Mod B

Module B
Professional Ethics
True / False Questions

1. A code of ethics serves as a reference and benchmark for acceptable
professional behavior.
True
False
2. In considering general ethics, the primary goal is to arrive at a set of

acceptable methods for making ethical decisions.
True
False
3. Ethics in the imperative sense is a function of moral rules and

principles, not a situation specific calculation of the consequences.
True
False
4. The SEC independence rules prohibit auditors from providing actuarial

services to public company audit clients.
True
False
5. The Sarbanes-Oxley Act of 2002 limits the engagement of and

concurring audit partners on an engagement to four-year terms.
True
False
6. Members of the AICPA are held responsible for compliance with the
Rules of Conduct by all persons associated with them in public practice,
including employees and partners.
True
False
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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
7. The AICPA Code of Professional Conduct derives its authority from

specific federal legislation.
True
False
8. Financial statement audit services are the only engagements that

require independence.
True
False
9. Integrity and objectivity are required in connection with all professional

services.
True
False
10 General standards Rule 201 prohibits the acceptance of any

. engagement that the CPA knowingly cannot handle.
True
False
11 Compliance with standards, Rule 202, requires adherence to duly

. promulgated technical standards in all areas of professional service.
True
False
12 Confidential information is information that should not be disclosed to

. outside parties, even if demanded by a court.
True
False
13 A CPA can accept a contingent fee for a compilation report to be used

. by a bank for purposes of granting a loan to the client as long as the
CPA discloses a lack of independence in the report.
True
False
14 CPAs are not permitted to advertise except in a few instances.

.
True False
15 Rule 503 permits commission type fees for all types of services.
.
True False
16 All CPAs are subject to the rules of conduct of the AICPA and state CPA
. societies.
True
False
17 Licenses to practice accounting are issued by the AICPA.

.
True False
18 Individual persons, not public accounting firms, are subject to the rules
. of conduct of state CPA societies and the AICPA only if they choose to
join these organizations.
True
False
19 Discipline of the members of a professional association is carried out by

. peers.
True
False
20 A trial board can admonish, suspend, expel, or fine a CPA who has
. violated the Code of Conduct.
True
False
Multiple Choice Questions

21 Which of the following is not a key element of the definition of ethics?
.
A.
B.
C.
D.
Reflective choice.
Moral principles.
Definitive conclusions.
Consequences of decisions.
22 Which of the following defines the imperative principle of ethics?

.
A. Ethic decisions cannot be resolved without evaluating all possible
outcomes of all choices.
B. Ethics are a function of moral rules and principles.
C. All ethical decisions will have positive and negative consequences.
D. It is essential that ethical decisions be made for the greater good of
society.
23 Which of the following philosophical principles in ethics emphasizes the
. consequences of action rather than on following the rules?
A.
B.
C.
D.
Imperative principle.
Utilitarianism principle.
Generalization principle.
Moral principle.
24 What agency has the ultimate authority for defining independence for
. public companies?
A.
B.
C.
D.
AICPA.
SEC.
Department of Justice.
Congress.
25 Which of the following is the responsibility of the Professional Ethics

. Executive Committee?
A.
To enforce SEC ethical standards.
B. To act as an investigative body of the AICPA when ethical violations
are suspected.
C. To make and enforce all rules of conduct for CPAs who are AICPA
members.
D. To establish minimal ethical standards for financial reporting.
26 Which of the following is not one of the AICPA Principles of Professional

. Conduct?
A.
B.
C.
D.
Responsibility.
Reliability.
Objectivity.
Due care.
27 Dara & Co. audits Hill Corporation. Ellie is the engagement partner on
. the audit with an office in Buffalo Grove. Which of the following would
not be considered a covered member?
A. Jason, who is a member of the attest engagement team with an

office in Elmhurst.
B. Adam, who is a tax partner and provided 50 hours of tax service to
Hill Company during the year of the audit with an office in Elmhurst.
C. Ben, a partner in Dara & Company, with an office in Buffalo Grove.
D. Julie, a partner in Dara & Company, with an office in Elmhurst.
28 Which of the following is not included in Rule of Conduct 102, Integrity
. and Objectivity?
A.
B.
C.
D.
Be prudent in assessment of facts.

Be free from conflict of interests.
Do not knowingly misrepresent facts.
Do not subordinate judgment to others.
29 Based on Sarbanes-Oxley, who is ultimately responsible for the

. independence of the external auditor?
A.
B.
C.
D.
The CPA firm's engagement partner.

The CPA firm's quality control partner.
The client's senior management.
The audit committee.
30 According to Sarbanes-Oxley, the audit committee must preapprove all

. audit and nonaudit services. This can be done
A. On a case-by-case basis, yes; through established policies, no; by

delegating the responsibility, yes.
B. On a case-by-case basis, yes; through established policies, yes; by
delegating the responsibility, no.
C. On a case-by-case basis, no; through established policies, yes; by
D. On a case-by-case basis, no; through established policies, no; by
31 Which of the following is not a restriction placed on audit partners by
. Sarbanes-Oxley?
A. It limits engagement partners to a five-year term as the engagement

partner.
B. It limits other partners associated with the engagement to a sevenyear term.
C. Engagement partners must review nonaudit work to ensure that
independence has not been compromised.
D. Partners who engage in selling services other than audit, review and
attestation, to an audit client are not independent with respect to
that client.
32 Which of the following is true according to Government Auditing
. Standards?
A. Nonaudit services cannot be provided to a government entity that is

an attest client.
B. Nonaudit services are allowed providing the audit organization does
not perform management functions, make management decisions, or
audit its own work.
C. Nonaudit services are allowed as long as the nature of the service is
publicly disclosed and includes a statement that independence has
not been compromised.
D. Nonaudit services are allowed if they have been approved by the
executive body of the governing organization.
33 Which of the following is allowed under the Government Auditing

. Standards?
A. Personnel who provide nonaudit services are prohibited from

planning, conducting, or reviewing audit work related to the nonaudit
service.
B. The audit organization must never reduce the scope of the audit
because of nonaudit services it performed.
C. The government entity must have established policies to ensure that
the nonaudit services will not affect the audit firm's ability to perform
the audit.
D. CPAs who perform nonaudit services are prohibited from being a
member of the audit team.
34 Rule 201, General Standards, requires a member to comply with
. standards and interpretations. Which of the following is not a standard
covered by Rule 201?
A.
B.
C.
D.
Independence.
Due professional care.
Planning and supervision.
Sufficient relevant data.
35 Maralee has been approached by J. Fox Entertainment to perform an

. audit of her theatre company. Maralee has never audited a theatre
company before. Maralee can
A. Decline the engagement because she does not have the specialized
industry knowledge.
B. Recommend another auditor and receive a fee for the referral.
C. Accept the engagement if she can obtain the required knowledge
before the end of the engagement.
D. Accept the engagement with the understanding that additional hours
will be required to learn and understand the nature of the business.
36 An audit client hires a member of the audit engagement team to be its

. new controller. Sarbanes-Oxley rules require that:
A. The new controller sever all relations with the CPA firm, including any
retirement funds.
B. The new controller not take part in any discussions regarding the
retention of the audit form.
C.
The client find a new audit firm.
D. The client disclose the controller's relationship in the notes to the
financial statements.
37 The SEC requires companies to disclose fees paid to independent public
. accounting firms for audit and consulting services in the belief that:
A. Such disclosures will end the practice of auditors performing

nonaudit services for audit clients.
B. Financial analysts will attribute far less credibility to financial
statements audited by public accounting firms that earn substantial
nonaudit fees from audit clients.
C. An audit firm's consulting on a client's accounting information
processing systems essentially impairs audit independence.
D. Client directors and financial statement users should consider all
aspects related to auditors' independence, and information about
fees is important.
38 CPA Krogstad is the executive in charge of the Omaha office of the audit
. firm. He is responsible for the practice in all areas of audit, tax, and
consulting, but he does not serve as a field audit partner or a reviewer.
CPA Ward is the partner in charge of the Dodger, Inc. audit (an SEC
filing). The audit firm's independence is impaired if:
A. Krogstad owns Dodger common stock.

B. Krogstad's brother owns 10 shares of Dodger common stock.
C. Ward's sister-in-law is a sales representative with a territory in
California.
D. Ward's fellow partner CPA Felix in the Omaha office has a wife who
owns Dodger stock through a mutual fund held in her own
employer's employee benefit plan.

. following rules rather than on the consequences of the decision?
A.
B.
C.
D.
Moral principle.
40 Julie and Lisa are sisters. Julie is a CPA auditing the company where Lisa
. works. Julie's independence is impaired if
A. Lisa owns 25 percent of the company.

B.
Lisa is the controller.
C.
Lisa is the marketing manager.
D. Independence is impaired in all of these situations.
41 Which of the following sections is not included in the AICPA Rules of
. Conduct?
A.
B.
C.
D.
Responsibilities to Clients.
Independence, Integrity, and Objectivity.
Responsibilities to Colleagues.
General and Technical Standards.
42 The interpretation of Rule 101, Independence, allows members to

.
A. Hold a material indirect interest in a client.
B. Have loans from a client that are collateralized by cash deposits held
by the client.
C. Have home mortgages with a client even if they participate in the
engagement.
D. Be a trustee of a client pension or profit sharing trust.
43 The AICPA Council has designated the following bodies to pronounce

. accounting principles under Rule 203 except the
A.
B.
C.
D.
Financial Accounting Standards Board.

Auditing Procedures Board.
Accounting Principles Board.
Governmental Accounting Standards Board.
44 The interpretation of Rule 501, Acts Discreditable to the Profession,

. would not include
A. Membership in an activist political party.

B. Withholding of a client's books until a professional fee is paid.
C. Failure to follow government audit standards in government audits.
D. Authorization for others to make misleading entries in records.
45 According to Rule 203, Accounting Principles, requires the auditor to
. adhere to official pronouncements except when
A. Complying would violate client confidentiality.

B. Pending legislation may change the reporting requirements of the
client.
C. Adherence to a pronouncement would be misleading.
D. It has been established that financial statement users prefer an
alternative presentation of information.
46 The AICPA has interpreted Rule 301, Confidential Client Information, to
. explicitly allow a CPA to divulge confidential client information to
A.
B.
C.
D.
The SEC.
The U.S. Department of Justice.
The AICPA Professional Ethics Division.
The Federal Trade Commission.
47 Perry Pinkney, CPA, is one of the general partners in a partnership,

. which in turn invested 70 percent of its assets in the common stock of
Pinkney's audit client (Darby Corporation). According to the AICPA Code
of Professional Conduct, Pinkney is considered to have
A.
B.
C.
D.
An indirect financial interest in Darby.

A direct financial interest in Darby.
No financial interest in Darby.
A partial financial interest in Darby.
48 A client has omitted a significant disclosure from the financial

. statements. The auditor has asked the client to include the information,
but the client refuses and claims the information is confidential. The
position of the CPA should be that the information
A. Cannot be considered confidential if it is necessary to the

completeness of the financial statements.
B. Cannot be considered confidential unless it can be covered by the
attorney-client privilege.
C. Is confidential and will be disclosed only under subpoena or for a
regulatory investigation.
D. Should be discussed with the audit committee to determine whether
the information should be disclosed.
. consideration of projecting the consequences of a choice in terms of
this question: "What may be the consequences of similar persons
making this choice in similar circumstances?"
A.
B.
C.
D.
Utilitarian principle.
Moral principle.
50 Which of the following forms of organization would not be allowed

. under Rule 505, Resolution Concerning Form of Organization and Name,
of the Professional Code of Conduct?
A. Limited liability partnership; all partners are CPAs.

B. Limited liability partnership; 70 percent of partners are CPAs.
C. Limited liability corporation; all shareholders are CPAs.
D. Partnership; 40 percent of partners are CPAs.
51 Red and Green, CPAs are the external auditors for Blue Corporation, a
. publicly held company. Blue Corporation has outsourced its internal
audit function to Red and Green. Which of the following statements is
true?
A. Doing internal audit work does not impair the independence of Red
and Green.
B. The independence of Red and Green is impaired only if employees of
Red and Green act in a management capacity or make management
decisions.
C. The independence of Red and Green is impaired only if a member of
Red and Green's engagement team is hired to manage an accounting
function in Blue Corporation.
D. As a public accounting firm, Red and Green cannot be both the
internal and external auditors for publicly held companies and
maintain independence.
52 Violet, CPA, audits Big Bank, a local financial institution. Which of the
. following would most likely impair Violet's independence with regard to
Big Bank?
A. A home loan with the value of the house exceeding the mortgage
balance.
B.
A car loan collateralized by the car.
C. A personal loan collateralized by cash deposits at Big Bank.
D. A Visa credit card issued by Big Bank with a balance of $2,500.
53 According to the profession's ethical standards, an auditor would be

. considered independent in which of the following instances?
A. The auditor is the officially appointed stock transfer agent of a client.

B. The auditor's checking account that is fully insured by a federal
agency is held at a client financial institution.
C. The client owes the auditor fees for more than two years prior to the
issuance of the audit report.
D. The client is the only tenant in a commercial building owned by the
auditor.
54 Which of the following is required for a CPA firm to designate itself as
. "Members of the American Institute of Certified Public Accountants" on
its letterhead?
A.
All owners must be members.
B. The owners whose names appear in the firm name must be
members.
C. At least one of the owners must be a member.
D. The firm must be a dues-paying member.
55 In which of the following circumstances would a CPA who audits XZ
. Corporation lack independence?
A. The CPA and XZ's president are both on the board of directors of COD
Corporation.
B. Both the CPA and XZ's president own 25 percent of FOB Corporation,
a closely held company.
C. The CPA has an automobile loan from XZ, a financial institution. The
loan is collateralized by the automobile.
D. The CPA reduced XZ's usual audit fee by 40 percent prior to the audit
because XZ's financial condition was unfavorable.
56 According to the ethical standards of the profession, which of the

. following acts is generally prohibited?
A. Purchasing a product from a third party and reselling it to a client.

B. Writing a financial management newsletter promoted and sold by a
publishing company.
C. Accepting a commission for recommending a product to an audit
client.
D. Accepting engagements obtained through the efforts of third parties.
57 According to the ethical standards of the profession, which of the
. following acts is generally prohibited?
A. Issuing a modified report explaining a failure to follow a

governmental regulatory agency's standards when conducting an
attest service for a client.
B. Revealing confidential client information during a quality review of a
professional practice by a team from the state CPA society.
C. Accepting a contingent fee for representing a client in an
examination of the client's federal tax return by an IRS agent.
D. Retaining client records after an engagement is terminated prior to
completion when the client demands their return.
58 Which of the following statements included in the advertising of a CPA
. firm is permissible according to Rule 502, Advertising and Other Forms
of Solicitation?
A. "Bob Bullet, CEO of A-One Corp, states that we are the best auditors
his company has ever used."
B. "We provide the best audit coverage of any firm in the state."
C. "We audit the five largest manufacturing companies in the state."
D. "We have several tax partners who work closely with judges and IRS
attorneys on high-profile legal issues."
59 To which group can a CPA provide audit documentation without being

. subpoenaed and without the client's consent?
A.
The IRS.
B.
The FASB.
C. Another CPA firm performing a peer review.
D. Another CPA firm considering the purchase of the auditing firm.
60 Auditors are interested in having independence in appearance because
.
A.
B.
C.
D.
They want to impress the public with their independence in fact.

They want the public at large to have confidence in the profession.
They need to comply with the Performance Principle of GAAS.
Audits should be planned and properly supervised.
61 Ensuring that the auditor is independent in appearance is the

. responsibility of
A.
B.
C.
D.
The public accounting firm.

Senior management.
The PCAOB.
62 If a public accounting firm says it always follows the rule that requires
. adherence to FASB pronouncements in order to give a standard
unqualified auditors' report, it is following a philosophy characterized
by
A. The imperative principle in moral philosophy.

B. The utilitarian principle in moral philosophy.
C. The generalization principle in moral philosophy.
D. Reliance on members' collective conscience.
63 Which of the following agencies issues independence rules for the

. auditors of public companies?
A. Financial Accounting Standards Board (FASB).

B. Government Accountability Office (GAO).
C. Public Company Accounting Oversight Board (PCAOB).
D. AICPA Accounting and Review Services Committee (ARSC).
64 Audit independence in fact is most clearly lost when
.
A. A public accounting firm audits competitor companies in the same
industry (e.g., Coca-Cola and Pepsi).
B. An auditor agrees to the argument of the client's financial vice
president that deferring losses on debt refinancing is in accordance
with generally accepted accounting principles.
C. An audit team fails to discover the client's misleading omission of
disclosure about permanent impairment of asset values.
D. A public accounting firm issues a standard unqualified report, but the
reviewing partner fails to notice that the assistant's observation of
inventory was woefully incomplete.
65 The audit committee's responsibility for auditor independence
. concerns
A. Ensuring that partners of the public accounting firm are not

stockholders in the company.
B. Ensuring that nonaudit services provided by the auditor do not impair
independence.
C. Reporting on auditor independence to the PCAOB.
D. Ensuring that all nonaudit services are provided by auditors who do
not perform the financial statement audit.
66 AICPA members who work in industry and government must always

. uphold which of the following AICPA rules of conduct?
A.
B.
C.
D.
Rule 101Independence.
Rule 102Integrity and Objectivity.
Rule 301Confidential Client Information.
Rule 302Contingent Fees.
67 A public accounting firm's independence is impaired when members of

. the audit engagement team does which of the following for a public
company audit client?
A. Prepares special purchase orders for active plutonium in secure

national defense installations.
B. Completes operational internal audit assignments under the
directions of the client's director of internal auditing.
C. Prepares outsourced internal audit work on the client's financial
accounting control monitoring.
D. Prepares actuarial assumptions used by the client's actuaries for life
insurance actuarial liability determination.
E. All of the above would impair the public accounting firm's
independence.
68 When the public accounting firm audits FUND-A in a mutual fund
. complex that has sister funds FUND-B and FUND-C, independence for
the audit of FUND-A is not impaired when
A. Managerial-level professionals located in the office where the

engagement audit partner is located but who are not on the
engagement team own shares in FUND-B, which is not an audit
client.
B. The wife of the FUND-A audit engagement partner owns shares in
FUND-C (an audit client of another of the firm's offices) and these
shares are held through the wife's employee benefit plan funded by
her employer, the AllSteelFence Company.
C.
Both (a) and (b).
D.
Neither (a) nor (b).
69 Which of the following is considered a close relative (but not an

. immediate family member) as defined by the AICPA?
A.
B.
C.
D.
Spouse.
Spousal equivalent.
Parent.
Uncle.
70 Which of the following is true if an auditor performs nonaudit services

. for a government entity?
A. The scope of the audit must be reduced so that the auditor does not
audit the area for which the nonaudit work was performed.
B. The auditor is prohibited from providing nonaudit work in areas
directly related to the production of accounting information.
C. The senior members of the government entity must document their
review of the nonaudit service and indicate why it is appropriate for
the auditors to perform this service.
D. The scope of the audit cannot be reduced because the nonaudit work
was performed by the public accounting firm.
71 Which of the following is true?
.
A. Members of an audit engagement team cannot speak with audit
client officers about matters outside the scope of the audit while the
audit engagement is in progress.
B. Audit team members who leave the public accounting firm for
employment with audit clients can provide audit efficiencies (next
year) because they are very familiar with the firm's audit plans.
C. Audit team partners who leave the public accounting firm for
employment with audit clients can retain variable annuity retirement
accounts established in the person's former firm retirement plan.
D. The public accounting firm must discuss with the audit client's board
or its audit committee the independence implications of the client's
having hired the audit engagement team manager as its financial
vice president.
72 Which of the following "bodies designated by Council" have been

. authorized to promulgate general standards enforceable under Rule
201 of the AICPA Code of Professional Conduct?
A.
B.
C.
D.
AICPA Division of Professional Ethics.

Government Accounting Standards Board.
Accounting and Review Services Committee.
73 Which of the following "bodies designated by Council" have been

. authorized to promulgate accounting principles enforceable under Rule
A.
Auditing Standards Board.
B. Federal Accounting Standards Advisory Board.
C. Consulting Services Executive Committee.
D. Accounting and Review Services Committee.
74 Phil Greb has a thriving practice in which he assists attorneys in
. preparing litigation dealing with accounting and auditing matters. Phil is
"practicing public accounting" if he
A. Uses his CPA designation on his letterhead and business card.

B.
Is in partnership with another CPA.
C. Practices in a professional corporation with other CPAs.
D. Never lets his clients know that he is a CPA.
75 The AICPA removed its general prohibition of CPAs taking commissions
. and contingent fees because
A. CPAs prefer more price competition to less.

B. Commissions and contingent fees enhance audit independence.
C. Nothing is inherently wrong about the form of fees charged to
nonaudit clients.
D. Objectivity is not always necessary in accounting and auditing
services.
76 CPA Kara Rambo is the auditor of Ajax Corporation. Her audit

. independence will not be considered impaired if she
A.
Owns $1,000 worth of Ajax stock.
B. Has a husband who owns $1,000 worth of Ajax stock.
C. Has a sister who is the financial vice president of Ajax.
D. Owns $1,000 worth of the stock of Pericles Corporation, which is
controlled by Ajax as a result of Ajax's ownership of 40 percent of
Pericles' stock, and Pericles contributes 3 percent of the total assets
and income in Ajax's financial statements.
77 When a client's financial statements contain a material departure from
. an FASB Statement on Accounting Standards and the public accounting
firm believes the departure is necessary to ensure that the statements
are not misleading,
A. The public accounting firm must qualify the auditors' report for a
departure from GAAP.
B. The public accounting firm can explain why the departure is
necessary and then give an unqualified opinion paragraph in the
auditors' report.
C. The public accounting firm must give an adverse auditors' report.
D. The public accounting firm can give the standard unqualified
auditors' report with an unqualified opinion paragraph.
78 Which of the following would not be considered confidential information
. obtained in the course of an engagement for which the client's consent
would be needed for disclosure?
A. Information about whether a consulting client has paid the CPA's fees
on time.
B. The actuarial assumptions used by a tax client in calculating pension
expense.
C. Management's strategic plan for next year's labor negotiations.
D. Information about material contingent liabilities relevant for audited
79 Which of the following would probably not be considered an "act

. discreditable to the profession"?
A.
Numerous moving traffic violations.
B. Failing to file the CPA's own tax return.
C. Filing a fraudulent tax return for a client in a severe financial
difficulty.
D. Refusing to hire Asian Americans in an accounting practice.
80 According to the AICPA Code of Conduct, which of the following acts is
. generally forbidden to CPAs in public practice?
A. Purchasing bookkeeping software from a hi-tech development

company and reselling it to tax clients.
B. Being the author of a "TaxAid" newsletter promoted and sold by a
publishing company.
C. Having a commission arrangement with an accounting software
developer to receive 4 percent of the price of programs
recommended and sold to audit clients.
D. Engaging a marketing firm to obtain new financial planning clients
for a fixed fee of $1,000 for each successful contact.
81 A CPA's legal license to practice public accounting can be revoked by
. the
A. American Institute of Certified Public Accountants.

B.
State society of CPAs.
C.
Auditing Standard Board.
D.
State board of accountancy.
82 According to Rule 501, which of the following is not a "discreditable

. act"?
A.
Withholding a client's sales records.
B.
Failing to file or remit tax payments.
C. Failing to follow requirements of the PCAOB during the audit of an
SEC client.
D. Advertising that indicated the firm can reduce IRS penalties.
83 An auditor's independence would not be considered impaired if she or
. he had
A. Owned common stock of the audit client but sold it before the
company became a client.
B. Sold short the common stock 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 for which the
president had no understanding of accounting principles.
84 When a CPA knows that a tax client has skimmed cash receipts and not
. reported the income in the federal income tax return but signs the
return as a CPA who prepared the return, the CPA has violated which of
the following AICPA Rules of Conduct?
A.
B.
C.
D.

Rule 203Accounting Principles.
85 An auditor recommends a local computer company to a client that is

. trying to upgrade its computerized sales records. The client purchases
$25,000 worth of equipment and sends a check to the auditor for 5
percent of the total sales. This is an example of a
A.
B.
C.
D.
Commission.
Contingent fee.
Referral fee.
Nonaudit fee.
86 If a CPA refuses a client because there would be a potential violation of

. the AICPA Code of Professional Conduct, the CPA is following the ethical
philosophy of the
A.
B.
C.
D.
Moral principle.
87 Which of the following is not one of the ideals expressed in the

. Principles of Professional Conduct?
A.
B.
C.
D.
Public interest.
Due care.
Self-regulation.
Responsibilities.
88 A CPA firm's independence will be impaired if a retired partner is a

. director of a non-SEC client and
A.
B.
C.
D.
Has fixed retirement benefits.

Retains only office privileges with the firm.
Is no longer active in the firm.
Is no longer associated with the firm.
89 Rule 201 of the Rules of Conduct contains no requirement that

. members of the AICPA comply with which of the following standards
and interpretations designated by the AICPA Council?
A.
B.
C.
D.
Independence.
Professional competence.
90 Which of the following would be permitted by the AICPA?

.
A. John Smith, CPA owns 50 percent of the firm and Joan Jones, non-CPA,
owns 50 percent.
B. Non-CPAs own 25 percent of the firm. The non-CPAs do not have a
college degree.
C. Non-CPAs own 40 percent of the firm and follow all AICPA
requirements.
D. Fred Smith, a non-CPA, owns 10 percent of the firm and has a fulltime job separate from the firm and views the ownership purely as an
investment.
91 The basic rationale for permitting CPAs to accept commissions is that
.
A. It does not affect independence in attest functions.
B. Professional liability insurance policies permit commission work.
C. State boards of accounting permit commissions and contingent fees.
D. Other professionals charge commissions in personal financial
planning engagements.
92 Which of the following is not one of the guidelines for advertising for
. CPAs practicing public accounting?
A. Advertising should be informative and objective.

B. Advertising should be restricted in frequency, size, style, and so on.
C. Advertising should not create expectations of favorable results.
D. Advertising may not contain fee estimates when a CPA knows they
are not representative.
93 If a CPA has violated a rule of Conduct, the AICPA trial board panel does
. not have the power to
A.
Revoke the person's CPA certificate.
B. Suspend the person's membership in AICPA and state society.
C.
Admonish the CPA.
D.
Acquit the CPA.
94 A member in public practice can receive a contingent fee for
.
A. An audit or review of a financial statement.
B. A compilation of a financial statement.
C. An examination of prospective financial statements.
D. Representing a client in an IRS tax audit.
95 Most state boards of accountancy do not
.
A.
B.
C.
D.
Issue licenses to practice accounting.

Regulate tax practice.
Limit the attest function to license holders.
Administer an ethics examination.
Fill in the Blank Questions

96 Two aspects of ethics operate in the professional environment:
. ____________________ ethics and ____________________ ethics.
________________________________________
97 The Wheelwright definition of ethics has three key elements: (1)
. question requiring ____________________ choice, (2) guides of
______________________, and (3) concerns with the ____________________ of
decisions.
________________________________________
98 The ____________________ principle directs a decision maker to act

. according to the requirements of an ethical rule.
________________________________________
99 The AICPA Code of Professional Conduct contains two basic sections:
. _______________________ and ________________________.
________________________________________
100 The detailed explanations of specific rules to help members
.
understand particular applications are referred to as
________________________________________.
________________________________________
101 The cornerstone of the public accounting profession is the concept of
.
_____________________________.
________________________________________
102 The spirit of Rule 102 is that integrity and objectivity are required in
.
connection with ____________________ professional services.
________________________________________
103 Members of the AICPA shall comply with standards and interpretations
.
designated by the _________________________.
________________________________________
104 ________________________________ is information that should not be
.
disclosed to outside parties unless demanded by a court.
_____________________________ cannot be demanded, even by a court.
________________________________________
105 Fees based on the number of hours or days worked are
.
____________________ considered ____________________ on the findings of
audit services.
________________________________________
106 Rule 501 on Acts Discreditable to the Profession is often referred to as

.
the ___________________________ of the Code.
________________________________________
107 ___________________, ___________________, or ____________________
.
advertising is not in the public interest and is prohibited.
________________________________________
108 ______________________________________ are fees a CPA receives for
.
recommending another CPA's services.
________________________________________
109 ___________________________ refers to quality control reviews and
.
disciplinary actions by fellow CPAs.
________________________________________
110 Under AICPA rules, independence will be considered impaired if a
.
member had or was committed to acquire any ____________ or
________________________ financial interest in the enterprise.
________________________________________
111 Under AICPA rules, it would be a conflict of interest if a CPA is engaged
.
to perform ___________________________ services for a plaintiff in a
lawsuit filed against a client. ________________________________________
112 Rule 102 is applicable to members employed in ___________________
.
and ________________.
________________________________________
Short Answer Questions
113 For each situation (1-5), identify the most applicable AICPA rule of
.
conduct and indicate whether there is a violation or no violation of the
rule (A-F). One or more letters may not be used.
A. Rule 101: Independence; no violation
B. Rule 101: Independence; violation
C. Rule 102: Integrity and Objectivity; no violation
D. Rule 102: Integrity and Objectivity; violation
E. Rule 203: Accounting Principles; no violation
F. Rule 203: Accounting Principles; violation
____ 1. Sterling Stevens, CPA, was auditing Global Services Company.
Global Services used an accounting principle that was not in
conformity with GAAP. Nevertheless, Stevens rendered a standard
unqualified audit report.
____ 2. Christina Hall, CPA, provided expert testimony for a plaintiff.
The defendant in the case was a client of Hall's.
____ 3. Sam Miller, CPA, owned 100 shares of Johnson Drilling, Inc., his
audit client.
____ 4. Dewey Wise, CPA, obtained a loan from an insurance company
using the cash value of the insurance policy as collateral. The loan is
for less money than the cash value of the policy.
____ 5. Stella Steinbeck, CPA, was auditing Good Services Company,
which used an accounting principle that was not in conformity with
GAAP. Good Services believed and Steinbeck concurred that using a
generally accepted method would cause the financial statements to be
misleading. Therefore, Steinbeck rendered a standard unqualified audit
report.
.
rule (A-F). One or more letters may not be used, and you may use any
letter more than once.
C. Rule 301: Confidential Client Information; no violation
D. Rule 301: Confidential Client Information; violation
E. Rule 302: Contingent Fees; no violation
F. Rule 302: Contingent Fees; violation
____ 1. Jackson, CPA, and one of his audit clients are considering
investing in a business together. Jackson would own 25 percent of the
business and the client would own 50 percent. Jackson's investment in
the business is material to his net worth.
____ 2. Feller, CPA, is the corporate controller for Robert Corporation.
Feller believes his employer may have committed an illegal act. After
discussing the matter with his attorney, Feller decides to disclose the
matter to the appropriate authorities.
____ 3. Brock, CPA, is an owner in the firm Louis and Brock, CPAs.
Brock's husband is on the board of directors of Midland Corporation, an
audit client of Louis and Brock. Brock does not participate on the audit
engagement.
____ 4. Ruth, CPA, owns a building and leases a portion of the space to
an audit client. The income from the lease is not material to Ruth.
____ 5. Maris, CPA, performs investment advisory services for an audit
client and receives an annual fee based on a percentage of the value
of the client's investment portfolio at the end of each year.
.
rule (A-F). One or more letters may not be used.
E. Rule 503: Commissions and Referrals; no violation
F. Rule 503: Commissions and Referrals; violation
____ 1. Brandon Frisby, CPA, found out that his client, Uptonogood, Inc.,
had failed to properly account for several leases. Frisby informed
Uptonogood's management that he must issue a qualified audit report
and disclose the lease problem in the report. Uptonogood's
management indicated that such a disclosure would constitute a
disclosure of confidential information. Nevertheless, Frisby rendered
the qualified audit report, including an explanatory paragraph about
the inadequate lease accounting.
____ 2. Priscilla Hudson, CPA, a partner in Hudson and Danhoffer, CPAs,
holds the position of honorary director for the Friends of the Symphony
Orchestra, a firm audit client.
____ 3. The wife of Gerald Skoch, CPA, is the controller of Fine
Corporation. Skoch is an audit partner for the Long Island office of
Barnes and Bucknell, CPAs. The Long Island office of Barnes and
Bucknell audits Fine Corporation, but Skoch is not part of the audit
team and provides no other services to Fine Corporation.
____ 4. Johnny Beacon, CPA, is the auditor of Novak Wholesale, Inc.
Beacon received a 10 percent commission from Computer Systems,
Inc. for hardware sold to Novak Wholesale, Inc. The sale was made
based on Beacon's recommendation to Novak Wholesale that the
company needed a new accounting information system. Beacon
disclosed the commission to Novak's management. Beacon also
performs an annual audit for Novak.
____ 5. Cecilia Hart, CPA, provides tax services to Myers Company. Hart
received a 10 percent commission from Computer Systems, Inc. for
hardware sold to Myers Company. The sale was made based on Hart's
recommendation to Myers Company that the company needed a new
accounting information system. Hart disclosed the commission to
Myers' management.
116 For each of the following cases, indicate where the action or situation
.
is a violation of the AICPA Code of Professional Conduct and cite the
relevant rule or interpretation that would apply to it.
Essay Questions
117 For each of the following cases indicate if the action by a member CPA
.
relevant rule.
A. Disclosed client information to another CPA firm during the
discussion of a merger of the two firms
B. Allowed a company to change the way it values inventory to a
method that is not GAAP because following GAAP would be misleading
C. Had a new car loan from a bank that is a client when the bank holds
the title to the car
D. Based a fee on approval of a bank loan dependent on audited
financial statements
E. Did not comply with Government Auditing Standards on a
government audit
118 For each of the following cases, indicate whether the action by a
.
member CPA is a violation of the AICPA Code of Professional Conduct
and cite the relevant rule.
A. Was a trustee of client's profit-sharing trust.
B. Accepted referral fees from local attorneys for nonattest clients with
the clients' knowledge.
C. Performed an audit in accordance with GASB standards.
D. Advises a client to have an insurance review from a local insurance
company in which the CPA has a material financial interest.
E. Promoted the CPA's tax service on local TV station.
119 What are (a) the AICPA Principles of Professional Conduct, (b) Rules of
.
Conduct, and (c) Interpretation of Rules of Conduct?
120 What are the powers of the AICPA trial board in ethics violations?
.
121 Susan Small, CPA, has Medium Corporation as an audit client. Medium
.
has asked Small to create and install a new computerized payroll
system. Because Small does not have the appropriate level of
expertise, she referred Medium to Compusystems, Inc., a local
software consulting company. Small has an arrangement by which
Compusystems pays her 10 percent of any fee received from her
referrals. Small has disclosed this to her client.
Required:
This situation involves a possible violation of the AICPA's Code of
Professional Conduct. State the rule in question and explain why or
why not there is a violation of the code. You need not refer to the rule
number but should clearly describe the rule in question.
122 Wally Wide is the partner on the audit engagement for First National
.
Bank for its fiscal year-end of January 31, 2013. Wally was recently
promoted to partner. Based on his increase in income, Wally and his
family bought a large home and a new car. First National Bank had the
most competitive mortgage rate and auto loan rates, so Wally
obtained both his mortgage loan and car loan from First National. Wally
paid 20 percent down on the house, received no special rate of
interest, and the First National Bank holds the title to the house. Wally
traded in his old car and made an additional down payment on the car
and financed 60 percent of the price of the car with the bank. Again,
Wally paid the prevailing interest rate and the bank holds the title to
the car.
Required:
This situation involves possible violations of the AICPA's Code of
123 Ben Big is a partner in the Cleveland office of the national accounting
.
firm of Price Brickhouse. He owns 1,000 shares of common stock in
Public, Inc., an audit client of the firm. This amount is not material to
his personal investments. The Public, Inc. audit is done out of the New
York office. Ben Big has not informed the firm that he owns the shares
because he is not on the audit, which the Cleveland office doesn't
perform.
Required:
124 The Code of Professional Conduct is very important for the auditing
.
profession. The AICPA, state CPA boards, and other professional
organizations spend a great deal of time and effort implementing and
reinforcing the ethical standards as well as penalizing those who
violate the ethical standards.
Required:
A. Why is the Code of Professional Conduct important to the
profession?
B. Many professionals believe that in today's business environment it
is more difficult to adhere to the Code of Professional Conduct than
ever before. Why might this be true?
Module B Professional Ethics Answer Key
True / False Questions

1.
A code of ethics serves as a reference and benchmark for acceptable

professional behavior.
TRUE
Reference: Question also found in study guide
AACSB: Ethics
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: B-01 Understand general ethics and a series of steps for making ethical decisions.
Topic: General Ethics
2.
In considering general ethics, the primary goal is to arrive at a set of

acceptable methods for making ethical decisions.
TRUE
AACSB: Ethics
AICPA BB: Industry
Blooms: Understand
Topic: General Ethics
3.
Ethics in the imperative sense is a function of moral rules and

principles, not a situation specific calculation of the consequences.
TRUE
AACSB: Ethics
AICPA BB: Industry
Blooms: Understand
Learning Objective: B-02 Reason through an ethical decision problem using the imperative; utilitarian; and
generalization principles of moral philosophy.
Topic: An Ethical Decision Process
4.
The SEC independence rules prohibit auditors from providing

actuarial services to public company audit clients.
TRUE
AACSB: Analytic
AICPA BB: Industry
AICPA BB: Legal
Blooms: Understand
Learning Objective: B-04 With reference to American Institute of Certified Public Accounting (AICPA);
Government Accountability Office (GAO); Public Company Accounting Oversight Board (PCAOB); and Securities
and Exchange Commission (SEC) rules; analyze factual situations and decide whether an accountant's conduct
does or does not impair independence.
Topic: An Emphasis on Independence
5.
The Sarbanes-Oxley Act of 2002 limits the engagement of and

concurring audit partners on an engagement to four-year terms.
FALSE
AACSB: Analytic
AICPA BB: Industry
AICPA BB: Legal
Blooms: Understand
6.
Members of the AICPA are held responsible for compliance with the
Rules of Conduct by all persons associated with them in public
practice, including employees and partners.
TRUE
AACSB: Analytic
AICPA BB: Industry
AICPA BB: Legal
Blooms: Understand
7.
The AICPA Code of Professional Conduct derives its authority from

specific federal legislation.
FALSE
AACSB: Analytic
AICPA BB: Industry
AICPA BB: Legal
Blooms: Understand
8.
Financial statement audit services are the only engagements that

require independence.
FALSE
AACSB: Analytic
AICPA BB: Industry
AICPA BB: Legal
Blooms: Understand
9.
Integrity and objectivity are required in connection with all

professional services.
TRUE
AACSB: Analytic
AICPA BB: Industry
AICPA BB: Legal
Blooms: Understand
Learning Objective: B-05 With reference to AICPA rules on topics other than independence; analyze factual
situations and decide whether an accountant's conduct does or does not conform to the AICPA Rules of Conduct.
Topic: AICPA Rules of Conduct: Integrity and Objectivity, Responsibilities to Clients, and Other Responsibilities
10.
General standards Rule 201 prohibits the acceptance of any

engagement that the CPA knowingly cannot handle.
TRUE
AACSB: Analytic
AICPA BB: Industry
AICPA BB: Legal
Blooms: Understand
11.
Compliance with standards, Rule 202, requires adherence to duly

promulgated technical standards in all areas of professional service.
TRUE
AACSB: Analytic
AICPA BB: Industry
AICPA BB: Legal
Blooms: Understand
12.
Confidential information is information that should not be disclosed to

outside parties, even if demanded by a court.
FALSE
AACSB: Analytic
AICPA BB: Industry
AICPA BB: Legal
Blooms: Understand
13.
A CPA can accept a contingent fee for a compilation report to be used

by a bank for purposes of granting a loan to the client as long as the
CPA discloses a lack of independence in the report.
TRUE
AACSB: Analytic
AICPA BB: Industry
AICPA BB: Legal
Blooms: Understand
14.
CPAs are not permitted to advertise except in a few instances.

FALSE
AACSB: Analytic
AICPA BB: Industry
AICPA BB: Legal
Blooms: Understand
15.
Rule 503 permits commission type fees for all types of services.
FALSE
AACSB: Analytic
AICPA BB: Industry
AICPA BB: Legal
Blooms: Understand
16.
All CPAs are subject to the rules of conduct of the AICPA and state
CPA societies.
FALSE
AACSB: Analytic
AICPA BB: Industry
AICPA BB: Legal
Blooms: Understand
17.
Licenses to practice accounting are issued by the AICPA.

FALSE
AACSB: Ethics
AICPA BB: Industry
Blooms: Understand
Learning Objective: B-03 Identify the different entities that make ethics rules for CPAs and public accounting
firms.
Topic: Ethical Codes of Conduct
18.
Individual persons, not public accounting firms, are subject to the

rules of conduct of state CPA societies and the AICPA only if they
choose to join these organizations.
FALSE
AACSB: Ethics
AICPA BB: Industry
Blooms: Understand
firms.
Topic: Ethical Codes of Conduct
19.
Discipline of the members of a professional association is carried out

by peers.
TRUE
AACSB: Analytic
AICPA BB: Industry
AICPA BB: Legal
Blooms: Understand
Learning Objective: B-06 Explain the types of penalties that can be imposed on accountants.
Topic: Consequences to Violating the Code of Professional Conduct
20.
A trial board can admonish, suspend, expel, or fine a CPA who has
violated the Code of Conduct.
FALSE
AACSB: Analytic
AICPA BB: Industry
AICPA BB: Legal
Blooms: Understand
Topic: Consequences to Violating the Code of Professional Conduct
Multiple Choice Questions

21.
Which of the following is not a key element of the definition of

ethics?
A.
B.
C.
D.
Reflective choice.
Moral principles.
Definitive conclusions.
Consequences of decisions.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Source: Original
Topic: Ethics
22.
Which of the following defines the imperative principle of ethics?
A. Ethic decisions cannot be resolved without evaluating all possible

outcomes of all choices.
B. Ethics are a function of moral rules and principles.
C. All ethical decisions will have positive and negative consequences.
D. It is essential that ethical decisions be made for the greater good
of society.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Source: Original
Topic: Philosophical Principles
23.
Which of the following philosophical principles in ethics emphasizes

the consequences of action rather than on following the rules?
A.
B.
C.
D.
Moral principle.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Source: Original
24.
What agency has the ultimate authority for defining independence

for public companies?
A.
B.
C.
D.
AICPA.
SEC.
Department of Justice.
Congress.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
firms.
Source: Original
Topic: Governing Bodies
25.
Which of the following is the responsibility of the Professional Ethics

Executive Committee?
A.
To enforce SEC ethical standards.
B. To act as an investigative body of the AICPA when ethical violations
are suspected.
C. To make and enforce all rules of conduct for CPAs who are AICPA
members.
D. To establish minimal ethical standards for financial reporting.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
firms.
Source: Original
26.
Which of the following is not one of the AICPA Principles of

Professional Conduct?
A.
B.
C.
D.
Responsibility.
Reliability.
Objectivity.
Due care.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Source: Original
Topic: Rules of Conduct
27.
Dara & Co. audits Hill Corporation. Ellie is the engagement partner on
the audit with an office in Buffalo Grove. Which of the following would
not be considered a covered member?
A. Jason, who is a member of the attest engagement team with an

office in Elmhurst.
B. Adam, who is a tax partner and provided 50 hours of tax service to
Hill Company during the year of the audit with an office in
Elmhurst.
C. Ben, a partner in Dara & Company, with an office in Buffalo Grove.
D. Julie, a partner in Dara & Company, with an office in Elmhurst.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Apply
Source: Original
Topic: Independence
28.
Which of the following is not included in Rule of Conduct 102,

Integrity and Objectivity?
A.
B.
C.
D.
Be prudent in assessment of facts.

Be free from conflict of interests.
Do not knowingly misrepresent facts.
Do not subordinate judgment to others.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Source: Original
29.
Based on Sarbanes-Oxley, who is ultimately responsible for the

independence of the external auditor?
A.
B.
C.
D.
The CPA firm's engagement partner.

The CPA firm's quality control partner.
The client's senior management.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Source: Original
Topic: Independence
30.
According to Sarbanes-Oxley, the audit committee must preapprove

all audit and nonaudit services. This can be done
A. On a case-by-case basis, yes; through established policies, no; by

B. On a case-by-case basis, yes; through established policies, yes; by
C. On a case-by-case basis, no; through established policies, yes; by
D. On a case-by-case basis, no; through established policies, no; by
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Difficulty: 3 Hard
Source: Original
Topic: Independence
31.
Which of the following is not a restriction placed on audit partners by

Sarbanes-Oxley?
A. It limits engagement partners to a five-year term as the

engagement partner.
B. It limits other partners associated with the engagement to a
seven-year term.
C. Engagement partners must review nonaudit work to ensure that
independence has not been compromised.
D. Partners who engage in selling services other than audit, review
and attestation, to an audit client are not independent with respect
to that client.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Difficulty: 3 Hard
Source: Original
Topic: Independence
32.
Which of the following is true according to Government Auditing

Standards?
A. Nonaudit services cannot be provided to a government entity that

is an attest client.
B. Nonaudit services are allowed providing the audit organization
does not perform management functions, make management
decisions, or audit its own work.
C. Nonaudit services are allowed as long as the nature of the service
is publicly disclosed and includes a statement that independence
has not been compromised.
D. Nonaudit services are allowed if they have been approved by the
executive body of the governing organization.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Difficulty: 3 Hard
Source: Original
Topic: Independence
33.
Which of the following is allowed under the Government Auditing

Standards?
A. Personnel who provide nonaudit services are prohibited from

planning, conducting, or reviewing audit work related to the
nonaudit service.
B. The audit organization must never reduce the scope of the audit
because of nonaudit services it performed.
C. The government entity must have established policies to ensure
that the nonaudit services will not affect the audit firm's ability to
perform the audit.
D. CPAs who perform nonaudit services are prohibited from being a
member of the audit team.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Source: Original
Topic: Independence
34.
Rule 201, General Standards, requires a member to comply with

standards and interpretations. Which of the following is not a
standard covered by Rule 201?
A.
B.
C.
D.
Independence.
Sufficient relevant data.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Source: Original
35.
Maralee has been approached by J. Fox Entertainment to perform an

audit of her theatre company. Maralee has never audited a theatre
company before. Maralee can
A. Decline the engagement because she does not have the

specialized industry knowledge.
B. Recommend another auditor and receive a fee for the referral.
C. Accept the engagement if she can obtain the required knowledge
before the end of the engagement.
D. Accept the engagement with the understanding that additional
hours will be required to learn and understand the nature of the
business.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Apply
Source: Original
36.
An audit client hires a member of the audit engagement team to be

its new controller. Sarbanes-Oxley rules require that:
A. The new controller sever all relations with the CPA firm, including
any retirement funds.
B. The new controller not take part in any discussions regarding the
retention of the audit form.
C.
The client find a new audit firm.
D. The client disclose the controller's relationship in the notes to the
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Apply
Source: Original
Topic: Independence
37.
The SEC requires companies to disclose fees paid to independent

public accounting firms for audit and consulting services in the belief
that:
A. Such disclosures will end the practice of auditors performing

nonaudit services for audit clients.
B. Financial analysts will attribute far less credibility to financial
statements audited by public accounting firms that earn
substantial nonaudit fees from audit clients.
C. An audit firm's consulting on a client's accounting information
processing systems essentially impairs audit independence.
D. Client directors and financial statement users should consider all
aspects related to auditors' independence, and information about
fees is important.
AACSB: Ethics
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Source: Original
Topic: Independence
38.
CPA Krogstad is the executive in charge of the Omaha office of the

audit firm. He is responsible for the practice in all areas of audit, tax,
and consulting, but he does not serve as a field audit partner or a
reviewer. CPA Ward is the partner in charge of the Dodger, Inc. audit
(an SEC filing). The audit firm's independence is impaired if:
A. Krogstad owns Dodger common stock.

B. Krogstad's brother owns 10 shares of Dodger common stock.
C. Ward's sister-in-law is a sales representative with a territory in
California.
D. Ward's fellow partner CPA Felix in the Omaha office has a wife who
owns Dodger stock through a mutual fund held in her own
employer's employee benefit plan.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Apply
Source: Original
Topic: Independence
39.

the following rules rather than on the consequences of the decision?
A.
B.
C.
D.
Moral principle.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Source: Original
40.
Julie and Lisa are sisters. Julie is a CPA auditing the company where
Lisa works. Julie's independence is impaired if
A. Lisa owns 25 percent of the company.

B.
Lisa is the controller.
C.
Lisa is the marketing manager.
D. Independence is impaired in all of these situations.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Apply
Source: Original
Topic: Independence
41.
Which of the following sections is not included in the AICPA Rules of

Conduct?
A.
B.
C.
D.
Responsibilities to Clients.
Independence, Integrity, and Objectivity.
Responsibilities to Colleagues.
General and Technical Standards.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Source: Original
42.
The interpretation of Rule 101, Independence, allows members to
A. Hold a material indirect interest in a client.

B. Have loans from a client that are collateralized by cash deposits
held by the client.
C. Have home mortgages with a client even if they participate in the
engagement.
D. Be a trustee of a client pension or profit sharing trust.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Source: Original
Topic: Independence
43.
The AICPA Council has designated the following bodies to pronounce

accounting principles under Rule 203 except the
A.
B.
C.
D.

Auditing Procedures Board.
Accounting Principles Board.
Governmental Accounting Standards Board.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Source: Original
44.
The interpretation of Rule 501, Acts Discreditable to the Profession,

would not include
A. Membership in an activist political party.

B. Withholding of a client's books until a professional fee is paid.
C. Failure to follow government audit standards in government
audits.
D. Authorization for others to make misleading entries in records.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Source: Original
45.
According to Rule 203, Accounting Principles, requires the auditor to

adhere to official pronouncements except when
A. Complying would violate client confidentiality.

B. Pending legislation may change the reporting requirements of the
client.
C. Adherence to a pronouncement would be misleading.
D. It has been established that financial statement users prefer an
alternative presentation of information.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Source: Original
46.
The AICPA has interpreted Rule 301, Confidential Client Information,

to explicitly allow a CPA to divulge confidential client information to
A.
B.
C.
D.
The SEC.
The U.S. Department of Justice.
The AICPA Professional Ethics Division.
The Federal Trade Commission.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Apply
Difficulty: 3 Hard
Source: Original
47.
Perry Pinkney, CPA, is one of the general partners in a partnership,

which in turn invested 70 percent of its assets in the common stock
of Pinkney's audit client (Darby Corporation). According to the AICPA
Code of Professional Conduct, Pinkney is considered to have
A.
B.
C.
D.
An indirect financial interest in Darby.

A direct financial interest in Darby.
No financial interest in Darby.
A partial financial interest in Darby.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Apply
Source: Original
Topic: Independence
48.
A client has omitted a significant disclosure from the financial

statements. The auditor has asked the client to include the
information, but the client refuses and claims the information is
confidential. The position of the CPA should be that the information
A. Cannot be considered confidential if it is necessary to the

completeness of the financial statements.
B. Cannot be considered confidential unless it can be covered by the
attorney-client privilege.
C. Is confidential and will be disclosed only under subpoena or for a
regulatory investigation.
D. Should be discussed with the audit committee to determine
whether the information should be disclosed.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Apply
Source: Original
49.

the consideration of projecting the consequences of a choice in terms
of this question: "What may be the consequences of similar persons
making this choice in similar circumstances?"
A.
B.
C.
D.
Utilitarian principle.
Moral principle.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Source: Original
50.
Which of the following forms of organization would not be allowed

under Rule 505, Resolution Concerning Form of Organization and
Name, of the Professional Code of Conduct?
A.
B.
C.
D.
Limited liability partnership; all partners are CPAs.

Limited liability partnership; 70 percent of partners are CPAs.
Limited liability corporation; all shareholders are CPAs.
Partnership; 40 percent of partners are CPAs.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Apply
Difficulty: 1 Easy
Source: Original
51.
Red and Green, CPAs are the external auditors for Blue Corporation, a
publicly held company. Blue Corporation has outsourced its internal
audit function to Red and Green. Which of the following statements is
true?
A. Doing internal audit work does not impair the independence of Red
and Green.
B. The independence of Red and Green is impaired only if employees
of Red and Green act in a management capacity or make
management decisions.
C. The independence of Red and Green is impaired only if a member
of Red and Green's engagement team is hired to manage an
accounting function in Blue Corporation.
D. As a public accounting firm, Red and Green cannot be both the
internal and external auditors for publicly held companies and
maintain independence.
AACSB: Ethics
Blooms: Apply
Source: Original
Topic: Independence
52.
Violet, CPA, audits Big Bank, a local financial institution. Which of the
following would most likely impair Violet's independence with regard
to Big Bank?
A. A home loan with the value of the house exceeding the mortgage
balance.
B.
A car loan collateralized by the car.
C. A personal loan collateralized by cash deposits at Big Bank.
D. A Visa credit card issued by Big Bank with a balance of $2,500.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Apply
Source: Original
Topic: Independence
53.
According to the profession's ethical standards, an auditor would be

considered independent in which of the following instances?
A. The auditor is the officially appointed stock transfer agent of a

client.
B. The auditor's checking account that is fully insured by a federal
agency is held at a client financial institution.
C. The client owes the auditor fees for more than two years prior to
the issuance of the audit report.
D. The client is the only tenant in a commercial building owned by the
auditor.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Apply
Source: AICPA
Topic: Independence
54.
Which of the following is required for a CPA firm to designate itself as

"Members of the American Institute of Certified Public Accountants"
on its letterhead?
A.
All owners must be members.
B. The owners whose names appear in the firm name must be
members.
C. At least one of the owners must be a member.
D. The firm must be a dues-paying member.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Source: AICPA
55.
In which of the following circumstances would a CPA who audits XZ

Corporation lack independence?
A. The CPA and XZ's president are both on the board of directors of
COD Corporation.
B. Both the CPA and XZ's president own 25 percent of FOB
Corporation, a closely held company.
C. The CPA has an automobile loan from XZ, a financial institution.
The loan is collateralized by the automobile.
D. The CPA reduced XZ's usual audit fee by 40 percent prior to the
audit because XZ's financial condition was unfavorable.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Apply
Source: AICPA
Topic: Independence
56.
According to the ethical standards of the profession, which of the

following acts is generally prohibited?
A. Purchasing a product from a third party and reselling it to a client.

B. Writing a financial management newsletter promoted and sold by
a publishing company.
C. Accepting a commission for recommending a product to an audit
client.
D. Accepting engagements obtained through the efforts of third
parties.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Source: AICPA
57.
According to the ethical standards of the profession, which of the

following acts is generally prohibited?
A. Issuing a modified report explaining a failure to follow a

governmental regulatory agency's standards when conducting an
attest service for a client.
B. Revealing confidential client information during a quality review of
a professional practice by a team from the state CPA society.
C. Accepting a contingent fee for representing a client in an
examination of the client's federal tax return by an IRS agent.
D. Retaining client records after an engagement is terminated prior to
completion when the client demands their return.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Source: AICPA
58.
Which of the following statements included in the advertising of a

CPA firm is permissible according to Rule 502, Advertising and Other
Forms of Solicitation?
A. "Bob Bullet, CEO of A-One Corp, states that we are the best
auditors his company has ever used."
B. "We provide the best audit coverage of any firm in the state."
C. "We audit the five largest manufacturing companies in the state."
D. "We have several tax partners who work closely with judges and
IRS attorneys on high-profile legal issues."
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Apply
Source: Original
59.
To which group can a CPA provide audit documentation without being

subpoenaed and without the client's consent?
A.
The IRS.
B.
The FASB.
C. Another CPA firm performing a peer review.
D. Another CPA firm considering the purchase of the auditing firm.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Source: Original
60.
Auditors are interested in having independence in appearance

because
A.
B.
C.
D.
They want to impress the public with their independence in fact.

They want the public at large to have confidence in the profession.
They need to comply with the Performance Principle of GAAS.
Audits should be planned and properly supervised.
Reference: Question also found in textbook

AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Source: Original
Topic: Independence
61.
Ensuring that the auditor is independent in appearance is the

responsibility of
A.
B.
C.
D.
The public accounting firm.

Senior management.
The PCAOB.

AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Source: Original
Topic: Independence
62.
If a public accounting firm says it always follows the rule that requires
adherence to FASB pronouncements in order to give a standard
unqualified auditors' report, it is following a philosophy characterized
by
A. The imperative principle in moral philosophy.

B. The utilitarian principle in moral philosophy.
C. The generalization principle in moral philosophy.
D. Reliance on members' collective conscience.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Apply
Source: Original
63.
Which of the following agencies issues independence rules for the

auditors of public companies?
A. Financial Accounting Standards Board (FASB).

B. Government Accountability Office (GAO).
C. Public Company Accounting Oversight Board (PCAOB).
D. AICPA Accounting and Review Services Committee (ARSC).
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
firms.
Source: Original
64.
Audit independence in fact is most clearly lost when
A. A public accounting firm audits competitor companies in the same

industry (e.g., Coca-Cola and Pepsi).
B. An auditor agrees to the argument of the client's financial vice
president that deferring losses on debt refinancing is in accordance
with generally accepted accounting principles.
C. An audit team fails to discover the client's misleading omission of
disclosure about permanent impairment of asset values.
D. A public accounting firm issues a standard unqualified report, but
the reviewing partner fails to notice that the assistant's
observation of inventory was woefully incomplete.
AACSB: Ethics
AICPA BB: Legal
Blooms: Apply
Source: Original
Topic: Independence
65.
The audit committee's responsibility for auditor independence

concerns
A. Ensuring that partners of the public accounting firm are not

stockholders in the company.
B. Ensuring that nonaudit services provided by the auditor do not
impair independence.
C. Reporting on auditor independence to the PCAOB.
D. Ensuring that all nonaudit services are provided by auditors who
do not perform the financial statement audit.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research

Blooms: Remember
Source: Original
Topic: Independence
66.
AICPA members who work in industry and government must always

uphold which of the following AICPA rules of conduct?
A.
B.
C.
D.
Rule 302Contingent Fees.

AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Source: Original
67.
A public accounting firm's independence is impaired when members

of the audit engagement team does which of the following for a
public company audit client?
A. Prepares special purchase orders for active plutonium in secure

national defense installations.
B. Completes operational internal audit assignments under the
directions of the client's director of internal auditing.
C. Prepares outsourced internal audit work on the client's financial
accounting control monitoring.
D. Prepares actuarial assumptions used by the client's actuaries for
life insurance actuarial liability determination.
E. All of the above would impair the public accounting firm's
independence.
AACSB: Ethics
AICPA BB: Legal
Blooms: Apply
Source: Original
Topic: Independence
68.
When the public accounting firm audits FUND-A in a mutual fund

complex that has sister funds FUND-B and FUND-C, independence for
the audit of FUND-A is not impaired when
A. Managerial-level professionals located in the office where the

engagement audit partner is located but who are not on the
engagement team own shares in FUND-B, which is not an audit
client.
B. The wife of the FUND-A audit engagement partner owns shares in
FUND-C (an audit client of another of the firm's offices) and these
shares are held through the wife's employee benefit plan funded
by her employer, the AllSteelFence Company.
C.
Both (a) and (b).
D.
Neither (a) nor (b).
AACSB: Ethics
AICPA BB: Legal
Blooms: Apply
Difficulty: 3 Hard
Source: Original
Topic: Independence
69.
Which of the following is considered a close relative (but not an

immediate family member) as defined by the AICPA?
A.
B.
C.
D.
Spouse.
Spousal equivalent.
Parent.
Uncle.

AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Source: Original
Topic: Independence
70.
Which of the following is true if an auditor performs nonaudit services

for a government entity?
A. The scope of the audit must be reduced so that the auditor does
not audit the area for which the nonaudit work was performed.
B. The auditor is prohibited from providing nonaudit work in areas
directly related to the production of accounting information.
C. The senior members of the government entity must document
their review of the nonaudit service and indicate why it is
appropriate for the auditors to perform this service.
D. The scope of the audit cannot be reduced because the nonaudit
work was performed by the public accounting firm.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Apply
Difficulty: 3 Hard
Source: Original
71.
Which of the following is true?
A. Members of an audit engagement team cannot speak with audit

client officers about matters outside the scope of the audit while
the audit engagement is in progress.
B. Audit team members who leave the public accounting firm for
employment with audit clients can provide audit efficiencies (next
year) because they are very familiar with the firm's audit plans.
C. Audit team partners who leave the public accounting firm for
employment with audit clients can retain variable annuity
retirement accounts established in the person's former firm
retirement plan.
D. The public accounting firm must discuss with the audit client's
board or its audit committee the independence implications of the
client's having hired the audit engagement team manager as its
financial vice president.
AACSB: Ethics
Blooms: Apply
Source: Original
Topic: Independence
72.
Which of the following "bodies designated by Council" have been

authorized to promulgate general standards enforceable under Rule
A. AICPA Division of Professional Ethics.

B. Financial Accounting Standards Board.
C. Government Accounting Standards Board.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
firms.
Source: Original
73.
Which of the following "bodies designated by Council" have been

authorized to promulgate accounting principles enforceable under
Rule 203 of the AICPA Code of Professional Conduct?
A.
Auditing Standards Board.
B. Federal Accounting Standards Advisory Board.
C. Consulting Services Executive Committee.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Source: Original
74.
Phil Greb has a thriving practice in which he assists attorneys in

preparing litigation dealing with accounting and auditing matters. Phil
is "practicing public accounting" if he
A. Uses his CPA designation on his letterhead and business card.

B.
Is in partnership with another CPA.
C. Practices in a professional corporation with other CPAs.
D. Never lets his clients know that he is a CPA.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Apply
Source: Original
75.
The AICPA removed its general prohibition of CPAs taking

commissions and contingent fees because
A. CPAs prefer more price competition to less.

B. Commissions and contingent fees enhance audit independence.
C. Nothing is inherently wrong about the form of fees charged to
nonaudit clients.
D. Objectivity is not always necessary in accounting and auditing
services.
AACSB: Ethics
AICPA FN: Research
Blooms: Apply
Source: Original
76.
CPA Kara Rambo is the auditor of Ajax Corporation. Her audit

independence will not be considered impaired if she
A.
Owns $1,000 worth of Ajax stock.
B. Has a husband who owns $1,000 worth of Ajax stock.
C. Has a sister who is the financial vice president of Ajax.
D. Owns $1,000 worth of the stock of Pericles Corporation, which is
controlled by Ajax as a result of Ajax's ownership of 40 percent of
Pericles' stock, and Pericles contributes 3 percent of the total
assets and income in Ajax's financial statements.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Apply
Source: Original
Topic: Independence
77.
When a client's financial statements contain a material departure

from an FASB Statement on Accounting Standards and the public
accounting firm believes the departure is necessary to ensure that
the statements are not misleading,
A. The public accounting firm must qualify the auditors' report for a
departure from GAAP.
B. The public accounting firm can explain why the departure is
necessary and then give an unqualified opinion paragraph in the
auditors' report.
C. The public accounting firm must give an adverse auditors' report.
D. The public accounting firm can give the standard unqualified
auditors' report with an unqualified opinion paragraph.
AACSB: Ethics
AICPA BB: Legal

AICPA FN: Reporting
Blooms: Apply
Difficulty: 3 Hard
Source: Original
78.
Which of the following would not be considered confidential

information obtained in the course of an engagement for which the
client's consent would be needed for disclosure?
A. Information about whether a consulting client has paid the CPA's

fees on time.
B. The actuarial assumptions used by a tax client in calculating
pension expense.
C. Management's strategic plan for next year's labor negotiations.
D. Information about material contingent liabilities relevant for
audited financial statements.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Apply
Difficulty: 3 Hard
Source: Original
79.
Which of the following would probably not be considered an "act

discreditable to the profession"?
A.
Numerous moving traffic violations.
B. Failing to file the CPA's own tax return.
C. Filing a fraudulent tax return for a client in a severe financial
difficulty.
D. Refusing to hire Asian Americans in an accounting practice.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Apply
Source: Original
80.
According to the AICPA Code of Conduct, which of the following acts

is generally forbidden to CPAs in public practice?
A. Purchasing bookkeeping software from a hi-tech development

company and reselling it to tax clients.
B. Being the author of a "TaxAid" newsletter promoted and sold by a
publishing company.
C. Having a commission arrangement with an accounting software
developer to receive 4 percent of the price of programs
recommended and sold to audit clients.
D. Engaging a marketing firm to obtain new financial planning clients
for a fixed fee of $1,000 for each successful contact.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Apply
Source: Original
81.
A CPA's legal license to practice public accounting can be revoked by

the
A. American Institute of Certified Public Accountants.

B.
State society of CPAs.
C.
Auditing Standard Board.
D.
State board of accountancy.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Source: Original
Topic: Ethics Violation Penalties
82.
According to Rule 501, which of the following is not a "discreditable

act"?
A.
Withholding a client's sales records.
B.
Failing to file or remit tax payments.
C. Failing to follow requirements of the PCAOB during the audit of an
SEC client.
D. Advertising that indicated the firm can reduce IRS penalties.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Apply
Source: Original
83.
An auditor's independence would not be considered impaired if she or

he had
A. Owned common stock of the audit client but sold it before the
company became a client.
B. Sold short the common stock 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 for which
the president had no understanding of accounting principles.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Apply
Difficulty: 1 Easy
Source: Original
Topic: Independence
84.
When a CPA knows that a tax client has skimmed cash receipts and
not reported the income in the federal income tax return but signs
the return as a CPA who prepared the return, the CPA has violated
which of the following AICPA Rules of Conduct?
A.
B.
C.
D.

Rule 203Accounting Principles.

AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research

Blooms: Apply
Source: Original
85.
An auditor recommends a local computer company to a client that is

trying to upgrade its computerized sales records. The client
purchases $25,000 worth of equipment and sends a check to the
auditor for 5 percent of the total sales. This is an example of a
A.
B.
C.
D.
Commission.
Contingent fee.
Referral fee.
Nonaudit fee.

AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Source: Original
86.
If a CPA refuses a client because there would be a potential violation

of the AICPA Code of Professional Conduct, the CPA is following the
ethical philosophy of the
A.
B.
C.
D.
Moral principle.

AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Source: Original
87.
Which of the following is not one of the ideals expressed in the

Principles of Professional Conduct?
A.
B.
C.
D.
Public interest.
Due care.
Self-regulation.
Responsibilities.

AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Source: Original
88.
A CPA firm's independence will be impaired if a retired partner is a

director of a non-SEC client and
A.
B.
C.
D.
Has fixed retirement benefits.

Retains only office privileges with the firm.
Is no longer active in the firm.
Is no longer associated with the firm.

AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Apply
Source: Original
Topic: Independence
89.
Rule 201 of the Rules of Conduct contains no requirement that

members of the AICPA comply with which of the following standards
and interpretations designated by the AICPA Council?
A.
B.
C.
D.
Independence.
Professional competence.

AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Source: Original
90.
Which of the following would be permitted by the AICPA?
A. John Smith, CPA owns 50 percent of the firm and Joan Jones, nonCPA, owns 50 percent.
B. Non-CPAs own 25 percent of the firm. The non-CPAs do not have a
college degree.
C. Non-CPAs own 40 percent of the firm and follow all AICPA
requirements.
D. Fred Smith, a non-CPA, owns 10 percent of the firm and has a fulltime job separate from the firm and views the ownership purely as
an investment.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Apply
Source: Original
Topic: Independence
91.
The basic rationale for permitting CPAs to accept commissions is that
A. It does not affect independence in attest functions.

B. Professional liability insurance policies permit commission work.
C. State boards of accounting permit commissions and contingent
fees.
D. Other professionals charge commissions in personal financial
planning engagements.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Apply
Source: Original
92.
Which of the following is not one of the guidelines for advertising for
CPAs practicing public accounting?
A. Advertising should be informative and objective.

B. Advertising should be restricted in frequency, size, style, and so
on.
C. Advertising should not create expectations of favorable results.
D. Advertising may not contain fee estimates when a CPA knows they
are not representative.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Apply
Source: Original
93.
If a CPA has violated a rule of Conduct, the AICPA trial board panel
does not have the power to
A. Revoke the person's CPA certificate.

B. Suspend the person's membership in AICPA and state society.
C.
Admonish the CPA.
D.
Acquit the CPA.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Source: Original
94.
A member in public practice can receive a contingent fee for
A. An audit or review of a financial statement.

B. A compilation of a financial statement.
C. An examination of prospective financial statements.
D. Representing a client in an IRS tax audit.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Apply
Source: Original
95.
Most state boards of accountancy do not
A.
B.
C.
D.
Issue licenses to practice accounting.

Regulate tax practice.
Limit the attest function to license holders.
Administer an ethics examination.

AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
firms.
Source: Original
Fill in the Blank Questions

96.
Two aspects of ethics operate in the professional environment:

____________________ ethics and ____________________ ethics.
general (spirit); professional (rules)
97.
The Wheelwright definition of ethics has three key elements: (1)

question requiring ____________________ choice, (2) guides of
______________________, and (3) concerns with the ____________________
of decisions.
reflective; right and wrong; consequences
98.
The ____________________ principle directs a decision maker to act

according to the requirements of an ethical rule.
imperative
99.
The AICPA Code of Professional Conduct contains two basic sections:

_______________________ and ________________________.
Principles of Professional Conduct, Rules of Conduct
100. The detailed explanations of specific rules to help members

understand particular applications are referred to as
________________________________________.
Interpretations of Rules of Conduct
101. The cornerstone of the public accounting profession is the concept of
_____________________________.
independence
102. The spirit of Rule 102 is that integrity and objectivity are required in
connection with ____________________ professional services.
all
103. Members of the AICPA shall comply with standards and

interpretations designated by the _________________________.
AICPA Council
104. ________________________________ is information that should not be
disclosed to outside parties unless demanded by a court.
_____________________________ cannot be demanded, even by a court.
Confidential information; Privileged information
105. Fees based on the number of hours or days worked are
____________________ considered ____________________ on the findings
of audit services.
not; contingent
106. Rule 501 on Acts Discreditable to the Profession is often referred to as
the ___________________________ of the Code.
morals clause
107. ___________________, ___________________, or ____________________
advertising is not in the public interest and is prohibited.
False; misleading; deceptive
108. ______________________________________ are fees a CPA receives for

recommending another CPA's services.
Referral fees
109. ___________________________ refers to quality control reviews and
disciplinary actions by fellow CPAs.
Self-regulation
110. Under AICPA rules, independence will be considered impaired if a
member had or was committed to acquire any ____________ or
________________________ financial interest in the enterprise.
direct; material indirect
111. Under AICPA rules, it would be a conflict of interest if a CPA is
engaged to perform ___________________________ services for a plaintiff
in a lawsuit filed against a client.
litigation support
112. Rule 102 is applicable to members employed in ___________________
and ________________.
government; industry
Short Answer Questions

113. For each situation (1-5), identify the most applicable AICPA rule of
conduct and indicate whether there is a violation or no violation of
the rule (A-F). One or more letters may not be used.
C. Rule 102: Integrity and Objectivity; no violation
D. Rule 102: Integrity and Objectivity; violation
E. Rule 203: Accounting Principles; no violation
F. Rule 203: Accounting Principles; violation
____ 1. Sterling Stevens, CPA, was auditing Global Services Company.
Global Services used an accounting principle that was not in
conformity with GAAP. Nevertheless, Stevens rendered a standard
unqualified audit report.
____ 2. Christina Hall, CPA, provided expert testimony for a plaintiff.
The defendant in the case was a client of Hall's.
____ 3. Sam Miller, CPA, owned 100 shares of Johnson Drilling, Inc., his
audit client.
____ 4. Dewey Wise, CPA, obtained a loan from an insurance company
using the cash value of the insurance policy as collateral. The loan is
for less money than the cash value of the policy.
____ 5. Stella Steinbeck, CPA, was auditing Good Services Company,
which used an accounting principle that was not in conformity with
GAAP. Good Services believed and Steinbeck concurred that using a
generally accepted method would cause the financial statements to
be misleading. Therefore, Steinbeck rendered a standard unqualified
audit report.
1. F; 2. C; 3. B; 4. B; 5. E
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research

Blooms: Apply
Source: Original
Topic: Independence
the rule (A-F). One or more letters may not be used, and you may use
any letter more than once.
E. Rule 302: Contingent Fees; no violation
F. Rule 302: Contingent Fees; violation
____ 1. Jackson, CPA, and one of his audit clients are considering
investing in a business together. Jackson would own 25 percent of the
business and the client would own 50 percent. Jackson's investment
in the business is material to his net worth.
____ 2. Feller, CPA, is the corporate controller for Robert Corporation.
Feller believes his employer may have committed an illegal act. After
discussing the matter with his attorney, Feller decides to disclose the
matter to the appropriate authorities.
____ 3. Brock, CPA, is an owner in the firm Louis and Brock, CPAs.
Brock's husband is on the board of directors of Midland Corporation,
an audit client of Louis and Brock. Brock does not participate on the
audit engagement.
____ 4. Ruth, CPA, owns a building and leases a portion of the space
to an audit client. The income from the lease is not material to Ruth.
____ 5. Maris, CPA, performs investment advisory services for an audit
client and receives an annual fee based on a percentage of the value
of the client's investment portfolio at the end of each year.
1. B; 2. C; 3. B; 4. A; 5. F
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Apply

Source: Original
Topic: Independence
the rule (A-F). One or more letters may not be used.
E. Rule 503: Commissions and Referrals; no violation
F. Rule 503: Commissions and Referrals; violation
____ 1. Brandon Frisby, CPA, found out that his client, Uptonogood,
Inc., had failed to properly account for several leases. Frisby informed
Uptonogood's management that he must issue a qualified audit
report and disclose the lease problem in the report. Uptonogood's
management indicated that such a disclosure would constitute a
disclosure of confidential information. Nevertheless, Frisby rendered
the qualified audit report, including an explanatory paragraph about
the inadequate lease accounting.
____ 2. Priscilla Hudson, CPA, a partner in Hudson and Danhoffer,
CPAs, holds the position of honorary director for the Friends of the
Symphony Orchestra, a firm audit client.
____ 3. The wife of Gerald Skoch, CPA, is the controller of Fine
Corporation. Skoch is an audit partner for the Long Island office of
Barnes and Bucknell, CPAs. The Long Island office of Barnes and
Bucknell audits Fine Corporation, but Skoch is not part of the audit
team and provides no other services to Fine Corporation.
____ 4. Johnny Beacon, CPA, is the auditor of Novak Wholesale, Inc.
Beacon received a 10 percent commission from Computer Systems,
Inc. for hardware sold to Novak Wholesale, Inc. The sale was made
based on Beacon's recommendation to Novak Wholesale that the
company needed a new accounting information system. Beacon
disclosed the commission to Novak's management. Beacon also
performs an annual audit for Novak.
____ 5. Cecilia Hart, CPA, provides tax services to Myers Company.
Hart received a 10 percent commission from Computer Systems, Inc.
for hardware sold to Myers Company. The sale was made based on
Hart's recommendation to Myers Company that the company needed
a new accounting information system. Hart disclosed the commission
to Myers' management.
1. C; 2. A; 3. B; 4. F; 5. E
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Apply
Source: Original
Topic: Independence
116. For each of the following cases, indicate where the action or situation
relevant rule or interpretation that would apply to it.
1. Rule 101. No violation if it is an honorary position and he is not

involved in management function.
2. Rule 101. Violation; Smith is not independent because of the
investor-investee relationship.
3. Rule 101. Violation; Smith has a financial interest in the
investment.
4. Rule 501. Violation; this would be an act discreditable to
profession. Smith should return the records.
5. Rule 502. Violation; deceptive advertising. He has no basis for
claim.
6. Rule 503. No violation if Smith does not violate part A of Rule 503.
7. Rule 203. No violation. The AICPA Council has designated the
opinions of the APB acceptable accounting principles.
8. Rule 302. No violation. A CPA can charge a fee contingent on
findings in a tax return engagement for which another authority will
determine the outcome.
9. Rule 301. Violation; Smith must release tax accrual workpapers to
the IRS.
10. Rule 201. Possible violation of professional competence standard;
it is incompatible if Brown's company is an SEC company.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Apply
Source: Original
Topic: Independence
Essay Questions
117. For each of the following cases indicate if the action by a member
CPA is a violation of the AICPA Code of Professional Conduct and cite
the relevant rule.
A. Disclosed client information to another CPA firm during the
discussion of a merger of the two firms
B. Allowed a company to change the way it values inventory to a
method that is not GAAP because following GAAP would be
misleading
C. Had a new car loan from a bank that is a client when the bank
holds the title to the car
D. Based a fee on approval of a bank loan dependent on audited
financial statements
E. Did not comply with Government Auditing Standards on a
government audit
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Apply
Source: Original
Topic: Independence
118. For each of the following cases, indicate whether the action by a
member CPA is a violation of the AICPA Code of Professional Conduct
and cite the relevant rule.
A. Was a trustee of client's profit-sharing trust.
B. Accepted referral fees from local attorneys for nonattest clients
with the clients' knowledge.
C. Performed an audit in accordance with GASB standards.
D. Advises a client to have an insurance review from a local insurance
company in which the CPA has a material financial interest.
E. Promoted the CPA's tax service on local TV station.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Apply
Source: Original
Topic: Independence
119. What are (a) the AICPA Principles of Professional Conduct, (b) Rules of
Conduct, and (c) Interpretation of Rules of Conduct?
a. The Principles of Professional Conduct express the profession's

high ideals on ethical conduct. They include essays on
responsibilities, the public interest, integrity, objectivity and
independence, due care and scope, and nature of services.
b. The Rules of Conduct apply to the services performed by members
of the AICPA in public and private practice. At present, they consist of
11 rules of conduct.
c. The Interpretations of Rules of Conduct are detailed explanations of
specific rules necessary to help members understand particular
applications.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Source: Original
120. What are the powers of the AICPA trial board in ethics violations?
The trial board has the power to (a) acquit the CPA, (b) admonish the
CPA, (c) suspend the CPA's membership in the state society and the
AICPA for up to two years, or (d) expel the CPA from the state society
and the AICPA.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Source: Original
121. Susan Small, CPA, has Medium Corporation as an audit client.

Medium has asked Small to create and install a new computerized
payroll system. Because Small does not have the appropriate level of
expertise, she referred Medium to Compusystems, Inc., a local
software consulting company. Small has an arrangement by which
Compusystems pays her 10 percent of any fee received from her
referrals. Small has disclosed this to her client.
Required:
The rule in question is Rule 503: Commissions. Susan Small has

violated this rule because she has accepted a commission from an
attestation client.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Apply
Source: Original
122. Wally Wide is the partner on the audit engagement for First National
Bank for its fiscal year-end of January 31, 2013. Wally was recently
promoted to partner. Based on his increase in income, Wally and his
family bought a large home and a new car. First National Bank had
the most competitive mortgage rate and auto loan rates, so Wally
obtained both his mortgage loan and car loan from First National.
Wally paid 20 percent down on the house, received no special rate of
interest, and the First National Bank holds the title to the house.
Wally traded in his old car and made an additional down payment on
the car and financed 60 percent of the price of the car with the bank.
Again, Wally paid the prevailing interest rate and the bank holds the
title to the car.
Required:
This situation involves possible violations of the AICPA's Code of
The rule in question is Rule 101Independence. Wally Wide has

violated this rule in the financing of the house. Under Interpretation
101-1.A.4, members are no longer allowed to obtain home mortgages
from clients. However, because the auto loan is collateralized by the
automobile, Wally has not violated the independence rule on the
financing of the car
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Apply
Source: Original
Topic: Independence
123. Ben Big is a partner in the Cleveland office of the national accounting
firm of Price Brickhouse. He owns 1,000 shares of common stock in
Public, Inc., an audit client of the firm. This amount is not material to
his personal investments. The Public, Inc. audit is done out of the
New York office. Ben Big has not informed the firm that he owns the
shares because he is not on the audit, which the Cleveland office
doesn't perform.
Required:
The rule in question is Rule 101: Independence. Ben Big has not
violated this rule because he is not considered a covered member.
Partners are covered members only if they are in the office in which
the lead attest engagement partner primarily practices in connection
with the attest engagement. Only covered members and their
immediate families are prohibited from having a direct financial
interest in the client
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Apply
Source: Original
Topic: Independence
124. The Code of Professional Conduct is very important for the auditing
profession. The AICPA, state CPA boards, and other professional
organizations spend a great deal of time and effort implementing and
reinforcing the ethical standards as well as penalizing those who
violate the ethical standards.
Required:
A. Why is the Code of Professional Conduct important to the
profession?
B. Many professionals believe that in today's business environment it
is more difficult to adhere to the Code of Professional Conduct than
ever before. Why might this be true?
A. If the profession is to maintain the public trust and confidence, it

must have standards that are visible to the public, and the profession
must demonstrate an adherence to those standards. Without a set of
minimum ethical standards, the profession might lose creditability in
its opinions provided to financial statement users.
B. In today's business environment, it may be more difficult to adhere
to ethical standards than ever before. Many more investment options
including pensions exist. It may not always be clear what some of the
funds are investing in and the extent of these investments. In
addition, as businesses become more complex, integrate more
technology, and engage in more global business practices, it
becomes more difficult for accountants to acquire the knowledge and
skills required to meet the standard of competence. As the number of
standards and the complexity increase, the adherence to standards
becomes more difficult. Also, as business moves more quickly and
corporations attempt to meet market expectations, the pressures
placed on auditors to perform audits faster and achieve results in line
with management expectations become greater.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Blooms: Apply
Difficulty: 3 Hard
Source: Original

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True / False Questions

2. In considering general ethics, the primary goal is to arrive at a set of

3. Ethics in the imperative sense is a function of moral rules and

4. The SEC independence rules prohibit auditors from providing actuarial

5. The Sarbanes-Oxley Act of 2002 limits the engagement of and

7. The AICPA Code of Professional Conduct derives its authority from

8. Financial statement audit services are the only engagements that

9. Integrity and objectivity are required in connection with all professional

10 General standards Rule 201 prohibits the acceptance of any

11 Compliance with standards, Rule 202, requires adherence to duly

12 Confidential information is information that should not be disclosed to

13 A CPA can accept a contingent fee for a compilation report to be used

14 CPAs are not permitted to advertise except in a few instances.

17 Licenses to practice accounting are issued by the AICPA.

19 Discipline of the members of a professional association is carried out by

Multiple Choice Questions

22 Which of the following defines the imperative principle of ethics?

25 Which of the following is the responsibility of the Professional Ethics

26 Which of the following is not one of the AICPA Principles of Professional

A. Jason, who is a member of the attest engagement team with an

Be prudent in assessment of facts.

29 Based on Sarbanes-Oxley, who is ultimately responsible for the

The CPA firm's engagement partner.

30 According to Sarbanes-Oxley, the audit committee must preapprove all

A. On a case-by-case basis, yes; through established policies, no; by

A. It limits engagement partners to a five-year term as the engagement

A. Nonaudit services cannot be provided to a government entity that is

33 Which of the following is allowed under the Government Auditing

A. Personnel who provide nonaudit services are prohibited from

35 Maralee has been approached by J. Fox Entertainment to perform an

36 An audit client hires a member of the audit engagement team to be its

A. Such disclosures will end the practice of auditors performing

A. Krogstad owns Dodger common stock.

39 Which of the following philosophical principles in ethics emphasizes the

A. Lisa owns 25 percent of the company.

42 The interpretation of Rule 101, Independence, allows members to

43 The AICPA Council has designated the following bodies to pronounce

Financial Accounting Standards Board.

44 The interpretation of Rule 501, Acts Discreditable to the Profession,

A. Membership in an activist political party.

A. Complying would violate client confidentiality.

47 Perry Pinkney, CPA, is one of the general partners in a partnership,

An indirect financial interest in Darby.

48 A client has omitted a significant disclosure from the financial

A. Cannot be considered confidential if it is necessary to the

50 Which of the following forms of organization would not be allowed

A. Limited liability partnership; all partners are CPAs.

53 According to the profession's ethical standards, an auditor would be

A. The auditor is the officially appointed stock transfer agent of a client.

56 According to the ethical standards of the profession, which of the

A. Purchasing a product from a third party and reselling it to a client.

A. Issuing a modified report explaining a failure to follow a

59 To which group can a CPA provide audit documentation without being

They want to impress the public with their independence in fact.

61 Ensuring that the auditor is independent in appearance is the

The public accounting firm.

A. The imperative principle in moral philosophy.

63 Which of the following agencies issues independence rules for the

A. Financial Accounting Standards Board (FASB).

A. Ensuring that partners of the public accounting firm are not

66 AICPA members who work in industry and government must always

67 A public accounting firm's independence is impaired when members of