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AICPA ETHICS EXAM 100 QUESTIONS
WITH 100% DETAILED AND CORRECT
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"Which factor must be in place for you to perform services in light of a potential conflict of interest? A. The affected parties have agreed to bring the matter to the BOD B. The affected parties have agreed not to sue you or your firm C. You have determined that your threats to objectivity are at an acceptable level
D. You have determined that some third parties might not question your objectivity - CORRECT
ANSWER=> C. You have determined that your threats to objectivity are at an acceptable level
To proceed with evaluating your potential conflict of interest, you must conclude that you can provide the services objectively (that is, threats to you objectivity are insignificant or have been reduced to an acceptable level)." "Suppose a statute exists in your state that allows you to place a lien on client records in the event of unpaid fees. Given these facts are you obligated to return the client's records? A. No, not until he pays the $5,000 he owes you
B. Yes, these records should be provided upon request - CORRECT ANSWER=> B. Yes, these records
should be provided upon request The code requires you to return client provided records under all circumstances." "As part of your work, you prepared several schedules relating to the client's investment trading activity. He now says he needs those schedules so that he can complete his tax return himself. Are you required to return those records? A. No, these are not considered client-provided records
B. Yes, schedules that you prepare are conspired client provided records - CORRECT ANSWER=> A. No,
these are not considered client-provided records Your work papers, including analyses and schedules prepared by the client at your request, are your property, not client provided records." "You are receiving requests from all the LPs asking that they receive copies if the partnership records. They claim the GP refused to furnish these records and referred all inquiries to you. Are you required to furnish these to all LPs that ask? A. No, since they are not the client representative
B. Yes, because they have a legitimate need for them - CORRECT ANSWER=> A. No, since they are not
the client representative
The code generally requires you to return client records once to the client's representative. After you have delivered them to the GP (client's representative), you need not comply with subsequent requests to again provide this information, so that the information does not get into the wrong hands. However, if as a result of a natural disaster or act of war, the client (GP) loses records that you had previously provided to him/her, you should honor this request." "Alf & Company, CPAs decides to subcontract a portion of its tax return preparation work to Dee Howard (DH) Tax Preparation Services, an unaffiliated income tax service provider. What does Alf & Company need to do to outsource the tax work? I Ensure that DH is current in its income tax obligations II. Ensure that DH has appropriate controls in place to protect the confidentiality of the client data III. Disclose to the client that services may be performed by DH IV. Have a contractual agreement with DH to protect the confidentiality of client information A. I, II, and III are required B. II, III, and IV are required C. III and IV are required
D. All of the items are required - CORRECT ANSWER=> B. II, III, and IV are required
The firm needs to take certain steps to protect client confidentiality, including a contractual agreement, and to inform the client that a third-party service provider may be used." "Hana is the controller of a large sporting goods store. Her boss instructs her to materially increase the company's inventory balance by crediting "other expenses." She doesn't understand why, but tells her staff to. book the journal entry. What statement best describes Hana's actions? A. Hana failed to evaluate a potential ethical issue by subordinating her judgement B. Hana failed to refer the matter to the AICPA ethics hotline C. Hana failed to ensure that her staff was competent to make the entry
D. Hana failed to consider the rules of other regulators - CORRECT ANSWER=> A. Hana failed to
evaluate a potential ethical issue by subordinating her judgment She is subordinating her judgement by not following up and asking her boss why he wants her to book this journal entry. This could be a material misstatement of the financial statements, especially considering the boss wants to use "other expenses" instead to a more specific account. Just because her boss tells her to do something, doesn't mean you should assume it's correct or ethical, and Hana will still be held accountable as the controller if it is improper. She should have evaluated the potential ethical issue. The other answer choices don't best describe the problem because there was no mention about her failing to use a hotline, ensuring competency of her staff, or not considering rules." "Hana receives tickets to Hamilton from one of her company's largest vendors. The gift included a card that congratulated her on a recent promotion. In determining whether accepting the gift would create a significant threat to her compliance with the AICPA code, what factor should she most consider? A. Whether she disclosed the receipt of the gift to the board of directors B. Whether she truly earned the gift C. Whether the gift is reasonable in the circumstances
D. Whether the tickets cost more than $100 - CORRECT ANSWER=> C. Whether the gift is reasonable in
the circumstances
"On October 11, 2017, ROC Accountants signed an engagement letter to begin auditing XYZ Corp for the 12-month period ended 12/31/17. Audit planning is scheduled to commence on 11/4/17. What is the earliest date on which ROC would be required to be independent of XYZ? A. January 1, 2017 B. October 11, 2017 C. November 4, 2017
D. December 31, 2017 - CORRECT ANSWER=> A. January 1, 2017
Return on Capital (ROC) should be independent for the period of profession engagement and the period covered by the financial statements. If ROC had certain business relationships during the period they will audit, their independence may be considered impaired." "A new staff accountant obtains an automobile loan under normal term and conditions from an audit client to purchase a BW sports car. The car is material to his net worth; it is his net worth as is the amount borrowed. He is a covered member of the lender. Did this loan impair independence? A. No, because it is fully secured (collateralized) by the automobile B. No, if it was used to purchase a foreign car C. Yes, because it is material to the staff's net worth
D. Yes, if the sticker price exceeds $40,000 - CORRECT ANSWER=> A. No, because it is fully secured
(collateralized) by the automobile An auto loan does not impair independence if it is obtained under the lender's normal terms and conditions and is fully secured by the vehicle. Car loans that are fully secured (collateralized) is a permitted loan that is an exception to the independence rules (See slide 13)." "A manager obtained her MBA prior to joining the firm 2013. While going to school, she obtained student loans under the lenders normal terms and conditions that are not material to her net worth. She is a covered member of the lender that made the loan. Does this loan impair independence? A. No, because the money way used to obtain a student loan B. No, because the loan is not material to the managers net worth and was obtained prior to her joining the firm C. Yes, if the manager obtained it within 5 years of joining the firm
D. Yes, because the manager is a covered member - CORRECT ANSWER=> B. No, because the loan is
not material to the manager's net worth and was obtained prior to her joining the firm A grandfathered and or covered member loan does not impair independence if the loan is immaterial to her net worth and she meets the other requirements for grandfathering. Certain grandfathered loans are an exception to the independence rules (see slide 14)." "A tax partner obtained a personal loan from a business associate in 2010. In 2014, the business associate became a director of the partner's client which is also an audit client of the firm. Does this loan impair independence? A. Probably, because she is aware of the situation, the partner should evaluate the loan under the conceptual framework B. Yes, the partner should renegotiate the loan as soon as possible C. No, because the lender is a colleague, not an attest client
D. No, because the partner acquired the loan before the lender became a director of an audit client -
CORRECT ANSWER=> A. Probably, because she is aware of the situation, the partner should evaluate
the loan under the conceptual framework When aware, a covered member should evaluate possible threats to independence caused by a lending relationship with an officer, director, or 10% or greater shareholder of an audit client's affiliate." "A staff member has a credit card from an attest client with respect to which he is a covered member. The balance on his current credit card statement is $10,100 and is material to his net worth. Does this impair independence? A. No, because credit card loans do not create threats to independence B. No, because the staff member rarely uses the credit card C. Yes, because the month purchases are material to the staff person's net worth
D. Yes, if the staff person does not. maintain a current balance of $10,000 or less - CORRECT
ANSWER=> D. Yes, if the staff person does not maintain a current balance of $10,000 or less
If the stand maintains a balance of $10,000 or less on a current basis, taking in to consideration the payment due date and any available grace period, the loan does not impair independence. See slide 13 - since the amount is over $10,000 independence would be impaired" "When performing non attest services for clients, which of these is the CPAs (AICPA member's) responsibility? A. Evaluate the adequacy of the services performed B. Establish an understanding with the client as to the services to be performed C. Design and implement the company's internal controls
D. All of these options - CORRECT ANSWER=> D. Establish an understanding with the client as to the
services to be performed See slide 3. The member (CPA) is required to establish an understanding with the client concerning the services to be performed. The other two choices are management's responsibility." "Rogers CPA is engaged to perform bookkeeping services (a non attest service) for an attest client. Which activity will impair Roger's independence? A. Supervise the client's employees as they perform their normal activities B. Post client-approve entries to the client's trial balance C. Advise the client on current accounting issues
D. None of these would impair independence - CORRECT ANSWER=> A. Supervise the client's
employees as they perform their normal activities See slide 10. Supervising client employees in the performance of their normal recurring activities impairs a member's independence. Posting entries is fine as long as the client approves the entry (you're just transferring numbers to the trial balance) and advising the client on issues is a typical nonattest service that wouldn't impair independence." "Which activity would be least likely to create unacceptable threats to a member's independence? A. Consummate a translation on behalf of the client with potential investors B. Prepare financial statements based on the client's trial balance
B. Whether the firm has a recent history of independence violations C. Whether the firm has adequate independence training for its personnel
D. Whether the firm is competent to complete the work - CORRECT ANSWER=> A. Whether the firm
acts as an advocate of the client This is one of the four principles mentioned by the SEC. The other are whether the firm (1) has a manual or conflicting interest with the client, (2) audits its own work, or (3) acts as management or an employee." "Under the SEC rules, with relationships between a covered person and an SEC audit client are NOT prohibited? A. Joint business ventures B. Agreements to share costs or profits C. Immaterial landlord-tenant relationships
D. Limited partnership agreements - CORRECT ANSWER=> C. Immaterial landlord-tenant relationships
See slide 8, all the other relationships would be prohibited by SEC rules except immaterial landlord- tenant relationships" "Deena is a covered person with respect to an SEC audit client. Is she prohibited from having a broker- dealer account with the client? A. Yes, because the client would have custody of Deena's assets B. Yes, because the SEC prohibits all financial interest with clients C. No, provided Deena does not invest in or borrow money from the client and the value of assets in the account does not exceed the insured or protected levels
D. No, there should be no restrictions on this type of account - CORRECT ANSWER=> No, provided
Deena does not incest in or borrow money from the client and the value of assets in the account does not exceed the insured or protected levels See slide 11. As long as the account does not hold any asset other than cash or securities, the contents of the account are insured, and you comply with the SEC's loan provisions, you are generally permitted to have such an account." "Under the SEC rules, a one-year "cooling off" period applies to which scenario? A. A tax manager working on a client's tax engagement is offered a managerial position at the client B. A client wants to hire its firm's lead audit partner to take over as CFO C. A technology consulting senior manger int he firm is seeking an executive role with the client D. A professional staff person on nan audit applies for a position as a senior accountant at the client -
CORRECT ANSWER=> B. A client wants to hire its firm's lead audit partner to take over as CFO
See slide 16, the one-year cooling off period only applies to audit team members who are hired to take a financial reporting oversight role (like CFO) at the client (who is an SEC registrant)" "Devo, Inc., an SEC registrant, requests AB auditor's assistance in performing human resource services. Which service may AB perform for Devo without violating independence rules? A. Searching for qualified financial executives B. Negotiating an appropriate salary for an incoming manager
C. Advising the client on whether a particular candidate has the proper qualifications for a specific position D. Conducting interviews of the applicants and recommending who should have a second interview -
CORRECT ANSWER=> C. Advising the client on whether a particular candidate has the proper
qualifications for a specific position The firm may advise the entity on the candidate's competence, but the firm may not recommend a specific candidate for a specific job at the SEC audit client." "Can Leider Electric (an SEC registrant) engage AB, its auditor, to perform information-technology related services under the SEC's independence rules? A. Yes, if the services have nonbearing on Leider Electric's financial reporting and related systems B. No, the SEC has a strict prohibition against information technology services C. Only if Leider's audit committee approves the services D. Only if AB hires an outside consultant to perform a concurring reviews of the services before the next
audit - CORRECT ANSWER=> A. Yes if the services have no bearing on Leider Electric's financial
reporting and related systems The SEC rules do not prohibit a firm from working on IT systems that are unrelated to the financial reporting process, as long as they are approved by the issuer's audit committee before the are performed and do not run afoul of any other SEC independence rule or principles (for example. perform management functions)." "Under SEC rules, which non-audit service would AB auditors most likely be permitted to provide to an SEC audit clienT? A. Business valuation services used to measure the impairment of goodwill B. Valuation services provided solely as part of a tax-planning engagement C. Actuarial services used to determine pension costs and related liability
D. Bookkeeping services while the entity ...... - CORRECT ANSWER=> B. Valuation services provided
solely as part of a tax-planning engagement Because these services are performed solely for tax purposes, they would generally be permitted" "Status Photos wants to engage Daily CPAs as their auditors for the year ended 12/31/18. What must happen under PCAOB Rule 3526? A. Daily must explicitly state that all covered persons in the firm have complied with relevant ethical requirements B. Daily must provide a list of all firm members who met be independent of client C. Daily must describe in writing all the relationships with Status Photos that may reasonably be expected to affect their independence D. Daily must provide the results of independence investigations for all persons who may work on the
engagement - CORRECT ANSWER=> C. Daily must describe in writing all the relationships with Status
Photos that may reasonably be expected to affect their independence Auditors are required to communicate in writing with Status Photo's audit committee a description of all relationships that Daily believes may reasonably be though to affect their independence. This provides the audit committee an opportunity to prove their input on whether or not they believe the matter would impact the firm's independence"
"Step 6 - CORRECT ANSWER=> Consider your comfort level
-how comfortable are you with each option -how would you feel if you have to discuss your decision in public"
"Step 7 - CORRECT ANSWER=> Consider rules, regulations, and laws
-rules set by AICPA, state accountancy board, state CPA society"
"Step 8 - CORRECT ANSWER=> Make a decision
-take the time you need -discuss with colleague, gain perspectives, counsel, don't be hasty"
"Step 9 - CORRECT ANSWER=> Document your efforts
-your understanding of the facts -who you consulted with and their professional affiliations -your decision"
"Step 10 - CORRECT ANSWER=> Evaluate the outcome
-would you have done anything differently"
"Professional & Regulatory Bodies - CORRECT ANSWER=> set ethics standards and rules for members
of the accounting profession State CPA licensing boards AICPA SEC PCABO IFAC IRS GAO DOL others"
"State CPA Licensing Boards - CORRECT ANSWER=> issues CPA licesnes and oversee ethical conduct of
jurisdiction"
"AICPA - CORRECT ANSWER=> American Institute of Certified Public Accountants
national professional organization for all CPAs; work with state CPA societies
-PEEC: Professional Ethics Executive Committee promulgates and enforces ethics and independence rules that apply to all members"
"SEC - CORRECT ANSWER=> Securities and Exchange Commission
federal agency establishes and enforces accounting and auditing policies"
"PCAOB - CORRECT ANSWER=> Public Company Accounting Oversight Board
establishes auditing, attestation, quality control, ethics and independence standards for public company auditors"
"IFAC - CORRECT ANSWER=> International Federation of Accountants
develop standards for auditing, education, ethics, and public sector financial reporting in the accounting profession globally promotes good ethical practices"
"IRS - CORRECT ANSWER=> Internal Revenue Service
government agency authorizes the Secretary of the Treasury to set rules and regulations necessary to enforce the UT tax laws Treasury Dept Circular 230 governs federal tax practice before the IRS IRS Office of Professional Responsibility (OPR) enforces these regulations"
"GAO - CORRECT ANSWER=> US Government Accountability Office
issues ethics and independence rules that apply to engagements performed under GAGAS"
"DOL - CORRECT ANSWER=> Department of Labor
interpretive bulletin on independence"
"Code of Conduct - CORRECT ANSWER=> -assume responsibilities above and beyond those required by
law -act honorably, even at the sacrifice of personal advantage"
"CPAs must follow the rules and standards promulgated by which bodies - CORRECT ANSWER=> Their
state CPA licensing board"
"3 Areas of AICPA's PEEC - CORRECT ANSWER=> members in public practice
"5. Due Care - CORRECT ANSWER=> You should observe the profession's technical and ethical
standards, strive continually to improve competence and the quality of services, and discharge professional responsibility to the best of your ability"
"6. Scope and Nature of Services - CORRECT ANSWER=> As a member in public practice, you should
observe the principles of the Code of Professional Conduct in determining the scope and nature of services to be performed"
"Rules for Members in Public Practice - CORRECT ANSWER=> Integrity and Objectivity
Independence General Standards Compliance with Standards Accounting Principles Acts Discreditable Fees and Other Types of Remuneration Advertising and Other Forms of Solicitation Confidential Information Form of Organization and Name"
"Rules for Members in Business - CORRECT ANSWER=> Integrity and Objectivity
General Standards Compliance with Standards Accounting Principles Acts Discreditable Other Members Acts Discreditable"
"Interpretations - CORRECT ANSWER=> The code provides interpretations of each of the rules of
conduct. Provides guidelines to members on scope and application. Members are required to apply these interpretations unless they can justify noncompliance."
"Integrity and Objectivity - CORRECT ANSWER=> - maintain objectivity and integrity
- be free of conflicts of interest
- shall not knowingly misrepresent facts or subordinate his or her judgment to others Integrity: honest and candid; measured in terms of what is right and just"
"Helping Hands Case Study - CORRECT ANSWER=> -an organization that is under financial duress may
have strong incentives to "bend the rules" -plan was to "temporarily be relieved of debt" until financial statements can be made and appear good ("goodwill gesture"/legal)
It's legal, but is it ethical? Objections: -manipulating financial statements is a violation of "integrity and objectivity rule" regarding false and misleading information -material changes to financial statements are a form of deceit -changes could affect user's decision about whether to continue donations -making change may not break any laws, but it is unethical Never subordinate your judgment to another person, even if that person is in a position of authority over you"
"Whistle-Blowing - CORRECT ANSWER=> -the act of alerting proper parties outside your organization
of unethical conduct by employees of your client or employer -consider all relevant professional and legal requirements -exhaust all appropriate channels first and obtain legal and other advice before making your decision -consider provisions in the code on client and employer confidentiality"
"Revenue Recognition Case Study - CORRECT ANSWER=> -Company books revenue early (on ship date
instead of when customer receives goods) -Go off of what they did historically and says it's up to judgment"
"Conceptual Framework - CORRECT ANSWER=> employs a "threats and safeguards" approach to
analyzing threats to compliance with the ethics rules that members must employ when evaluating a matter that the code does not specifically address
- Identify threat(s) to compliance with one or more rules
- Evaluate whether the threat (or threats in the aggregate, if applicable) is significant --if the threat is not significant, stop - no further consideration is needed --if the threat is significant, proceed to 3
- Identify and apply safeguards --if safeguard(s) would eliminate the threat or reduce the threat to an acceptable level, proceed with professional services or engagement --if a safeguard(s) is not available or insufficient (that is, does not reduce threat(s) to acceptable level), decline or discontinue professional service or resign from the engagement Definitions Threats: relationships or circumstances that could compromise a member's compliance with the rules. These include adverse interest; advocacy, familiarity, management participation, self-interest, self- review, and undue influence Acceptable level: a level at which a reasonable and informed third party who is aware of the relevant information would be expected to conclude that a member's compliance with the rules is not compromised
-company wanted to go public so asked him for experience working with public companies -- his response was vaguely true but not exactly accurate given the context of the question Consider - What is the most likely overall effect of your decision on the company's management team, employees, and other key stakeholders?"
"Accounting Principles - CORRECT ANSWER=> -do not say that financial data is presented in conformity
with GAAP if such data contains any departure from an accounting principle -exception exists for data the justifiably departs from GAAP because not doing so would make the information misleading"
"The AICPA Code - CORRECT ANSWER=> -if financial statements are prepared under framework beside
GAAP, ensure the basis is clearly specified so readers don't wrongly assume -departure from GAAP acceptable in unusual circumstances when application of GAAP would make financial statements misleading"
"Confidential Client Information - CORRECT ANSWER=> - do not disclose any confidential information
unless the client specifically allows you to do so -best to treat ALL information about your client as confidential -confidential client information is any information obtained from the client that is not available to the public You MAY disclose confidential client information without client permission only in certain circumstances: -comply with standards -subpoena -investigation or disciplinary proceeding -in conjunction with prospective sale, purchase, or merger of your practice (take appropriate precautions) -tax practice quality review Be discreet when discussing client matters, especially in public places Your obligation to follow the accounting standards always takes precedence over retaining client confidentiality"
"Client's Consent - CORRECT ANSWER=> member should
-obtain the client's specific consent, preferable in writing, about the nature of the information that may be disclosed -the persons to whom to may be disclosed, and -its intended use Even if you are stripping information of any identifying reference to the client, still get their permission"
"Acts Discreditable to the Profession - CORRECT ANSWER=> -discrimination and harassment
-noncompliance with government regulations -improper preparation of financial statements -removing client files -failure to timely filing of tax returns -indemnification or limitation of liability -disclosure of employer's confidential information (including volunteer positions) Records Request by Client -member must always return to the client documents the client provided him or her to perform the service (only have to return to client's representative, ex. general partner and not to all limited partners) -may withhold certain work product that is incomplete or for which the client has not yet paid" "Transfer of Files and Return of Client Records in Sale, Transfer, Discontinuance, or Acquisition of a
Practice - CORRECT ANSWER=> If the member sells or transfers a practice to another party and will no
longer retain any ownership in the practice, the member should do the following: -request in writing the client's consent to transfer records to the successor firm or owner -if the client does not reply within 90 days, the member may presume consent is given If the member is discontinuing the practice, but does not sell or transfer the practice, he or she should do the following: -notify each current client -return the client's records to client as specified in the "Records Request" interpretation unless the member had a different arrangement with the client If a member is buying (not selling) all or part of another member's practice, the member should determine that: -the seller has notified the firm's clients that are being acquired of the sale, -those clients have consented to the continuation of professional services by the member acquiring the practice (or 90 days has lapsed since client was notified), and -those clients have not objected to the retention of any client files or records the member obtained as part of the purchase"
"Rules for CPAs in Public Practice - CORRECT ANSWER=> Outsourcing
-you are required to take certain actions when you outsource the performance of your services to "third- party providers" -inform the client that you may be using a service provider -must oversee service provider and make sure all applicable professional standards are met -enter agreement with contractor for client confidentiality Advertising & Solicitations -may not advertise their services in a manner that is false, misleading, or deceptive
D. My superior's interest - CORRECT ANSWER=> C. Your primary responsibility is to serve the public
interest." "As a professional CPA, I have a responsibility to maintain and broaden public confidence by performing all my responsibilities with: A. Integrity B. Speed C. Agility
D. Perfection - CORRECT ANSWER=> A. Integrity
Integrity is one of the cornerstones of our profession." "I also must maintain my objectivity, be free of conflicts of interest, and discharge all of my responsibilities with due... A. Respect B. Care C. Diligence
D. Speed - CORRECT ANSWER=> B. Care
Due care implies a certain level of quality and competence in the performance of services." "Bob is a CPA who works as a senior accountant in a small but diversified financial services company. Bob works for the parent company (bank) in a division that makes business loans. His mother has been offered a seat on the board of directors of a subsidiary company that is an investment advisor. Does Bob's situation cause a significant threat to Bob's integrity and objectivity (conflict of interest)? A. No. The bank and investment advisory firm are separate and distinct businesses B. Yes. Directorships of relatives always result in conflicts of interest
C. Maybe. But more facts should be considered - CORRECT ANSWER=> C. Maybe. But more facts
should be considered We need more information to determine whether this situation creates a significant threat to Bob's ability to be objective."
