1. Which of the following statements best explains why the CPA profession has found it essential to promulgate ethical standards and to establish means for ensuring their observance?
a. Vigorous enforcement of an established code of ethics is the best way to prevent unscrupulous acts.
b. Ethical standards that emphasize excellence in performance over material rewards establish a reputation for competence and character.
c. A distinguishing mark of a profession is its acceptance of responsibility to the public.
d. A requirement for a profession is to establish ethical standards that stress primarily a responsibility to clients and colleagues.
2. The AICPA Code of Professional Conduct contains both general ethical principles that are designed to inspire the auditor and also a
a. List of violations that would cause the automatic suspension of a member's license.
b. Set of specific, mandatory rules describing minimum levels of conduct a member must maintain.
c. Description of a member's procedures for responding to an inquiry from a trial board.
d. List of specific acts discreditable to the profession.
3. An auditor strives to achieve independence in appearance to
a. Maintain public confidence in the profession.
b. Become independent in fact.
c. Comply with the generally accepted auditing standards of field work.
d. Maintain an unbiased mental attitude.
4. Which of the following most completely describes how independence has been defined by the CPA profession?
a. Performing an audit from the viewpoint of the public.
b. Avoiding the appearance of significant interests in the affairs of an audit client.
c. Possessing the ability to act with integrity and objectivity.
d. Accepting responsibility to act professionally and in accordance with a professional code of ethics.
5. The concept of materiality is least important to an auditor when considering the
a. Effects of a direct financial interest in the client upon the auditor's independence.
b. Decision whether to use positive or negative confirmations of accounts receivable.
c. Adequacy of disclosure of a client's illegal act.
d. Discovery of weaknesses in a client's internal control.
6. A CPA purchases stock in an audit client corporation and placed it in an educational trust for the CPA's minor child. The trust securities were not material to the CPA but were material to the child's personal net worth. Is the CPA's independence considered to be impaired with respect to the client?
a. Yes, because the stock is considered a direct financial interest and, consequently materiality is not a factor.
b. Yes, because the stock is considered an indirect financial interest that is material to the CPA's child.
c. No, because the CPA is not considered to have a direct financial interest in the client.
d. No, because the CPA is not considered to have a material indirect financial interest in the client.
7. Under the ethical standards of the profession, which of the following situations involving dependent members of an auditor's family is most likely to impair the independence of an individual participating in an audit engagement?
a. A parent's immaterial investment in a client.
b. A first cousin's loan from a client.
c. A spouse's employment with a client.
d. A sibling's loan to a director of a client.
8. The appearance of independence of a CPA, or that CPA's firm, is most likely to be impaired if the CPA
a. Provides appraisal, valuation, or actuarial services for an attest client.
b. Joins a trade association which is an attest client, and serves in a non- management capacity.
c. Accepts a token gift from an attest client.
d. Serves as an executor and trustee of the estate of an individual who owned the majority of the stock of a closely held client corporation.
9. In which of the following circumstances will a CPA who audits XM Corporation lack independence?
a. The CPA is a director of, but does not control, YN Corporation, which has a loan from XM.
b. The CPA and XM's president each owns 25% of FOB Corporation, a closely held company.
c. The CPA has an automobile loan from XM, a financial institution. The loan is collateralized by the automobile.
d. The CPA reduced XM's usual audit fee by 40% prior to the audit because XM's financial condition was unfavorable.
10. According to the profession's ethical standards, an auditor is considered independent in which of the following instances?
a. The auditor's checking account, which is fully insured by a federal agency, is held at a client institution.
b. The auditor is also an attorney who serves the client as its general counsel.
c. A professional employee of the auditor is the treasurer of a charitable organization that is a client.
d. The client owes the auditor fees for two consecutive audits.