Auditing Final Exam

Which of the following statements best explains why public accounting, as a profession, promulgates ethical standards and establishes means for ensuring their observance?

• A requirement for a profession is to establish ethical standards that primarily stress responsibility to entities and colleagues.

• Vigorous enforcement of an established code of ethics is the best way to prevent unscrupulous acts.

• Ethical standards are established so that users of accounting services know what to expect and accounting professionals know what behaviors are acceptable, and so that discipline can be applied when necessary.

• Ethical standards that emphasize excellence in performance over material rewards establish individual reputations for competence and character.

All of the following nonaudit services are identified by the SEC as generally impairing an auditor’s independence with respect to an audited entity except:

• some specific tax services.

• information systems design and implementation.

• management functions.

• human resource services.

Under the SEC’s rules regarding independence, which of the following must an entity disclose?

• only fees for systems implementation and design and nonaudit services performed by the audit firm

• fees for the external audit, audit-related fees, tax fees, and fees for other nonaudit services performed by the audit firm

• only fees for the external audit

• only fees for internal and external audit services provided by the audit firm

The AICPA Code of Professional Conduct contains both general ethical principles that are aspirational in character and a:

• set of specific, mandatory rules describing minimum levels of conduct a CPA must maintain.

• list of violations that would cause the automatic suspension of a CPA’s license.

• complete list of all the different kinds of crimes that would be considered as acts discreditable to the profession.

• description of a CPA’s procedures for responding to an inquiry from a trial board.

In which of the following situations would a CPA’s independence be considered impaired according to the Code of Professional Conduct?

1. 1. The CPA has a car loan from a bank that is an audit entity. The loan was made under the same terms available to all customers.

2. 2. The CPA has a direct financial interest in an audit entity, but the investment is maintained in a blind trust.

3. 3. The CPA owns a commercial building and leases it to an audit entity. The rental income is material to the CPA.

• 1 and 3

• 2 and 3

• 1 and 2

• 1, 2, and 3

An audited company has not paid its 2021 audit fees. According to the AICPA Code of Professional Conduct, for the auditor to be considered independent with respect to the 2022 audit, the 2021 audit fees must be paid before the:

• 2023 fieldwork is started.

• 2022 report is issued.

• 2022 fieldwork is started.

• 2021 report is issued.

Which of the following legal situations would be considered to impair the auditor’s independence?

• An expressed intention by the present management to commence litigation against the auditor, alleging deficiencies in audit work for the entity, although the auditor considers that there is only a remote possibility that such a claim will be filed.

• Actual litigation by the entity against the auditor for an amount not material to the auditor or to the financial statements of the entity arising out of a dispute as to billings for tax services.

• Actual litigation by the auditor against the entity for an amount not material to the auditor or to the financial statements of the entity arising out of disputes as to billings for management advisory services.

• Actual litigation by the auditor against the present management, alleging management fraud or deceit.

A violation of the profession’s ethical standards is least likely to occur when a CPA:

• has a public accounting practice and is president and sole stockholder of a corporation that engages in data processing services for the public. The CPA often refers his attest entities to the data processing company.

• receives a percentage of the amounts invested by the CPA’s audit entities in a tax shelter with the entities’ knowledge and approval.

• purchases another CPA’s accounting practice and bases the price on a percentage of the fees accruing from entities over a three-year period.

• forms an association—not a legally binding partnership—with two other sole practitioners and calls the association Adams, Betts & Associates, CPAs.

Rick, an independent CPA, must make an ethical judgment related to the audit of an entity. If he primarily focuses on whether his decision might yield unfair advantages for some at the expense of others, he is using:

• a justice-based perspective.

• a utilitarian perspective.

• rule-based AICPA guidelines.

• a rights-based approach.

During the audit of Moon Company, the auditor disagrees with management’s estimation of collectible accounts receivable. The possible misstatement amount is material. Which of the statements below should weigh most heavily for the auditor in this instance?

• There is a small but reasonable chance that Accounts Receivable as stated by Moon Company might turn out to be fully collectible.

• Requiring an adjustment to the allowance for doubtful accounts would give stockholders access to fair and adequate information.

• The interests of Moon Company, the auditor, and the public should be weighed equally in the decision.

• Moon management has the right to make company estimates.