use personal email accounts for governmentrelated communications. 36. Department of Labor (DOL) independence rules apply to a. All services provided to employee benefit plans. b. Accounting services provided to employee benefit plans' sponsors. c. Audit services provided to employee benefit plans subject to ERISA requirements. d. All governmental audit and accounting engagements. 37. In which way do DOL independence rules differ from the AICPA rules? a. The DOL rules on nonattest services are more comprehensive than the AICPA independence rules. b. The DOL rules ban auditors from providing actuarial services to benefit plans that they audit. c. The DOL defines member much more broadly than the AICPA's covered member. d. The DOL permits auditors to perform recordkeeping, whereas the AICPA rules would not. 38. Tax return preparers may generally rely on a client's representations without verification unless a. The client is incompetent. b. The tax matter is complex. c. The information seems incorrect, inconsistent, or incomplete. d. The client is new to the preparer. 39. Our old friend Wanda has been falsely accused of violating an AICPA rule, or IRS rule, or both; she is trying to understand the possible sanctions. Which of the following is possible: a. Suspension of AICPA membership or the ability to practice before the IRS. b. Imposition of a monetary penalty by the IRS. c. Publication of an admonishment by the AICPA. d. All of the above. 40. Technical qualifications necessary to supervise the work of others in completing a professional assignment is a characteristic of a. Due professional care. b. Independence. c. Competence. d. Cost benefit. 41. A practitioner is engaged to prepare a client's federal income tax return for 2013 and 2014. The practitioner files the 2013 return on the client's behalf. After the 2014 return is prepared, the client disputes the fees for the 2014 tax engagement, terminates the relationship, and requests all tax returns and related records. The client has not yet paid for preparation of the 2014 return. Under IRS Circular No. 230, which records must the practitioner return to the client? a. Schedules the practitioner prepared, which the client needs to file in its 2014 federal income tax return. b. c. The engagement letter executed by the client for preparation of the 2014 federal income tax return. Actg 470 AICPA Final d. An appraisal the practitioner prepared in connection with the 2013 federal income tax return. e. Notes the practitioner took when meeting with the client about the 2013 and 2014 tax returns. 42. Our favorite CPA, Wanda, finds a material error in the tax return of her client, Donatella Nobodi (yes, that is her old boss from Premium Sausage). Wanda advises Donatella on how to correct it. Under AICPA rules, what should Wanda do if the client does not agree to correct the error? a. Document the consultation with the client, including the client's rationale for not amending the return, but nothing further. b. Make the correction without the client's knowledge and file the return. c. Consider whether the client's decision not to correct the error may predict future behavior that warrants termination of the client relationship. d. Disclose the matter to the AICPA Professional Ethics division. 43. A CPA firm performs the annual audit of The Leahy Group, a private company. The client has asked the firm to perform a study to determine whether the company would qualify for certain municipal tax credits and prepare the request. The firm will receive 15 percent of any tax credits that Leahy obtains for the client as a result of the request but no fees if the request is denied. City officials do not perform a substantive review of each request for tax credits. Would this fee arrangement be permitted under the AICPA Code of Professional Conduct? a. Yes, because the services are taxrelated. b. Yes, if the projected fees would be immaterial to the firm. c. No, because the fee arrangement is a prohibited contingent fee. d. No, because the service would be considered to be a management function. 44. The clientele of Black & Company's audit practice consists primarily of privatelyowned small and middle market companies. Recently the firm won two audits of public companies, including one issuer. From an independence perspective, what impact will these new client engagements have on Black & Company? a. Black & Co. will have to comply with SEC and PCAOB independence rules. b. Black & Co. will have to comply with DOL and GAO independence rules. c. Black & Co. will have to apply the IESBA's conceptual framework approach. d. Black & Co. will need an annual peer review and PCAOB inspection. 45. Rocky Point Brewery (RPB) filed an initial public offering in January 2015. RPB engaged Gladys, Overwith & Dunne, CPAs in 2012 to keep the books and prepare monthly and annual financial statement (while the company was privatelyheld), and terminated those services in December 2014. Could RPB engage Gladys, Overwith to be their auditors now that they are a public company? a. Yes, because the prohibited non-audit services were performed before the period of professional engagement. b. Yes, but only if O&A rescinds any indemnification language existing in their nonaudit engagement letters. c. No, because the prohibited nonaudit services were performed during the period covered by the financial statements. d. No, but only if the fees O&A received from these engagements exceeded five percent of the firm's overall annual revenues. Actg 470 AICPA Final