Chapter 19 - Professional Conduct, Independence, and Quality Control

Chapter 19 Professional Conduct, Independence, and Quality Control

True / False Questions

1. The term "ethics" refers to a person's propensity to follow the laws of the land. True alse

!. Professionalism refers to the conduct, aims, or "ualities that characteri#e or mar$ a %i&en profession. True alse

'. (hen auditin% a pu)lic company, a CP* must follow the auditin% standards and Code of Professional Conduct of the PC*+,. True alse

-. The *ICP* Code of Professional Conduct deals mainly with )eha&ior and actions of indi&idual auditors. True alse

.. The Principles of Professional Conduct set forth the minimum standards. True alse

/. 0ules of Conduct are enforcea)le. True alse

1. 2thical rulin%s are enforcea)le. True alse

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Chapter 19 - Professional Conduct, Independence, and Quality Control

3. Principles are stated at a conceptual le&el, not a detailed le&el. True alse

9. The rules contained in 4ection 155 co&er issues relatin% to independence, inte%rity, and auditin% standards. True alse

15. If an auditor is not independent of the client, it is unli$ely that a user of financial statements will place much reliance on the CP*'s wor$. True alse

11. *s per the Conceptual ramewor$ for *ICP* Independence 4tandards made effecti&e in !55/, a CP* is re"uired to identify and assess the e6tent to which a threat to independence e6ists. True alse

1!. *n indirect financial interest is defined as a financial interest that is owned or is under the control of an indi&idual or entity. True alse

1'. * financial interest is ")eneficially owned" when an indi&idual or entity is 7+T the recorded owner of the interest )ut has a ri%ht to some or all of the underlyin% )enefits of ownership. True alse

1-. If a CP* owns an insurance policy issued )y an attest client, independence would )e considered impaired, e&en if the policy was purchased under the insurance company's normal terms and procedures and does not offer an in&estment option. True alse

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Chapter 19 - Professional Conduct, Independence, and Quality Control

1.. The independence standards issued )y the PC*+, do not prohi)it the pro&ision of ta6 ser&ices to an attest client. True alse

1/. PC*+, rules re"uire ta6 ser&ices pro&ided )y a pu)lic company auditor to )e considered and appro&ed )y the company's audit committee. True alse

Multiple Choice Questions

11. (ith respect to ethics, the ri%hts-)ased approach *. 4u%%ests that auditors should always &erify ownership of a client's material tan%i)le assets. ,. Is primarily concerned with e"uity and impartiality. C. 4u%%ests that an indi&idual's actions should not &iolate the ri%hts of any indi&idual. 8. 0eco%ni#es that decisions in&ol&e trade-offs )etween costs and )enefits.

13. (ith respect to ethics, the utilitarian theory *. 4u%%ests that auditors should always &erify ownership of a client's material tan%i)le assets. ,. Is primarily concerned with e"uity and impartiality. C. 4u%%ests that an indi&idual's actions should not &iolate the ri%hts of any indi&idual. 8. 0eco%ni#es that decisions in&ol&e trade-offs )etween costs and )enefits.

19. (ith respect to ethics, the 9ustice-)ased approach *. 4u%%ests that auditors should always &erify ownership of a client's material tan%i)le assets. ,. Is primarily concerned with e"uity and impartiality. C. 4u%%ests that an indi&idual's actions should not &iolate the ri%hts of any indi&idual. 8. 0eco%ni#es that decisions in&ol&e trade-offs )etween costs and )enefits.

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Chapter 19 - Professional Conduct, Independence, and Quality Control

!5. In auditin% a pri&ately held entity, an auditor must follow the professional standards esta)lished )y all of the followin% e6cept: *. The *ICP*'s *uditin% 4tandards ,oard. ,. The Professional Code of Conduct. C. The Independence 4tandards ,oard. 8. The PC*+,.

!1. (hich of the followin% is not a Principle of Professional Conduct as defined )y the Code of Professional Conduct; *. Inte%rity. ,. 8ue care. C. 0eportin%. 8. 4cope and nature of ser&ices.

!!. (hat is meant )y the Code of Professional Conduct's definition of "holdin% out"; *. Informin% a client a)out one's status as a CP*. ,. (ithholdin% an audit report until the fee is paid. C. 7ot sharin% audit documentation with a successor auditor. 8. 7ot su%%estin% that mana%ement ma$e an ad9ustin% entry that is deemed immaterial.

!'. or pri&ate companies, accountin% firms are prohi)ited from pro&idin% *. +utsourced internal audit ser&ices. ,. *udit ser&ices. C. 0e&iew ser&ices. 8. 7one of the a)o&e.

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Chapter 19 - Professional Conduct, Independence, and Quality Control

!-. * &iolation of the profession's ethical standards would most li$ely ha&e occurred when a CP* *. Purchased a )oo$$eepin% firm's practice of monthly write-ups for a percenta%e of fees recei&ed o&er a three-year period. ,. <ade arran%ements with a )an$ to collect notes issued )y a client in payment of fees due. C. 7amed 4mith formed a partnership with two other CP*s and used "4mith = Co." as the firm name. 8. Issued an un"ualified opinion on the !511 financial statements when fees for the !515 audit were unpaid.

!.. (hich of the followin% is re"uired for a firm to desi%nate itself as a "<em)er of the *merican Institute of Certified Pu)lic *ccountants" on its letterhead; *. *t least one of the partners must )e a mem)er. ,. The partners whose names appear in the firm name must )e mem)ers. C. *ll partners must )e mem)ers. 8. The firm must )e a dues-payin% mem)er.

!/. * &iolation of the profession's ethical standards would least li$ely ha&e occurred when a CP* in pu)lic practice *. >sed a records-retention a%ency to store the CP*'s wor$in% papers and client records. ,. 4er&ed as an e6pert witness in a dama%e suit and recei&ed compensation )ased on the amount awarded to the plaintiff. C. 0eferred life insurance assi%nments to the CP*'s spouse, who is a life insurance a%ent. 8. ailed to file his personal ta6 return.

!1. *ccordin% to the Code of Professional Conduct, which of the followin% indi&iduals is not in a position to influence an attest en%a%ement ?i.e., not a co&ered mem)er@; *. The office's mana%in% partner who determines the compensation of the attest en%a%ement partner. ,. The office's IT e6pert, who consulted with the en%a%ement partner re%ardin% the client's IT system. C. The partner in another office in a near)y city who re%ularly plays %olf with the en%a%ement partner. 8. The office's partner who monitors "uality control o&er the attest en%a%ement.

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Chapter 19 - Professional Conduct, Independence, and Quality Control

!3. * CP*, while performin% an audit, stri&es to achie&e independence in appearance in order to *. 0educe ris$ and lia)ility. ,. Comply with the %enerally accepted standards of fieldwor$. C. ,ecome independent in fact. 8. <aintain pu)lic confidence in the profession.

!9. In which of the followin% instances would the independence of the CP* not )e considered to )e impaired; The CP* has )een retained as the auditor of a )ro$era%e firm *. (hich owes the CP* audit fees for more than one year. ,. In which the CP* has a lar%e acti&e mar%in account. C. In which the CP*'s )rother is the controller. 8. (hich owes the CP* audit fees for current year ser&ices and has 9ust filed a petition for )an$ruptcy.

'5. The 42C has issued independence rules that differ from the *ICP*'s in all of the followin% areas e6cept: *. (or$in% paper documentation. ,. Pro&ision of other professional ser&ices. C. Auman resource and compensation-related issues. 8. 0e"uired communication.

'1. (hich of the followin% is not an element of "uality control as defined )y 4tatement of Quality Control 4tandards 7o. 3; *. <onitorin%. ,. Independence. C. Auman resources. 8. 0ele&ant ethical re"uirements.

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Chapter 19 - Professional Conduct, Independence, and Quality Control

'!. * )asic o)9ecti&e of a CP* firm is to pro&ide professional ser&ices that conform to professional standards. 0easona)le assurance of achie&in% this )asic o)9ecti&e is pro&ided throu%h *. Compliance with %enerally accepted reportin% standards. ,. * system of "uality control. C. * system of peer re&iew. 8. Continuin% professional education.

''. The "uality control standards are concerned primarily with *. *ctions of indi&idual auditors. ,. * firm's monitorin% of its practice. C. 8isciplinary actions a%ainst indi&idual auditors. 8. Pre&entin% le%al action.

'-. (hich of the followin% )odies ordinarily would ha&e the authority to suspend or re&o$e a CP*'s license to practice pu)lic accountin%; *. The 42C. ,. The *ICP*. C. * state CP* society. 8. * state )oard of accountancy.

'.. (hich of the followin% statements )est descri)es why the profession of certified pu)lic accountants has deemed it essential to promul%ate a code of conduct and to esta)lish a mechanism for enforcin% o)ser&ance of the code; *. 2thical standards are esta)lished so that users of accountin% ser&ices $now what to e6pect, the professionals $now what )eha&iors are accepta)le, and o&erseers can ta$e disciplinary action when appropriate. ,. * prere"uisite to success is the esta)lishment of an ethical code that stresses primarily the professional's responsi)ility to clients and collea%ues. C. * re"uirement of most state laws calls for the profession to esta)lish a code of conduct. 8. *n essential means of self-protection for the profession is the esta)lishment of fle6i)le ethical standards )y the profession.

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Chapter 19 - Professional Conduct, Independence, and Quality Control

'/. * CP*'s license to practice will ordinarily )e suspended or re&o$ed automatically for *. Controllin% the )oo$$eepin% for a compilation client. ,. Con&iction of willful failure to file personal income ta6 return. C. 0efusin% to respond to an in"uiry )y the *ICP* practice re&iew committee. 8. *cceptin% compensation while honorin% a su)poena to appear as an e6pert witness.

'1. * CP*'s retention of client records as a means of enforcin% payment of an o&erdue audit fee is an action that is *. Considered accepta)le )y the *ICP* Code of Professional Conduct. ,. Ill-ad&ised )ecause it would impair the CP*'s independence with respect to the client. C. Considered discredita)le to the profession. 8. * &iolation of %enerally accepted auditin% standards.

'3. (hich of the followin% is allowa)le for a CP*; *. * used car loan from a )an$in% client where the client has a lien on the car. ,. *n uncollaterali#ed si%nature loan from a client. C. +wnin% more than fi&e percent of the outstandin% shares of client stoc$ in a retirement account. 8. The audit en%a%ement partner ser&es on the client's audit committee.

'9. In performin% an audit, Bac$son, CP*, disco&ers that the professional competence necessary for the en%a%ement is lac$in%. Bac$son informs mana%ement of the situation and recommends another local CP* firm and mana%ement en%a%es this other firm. >nder these circumstances *. Bac$son may re"uest compensation from the other CP* firm for any professional ser&ices rendered to it in connection with the en%a%ement. ,. Bac$son may accept a referral fee from the other CP* firm. C. Bac$son has &iolated the *ICP* Code of Professional Conduct )ecause of non-fulfillment of the duty of performance. 8. Bac$son's lac$ of competence should )e construed to )e a &iolation of %enerally accepted auditin% standards.

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Chapter 19 - Professional Conduct, Independence, and Quality Control

-5. In which one of the followin% situations would a CP* )e in &iolation of the *ICP* Code of Professional Conduct in determinin% a fee; *. * fee )ased on whether the CP*'s report on the client's financial statements results in the appro&al of a )an$ loan. ,. * fee )ased on an estimate of the num)er of hours needed to complete the en%a%ement )y auditors of &arious le&els of e6perience. C. * fee )ased on the nature of the ser&ice rendered and the CP*'s particular e6pertise instead of the actual time spent on the en%a%ement. 8. * fee )ased on the fee char%ed )y the prior auditor.

-1. In connection with a lawsuit, a third party attempts to %ain access to the auditor's wor$in% papers. The client's defense of pri&ile%ed communication will )e successful only to the e6tent it is protected )y the *. *uditor's ac"uiescence in use of this defense. ,. Common law. C. *ICP* Code of Professional Conduct. 8. 4tate law.

-!. The profession's ethical standards would most li$ely )e considered to ha&e )een &iolated when the CP* represents that specific consultin% ser&ices will )e performed for a stated fee and it is apparent at the time of the representation that the *. CP* would not )e independent. ,. ee was a competiti&e )id. C. *ctual fee would )e su)stantially hi%her. 8. *ctual fee would )e su)stantially lower than the fees char%ed )y other CP*s for compara)le ser&ices.

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Chapter 19 - Professional Conduct, Independence, and Quality Control

-'. *ccordin% to the ethical standards of the profession, which of the followin% acts is %enerally prohi)ited; *. Issuin% a modified report e6plainin% a failure to follow a %o&ernmental re%ulatory a%ency's standards when conductin% an attest ser&ice for a client. ,. 0e&ealin% confidential client information durin% a "uality re&iew of a professional practice )y a team from the state CP* society. C. *cceptin% a contin%ent fee for representin% a client in an e6amination of the client's federal ta6 return )y an I04 a%ent. 8. 0etainin% client records after an en%a%ement is terminated prior to completion and the client has demanded its return.

--. *ccordin% to the ethical standards of the profession, which of the followin% acts is %enerally prohi)ited; *. Purchasin% a product from a third party and resellin% it to a client. ,. (ritin% a financial mana%ement newsletter promoted and sold )y a pu)lishin% company. C. *cceptin% a commission for recommendin% a product to an audit client. 8. *cceptin% en%a%ements o)tained throu%h the efforts of third parties.

-.. In which of the followin% circumstances would a CP* who audits C< Corporation lac$ independence; *. The CP* and C<'s president are )oth on the )oard of directors of C+8 Corporation. ,. The CP* and C<'s president each owns !. percent of +, Corporation, a closely-held company. C. The CP* has an automo)ile loan from C<, which is a sa&in%s and loan or%ani#ation and the loan is collaterali#ed )y the automo)ile. 8. The CP* reduced C<'s usual audit fee )y -5 percent )ecause C<'s financial condition was unfa&ora)le.

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Chapter 19 - Professional Conduct, Independence, and Quality Control

-/. <a&is, CP*, has audited the financial statements of 4outh ,ay 4ales Incorporated for se&eral years and had always )een paid promptly for ser&ices rendered. Dast year's audit in&oices ha&e not )een paid )ecause 4outh ,ay is e6periencin% cash flow difficulties and the current year's audit is scheduled to commence in one wee$. (ith respect to the past due audit fees, <a&is should *. Perform the scheduled audit and allow 4outh ,ay to pay when the cash flow difficulties are alle&iated. ,. Perform the scheduled audit only after arran%in% a definite payment schedule and securin% notes si%ned )y 4outh ,ay. C. Inform 4outh ,ay's mana%ement that the past due audit fees are considered an impairment of auditor independence. 8. Inform 4outh ,ay's mana%ement that the past due audit fees may )e considered a loan on which interest must )e imputed for financial statement purposes.

-1. In which of the followin% instances would the independence of the CP* not )e considered to )e impaired; The CP* has )een retained as the auditor of a *. Charita)le or%ani#ation in which an employee of the CP* ser&es as treasurer. ,. <unicipality in which the CP* owns E!.,555 of the E!,.55,555 inde)tedness of the municipality. C. 0estaurant where the CP* dines fre"uently. 8. Company in which the CP*'s pri&ate in&estment clu) owns a one-tenth interest.

-3. * CP* firm's personnel partner periodically studies the CP* firm's personnel ad&ancement e6perience to ascertain whether the indi&iduals who were assi%ned increased de%rees of responsi)ility met predetermined criteria. This is e&idence of the CP* firm's adherence to prescri)ed standards of *. Quality control. ,. 8ue professional care. C. 4uper&ision and re&iew. 8. ieldwor$.

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Chapter 19 - Professional Conduct, Independence, and Quality Control

-9. * CP* firm would )e reasona)ly assured of meetin% its o&erall responsi)ility to pro&ide ser&ices that conform with professional standards )y *. *dherin% to %enerally accepted accountin% principles. ,. Implementin% an appropriate system of "uality control. C. Boinin% professional societies that enforce ethical conduct. 8. <aintainin% an attitude of independence in its en%a%ements.

.5. (hich of the followin% is an element of a CP* firm's "uality control system that should )e considered in esta)lishin% its "uality control policies and procedures; *. >sin% the audit ris$ model. ,. >sin% statistical samplin% techni"ues. C. *ssi%nin% personnel to en%a%ements. 8. Considerin% audit ris$ and materiality.

.1. (hat is the primary purpose of the acceptance and continuance of client relationships and specific en%a%ements element of "uality control; *. Fuarantee that firms do not associate with clients whose mana%ement lac$s inte%rity. ,. Pro&ide reasona)le assurance that firms do not associate with clients whose mana%ement lac$s inte%rity. C. Fuarantee that firms will not )e sued as a result of association with a client. 8. Pro&ide reasona)le assurance that firms will not )e sued as a result of association with a client.

.!. In order to achie&e effecti&e "uality control, a firm of independent auditors should esta)lish policies and procedures for *. 8eterminin% the minimum procedures necessary for unaudited financial statements. ,. 4ettin% the scope of audit wor$. C. 8ecidin% whether to accept or continue a client. 8. 4ettin% the scope of internal control study and e&aluation.

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Chapter 19 - Professional Conduct, Independence, and Quality Control

.'. (ithin the conte6t of "uality control, the primary purpose of continuin% professional education and trainin% acti&ities is to ena)le a CP* firm to pro&ide personnel within the firm with *. Technical trainin% that ensures proficiency as an auditor. ,. +pportunities for career ad&ancement outside the accountin% firm. C. Gnowled%e re"uired to fulfill assi%ned responsi)ilities. 8. Gnowled%e re"uired to perform a peer re&iew.

.-. * CP* firm e&aluates its personnel ad&ancement e6perience to ascertain whether indi&iduals assi%ned to increased de%rees of responsi)ility meet predetermined criteria. This policy is e&idence of the firm's adherence to which of the followin% prescri)ed standards; *. Professional ethics. ,. 4uper&ision and re&iew. C. *ccountin% and re&iew ser&ices. 8. Quality control.

... The primary purpose of esta)lishin% "uality control policies and procedures for decidin% whether to accept a new client is to *. 2na)le the CP* firm to attest to the relia)ility of the client. ,. 4atisfy the CP* firm's duty to the pu)lic concernin% the acceptance of new clients. C. <inimi#e the li$elihood of association with clients whose mana%ement lac$s inte%rity. 8. *nticipate )efore performin% any fieldwor$ whether an un"ualified opinion can )e e6pressed.

./. ollowin% the issuance of a PC*+, draft report, how many days does the CP* firm ha&e to respond to accusations; *. 15 days. ,. '5 days. C. .5 days. 8. 95 days.

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Chapter 19 - Professional Conduct, Independence, and Quality Control

.1. * &iolation of the profession's ethical standards would most li$ely occur when a CP* who *. Is also admitted to the ,ar represents on letterhead to )e )oth an attorney and a CP*. ,. (rites a newsletter on financial mana%ement also permits a pu)lishin% company to solicit su)scriptions )y direct mail. C. Is controller of a )an$ permits the )an$ to use the controller's CP* title in the listin% of officers in its pu)lications. 8. 0efused to hire a new employee does so )ecause the CP* deemed the candidate to )e "too old."

.3. In determinin% estimates of fees, an auditor may ta$e into account each of the followin%, e6cept the: *. Halue of the ser&ice to the client. ,. 8e%ree of responsi)ility assumed )y underta$in% the en%a%ement. C. 4$ills re"uired to perform the ser&ice. 8. *ttainment of specific findin%s.

.9. *n auditor is a)out to commence a recurrin% annual audit en%a%ement. The continuin% auditor's independence would ordinarily )e considered to )e impaired if the prior year's audit fee *. (as unusually lar%e. ,. Aas not )een paid and will not )e paid for at least twel&e months. C. Aas not )een paid and the client has filed a &oluntary petition for )an$ruptcy. 8. (as rene%otiated durin% the prior year audit )ased on the need for e6panded testin%.

/5. In which of the followin% circumstances would a CP* )e )ound )y ethics to refrain from disclosin% any confidential information o)tained durin% the course of a professional en%a%ement; *. The CP* is issued a summons enforcea)le )y a court order that orders the CP* to present confidential information. ,. * ma9or stoc$holder of a client company see$s accountin% information from the CP* after mana%ement declined to disclose the re"uested information. C. Confidential client information is re"uested as part of a "uality re&iew of the CP*'s practice )y a re&iew team authori#ed )y the *ICP*. 8. *n in"uiry )y a disciplinary )ody of a state CP* society re"uests confidential client information.

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Chapter 19 - Professional Conduct, Independence, and Quality Control

/1. >nder which of the followin% circumstances would the independence of a CP* )e considered impaired if the CP*, who also is an attorney, ser&es as auditor and pro&ides le%al ser&ices to the same client; *. (hen the CP*, as le%al a%ent, consummates a )usiness ac"uisition for the client. ,. (hen the CP*'s audit fees and le%al fees are not )illed separately. C. (hen the CP* uses le%al e6pertise to research a "uestion of income ta6 law. 8. (hen the le%al ser&ices consist of an analysis of the terms of an e6istin% lease a%reement.

/!. *ccordin% to the profession's ethical standards, a CP* would )e considered independent in which of the followin% instances; *. * client leases part of an office )uildin% from the CP*, resultin% in a material indirect financial interest to the CP*. ,. The CP* has a material direct financial interest in a client, )ut transfers the interest into a )lind trust. C. The CP* owns an office )uildin% and the mort%a%e on the )uildin% is %uaranteed )y a client. 8. The CP* )elon%s to a country clu) client in which mem)ership re"uires an annual fee.

/'. (hen auditin% a pu)lic company, which of the followin% impairs an auditor's independence; *. +fferin% audit ser&ices as well as preparin% the ta6 return for the same client. ,. The auditor's spouse wor$s in the assem)ly line of an audit client. C. Dac$ of fee disclosure in the client's annual report. 8. The auditor has )een a partner on the en%a%ement for ten years.

Short Answer Questions

/-. (hy do professions esta)lish codes of conduct that define ethical )eha&iors for mem)ers of the profession;

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Chapter 19 - Professional Conduct, Independence, and Quality Control

/.. 8istin%uish )etween the followin% theories of ethical )eha&ior: utilitarianism, a ri%hts)ased approach, and a 9ustice-)ased approach.

//. (hich professional and re%ulatory )odies esta)lish the ethical and professional rules for auditors of: ?1@ pu)lic companies and ?!@ pri&ate companies;

/1. Disted )elow are definitions of the si6 Principles of Professional Conduct. or each, identify the principle )ein% defined. a. * mem)er should o)ser&e the profession's technical and ethical standards, stri&e continually to impro&e competence and the "uality of ser&ices, and dischar%e professional responsi)ility to the )est of the mem)er's a)ility. ). <em)ers should e6ercise sensiti&e professional and moral 9ud%ments in all their acti&ities. c. * mem)er should )e free of conflicts of interest in dischar%in% professional responsi)ilities. d. * mem)er in pu)lic practice should o)ser&e the Principles of the Code of Professional Conduct in determinin% the type and e6tent of ser&ices to )e pro&ided. e. <em)ers should accept the o)li%ation to act in a way that will honor the pu)lic trust and demonstrate commitment to professionalism. f. To maintain and )roaden pu)lic confidence, mem)ers should perform all professional responsi)ilities with the hi%hest sense of IIIIIIIIIIIIII.

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Chapter 19 - Professional Conduct, Independence, and Quality Control

/3. <s. Dem)$e is a partner for 8T4, a CP* firm. 4he is the lead partner for the firm's lar%est client, The Frey 2lephant. <s. Jadina, who wor$s in the same office as <s. Dem)$e, has a sister who is the controller for The Frey 2lephant. ,ecause of potential independence issues, <s. Jadina does no wor$ for The Frey 2lephant. <s. Jadina is )ein% considered for promotion to partner. (hat independence issues should <s. Dem)$e consider )efore promotin% <s. Jadina;

/9. The 42C's rules with respect to ser&ices pro&ided )y auditors are predicated on three )asic principles of auditor o)9ecti&ity and independence. (hat are the three )asic principles;

15. Identify the primary purposes of 0ules !51-!5' of the 0ules of Conduct.

11. (hen can a CP* disclose confidential information without the client's consent;

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Chapter 19 - Professional Conduct, Independence, and Quality Control

Matchin Questions

1!. <atch each term )elow with its definition as pro&ided )y the *ICP* 0ules of Conduct. 26amples include financial statement audits, re&iews, and e6aminations of prospecti&e financial information *ny person or entity, other than the mem)er's employer, that en%a%es a mem)er or a mem)er's firm to perform professional ser&ices *ny action initiated )y a mem)er that informs others of his or her status as a CP* or *ICP*-accredited specialist * proprietor, part owner, or any indi&idual who assumes the ris$s and )enefits of firm ownership or who is otherwise held out )y the firm to )e the e"ui&alent of any of the aforementioned The performance for a client )y a mem)er or a mem)er's firm while holdin% out as CP*?s@ of the professional ser&ices of accountin%, ta6, personal financial plannin%, liti%ation support ser&ices, and those professional ser&ices for which standards are promul%ated )y )odies desi%nated )y Council *ll ser&ices performed )y mem)er while holdin% out as a CP*

1. Partner !. Professional ser&ices '. Practice of pu)lic accountin%

IIII IIII IIII

-. Client

IIII

.. *ttest en%a%ement /. Aoldin% out

IIII IIII

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Chapter 19 - Professional Conduct, Independence, and Quality Control

Chapter 19 Professional Conduct, Independence, and Quality Control *nswer Gey

True / False Questions

1. The term "ethics" refers to a person's propensity to follow the laws of the land. FA!S"

AACSB: Ethics AICPA BB: Critical Thinking AICPA FN: Decision Making Blooms: Remember Diffic lt!: " Eas! #earning $b%ecti&e: "'()" *no+ the ,efinitions an, general im-ortance of ethics an, -rofessionalism. To-ic: Ethics an, Professional Con, ct

!. Professionalism refers to the conduct, aims, or "ualities that characteri#e or mar$ a %i&en profession. T#$"

AACSB: Ethics AICPA BB: Critical Thinking AICPA FN: Decision Making Blooms: Remember Diffic lt!: " Eas! #earning $b%ecti&e: "'()" *no+ the ,efinitions an, general im-ortance of ethics an, -rofessionalism. To-ic: Ethics an, Professional Con, ct

'. (hen auditin% a pu)lic company, a CP* must follow the auditin% standards and Code of Professional Conduct of the PC*+,. T#$"

AACSB: Ethics AICPA BB: Critical Thinking AICPA FN: Decision Making Blooms: Remember Diffic lt!: " Eas! #earning $b%ecti&e: "'()/ *no+ ho+ -rofessional ethics stan,ar,s for a ,itors ha&e ,e&elo-e, o&er time an, the entities in&ol&e,. To-ic: Stan,ar,s for A ,itor Professionalism

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Chapter 19 - Professional Conduct, Independence, and Quality Control

-. The *ICP* Code of Professional Conduct deals mainly with )eha&ior and actions of indi&idual auditors. T#$"

AACSB: Ethics AICPA BB: Critical Thinking AICPA FN: Decision Making Blooms: Remember Diffic lt!: " Eas! #earning $b%ecti&e: "'()0 1n,erstan, the frame+ork for the Co,e of Professional Con, ct. To-ic: The AICPA Co,e of Professional Con, ct: A Com-rehensi&e Frame+ork for A ,itors

.. The Principles of Professional Conduct set forth the minimum standards. FA!S"

AACSB: Ethics AICPA BB: Critical Thinking AICPA FN: Decision Making Blooms: Remember Diffic lt!: " Eas! #earning $b%ecti&e: "'()0 1n,erstan, the frame+ork for the Co,e of Professional Con, ct. To-ic: The AICPA Co,e of Professional Con, ct: A Com-rehensi&e Frame+ork for A ,itors

/. 0ules of Conduct are enforcea)le. T#$"

AACSB: Ethics AICPA BB: Critical Thinking AICPA FN: Decision Making Blooms: Remember Diffic lt!: " Eas! #earning $b%ecti&e: "'()0 1n,erstan, the frame+ork for the Co,e of Professional Con, ct. To-ic: The AICPA Co,e of Professional Con, ct: A Com-rehensi&e Frame+ork for A ,itors

1. 2thical rulin%s are enforcea)le. FA!S"

AACSB: Ethics AICPA BB: Critical Thinking AICPA FN: Decision Making Blooms: Remember Diffic lt!: " Eas! #earning $b%ecti&e: "'()0 1n,erstan, the frame+ork for the Co,e of Professional Con, ct. To-ic: The AICPA Co,e of Professional Con, ct: A Com-rehensi&e Frame+ork for A ,itors

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Chapter 19 - Professional Conduct, Independence, and Quality Control

3. Principles are stated at a conceptual le&el, not a detailed le&el. T#$"

AACSB: Ethics AICPA BB: Critical Thinking AICPA FN: Decision Making Blooms: Remember Diffic lt!: " Eas! #earning $b%ecti&e: "'()2 *no+ the -rinci-les of -rofessional con, ct. To-ic: Princi-les of Professional Con, ct

9. The rules contained in 4ection 155 co&er issues relatin% to independence, inte%rity, and auditin% standards. FA!S"

AACSB: Ethics AICPA BB: Critical Thinking AICPA FN: Decision Making Blooms: Remember Diffic lt!: " Eas! #earning $b%ecti&e: "'()3 1n,erstan, the frame+ork for the R les of Con, ct. To-ic: R les of Con, ct

15. If an auditor is not independent of the client, it is unli$ely that a user of financial statements will place much reliance on the CP*'s wor$. T#$"

AACSB: Ethics AICPA BB: Critical Thinking AICPA FN: Decision Making Blooms: 1n,erstan, Diffic lt!: " Eas! #earning $b%ecti&e: "'()4 5a&e a +orking kno+le,ge of the r les of con, ct that a--l! to in,e-en,ence6 integrit!6 an, ob%ecti&it!. To-ic: In,e-en,ence7 Integrit!7 an, $b%ecti&it!

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Chapter 19 - Professional Conduct, Independence, and Quality Control

11. *s per the Conceptual ramewor$ for *ICP* Independence 4tandards made effecti&e in !55/, a CP* is re"uired to identify and assess the e6tent to which a threat to independence e6ists. T#$"

AACSB: Ethics AICPA BB: #egal AICPA FN: Decision Making Blooms: Remember Diffic lt!: " Eas! #earning $b%ecti&e: "'()4 5a&e a +orking kno+le,ge of the r les of con, ct that a--l! to in,e-en,ence6 integrit!6 an, ob%ecti&it!. To-ic: In,e-en,ence7 Integrit!7 an, $b%ecti&it!

1!. *n indirect financial interest is defined as a financial interest that is owned or is under the control of an indi&idual or entity. FA!S"

AACSB: Ethics AICPA BB: #egal AICPA FN: Decision Making Blooms: Remember Diffic lt!: " Eas! #earning $b%ecti&e: "'()4 5a&e a +orking kno+le,ge of the r les of con, ct that a--l! to in,e-en,ence6 integrit!6 an, ob%ecti&it!. To-ic: In,e-en,ence7 Integrit!7 an, $b%ecti&it!

1'. * financial interest is ")eneficially owned" when an indi&idual or entity is 7+T the recorded owner of the interest )ut has a ri%ht to some or all of the underlyin% )enefits of ownership. T#$"

AACSB: Ethics AICPA BB: #egal AICPA FN: Decision Making Blooms: 1n,erstan, Diffic lt!: " Eas! #earning $b%ecti&e: "'()4 5a&e a +orking kno+le,ge of the r les of con, ct that a--l! to in,e-en,ence6 integrit!6 an, ob%ecti&it!. To-ic: In,e-en,ence7 Integrit!7 an, $b%ecti&it!

19-!!

Chapter 19 - Professional Conduct, Independence, and Quality Control

1-. If a CP* owns an insurance policy issued )y an attest client, independence would )e considered impaired, e&en if the policy was purchased under the insurance company's normal terms and procedures and does not offer an in&estment option. FA!S"

AACSB: Ethics AICPA BB: #egal AICPA FN: Decision Making Blooms: A--l! Diffic lt!: 8 Me,i m #earning $b%ecti&e: "'()4 5a&e a +orking kno+le,ge of the r les of con, ct that a--l! to in,e-en,ence6 integrit!6 an, ob%ecti&it!. To-ic: In,e-en,ence7 Integrit!7 an, $b%ecti&it!

1.. The independence standards issued )y the PC*+, do not prohi)it the pro&ision of ta6 ser&ices to an attest client. T#$"

AACSB: Ethics AICPA BB: #egal AICPA FN: Decision Making Blooms: Remember Diffic lt!: " Eas! #earning $b%ecti&e: "'()' *no+ the basic ,ifferences bet+een the SEC9s in,e-en,ence r les for - blic com-an! a ,itors an, AICPA stan,ar,s for a ,its of non- blic entities. To-ic: SEC an, PCA$B In,e-en,ence Re: irements for A ,its of P blic Com-anies

1/. PC*+, rules re"uire ta6 ser&ices pro&ided )y a pu)lic company auditor to )e considered and appro&ed )y the company's audit committee. T#$"

AACSB: Ethics AICPA BB: #egal AICPA FN: Decision Making Blooms: A--l! Diffic lt!: ; 5ar, #earning $b%ecti&e: "'()' *no+ the basic ,ifferences bet+een the SEC9s in,e-en,ence r les for - blic com-an! a ,itors an, AICPA stan,ar,s for a ,its of non- blic entities. To-ic: SEC an, PCA$B In,e-en,ence Re: irements for A ,its of P blic Com-anies

19-!'

Chapter 19 - Professional Conduct, Independence, and Quality Control

Multiple Choice Questions

11. (ith respect to ethics, the ri%hts-)ased approach *. 4u%%ests that auditors should always &erify ownership of a client's material tan%i)le assets. ,. Is primarily concerned with e"uity and impartiality. C% 4u%%ests that an indi&idual's actions should not &iolate the ri%hts of any indi&idual. 8. 0eco%ni#es that decisions in&ol&e trade-offs )etween costs and )enefits.

AACSB: Ethics AICPA BB: Critical Thinking AICPA FN: Decision Making Blooms: Remember Diffic lt!: " Eas! #earning $b%ecti&e: "'()8 Be able to e<-lain three basic theories of ethical beha&ior. To-ic: Theories of Ethical Beha&ior

13. (ith respect to ethics, the utilitarian theory *. 4u%%ests that auditors should always &erify ownership of a client's material tan%i)le assets. ,. Is primarily concerned with e"uity and impartiality. C. 4u%%ests that an indi&idual's actions should not &iolate the ri%hts of any indi&idual. &% 0eco%ni#es that decisions in&ol&e trade-offs )etween costs and )enefits.

AACSB: Ethics AICPA BB: Critical Thinking AICPA FN: Decision Making Blooms: Remember Diffic lt!: " Eas! #earning $b%ecti&e: "'()8 Be able to e<-lain three basic theories of ethical beha&ior. To-ic: Theories of Ethical Beha&ior

19. (ith respect to ethics, the 9ustice-)ased approach *. 4u%%ests that auditors should always &erify ownership of a client's material tan%i)le assets. '% Is primarily concerned with e"uity and impartiality. C. 4u%%ests that an indi&idual's actions should not &iolate the ri%hts of any indi&idual. 8. 0eco%ni#es that decisions in&ol&e trade-offs )etween costs and )enefits.

AACSB: Ethics AICPA BB: Critical Thinking AICPA FN: Decision Making Blooms: Remember Diffic lt!: " Eas! #earning $b%ecti&e: "'()8 Be able to e<-lain three basic theories of ethical beha&ior. To-ic: Theories of Ethical Beha&ior

19-!-

Chapter 19 - Professional Conduct, Independence, and Quality Control

!5. In auditin% a pri&ately held entity, an auditor must follow the professional standards esta)lished )y all of the followin% e6cept: *. The *ICP*'s *uditin% 4tandards ,oard. ,. The Professional Code of Conduct. C. The Independence 4tandards ,oard. &% The PC*+,.

AACSB: Ethics AICPA BB: #egal AICPA FN: Decision Making Blooms: Remember Diffic lt!: " Eas! #earning $b%ecti&e: "'()/ *no+ ho+ -rofessional ethics stan,ar,s for a ,itors ha&e ,e&elo-e, o&er time an, the entities in&ol&e,. To-ic: Stan,ar,s for A ,itor Professionalism

!1. (hich of the followin% is not a Principle of Professional Conduct as defined )y the Code of Professional Conduct; *. Inte%rity. ,. 8ue care. C% 0eportin%. 8. 4cope and nature of ser&ices.

AACSB: Ethics AICPA BB: #egal AICPA FN: Decision Making Blooms: Remember Diffic lt!: " Eas! #earning $b%ecti&e: "'()2 *no+ the -rinci-les of -rofessional con, ct. To-ic: Princi-les of Professional Con, ct

!!. (hat is meant )y the Code of Professional Conduct's definition of "holdin% out"; A% Informin% a client a)out one's status as a CP*. ,. (ithholdin% an audit report until the fee is paid. C. 7ot sharin% audit documentation with a successor auditor. 8. 7ot su%%estin% that mana%ement ma$e an ad9ustin% entry that is deemed immaterial.

AACSB: Ethics AICPA BB: #egal AICPA FN: Decision Making Blooms: Remember Diffic lt!: " Eas! #earning $b%ecti&e: "'()0 1n,erstan, the frame+ork for the Co,e of Professional Con, ct. #earning $b%ecti&e: "'()3 1n,erstan, the frame+ork for the R les of Con, ct. To-ic: R les of Con, ct To-ic: The AICPA Co,e of Professional Con, ct: A Com-rehensi&e Frame+ork for A ,itors

19-!.

Chapter 19 - Professional Conduct, Independence, and Quality Control

!'. or pri&ate companies, accountin% firms are prohi)ited from pro&idin% *. +utsourced internal audit ser&ices. ,. *udit ser&ices. C. 0e&iew ser&ices. &% 7one of the a)o&e.

AACSB: Ethics AICPA BB: #egal AICPA FN: Decision Making Blooms: A--l! Diffic lt!: " Eas! #earning $b%ecti&e: "'()4 5a&e a +orking kno+le,ge of the r les of con, ct that a--l! to in,e-en,ence6 integrit!6 an, ob%ecti&it!. To-ic: In,e-en,ence7 Integrit!7 an, $b%ecti&it!

!-. * &iolation of the profession's ethical standards would most li$ely ha&e occurred when a CP* *. Purchased a )oo$$eepin% firm's practice of monthly write-ups for a percenta%e of fees recei&ed o&er a three-year period. ,. <ade arran%ements with a )an$ to collect notes issued )y a client in payment of fees due. C. 7amed 4mith formed a partnership with two other CP*s and used "4mith = Co." as the firm name. &% Issued an un"ualified opinion on the !511 financial statements when fees for the !515 audit were unpaid.

AACSB: Ethics AICPA BB: #egal AICPA FN: Decision Making Blooms: A--l! Diffic lt!: " Eas! #earning $b%ecti&e: "'()4 5a&e a +orking kno+le,ge of the r les of con, ct that a--l! to in,e-en,ence6 integrit!6 an, ob%ecti&it!. #earning $b%ecti&e: "'("" *no+ the r les of con, ct that a--l! to res-onsibilities to clients. To-ic: In,e-en,ence7 Integrit!7 an, $b%ecti&it! To-ic: Res-onsibilities to Clients

19-!/

Chapter 19 - Professional Conduct, Independence, and Quality Control

!.. (hich of the followin% is re"uired for a firm to desi%nate itself as a "<em)er of the *merican Institute of Certified Pu)lic *ccountants" on its letterhead; *. *t least one of the partners must )e a mem)er. ,. The partners whose names appear in the firm name must )e mem)ers. C% *ll partners must )e mem)ers. 8. The firm must )e a dues-payin% mem)er.

AACSB: Ethics AICPA BB: #egal AICPA FN: Decision Making Blooms: Remember Diffic lt!: " Eas! #earning $b%ecti&e: "'()2 *no+ the -rinci-les of -rofessional con, ct. #earning $b%ecti&e: "'("8 *no+ the r les of con, ct that a--l! to other res-onsibilities an, -ractices. To-ic: $ther Res-onsibilities an, Practices To-ic: Princi-les of Professional Con, ct

!/. * &iolation of the profession's ethical standards would least li$ely ha&e occurred when a CP* in pu)lic practice A% >sed a records-retention a%ency to store the CP*'s wor$in% papers and client records. ,. 4er&ed as an e6pert witness in a dama%e suit and recei&ed compensation )ased on the amount awarded to the plaintiff. C. 0eferred life insurance assi%nments to the CP*'s spouse, who is a life insurance a%ent. 8. ailed to file his personal ta6 return.

AACSB: Ethics AICPA BB: #egal AICPA FN: Decision Making Blooms: 1n,erstan, Diffic lt!: " Eas! #earning $b%ecti&e: "'()2 *no+ the -rinci-les of -rofessional con, ct. #earning $b%ecti&e: "'("8 *no+ the r les of con, ct that a--l! to other res-onsibilities an, -ractices. To-ic: $ther Res-onsibilities an, Practices To-ic: Princi-les of Professional Con, ct

19-!1

Chapter 19 - Professional Conduct, Independence, and Quality Control

!1. *ccordin% to the Code of Professional Conduct, which of the followin% indi&iduals is not in a position to influence an attest en%a%ement ?i.e., not a co&ered mem)er@; *. The office's mana%in% partner who determines the compensation of the attest en%a%ement partner. ,. The office's IT e6pert, who consulted with the en%a%ement partner re%ardin% the client's IT system. C% The partner in another office in a near)y city who re%ularly plays %olf with the en%a%ement partner. 8. The office's partner who monitors "uality control o&er the attest en%a%ement.

AACSB: Ethics AICPA BB: #egal AICPA FN: Decision Making Blooms: A--l! Diffic lt!: 8 Me,i m #earning $b%ecti&e: "'()0 1n,erstan, the frame+ork for the Co,e of Professional Con, ct. To-ic: The AICPA Co,e of Professional Con, ct: A Com-rehensi&e Frame+ork for A ,itors

!3. * CP*, while performin% an audit, stri&es to achie&e independence in appearance in order to *. 0educe ris$ and lia)ility. ,. Comply with the %enerally accepted standards of fieldwor$. C. ,ecome independent in fact. &% <aintain pu)lic confidence in the profession.

AACSB: Ethics AICPA BB: Critical Thinking AICPA FN: Decision Making Blooms: 1n,erstan, Diffic lt!: " Eas! #earning $b%ecti&e: "'()4 5a&e a +orking kno+le,ge of the r les of con, ct that a--l! to in,e-en,ence6 integrit!6 an, ob%ecti&it!. To-ic: In,e-en,ence7 Integrit!7 an, $b%ecti&it!

19-!3

Chapter 19 - Professional Conduct, Independence, and Quality Control

!9. In which of the followin% instances would the independence of the CP* not )e considered to )e impaired; The CP* has )een retained as the auditor of a )ro$era%e firm *. (hich owes the CP* audit fees for more than one year. ,. In which the CP* has a lar%e acti&e mar%in account. C. In which the CP*'s )rother is the controller. &% (hich owes the CP* audit fees for current year ser&ices and has 9ust filed a petition for )an$ruptcy.

AACSB: Ethics AICPA BB: #egal AICPA FN: Decision Making Blooms: A--l! Diffic lt!: " Eas! #earning $b%ecti&e: "'()4 5a&e a +orking kno+le,ge of the r les of con, ct that a--l! to in,e-en,ence6 integrit!6 an, ob%ecti&it!. To-ic: In,e-en,ence7 Integrit!7 an, $b%ecti&it!

'5. The 42C has issued independence rules that differ from the *ICP*'s in all of the followin% areas e6cept: A% (or$in% paper documentation. ,. Pro&ision of other professional ser&ices. C. Auman resource and compensation-related issues. 8. 0e"uired communication.

AACSB: Ethics AICPA BB: #egal AICPA FN: Decision Making Blooms: Remember Diffic lt!: " Eas! #earning $b%ecti&e: "'()' *no+ the basic ,ifferences bet+een the SEC9s in,e-en,ence r les for - blic com-an! a ,itors an, AICPA stan,ar,s for a ,its of non- blic entities. To-ic: SEC an, PCA$B In,e-en,ence Re: irements for A ,its of P blic Com-anies

19-!9

Chapter 19 - Professional Conduct, Independence, and Quality Control

'1. (hich of the followin% is not an element of "uality control as defined )y 4tatement of Quality Control 4tandards 7o. 3; *. <onitorin%. '% Independence. C. Auman resources. 8. 0ele&ant ethical re"uirements.

AACSB: Ethics AICPA BB: #egal AICPA FN: Decision Making Blooms: Remember Diffic lt!: " Eas! #earning $b%ecti&e: "'("/ Be able to ,escribe the elements of : alit! control an, ho+ a firm monitors its : alit! control s!stem. To-ic: Elements of = alit! Control

'!. * )asic o)9ecti&e of a CP* firm is to pro&ide professional ser&ices that conform to professional standards. 0easona)le assurance of achie&in% this )asic o)9ecti&e is pro&ided throu%h *. Compliance with %enerally accepted reportin% standards. '% * system of "uality control. C. * system of peer re&iew. 8. Continuin% professional education.

AACSB: Ethics AICPA BB: #egal AICPA FN: Decision Making Blooms: Remember Diffic lt!: " Eas! #earning $b%ecti&e: "'("; Be able to e<-lain the ,efinition of a s!stem of : alit! control an, the AICPA9s -eer re&ie+ -rogram. To-ic: = alit! Control Stan,ar,s

19-'5

Chapter 19 - Professional Conduct, Independence, and Quality Control

''. The "uality control standards are concerned primarily with *. *ctions of indi&idual auditors. '% * firm's monitorin% of its practice. C. 8isciplinary actions a%ainst indi&idual auditors. 8. Pre&entin% le%al action.

AACSB: Ethics AICPA BB: #egal AICPA FN: Decision Making Blooms: Remember Diffic lt!: " Eas! #earning $b%ecti&e: "'("; Be able to e<-lain the ,efinition of a s!stem of : alit! control an, the AICPA9s -eer re&ie+ -rogram. #earning $b%ecti&e: "'("/ Be able to ,escribe the elements of : alit! control an, ho+ a firm monitors its : alit! control s!stem. To-ic: Elements of = alit! Control To-ic: = alit! Control Stan,ar,s

'-. (hich of the followin% )odies ordinarily would ha&e the authority to suspend or re&o$e a CP*'s license to practice pu)lic accountin%; *. The 42C. ,. The *ICP*. C. * state CP* society. &% * state )oard of accountancy.

AACSB: Ethics AICPA BB: #egal AICPA FN: Decision Making Blooms: Remember Diffic lt!: ; 5ar, #earning $b%ecti&e: "'("8 *no+ the r les of con, ct that a--l! to other res-onsibilities an, -ractices. To-ic: $ther Res-onsibilities an, Practices

19-'1

Chapter 19 - Professional Conduct, Independence, and Quality Control

'.. (hich of the followin% statements )est descri)es why the profession of certified pu)lic accountants has deemed it essential to promul%ate a code of conduct and to esta)lish a mechanism for enforcin% o)ser&ance of the code; A% 2thical standards are esta)lished so that users of accountin% ser&ices $now what to e6pect, the professionals $now what )eha&iors are accepta)le, and o&erseers can ta$e disciplinary action when appropriate. ,. * prere"uisite to success is the esta)lishment of an ethical code that stresses primarily the professional's responsi)ility to clients and collea%ues. C. * re"uirement of most state laws calls for the profession to esta)lish a code of conduct. 8. *n essential means of self-protection for the profession is the esta)lishment of fle6i)le ethical standards )y the profession.

AACSB: Ethics AICPA BB: Critical Thinking AICPA FN: Decision Making Blooms: 1n,erstan, Diffic lt!: 8 Me,i m #earning $b%ecti&e: "'()" *no+ the ,efinitions an, general im-ortance of ethics an, -rofessionalism. To-ic: Ethics an, Professional Con, ct

'/. * CP*'s license to practice will ordinarily )e suspended or re&o$ed automatically for *. Controllin% the )oo$$eepin% for a compilation client. '% Con&iction of willful failure to file personal income ta6 return. C. 0efusin% to respond to an in"uiry )y the *ICP* practice re&iew committee. 8. *cceptin% compensation while honorin% a su)poena to appear as an e6pert witness.

AACSB: Ethics AICPA BB: #egal AICPA FN: Decision Making Blooms: A--l! Diffic lt!: 8 Me,i m #earning $b%ecti&e: "'()2 *no+ the -rinci-les of -rofessional con, ct. #earning $b%ecti&e: "'()3 1n,erstan, the frame+ork for the R les of Con, ct. #earning $b%ecti&e: "'("8 *no+ the r les of con, ct that a--l! to other res-onsibilities an, -ractices. To-ic: $ther Res-onsibilities an, Practices To-ic: Princi-les of Professional Con, ct To-ic: R les of Con, ct

19-'!

Chapter 19 - Professional Conduct, Independence, and Quality Control

'1. * CP*'s retention of client records as a means of enforcin% payment of an o&erdue audit fee is an action that is *. Considered accepta)le )y the *ICP* Code of Professional Conduct. ,. Ill-ad&ised )ecause it would impair the CP*'s independence with respect to the client. C% Considered discredita)le to the profession. 8. * &iolation of %enerally accepted auditin% standards.

AACSB: Ethics AICPA BB: #egal AICPA FN: Decision Making Blooms: A--l! Diffic lt!: 8 Me,i m #earning $b%ecti&e: "'("8 *no+ the r les of con, ct that a--l! to other res-onsibilities an, -ractices. To-ic: $ther Res-onsibilities an, Practices

'3. (hich of the followin% is allowa)le for a CP*; A% * used car loan from a )an$in% client where the client has a lien on the car. ,. *n uncollaterali#ed si%nature loan from a client. C. +wnin% more than fi&e percent of the outstandin% shares of client stoc$ in a retirement account. 8. The audit en%a%ement partner ser&es on the client's audit committee.

AACSB: Ethics AICPA BB: #egal AICPA FN: Decision Making Blooms: A--l! Diffic lt!: 8 Me,i m #earning $b%ecti&e: "'()2 *no+ the -rinci-les of -rofessional con, ct. #earning $b%ecti&e: "'()4 5a&e a +orking kno+le,ge of the r les of con, ct that a--l! to in,e-en,ence6 integrit!6 an, ob%ecti&it!. To-ic: In,e-en,ence7 Integrit!7 an, $b%ecti&it! To-ic: Princi-les of Professional Con, ct

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Chapter 19 - Professional Conduct, Independence, and Quality Control

'9. In performin% an audit, Bac$son, CP*, disco&ers that the professional competence necessary for the en%a%ement is lac$in%. Bac$son informs mana%ement of the situation and recommends another local CP* firm and mana%ement en%a%es this other firm. >nder these circumstances A% Bac$son may re"uest compensation from the other CP* firm for any professional ser&ices rendered to it in connection with the en%a%ement. ,. Bac$son may accept a referral fee from the other CP* firm. C. Bac$son has &iolated the *ICP* Code of Professional Conduct )ecause of non-fulfillment of the duty of performance. 8. Bac$son's lac$ of competence should )e construed to )e a &iolation of %enerally accepted auditin% standards.

AACSB: Ethics AICPA BB: #egal AICPA FN: Decision Making Blooms: Anal!>e Diffic lt!: 8 Me,i m #earning $b%ecti&e: "'()2 *no+ the -rinci-les of -rofessional con, ct. #earning $b%ecti&e: "'(") *no+ the r les of con, ct that a--l! to general stan,ar,s an, acco nting -rinci-les. To-ic: ?eneral Stan,ar,s an, Acco nting Princi-les To-ic: Princi-les of Professional Con, ct

-5. In which one of the followin% situations would a CP* )e in &iolation of the *ICP* Code of Professional Conduct in determinin% a fee; A% * fee )ased on whether the CP*'s report on the client's financial statements results in the appro&al of a )an$ loan. ,. * fee )ased on an estimate of the num)er of hours needed to complete the en%a%ement )y auditors of &arious le&els of e6perience. C. * fee )ased on the nature of the ser&ice rendered and the CP*'s particular e6pertise instead of the actual time spent on the en%a%ement. 8. * fee )ased on the fee char%ed )y the prior auditor.

AACSB: Ethics AICPA BB: #egal AICPA FN: Decision Making Blooms: Anal!>e Diffic lt!: 8 Me,i m #earning $b%ecti&e: "'("" *no+ the r les of con, ct that a--l! to res-onsibilities to clients. To-ic: Res-onsibilities to Clients

19-'-

Chapter 19 - Professional Conduct, Independence, and Quality Control

-1. In connection with a lawsuit, a third party attempts to %ain access to the auditor's wor$in% papers. The client's defense of pri&ile%ed communication will )e successful only to the e6tent it is protected )y the *. *uditor's ac"uiescence in use of this defense. ,. Common law. C. *ICP* Code of Professional Conduct. &% 4tate law.

AACSB: Ethics AICPA BB: #egal AICPA FN: Decision Making Blooms: A--l! Diffic lt!: ; 5ar, #earning $b%ecti&e: "'()2 *no+ the -rinci-les of -rofessional con, ct. #earning $b%ecti&e: "'("" *no+ the r les of con, ct that a--l! to res-onsibilities to clients. To-ic: Princi-les of Professional Con, ct To-ic: Res-onsibilities to Clients

-!. The profession's ethical standards would most li$ely )e considered to ha&e )een &iolated when the CP* represents that specific consultin% ser&ices will )e performed for a stated fee and it is apparent at the time of the representation that the *. CP* would not )e independent. ,. ee was a competiti&e )id. C% *ctual fee would )e su)stantially hi%her. 8. *ctual fee would )e su)stantially lower than the fees char%ed )y other CP*s for compara)le ser&ices.

AACSB: Ethics AICPA BB: #egal AICPA FN: Decision Making Blooms: Remember Diffic lt!: 8 Me,i m #earning $b%ecti&e: "'()2 *no+ the -rinci-les of -rofessional con, ct. #earning $b%ecti&e: "'("" *no+ the r les of con, ct that a--l! to res-onsibilities to clients. To-ic: Princi-les of Professional Con, ct To-ic: Res-onsibilities to Clients

19-'.

Chapter 19 - Professional Conduct, Independence, and Quality Control

-'. *ccordin% to the ethical standards of the profession, which of the followin% acts is %enerally prohi)ited; *. Issuin% a modified report e6plainin% a failure to follow a %o&ernmental re%ulatory a%ency's standards when conductin% an attest ser&ice for a client. ,. 0e&ealin% confidential client information durin% a "uality re&iew of a professional practice )y a team from the state CP* society. C. *cceptin% a contin%ent fee for representin% a client in an e6amination of the client's federal ta6 return )y an I04 a%ent. &% 0etainin% client records after an en%a%ement is terminated prior to completion and the client has demanded its return.

AACSB: Ethics AICPA BB: #egal AICPA FN: Decision Making Blooms: A--l! Diffic lt!: 8 Me,i m #earning $b%ecti&e: "'()2 *no+ the -rinci-les of -rofessional con, ct. #earning $b%ecti&e: "'("" *no+ the r les of con, ct that a--l! to res-onsibilities to clients. #earning $b%ecti&e: "'("8 *no+ the r les of con, ct that a--l! to other res-onsibilities an, -ractices. To-ic: $ther Res-onsibilities an, Practices To-ic: Princi-les of Professional Con, ct To-ic: Res-onsibilities to Clients

--. *ccordin% to the ethical standards of the profession, which of the followin% acts is %enerally prohi)ited; *. Purchasin% a product from a third party and resellin% it to a client. ,. (ritin% a financial mana%ement newsletter promoted and sold )y a pu)lishin% company. C% *cceptin% a commission for recommendin% a product to an audit client. 8. *cceptin% en%a%ements o)tained throu%h the efforts of third parties.

AACSB: Ethics AICPA BB: #egal AICPA FN: Decision Making Blooms: A--l! Diffic lt!: 8 Me,i m #earning $b%ecti&e: "'()2 *no+ the -rinci-les of -rofessional con, ct. #earning $b%ecti&e: "'("8 *no+ the r les of con, ct that a--l! to other res-onsibilities an, -ractices. To-ic: $ther Res-onsibilities an, Practices To-ic: Princi-les of Professional Con, ct

19-'/

Chapter 19 - Professional Conduct, Independence, and Quality Control

-.. In which of the followin% circumstances would a CP* who audits C< Corporation lac$ independence; *. The CP* and C<'s president are )oth on the )oard of directors of C+8 Corporation. '% The CP* and C<'s president each owns !. percent of +, Corporation, a closely-held company. C. The CP* has an automo)ile loan from C<, which is a sa&in%s and loan or%ani#ation and the loan is collaterali#ed )y the automo)ile. 8. The CP* reduced C<'s usual audit fee )y -5 percent )ecause C<'s financial condition was unfa&ora)le.

AACSB: Ethics AICPA BB: #egal AICPA FN: Decision Making Blooms: Anal!>e Diffic lt!: 8 Me,i m #earning $b%ecti&e: "'()4 5a&e a +orking kno+le,ge of the r les of con, ct that a--l! to in,e-en,ence6 integrit!6 an, ob%ecti&it!. To-ic: In,e-en,ence7 Integrit!7 an, $b%ecti&it!

-/. <a&is, CP*, has audited the financial statements of 4outh ,ay 4ales Incorporated for se&eral years and had always )een paid promptly for ser&ices rendered. Dast year's audit in&oices ha&e not )een paid )ecause 4outh ,ay is e6periencin% cash flow difficulties and the current year's audit is scheduled to commence in one wee$. (ith respect to the past due audit fees, <a&is should *. Perform the scheduled audit and allow 4outh ,ay to pay when the cash flow difficulties are alle&iated. ,. Perform the scheduled audit only after arran%in% a definite payment schedule and securin% notes si%ned )y 4outh ,ay. C% Inform 4outh ,ay's mana%ement that the past due audit fees are considered an impairment of auditor independence. 8. Inform 4outh ,ay's mana%ement that the past due audit fees may )e considered a loan on which interest must )e imputed for financial statement purposes.

AACSB: Ethics AICPA BB: #egal AICPA FN: Decision Making Blooms: A--l! Diffic lt!: 8 Me,i m #earning $b%ecti&e: "'()4 5a&e a +orking kno+le,ge of the r les of con, ct that a--l! to in,e-en,ence6 integrit!6 an, ob%ecti&it!. To-ic: In,e-en,ence7 Integrit!7 an, $b%ecti&it!

19-'1

Chapter 19 - Professional Conduct, Independence, and Quality Control

-1. In which of the followin% instances would the independence of the CP* not )e considered to )e impaired; The CP* has )een retained as the auditor of a *. Charita)le or%ani#ation in which an employee of the CP* ser&es as treasurer. ,. <unicipality in which the CP* owns E!.,555 of the E!,.55,555 inde)tedness of the municipality. C% 0estaurant where the CP* dines fre"uently. 8. Company in which the CP*'s pri&ate in&estment clu) owns a one-tenth interest.

AACSB: Ethics AICPA BB: #egal AICPA FN: Decision Making Blooms: A--l! Diffic lt!: 8 Me,i m #earning $b%ecti&e: "'()4 5a&e a +orking kno+le,ge of the r les of con, ct that a--l! to in,e-en,ence6 integrit!6 an, ob%ecti&it!. To-ic: In,e-en,ence7 Integrit!7 an, $b%ecti&it!

-3. * CP* firm's personnel partner periodically studies the CP* firm's personnel ad&ancement e6perience to ascertain whether the indi&iduals who were assi%ned increased de%rees of responsi)ility met predetermined criteria. This is e&idence of the CP* firm's adherence to prescri)ed standards of A% Quality control. ,. 8ue professional care. C. 4uper&ision and re&iew. 8. ieldwor$.

AACSB: Ethics AICPA BB: #egal AICPA FN: Decision Making Blooms: A--l! Diffic lt!: 8 Me,i m #earning $b%ecti&e: "'("/ Be able to ,escribe the elements of : alit! control an, ho+ a firm monitors its : alit! control s!stem. To-ic: Elements of = alit! Control

19-'3

Chapter 19 - Professional Conduct, Independence, and Quality Control

-9. * CP* firm would )e reasona)ly assured of meetin% its o&erall responsi)ility to pro&ide ser&ices that conform with professional standards )y *. *dherin% to %enerally accepted accountin% principles. '% Implementin% an appropriate system of "uality control. C. Boinin% professional societies that enforce ethical conduct. 8. <aintainin% an attitude of independence in its en%a%ements.

AACSB: Ethics AICPA BB: #egal AICPA FN: Decision Making Blooms: A--l! Diffic lt!: 8 Me,i m #earning $b%ecti&e: "'("/ Be able to ,escribe the elements of : alit! control an, ho+ a firm monitors its : alit! control s!stem. To-ic: Elements of = alit! Control

.5. (hich of the followin% is an element of a CP* firm's "uality control system that should )e considered in esta)lishin% its "uality control policies and procedures; *. >sin% the audit ris$ model. ,. >sin% statistical samplin% techni"ues. C% *ssi%nin% personnel to en%a%ements. 8. Considerin% audit ris$ and materiality.

AACSB: Ethics AICPA BB: Critical Thinking AICPA FN: Decision Making Blooms: A--l! Diffic lt!: 8 Me,i m #earning $b%ecti&e: "'("/ Be able to ,escribe the elements of : alit! control an, ho+ a firm monitors its : alit! control s!stem. To-ic: Elements of = alit! Control

19-'9

Chapter 19 - Professional Conduct, Independence, and Quality Control

.1. (hat is the primary purpose of the acceptance and continuance of client relationships and specific en%a%ements element of "uality control; *. Fuarantee that firms do not associate with clients whose mana%ement lac$s inte%rity. '% Pro&ide reasona)le assurance that firms do not associate with clients whose mana%ement lac$s inte%rity. C. Fuarantee that firms will not )e sued as a result of association with a client. 8. Pro&ide reasona)le assurance that firms will not )e sued as a result of association with a client.

AACSB: Ethics AICPA BB: In, str! AICPA FN: Risk Anal!sis Blooms: A--l! Diffic lt!: 8 Me,i m #earning $b%ecti&e: "'("/ Be able to ,escribe the elements of : alit! control an, ho+ a firm monitors its : alit! control s!stem. To-ic: Elements of = alit! Control

.!. In order to achie&e effecti&e "uality control, a firm of independent auditors should esta)lish policies and procedures for *. 8eterminin% the minimum procedures necessary for unaudited financial statements. ,. 4ettin% the scope of audit wor$. C% 8ecidin% whether to accept or continue a client. 8. 4ettin% the scope of internal control study and e&aluation.

AACSB: Ethics AICPA BB: In, str! AICPA FN: Risk Anal!sis Blooms: A--l! Diffic lt!: 8 Me,i m #earning $b%ecti&e: "'("/ Be able to ,escribe the elements of : alit! control an, ho+ a firm monitors its : alit! control s!stem. To-ic: Elements of = alit! Control

19--5

Chapter 19 - Professional Conduct, Independence, and Quality Control

.'. (ithin the conte6t of "uality control, the primary purpose of continuin% professional education and trainin% acti&ities is to ena)le a CP* firm to pro&ide personnel within the firm with *. Technical trainin% that ensures proficiency as an auditor. ,. +pportunities for career ad&ancement outside the accountin% firm. C% Gnowled%e re"uired to fulfill assi%ned responsi)ilities. 8. Gnowled%e re"uired to perform a peer re&iew.

AACSB: Ethics AICPA BB: In, str! AICPA FN: Decision Making Blooms: Anal!>e Diffic lt!: 8 Me,i m #earning $b%ecti&e: "'("/ Be able to ,escribe the elements of : alit! control an, ho+ a firm monitors its : alit! control s!stem. To-ic: Elements of = alit! Control

.-. * CP* firm e&aluates its personnel ad&ancement e6perience to ascertain whether indi&iduals assi%ned to increased de%rees of responsi)ility meet predetermined criteria. This policy is e&idence of the firm's adherence to which of the followin% prescri)ed standards; *. Professional ethics. ,. 4uper&ision and re&iew. C. *ccountin% and re&iew ser&ices. &% Quality control.

AACSB: Ethics AICPA BB: #egal AICPA FN: Decision Making Blooms: 1n,erstan, Diffic lt!: 8 Me,i m #earning $b%ecti&e: "'("/ Be able to ,escribe the elements of : alit! control an, ho+ a firm monitors its : alit! control s!stem. To-ic: Elements of = alit! Control

19--1

Chapter 19 - Professional Conduct, Independence, and Quality Control

... The primary purpose of esta)lishin% "uality control policies and procedures for decidin% whether to accept a new client is to *. 2na)le the CP* firm to attest to the relia)ility of the client. ,. 4atisfy the CP* firm's duty to the pu)lic concernin% the acceptance of new clients. C% <inimi#e the li$elihood of association with clients whose mana%ement lac$s inte%rity. 8. *nticipate )efore performin% any fieldwor$ whether an un"ualified opinion can )e e6pressed.

AACSB: Ethics AICPA BB: In, str! AICPA FN: Risk Anal!sis Blooms: A--l! Diffic lt!: 8 Me,i m #earning $b%ecti&e: "'("/ Be able to ,escribe the elements of : alit! control an, ho+ a firm monitors its : alit! control s!stem. To-ic: Elements of = alit! Control

./. ollowin% the issuance of a PC*+, draft report, how many days does the CP* firm ha&e to respond to accusations; *. 15 days. '% '5 days. C. .5 days. 8. 95 days.

AACSB: Ethics AICPA BB: #egal AICPA FN: Decision Making Blooms: Remember Diffic lt!: 8 Me,i m #earning $b%ecti&e: "'("0 Be familiar +ith the PCA$B ins-ection -rogram for acco nting firms that a ,it - blic com-anies. To-ic: PCA$B Ins-ections of Registere, P blic Acco nting Firms

19--!

Chapter 19 - Professional Conduct, Independence, and Quality Control

.1. * &iolation of the profession's ethical standards would most li$ely occur when a CP* who *. Is also admitted to the ,ar represents on letterhead to )e )oth an attorney and a CP*. ,. (rites a newsletter on financial mana%ement also permits a pu)lishin% company to solicit su)scriptions )y direct mail. C. Is controller of a )an$ permits the )an$ to use the controller's CP* title in the listin% of officers in its pu)lications. &% 0efused to hire a new employee does so )ecause the CP* deemed the candidate to )e "too old."

AACSB: Ethics AICPA BB: #egal AICPA FN: Decision Making Blooms: A--l! Diffic lt!: " Eas! #earning $b%ecti&e: "'()2 *no+ the -rinci-les of -rofessional con, ct. #earning $b%ecti&e: "'("8 *no+ the r les of con, ct that a--l! to other res-onsibilities an, -ractices. To-ic: $ther Res-onsibilities an, Practices To-ic: Princi-les of Professional Con, ct

.3. In determinin% estimates of fees, an auditor may ta$e into account each of the followin%, e6cept the: *. Halue of the ser&ice to the client. ,. 8e%ree of responsi)ility assumed )y underta$in% the en%a%ement. C. 4$ills re"uired to perform the ser&ice. &% *ttainment of specific findin%s.

AACSB: Ethics AICPA BB: #egal AICPA FN: Decision Making Blooms: A--l! Diffic lt!: 8 Me,i m #earning $b%ecti&e: "'("" *no+ the r les of con, ct that a--l! to res-onsibilities to clients. To-ic: Res-onsibilities to Clients

19--'

Chapter 19 - Professional Conduct, Independence, and Quality Control

.9. *n auditor is a)out to commence a recurrin% annual audit en%a%ement. The continuin% auditor's independence would ordinarily )e considered to )e impaired if the prior year's audit fee *. (as unusually lar%e. '% Aas not )een paid and will not )e paid for at least twel&e months. C. Aas not )een paid and the client has filed a &oluntary petition for )an$ruptcy. 8. (as rene%otiated durin% the prior year audit )ased on the need for e6panded testin%.

AACSB: Ethics AICPA BB: #egal AICPA FN: Decision Making Blooms: A--l! Diffic lt!: 8 Me,i m #earning $b%ecti&e: "'()2 *no+ the -rinci-les of -rofessional con, ct. #earning $b%ecti&e: "'()4 5a&e a +orking kno+le,ge of the r les of con, ct that a--l! to in,e-en,ence6 integrit!6 an, ob%ecti&it!. To-ic: In,e-en,ence7 Integrit!7 an, $b%ecti&it! To-ic: Princi-les of Professional Con, ct

/5. In which of the followin% circumstances would a CP* )e )ound )y ethics to refrain from disclosin% any confidential information o)tained durin% the course of a professional en%a%ement; *. The CP* is issued a summons enforcea)le )y a court order that orders the CP* to present confidential information. '% * ma9or stoc$holder of a client company see$s accountin% information from the CP* after mana%ement declined to disclose the re"uested information. C. Confidential client information is re"uested as part of a "uality re&iew of the CP*'s practice )y a re&iew team authori#ed )y the *ICP*. 8. *n in"uiry )y a disciplinary )ody of a state CP* society re"uests confidential client information.

AACSB: Ethics AICPA BB: #egal AICPA FN: Decision Making Blooms: A--l! Diffic lt!: 8 Me,i m #earning $b%ecti&e: "'()2 *no+ the -rinci-les of -rofessional con, ct. #earning $b%ecti&e: "'("" *no+ the r les of con, ct that a--l! to res-onsibilities to clients. To-ic: Princi-les of Professional Con, ct To-ic: Res-onsibilities to Clients

19---

Chapter 19 - Professional Conduct, Independence, and Quality Control

/1. >nder which of the followin% circumstances would the independence of a CP* )e considered impaired if the CP*, who also is an attorney, ser&es as auditor and pro&ides le%al ser&ices to the same client; A% (hen the CP*, as le%al a%ent, consummates a )usiness ac"uisition for the client. ,. (hen the CP*'s audit fees and le%al fees are not )illed separately. C. (hen the CP* uses le%al e6pertise to research a "uestion of income ta6 law. 8. (hen the le%al ser&ices consist of an analysis of the terms of an e6istin% lease a%reement.

AACSB: Ethics AICPA BB: #egal AICPA FN: Decision Making Blooms: A--l! Diffic lt!: ; 5ar, #earning $b%ecti&e: "'()4 5a&e a +orking kno+le,ge of the r les of con, ct that a--l! to in,e-en,ence6 integrit!6 an, ob%ecti&it!. To-ic: In,e-en,ence7 Integrit!7 an, $b%ecti&it!

/!. *ccordin% to the profession's ethical standards, a CP* would )e considered independent in which of the followin% instances; *. * client leases part of an office )uildin% from the CP*, resultin% in a material indirect financial interest to the CP*. ,. The CP* has a material direct financial interest in a client, )ut transfers the interest into a )lind trust. C. The CP* owns an office )uildin% and the mort%a%e on the )uildin% is %uaranteed )y a client. &% The CP* )elon%s to a country clu) client in which mem)ership re"uires an annual fee.

AACSB: Ethics AICPA BB: #egal AICPA FN: Decision Making Blooms: A--l! Diffic lt!: ; 5ar, #earning $b%ecti&e: "'()4 5a&e a +orking kno+le,ge of the r les of con, ct that a--l! to in,e-en,ence6 integrit!6 an, ob%ecti&it!. To-ic: In,e-en,ence7 Integrit!7 an, $b%ecti&it!

19--.

Chapter 19 - Professional Conduct, Independence, and Quality Control

/'. (hen auditin% a pu)lic company, which of the followin% impairs an auditor's independence; *. +fferin% audit ser&ices as well as preparin% the ta6 return for the same client. ,. The auditor's spouse wor$s in the assem)ly line of an audit client. C. Dac$ of fee disclosure in the client's annual report. &% The auditor has )een a partner on the en%a%ement for ten years.

AACSB: Ethics AICPA BB: #egal AICPA FN: Decision Making Blooms: Anal!>e Diffic lt!: 8 Me,i m #earning $b%ecti&e: "'()' *no+ the basic ,ifferences bet+een the SEC9s in,e-en,ence r les for - blic com-an! a ,itors an, AICPA stan,ar,s for a ,its of non- blic entities. To-ic: SEC an, PCA$B In,e-en,ence Re: irements for A ,its of P blic Com-anies

Short Answer Questions

/-. (hy do professions esta)lish codes of conduct that define ethical )eha&iors for mem)ers of the profession; These rules are esta)lished so that users of the professional ser&ices $now what to e6pect when they purchase such ser&ices. The rules also let mem)ers of the profession $now what )eha&ior is accepta)le and allow the profession to monitor the actions of its mem)ers and apply discipline where appropriate.

AACSB: Ethics AICPA BB: Critical Thinking AICPA FN: Decision Making Blooms: Remember Diffic lt!: " Eas! #earning $b%ecti&e: "'()" *no+ the ,efinitions an, general im-ortance of ethics an, -rofessionalism. To-ic: Ethics an, Professional Con, ct

19--/

Chapter 19 - Professional Conduct, Independence, and Quality Control

/.. 8istin%uish )etween the followin% theories of ethical )eha&ior: utilitarianism, a ri%hts)ased approach, and a 9ustice-)ased approach. 1tilitarianism focuses on the conse"uences of a decision on all indi&iduals in&ol&ed, and not 9ust the decision ma$er. The ethical choice is the choice that pro&ides the %reatest %ood to the %reatest num)er of people. * rights(base, a--roach focuses on respectin% the ri%hts of indi&iduals. The ethical choice is the choice that a&oids &iolatin% the ri%hts of any in&ol&ed indi&idual. The % stice(base, a--roach is concerned with e"uity, fairness, and impartiality to all in&ol&ed. The ethical choice is the choice that fairly and e"uita)ly distri)utes resources amon% the indi&iduals or %roups affected.

AACSB: Ethics AICPA BB: Critical Thinking AICPA FN: Decision Making Blooms: 1n,erstan, Diffic lt!: 8 Me,i m #earning $b%ecti&e: "'()8 Be able to e<-lain three basic theories of ethical beha&ior. To-ic: Theories of Ethical Beha&ior

//. (hich professional and re%ulatory )odies esta)lish the ethical and professional rules for auditors of: ?1@ pu)lic companies and ?!@ pri&ate companies; ?1@ The principles, rules and re%ulations that %o&ern ethics and professionalism for auditors of pu)lic companies are esta)lished )y the PC*+, ?which were adopted from the *ICP*@, the 42C, and the I4,. ?!@ The rules for pri&ate companies are esta)lished )y the *ICP* and the I4,. 7ote that the rules %o&ernin% pu)lic company audits are more strin%ent in nature.

AACSB: Ethics AICPA BB: #egal AICPA FN: Decision Making Blooms: Remember Diffic lt!: 8 Me,i m #earning $b%ecti&e: "'()/ *no+ ho+ -rofessional ethics stan,ar,s for a ,itors ha&e ,e&elo-e, o&er time an, the entities in&ol&e,. To-ic: Stan,ar,s for A ,itor Professionalism

19--1

Chapter 19 - Professional Conduct, Independence, and Quality Control

/1. Disted )elow are definitions of the si6 Principles of Professional Conduct. or each, identify the principle )ein% defined. a. * mem)er should o)ser&e the profession's technical and ethical standards, stri&e continually to impro&e competence and the "uality of ser&ices, and dischar%e professional responsi)ility to the )est of the mem)er's a)ility. ). <em)ers should e6ercise sensiti&e professional and moral 9ud%ments in all their acti&ities. c. * mem)er should )e free of conflicts of interest in dischar%in% professional responsi)ilities. d. * mem)er in pu)lic practice should o)ser&e the Principles of the Code of Professional Conduct in determinin% the type and e6tent of ser&ices to )e pro&ided. e. <em)ers should accept the o)li%ation to act in a way that will honor the pu)lic trust and demonstrate commitment to professionalism. f. To maintain and )roaden pu)lic confidence, mem)ers should perform all professional responsi)ilities with the hi%hest sense of IIIIIIIIIIIIII. a. 8ue care. ). 0esponsi)ilities. c. +)9ecti&ity and Independence. d. 4cope and nature of ser&ices. e. Pu)lic interest. f. Inte%rity.

AACSB: Ethics AICPA BB: #egal AICPA FN: Decision Making Blooms: 1n,erstan, Diffic lt!: " Eas! #earning $b%ecti&e: "'()2 *no+ the -rinci-les of -rofessional con, ct. To-ic: Princi-les of Professional Con, ct

19--3

Chapter 19 - Professional Conduct, Independence, and Quality Control

/3. <s. Dem)$e is a partner for 8T4, a CP* firm. 4he is the lead partner for the firm's lar%est client, The Frey 2lephant. <s. Jadina, who wor$s in the same office as <s. Dem)$e, has a sister who is the controller for The Frey 2lephant. ,ecause of potential independence issues, <s. Jadina does no wor$ for The Frey 2lephant. <s. Jadina is )ein% considered for promotion to partner. (hat independence issues should <s. Dem)$e consider )efore promotin% <s. Jadina; Interpretation 151-1 of the *ICP* 0ules of Conduct states that all partners of a firm must )e independent of any attestation clients of the firm. Therefore, if <s. Jadina is promoted to partner, 8T4 would no lon%er )e a)le to pro&ide attestation ser&ices for The Frey 2lephant. If <s. Jadina is promoted, she will ha&e to mo&e to another office or 8T4 will ha&e to %i&e up its lar%est client.

AACSB: Ethics AICPA BB: #egal AICPA FN: Decision Making Blooms: Anal!>e Diffic lt!: " Eas! #earning $b%ecti&e: "'()3 1n,erstan, the frame+ork for the R les of Con, ct. #earning $b%ecti&e: "'()4 5a&e a +orking kno+le,ge of the r les of con, ct that a--l! to in,e-en,ence6 integrit!6 an, ob%ecti&it!. To-ic: In,e-en,ence7 Integrit!7 an, $b%ecti&it! To-ic: R les of Con, ct

/9. The 42C's rules with respect to ser&ices pro&ided )y auditors are predicated on three )asic principles of auditor o)9ecti&ity and independence. (hat are the three )asic principles; The three )asic principles are: ?1@ an auditor should not audit his or her own wor$, ?!@ an auditor should not function in the role of mana%ement, and ?'@ an auditor should not ser&e in an ad&ocacy role for his or her client.

AACSB: Ethics AICPA BB: #egal AICPA FN: Decision Making Blooms: Remember Diffic lt!: " Eas! #earning $b%ecti&e: "'()' *no+ the basic ,ifferences bet+een the SEC9s in,e-en,ence r les for - blic com-an! a ,itors an, AICPA stan,ar,s for a ,its of non- blic entities. To-ic: SEC an, PCA$B In,e-en,ence Re: irements for A ,its of P blic Com-anies

19--9

Chapter 19 - Professional Conduct, Independence, and Quality Control

15. Identify the primary purposes of 0ules !51-!5' of the 0ules of Conduct. 0ule !51 captures much of what is contained in the 15 %enerally accepted auditin% standards and codifies it as part of the Code. 0ule !5! re"uires that mem)ers of the *ICP* comply with professional standards when performin% professional ser&ices, whether or not they are practicin% in pu)lic accountin%. 0ule !5' was adopted to re"uire compliance )y CP*s with F**P.

AACSB: Ethics AICPA BB: #egal AICPA FN: Decision Making Blooms: Remember Diffic lt!: ; 5ar, #earning $b%ecti&e: "'(") *no+ the r les of con, ct that a--l! to general stan,ar,s an, acco nting -rinci-les. To-ic: ?eneral Stan,ar,s an, Acco nting Princi-les

11. (hen can a CP* disclose confidential information without the client's consent; * CP* can disclose confidential information without the client's consent ?1@ to meet disclosure re"uirements for F**P or F**4K ?!@ to comply with a &alid su)poenaK ?'@ to allow a re&iew of a mem)er's professional practice under the authority of the *ICP*, a state CP* society, or a statement )oard of accountancyK ?-@ to comply with an in&esti%ati&e or disciplinary proceedin%K and ?.@ to allow a re&iew of a CP*'s professional practice in con9unction with the purchase, sale, or mer%er of the practice.

AACSB: Ethics AICPA BB: #egal AICPA FN: Decision Making Blooms: A--l! Diffic lt!: " Eas! #earning $b%ecti&e: "'("" *no+ the r les of con, ct that a--l! to res-onsibilities to clients. To-ic: Res-onsibilities to Clients

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Chapter 19 - Professional Conduct, Independence, and Quality Control

Matchin Questions

1!. <atch each term )elow with its definition as pro&ided )y the *ICP* 0ules of Conduct. 26amples include financial statement audits, re&iews, and e6aminations of prospecti&e financial information ( *ny person or entity, other than the mem)er's employer, that en%a%es a mem)er or a mem)er's firm to perform professional ser&ices ) *ny action initiated )y a mem)er that informs others of his or her status as a CP* or *ICP*-accredited specialist * proprietor, part owner, or any indi&idual who assumes the ris$s and )enefits of firm ownership or who is otherwise held out )y the firm to )e the e"ui&alent of any of the aforementioned The performance for a client )y a mem)er or a mem)er's firm while holdin% out as CP*?s@ of the professional ser&ices of accountin%, ta6, personal financial plannin%, liti%ation support ser&ices, and those professional ser&ices for which standards are promul%ated )y )odies desi%nated )y Council *ll ser&ices performed )y mem)er while holdin% out as a CP* *

1. Partner !. Professional ser&ices '. Practice of pu)lic accountin%

-. Client

.. *ttest en%a%ement /. Aoldin% out

+ ,

AACSB: Ethics AICPA BB: #egal AICPA FN: Decision Making Blooms: 1n,erstan, Diffic lt!: 8 Me,i m #earning $b%ecti&e: "'()3 1n,erstan, the frame+ork for the R les of Con, ct. To-ic: R les of Con, ct

19-.1