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Flashcards in NINJA AUD 6 Deck (20):
1

Which of the following statements is correct regarding the liability of a CPA for services performed?

A.
A CPA's work is not guaranteed to be accurate even though the CPA acted in a reasonably competent and professional manner.

B.
A CPA is negligent for exercising only that degree of care a reasonably competent CPA would exercise under the circumstances.

C.
A CPA's liability for negligence extends only to the client and no further.

D.
A CPA's liability for fraud extends only to the client and no further.

The correct answer is A.

A CPA is required to exercise due care when preparing tax returns or other accounting work. The CPA is held only to the standards of reasonable care and competence and does not have the duty to be infallible.

2

A government internal audit function is presumed to be free from organizational independence impairments for reporting internally when the head of the organization:

A.
is not accountable to those charged with governance.

B.
performs auditing procedures that are consistent with generally accepted accounting principles.

C.
is a line manager of the unit under audit.

D.
is removed from political pressures to conduct audits objectively, without fear of political reprisal.

The correct answer is D.

A government internal audit function is presumed to be free from organizational independence impairments for reporting internally when the head of the organization is removed from political pressures to conduct audits objectively, without fear of political reprisal.

Accountability to those charged with governance generally increases the objectivity of the internal auditors.

The audit procedures used for the government audit should be consistent with generally accepted government auditing standards (GAGAS), not GAAP.

If the head of the organization is also the line manager under the current audit, there is a potential conflict of interest with these two roles and potential pressure on behalf of the internal auditor to provide a more favorable audit opinion.

3

The IESBA Code of Ethics for Professional Accountants establishes ethical requirements for professional accountants through which of the following?

A.
Conceptual Framework

B.
Rules

C.
Interpretations

D.
All of the answer choices are correct.

The correct answer is A.

The International Ethics Standards Board for Accountants (IESBA) Code of Ethics for Professional Accountants only establishes a conceptual framework. They have not issued Rules or Interpretations (or Rulings). The conceptual framework promotes compliance with five fundamental principles of professional ethics: integrity, objectivity, professional competence and due care, confidentiality, and professional behavior.

4

A CPA in public practice may not disclose confidential client information regarding auditing services without the client's consent in response to which of the following situations?

A.
A review of the CPA's professional practice by a state CPA society

B.
A letter to the client from the IRS

C.
An inquiry from the professional ethics division of the AICPA

D.
A court-ordered subpoena or summons

You are correct, the answer is B.

Normally, the only time a CPA can disclose confidential information is with the client's consent. The exceptions to client's consent are:

a peer review by a state CPA society or state board of accountancy.
a subpoena or court summons to release confidential information.
an inquiry that is made by a recognized investigatory body.

5

The GAO standards list several threats to independence. The threat of self-interest is defined as:

A.
a financial or other interest that will inappropriately influence the auditor's judgment or behavior.

B.
when an auditor will not appropriately evaluate the results of a previous judgment made or service performed by an auditor.

C.
when an auditor will, as a result of political, ideological, social, or other convictions, promote a position to the point that objectivity is compromised.

D.
when, due to a long or close relationship with management or other personnel, the auditor will be too sympathetic or accepting of work.

The correct answer is A.

The Government Accountability Office (GAO) has identified several types of circumstances that could lead to threats of independence, including the following:

Self-interest—the threat that a financial or other interest will inappropriately influence judgment
Self-review—the threat that an auditor will not properly evaluate the results
Bias—the threat that an auditor will promote a position where objectivity is compromised
Familiarity—the threat that a close relationship will impact objectivity

6

Prior to seeking approval of certain tax services from the audit committee, a registered public accounting firm must:

A.
describe in writing, to the audit committee, the scope of service and fee structure.

B.
discuss with the audit committee the potential effects of the services on independence of the firm.

C.
document the substance of the discussion with the audit committee.

D.
All of the answer choices are correct.

The correct answer is D.

Public Company Accounting Oversight Board (PCAOB) Rule 3524 requires the registered public accounting firm to describe in writing the scope and fee structure of the services, discuss potential effects on independence, and document the substance of the discussion with the audit committee.

7

The auditor with final responsibility for an engagement and one of the assistants have a difference of opinion about the results of an auditing procedure. If the assistant believes it is necessary to be disassociated from the matter's resolution, the CPA firm's procedures should enable the assistant to:

A.
refer the disagreement to the AICPA's Quality Review Committee.

B.
document the details of the disagreement with the conclusion reached.

C.
discuss the disagreement with the entity's management or its audit committee.

D.
report the disagreement to an impartial peer review monitoring team.

The correct answer is B.

AU-C 220.A20 explains, “Members of the engagement team have a professional responsibility to bring to the attention of appropriate personnel matters that, in their professional judgment, are difficult or contentious and may require consultation” that might arise with respect to audit issues. In addition, each assistant has a right to document the disagreement if the assistant believes it is necessary to be disassociated from the resolution of the matter.

8

A person identified as an audit committee financial expert of an issuer generally must have acquired the attributes of a financial expert through any of the following experiences except:

A.
as a principal financial officer, principal accounting officer, controller, public accountant, or auditor.

B.
serving on at least one other issuer's audit committee or disclosure committee of the board of directors.

C.
actively supervising a principal financial officer or principal accounting officer.

D.
assessing the performance of public accountants with respect to preparation, auditing, or evaluation of financial statements.

The correct answer is B.

“Financial expert” is defined in SOX Title IV as whether a person has, through education and experience as a public accountant or auditor or a principal financial officer, comptroller, or principal accounting officer of an issuer:

an understanding of GAAP and financial statements;
experience in:
the preparation or auditing of financial statements of generally comparable issuers and
the application of such principles in connection with the accounting for estimates, accruals, and reserves;
experience with internal accounting controls; and
an understanding of audit committee functions.
There is no requirement that the financial expert had to obtain this experience by serving on a prior audit committee or board of directors.

9

Would the following factors ordinarily be considered in planning an audit engagement’s personnel requirements?

I. Opportunities or on-the-job training
II. Continuity and periodic rotation of personnel

A.
Both I and II

B.
I only

C.
II only

D.
Neither I nor II

The correct answer is A.

Effective policies and procedures emphasize the need for levels of firm personnel to participate in general and industry-specific continuing professional education and other professional development activities that enable them to fulfill responsibilities assigned to them.

Supervision involves directing the efforts of the engagement team that is involved in accomplishing the objective of the audit and determining whether those objectives were met. This requires the supervisor to make judgments regarding the continuity or rotation of personnel.

10

The AICPA's Code of Professional Conduct states that:

A.
any acts carried out on behalf of the CPA by an uncompensated person cannot cause the CPA to violate the rules.

B.
a member may follow another country's rules if practicing outside of the United States.

C.
a member cannot be assumed to have control over another professional; therefore, another's acts cannot reflect on the member.

D.
another person cannot impair the independence of a CPA.

You are correct, the answer is B.

The Code of Professional Conduct applies to all members (CPAs who are members of the AICPA or of a state society that adopts the Code). If, however, a member is practicing outside of the United States and following the applicable rules in that country, the member will not be subject to discipline.

The other answer choices are false:

A member shall not knowingly permit a person, whom the member has the authority or capacity to control, to carry out on her behalf, with or without compensation, acts which, if carried out by the member, would place the member in violation of the rules.
A member may be held responsible for the acts of all persons associated with the member in the practice of public accounting whom the member has the authority or capacity to control.
A member may be considered to have her independence impaired, with respect to a client, as the result of the actions or relationships of certain persons or entities.

11

In terms of services that can be performed, the AICPA and SEC vary in what services can be performed by auditors of private and public (issuers) companies. Which of the following bookkeeping services is allowed by the AICPA but prohibited by the SEC?

A.
Preparing source documents

B.
Recording transactions

C.
Preparing financial statements

D.
All of these services are prohibited by both the AICPA and SEC.

The correct answer is C.

The AICPA does not prohibit auditors from assisting in the preparation of financial statements, whereas the SEC does. Both the AICPA and SEC prohibit auditors from preparing source documents and recording transactions.

12

Which of the following statements is correct regarding disclosure of client working papers prepared by a CPA?

A.
Working papers may not be transferred to another accountant without the client's permission.

B.
Working papers may not be turned over to a CPA quality review team without the client's permission.

C.
Working papers may not be disclosed under a federal court subpoena without the client's permission.

D.
Working papers may not be disclosed to any third parties without the client's permission.

The correct answer is A.

CPAs are independent contractors, not employees; as a result, they have legal title to their workpapers. The CPA's ownership of the workpapers is custodial and cannot be transferred without the client's permission. Exceptions include subpoena by a federal court or agency, or inspection by an AICPA or state society quality review team. A seller of an accounting practice must obtain permission of the client before transfer to a buyer of the practice.

13

In which of the following circumstances would a covered member's independence be impaired with respect to a nonissuer client?

A.
The member is designated to serve as guardian of a friend's children if the need arises, and the friend's estate, which would be held in trust for the children, holds significant stock ownership in a client entity.

B.
The member's spouse qualifies because of geographical residence to belong to a client's credit union, and all transactions with the credit union are conducted under normal operating practices.

C.
The member owns municipal utility bonds issued by a client, and the bonds are not material to the member's wealth.

D.
The member belongs to a client golf club that requires members to acquire a share of the club's debt securities

The correct answer is C.

According to the AICPA Code of Professional Conduct, independence will be impaired if, during the period of the professional engagement, a covered member had or was committed to acquire any direct or material indirect financial interest in the client. Although the bonds are not material in relation to the member's total wealth, independence is still impaired because the ownership of the bonds represents a direct financial interest in the client.

Independence is not violated if a member is designated to serve as guardian of a friend's children if the need arises, and the friend's estate, which would be held in trust for the children because the member is the children's guardian, but is not a trustee of the estate held in trust for the children.

Independence is not impaired by membership in a client credit union.

According to an AICPA ethics ruling, as long as the membership in the golf club is essentially a social matter, the covered member's association with the golf club would not impair independence because the debt ownership is not considered to be a direct financial interest.

14

Which of the following is a correct statement about the circumstances under which a CPA firm may or may not disclose the names of its clients without the clients' express permission?

A.
A CPA firm may disclose this information if the practice is limited to bankruptcy matters, so that prospective clients with similar concerns will be able to contact current clients.

B.
A CPA firm may disclose this information if the practice is limited to performing asset valuations in anticipation of mergers and acquisitions.

C.
A CPA firm may disclose this information unless disclosure would suggest that the client may be experiencing financial difficulties.

D.
A CPA firm may not disclose this information because the identity of its clients is confidential information.

The correct answer is C.

The Internal Revenue Service (IRS) has rules against a CPA or other preparer disclosing a tax return client's name. Since auditing and tax preparation have been separated by the Sarbanes-Oxley Act, audit clients could be disclosed. Such disclosure would be prohibited if it would suggest the company had financial problems, such as a company consulting a bankruptcy specialist.

15

Prior to rules of the PCAOB becoming effective, they must be approved by the:

A.
AICPA.

B.
IASB.

C.
SEC.

D.
Congress.

The correct answer is C.

The SEC must approve all rules of the Public Company Accounting Oversight Board prior to such rules becoming effective.

16

Should a professional accountant inadvertently violate one of the principles of the IESBA Code of Ethics for Professional Accountants, they should:

A.
remove themselves from the engagement immediately.

B.
correct the violation promptly and apply safeguards.

C.
disclose the violation to the International Federation of Accountants (IFAC).

D.
All of the answer choices are correct.

The correct answer is B.

Inadvertent violations of the International Ethics Standards Board for Accountants (IESBA) Code of Ethics for Professional Accountants do not necessarily compromise compliance with the conceptual framework, and as such, professional accountants should promptly correct the violation and apply safeguards to avoid future violations.

17

Which of the following statements represents a quality control requirement under Government Auditing Standards?

A.
A CPA who conducts government audits is required to undergo an annual external quality control review when an appropriate internal quality control system is not in place.

B.
A CPA seeking to enter into a contract to perform an audit should provide the CPA's most recent external quality control review report to the party contracting for the audit.

C.
An external quality control review of a CPA's practice should include a review of the workpapers of each government audit performed since the prior external quality control review.

D.
A CPA who conducts government audits may not make the CPA's external quality control review report available to the public.

The correct answer is B.

A quality control requirement under Government Auditing Standards requires a CPA seeking to enter into an audit contract to provide the CPA's most recent external quality control review report to the party contracting for the audit.

18

Which of the following fee arrangements generally would not be permitted under the ethical standards published in the Treasury Department Circular 230?

A.
A referral fee paid by a CPA to obtain a client

B.
A commission for compiling a client's internal-use financial statements

C.
A contingent fee for preparing a client's income tax return

D.
A contingent fee for representing a client in tax court

The correct answer is C.

Treasury Circular 230 states in section 10.27 that a practitioner shall not prepare an original or amended tax return or claim for a tax refund for a contingent fee for any client.

A contingent fee is one that is determined based on the outcome of the services provided. For instance, it would be prohibited for a CPA's fee to increase if the tax refund increases.

Charging a contingent fee is permitted for representing a client in a tax examination or in tax court. Referral fees to obtain clients and commissions for compiling internal-use financial statements are permitted.

19

Under the Statements on Standards for Consulting Services, which of the following statements best reflects a CPA’s responsibility when undertaking a consulting services engagement? The CPA must:

A.
not seek to modify any agreement made with the client.

B.
not perform any attest services for the client.

C.
inform the client of significant reservations concerning the benefits of the engagement.

D.
obtain a written understanding with the client concerning the time for completion of the engagement.

The correct answer is C.

Before accepting and during the performance of the engagement, the member should consider the applicability of Rule 102, Integrity and Objectivity. If the member believes that he or she can perform the services with objectivity, the member would not be prohibited from accepting the engagement. The member should also consider informing the company and the executives of possible results of the engagement prior to accepting the engagement.

20

In order to participate on the PCAOB Board, members must:

A.
be registered CPAs.

B.
demonstrate commitment to the interests of investors and the public.

C.
have no current, or past, affiliation with a public accounting firm.

D.
have formerly served on the SEC.

The correct answer is B.

Members of the Public Company Accounting Oversight Board must be of high integrity and be committed to the interests of investors and the public. Additionally, these members should have an understanding of the financial reporting process along with the responsibilities of accountants regarding the preparation and issuance of audit reports.