4-18 (Objective 4-6) The following questions concern independence and the Code of Professional Conduct or GAAS. Choose the best response.

· a. What is the meaning of the generally accepted auditing standard that requires the auditor be independent?

· (1) The auditor must be without bias with respect to the client under audit.

· (2) The auditor must adopt a critical attitude during the audit.

· (3) The auditor’s sole obligation is to third parties.

· (4) The auditor may have a direct ownership interest in the client’s business if it is not material.

· b. The independent audit is important to readers of financial statements because it

· (1) determines the future stewardship of the management of the company whose financial statements are audited.

· (2) measures and communicates financial and business data included in financial statements.

· (3) involves the objective examination of and reporting on management-prepared statements.

· (4) reports on the accuracy of all information in the financial statements.

· c. An auditor strives to achieve independence in appearance to

· (1) maintain public confidence in the profession.

· (2) become independent in fact.

· (3) comply with the generally accepted auditing standards of field work.

· (4) maintain an unbiased mental attitude.

4-19( Objective4-7) The following questions concern possible violations of the AICPA Code of Professional Conduct. Choose the best response.

· a. In which one of the following situations would a CPA be in violation of the AICPACode of Professional Conduct in determining the audit fee?

· (1) A fee based on whether the CPA’s report on the client’s financial statements results in the approval of a bank loan.

· (2) A fee based on the outcome of a bankruptcy proceeding.

· (3) A fee based on the nature of the service rendered and the CPA’s expertise instead of the actual time spent on the engagement.

· (4) A fee based on the fee charged by the prior auditor.

· b. The AICPA Code of Professional Conduct states that a CPA shall not disclose any confidential information obtained in the course of a professional engagement except with the consent of the client. In which one of the following situations would disclosure by a CPA be in violation of the code?

· (1) Disclosing confidential information in order to properly discharge the CPA’s responsibilities in accordance with the profession’s standards.

· (2) Disclosing confidential information in compliance with a subpoena issued by a court.

· (3) Disclosing confidential information to another accountant interested in purchasing the CPA’s practice.

· (4) Disclosing confidential information during an AICPA authorized peer review.

· c. A CPA’s retention of client records as a means of enforcing payment of an overdue audit fee is an action that is

· (1) not addressed by the AICPA Code of Professional Conduct.

· (2) acceptable if sanctioned by the state laws.

· (3) prohibited under the AICPA rules of conduct.

· (4) a violation of generally accepted auditing standards.


4-20 (Objectives 4-5, 4-6) The following situations involve the provision of nonaudit services. Indicate whether providing the service is a violation of AICPA rules or SEC rules including Sarbanes–Oxley requirements on independence. Explain your answer as necessary.

· a. Providing bookkeeping services to a public company. The services were preapproved by the audit committee of the company.

· b. Providing internal audit services to a public company that is not an audit client.

· c. Implementing a financial information system designed by management for a private company.

· d. Recommending a tax shelter to a client that is publicly held. The services were preapproved by the audit committee.

· e. Providing internal audit services to a public company audit client with the preapproval of the audit committee.

· f. Providing bookkeeping services to an audit client that is a private company.

4-21 (Objectives 4-6, 4-7) Each of the following situations involves a possible violation of the AICPA’sCode of Professional Conduct. For each situation, state the applicable section of the rules of conduct and whether it is a violation.

· a. Emrich, CPA, provides tax services, management advisory services, and bookkeeping services and conducts audits for the same nonpublic client. Because the firm is small, the same person often provides all the services.

· b. Franz Marteens is a CPA, but not a partner, with 3 years of professional experience with Roberts and Batchelor, CPAs. He owns 25 shares of stock in an audit client of the firm, but he does not take part in the audit of the client, and the amount of stock is not material in relation to his total wealth.

· c. A nonaudit client requests assistance of M. Wilkenson, CPA, in the installation of a local area network. Wilkenson had no experience in this type of work and no knowledge of the client’s computer system, so he obtained assistance from a computer consultant. The consultant is not in the practice of public accounting, but Wilkenson is confident of his professional skills. Because of the highly technical nature of the work, Wilkenson is not able to review the consultant’s work.

· d. In preparing the personal tax returns for a client, Sarah Milsaps, CPA, observed that the deductions for contributions and interest were unusually large. When she asked the client for backup information to support the deductions, she was told, “Ask me no questions, and I will tell you no lies.” Milsaps completed the return on the basis of the information acquired from the client.

· e. Roberta Hernandez, CPA, serves as controller of a U.S. based company that has a significant portion of its operations in several South American countries. Certaingovernment provisions in selected countries require the company to file financial statements based on international standards. Roberta oversees the issuance of the company’s financial statements and asserts that the statements are based on international financial accounting standards; however the standards she uses are not those issued by the International Accounting Standards Board.

· f. Steve Custer, CPA, set up a casualty and fire insurance agency to complement his auditing and tax services. He does not use his own name on anything pertaining to the insurance agency and has a highly competent manager, Jack Long, who runs it. Custer often requests Long to review the adequacy of a client’s insurance with management if it seems underinsured. He believes that he provides a valuable service to clients by informing them when they are underinsured.

· g. Seven small Seattle CPA firms have become involved in an information project by taking part in an interfirm working paper review program. Under the program, each firm designates two partners to review the audit files, including the tax returns and the financial statements of another CPA firm taking part in the program. At the end of each review, the auditors who prepared the working papers and the reviewers have a conference to discuss the strengths and weaknesses of the audit. They do not obtain authorization from the audit client before the review takes place.

· h. Archer Ressner, CPA, stayed longer than he should have at the annual Christmas party of Ressner and Associates, CPAs. On his way home he drove through a red light and was stopped by a police officer, who observed that he was intoxicated. In a jury trial, Ressner was found guilty of driving under the influence of alcohol. Because this was not his first offense, he was sentenced to 30 days in jail and his driver’s license was revoked for 1 year.

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