Multiple-Choice Questions

1. 1. (LO 1) A key aspect of the "concern for the public interest" definition of a professional is:
2. the level of professional expertise of the professional.
3. the fact that there are situations where professionals must put the interest of society ahead of the interest of their clients or their own well-being.
4. the incorporation of this definition into the Sarbanes-Oxley Act of 2002.
5. the unique ability of CPAs to sign attest reports.
6. 2. (LO 2) Which of the following statements is true about interpretations of the AICPA Code of Professional Conduct?
7. Interpretations are not enforceable by the AICPA in a disciplinary matter.
8. Interpretations are strictly enforceable by the AICPA in a disciplinary matter.
9. Interpretations are strictly enforceable by the AICPA and all state boards of accountancy in a disciplinary matter.
10. An AICPA member who departs from an interpretation has the burden of justifying a departure in any disciplinary hearing.
11. 3. (LO 3) In the conceptual framework to the AICPA Code of Professional Conduct, a self-interest threat is:
12. the threat that a CPA could benefit, financially or otherwise, from an interest in, or a relationship with, a client or persons associated with the client.
13. the threat that a CPA will not act with objectivity because the CPA's interests are opposed to the client's interests
14. the threat that a CPA will take on the role of client management or otherwise assume management responsibilities.
15. the threat that a CPA will promote a client's interests or position to the point that the CPA's objectivity or independence is compromised.
16. 4. (LO 4) A CPA would violate the AICPA rule on integrity and objectivity if:
17. a CPA in industry knowingly misrepresented the earnings of the company he worked for.
18. a CPA in public practice represented both the buyer and seller in helping the parties negotiate the sale (purchase) of a business.
19. a CPA who was an audit staff member subordinated his or her judgment to that of the audit partner.
20. All of the answers are violations of the AICPA rule on integrity and objectivity.
21. 5. (LO 5) According to the profession's ethical standards, an auditor would be considered independent in which of the following instances?
22. A professional employee, who does not work on the audit, has a spouse who is a marketing manager for an audit client.
23. The auditor is also an attorney who advises the client as its general counsel.
24. An employee of the auditor donates service as treasurer of a charitable organization that is a client.
25. The client owes the auditor fees for two consecutive annual audits.
26. 6. (LO 5) A CPA who is a "covered person" purchased stock in a client corporation and placed it in a trust as an educational fund for the CPA's minor child. The trust securities were not material to the CPA but were material to the child's personal net worth. Would the independence of the CPA be considered impaired with respect to the client?
27. Yes, because the stock would be considered an indirect financial interest that is material to the CPA's child.
28. No, because the CPA would not be considered to have a direct financial interest in the client.
29. Yes, because the stock would be considered a direct financial interest and, consequently, materiality is not a factor.
30. No, because the CPA would not be considered to have a material indirect financial interest in the client.
31. 7. (LO 5) Under the AICPA ethics rules on independence, which of the following individuals would not be a covered member?
32. A consulting manager in another office who provides 100 hours of non-audit services to the audit client.
33. A partner in the same office as the lead partner who provides no services to the audit client.
34. A partner in another office who evaluates partner performance and compensation, but provides no services to the audit client.
35. A tax partner in another office who provides 9 hours of tax services to the audit client.
36. 8. (LO 5) Which of the following best describes the independence requirements for a close relative of a covered member?
37. A close relative cannot have an immaterial, direct investment in an audit client.
38. A close relative cannot have a loan from an audit client.
39. A close relative cannot hold a key position with an audit client.
40. A close relative cannot have an immaterial, indirect investment in an audit client.
41. 9. (LO 6) The essence of the due care standard is that the auditor should not be guilty of:
42. bias.
43. errors in judgment.
44. fraud.
45. negligence.
46. 10. (LO 7) Without the consent of the client, a CPA should not disclose confidential client information contained in working papers to a:
47. voluntary quality control review board.
48. CPA firm that is a likely successor auditor.
49. federal court that has issued a valid subpoena.
50. disciplinary body created under state statute.
51. 11. (LO 8) If a stockholder sues a CPA for common law fraud based on false statements contained in the financial statements audited by the CPA, which of the following is the CPA's best defense?
52. The CPA did not financially benefit from the alleged fraud.
53. There was contributory negligence of the client.
54. The stockholder lacks privity to sue.
55. The auditor followed GAAS.
56. 12. (LO 8) Starr Corp. approved a plan of merger with Silo Corp. One of the determining factors in approving the merger was the strong financial statements of Silo, which were audited by Cox & Co., CPAs. Starr had engaged Cox to audit Silo's financial statements. While performing the audit, Cox failed to discover material fraud, which subsequently caused Starr to suffer substantial losses. For Cox to be liable under common law under the Ultramares decision, Starr, at a minimum, must prove that Cox:
57. was a party to the fraud.
58. acted recklessly or with a lack of reasonable grounds for belief.
59. failed to exercise due care.
60. was grossly negligent.
61. 13. (LO 9) When a plaintiff is suing the auditor for damages under Rule 10(b)-5 of the 1934 Securities Act, which of the following is not part of the plaintiff's burden of proof?
62. The financial statements contained a material, factual misrepresentation or omission.
63. The auditor was negligent.
64. The plaintiff relied on the financial statements.
65. Damages were suffered as a result of reliance on the financial statements.
66. 14. (LO 9) One of the elements necessary to recover damages if there has been a material misstatement in a registration statement filed pursuant to the Securities Act of 1933 is that:
67. there was a material false or misleading statement in the financial statements.
68. the plaintiff knew the auditor.
69. issuer and plaintiff were in privity of contract with each other.
70. issuer failed to exercise due care in connection with the sale of the securities.