Questions and Answers of Principles Of Auditing And Other Assurance Services

In the overwhelming majority of cases, independent auditors issue unqualified, rather than qualified, opinions for their publicly traded clients since it is unusual (though not rare):For a client's
Over the years, a substantial literature has been devoted to financial distress in general, and in particular to the independent auditor's decision to modify a report for substantial doubt about the
What are general ethics, and how do they relate to professional ethics?
Identify and briefly describe the four components of the AICPA Code of Professional Conduct.
Relate the Principles of Professional Conduct, ideal conduct, and trust. Be specific.
Discuss the applicability of the AICPA Rules of Conduct.
Identify at least four examples of situations in which an AICPA member would not be deemed independent.
May an AICPA member serve as an attorney for an audit client? Explain.
Does Rule 301, "Confidential Client Information," preclude AICPA members who serve on AICPA ethics division subcommittees and members of state society ethics committees from exchanging confidential
Who should initiate communication between predecessor and successor auditors when a change in auditors occurs? Explain. What impact does Rule 301, "Confidential Client Information," have on
Rule 502, "Advertising and Other Forms of Solicitation," precludes a member from advertising in a manner that is false, misleading, or deceptive. What is meant by"false, misleading, or deceptive"
When referring a client to another CPA, can an AICPA member accept a referral fee from the CPA if: (a) the amount is clearly immaterial, and (b) it merely covers the AICPA member's costs (i.e., time
Explain the current national joint ethics enforcement system.
Briefly explain the AICPA's quality review program for public accounting firms.
Explain how quality control, attestation standards, and generally accepted auditing standards are related.
General ethics is the study of:a. Ideal method in thought.b. Ultimate reality.c. Ideal conduct.d. Ideal social organization.Choose the correct answer.
Professional codes of ethics:a. Are uncommon in professions other than public accounting.b. Mandate ideal standards of behavior.c. Are enforceable if based in standards of ideal behavior.d. Mandate
A practitioner can perform accounting and auditing services for a privately owned client assuming that:a. The practitioner takes responsibility for management's assertions.b. The practitioner has
According to the profession's Rules of Conduct, an auditor would be considered independent in which of the following instances?a. The auditor's checking account is held at a client financial
The Rules of Conduct would most likely be violated if an auditor:a. Owns a building and leases floor space to an attestation client.b. Has an insured account with a brokerage firm audit client.c. Is
Objectivity refers to a practitioner's ability:a. To remain impartial.b. To identify assertions that are appropriate.c. To be unyielding in all disputes.d. To choose independently between
Absent a client's consent, a practitioner is precluded from disclosing confidential client information to:a. The Joint National Trial Board.b. A state board of accountancy.c. The board of
Which of the following fee arrangements would violate the AICPA Code of Professional Conduct?a. A fee based on the approval of a bank loan.b. A fee based on the outcome of a bankruptcy proceeding.c.
Which of the following published in a promotional brochure would likely violate the AICPA Rules of Conduct?a. Names and addresses, telephone numbers, numbers of partners, office hours, foreign
Which of the following acts by a CPA who is not in public practice would most likely be considered a violation of the profession's Code of Professional Conduct?a. Using the designation "CPA" on a
Quality control policies for the acceptance and continuance of clients are established to:a. Enable the auditor to report on management's integrity.b. Comply with standards established by
In the 1980s, the financial press raised the public consciousness by publicizing a series of audit failures and financial failures, most notably in the banking and government securities industries.
Practitioners repeatedly face situations that call for an immediate response: Is this a violation of the Code of Professional Conduct? The following situations, all related to independence, are posed
An auditor must not only be independent in fact, but must also appear independent.Required:1. Explain the concept of "independence" as it applies to third-party reliance on management's
The attribute of independence has traditionally been associated with the CPA's function of auditing and expressing opinions on financial statements.Required:1. What is meant by "independence" as
Ruth Shafer, CPA, is auditing the financial statements of the Nelson Company. Her son, age 16, owns 100 shares of the 50,000 shares of the Nelson Company common stock outstanding at the balance sheet
Your audit client, Nuesel Corporation, requests that you conduct a feasibility study to advise management of the best way for the corporation to utilize computer equipment and which computer, if any,
Benjamin Leon, a retired partner of your public accounting firm, has just been appointed to the board of directors of Palmer Corporation, your firm's client. Leon is also a member of your firm's
Audrey Campbell, CPA, has audited the financial statements of the Grimm Company for several years. Grimm's president has now asked Campbell to install an inventory control system for the
Charles Adams, CPA, has practiced public accounting for several years, but feels uncomfortable with computers. As a result, he contemplates hiring an additional professional staff member who
Paulette Martin, CPA, has been approached by a staff assistant regarding the applicability of the AICPA Rules of Conduct to unaudited financial statements. The assistant notes that Rule 202,
Donald Bowie, CPA, is the assistant controller for Aberdeen Industries, a highly diversified conglomerate operating in the U.S. and abroad. Bowie has been asked by Aberdeen's corporate controller to
Doris Sweeny, CPA, is engaged by the local municipal government to conduct periodic personal property tax audits of companies operating within the municipality. The property tax relates to business
Judy Hanlon, CPA, is engaged to prepare the federal income tax return for the Guild Corporation for the year ended December 31, 1999, Hanlon's first engagement of any kind for the Guild Corporation.
Certified public accountants often serve as expert witnesses in damage suits involving accounting and auditing matters. For example, accountants acting as expert witnesses could be asked to testify
Each of the following situations relates to Rule 502, "Advertising and Other Forms of Solicitation":a. A trade association engages a CPA to analyze specific problems affecting members of the
Form of Practice and Name Several CPAs within the firm of Harding & Co. specialize in professional services related to client acquisitions and mergers. The policy committee of Harding & Co.decides to
A CPA in public practice wishes to be a representative of a computer company that services tax practitioners. The CPA will utilize contacts with professional tax practitioners to introduce and
Tom Jencks, CPA, conducts a public accounting practice. In 1999, Jencks and Raymond Curtis, a non-CPA, organized Electro-Data Corporation to specialize in computerized bookkeeping services. Jencks
A CPA in public practice is considering running for the elected office of state controller.Principal functions of the state controller include maintaining control over all state fund accounts,
Your CPA firm decides to form a partnership with Faye Reitz, a non-CPA management consultant, which would result in a "mixed partnership" of a CPA and a non-CPA.Required: Under what circumstances, if
Although not partners, two CPAs share an office, maintain joint bank accounts, and work together on each other's engagements. As a result, they decide to have a joint letterhead showing both names,
Frank Gilbert and Gloria Aponte formed a corporation called Financial Services, Inc., each taking 50 percent of the authorized common stock. Gilbert is a CPA and a member of the American Institute of
Lakeview Development Corporation was formed on January 2, 1999, to develop a vacation recreation area on land purchased the same day by the corporation for $$100,000.$ The corporation also
In response to the AICPA's quality control program for individual public accounting firms, many firms have drafted quality control documents that describe policies and procedures designed to provide
The financial press often reports business practices that raise ethical issues. For example, consider a single topical question confronting all major oil and gas exploration companies:although double
Ethical issues are faced in all professions, including those for which there's a presumption that ethics drives the profession, such as the financial aid professionals in colleges and universities.
Discuss the two issues that help explain the litigation explosion against independent auditors.
Identify the major issues involved in a civil action against an independent auditor.
Distinguish between ordinary negligence, gross negligence, and fraud.
In general, what elements must be proved by various parties to a legal liability case involving auditors?
What is the auditor's common law liability to clients? What is the minimum basis for liability?
What lesson is learned from both Maryland Casualty Co. v. Jonathan Cook and 1136 Tenants' Corp. v. Max Rothenberg & Co.?
Briefly describe the facts in Ultramares Corp. v. Toiiche and cite the significance of the case.
Explain how primary beneficiaries differ from foreseen beneficiaries. Give examples.
What is the significance to the profession of Bily v. Arthur Young & Co., a 1993 California Supreme Court case?
Describe an auditor's alternative defenses under Section 11 of the Securities Act of 1933.
What lessons does Escott v. BarChris Construction Corp. offer about an inexperienced audit staff?
How does the burden of proof under Section 18 of the Securities Exchange Act of 1934 differ from that under Section 10(b) and Rule lOb-5?
What is the significance of United States o. Simon to an independent auditor?
Identify several precautions an auditor might take to avoid litigation.
Distinguish between client errors and fraud.
In light of material undetected errors or fraud, what inherent risk does an auditor sustain by not auditing all of an entity's transactions and events during a financial statement audit? How do
How should an independent auditor proceed if the effect of an illegal act on financial statements is not susceptible to reasonable investigation?
What is the purpose of the record keeping and internal control provisions of the Foreign Corrupt Practices Act?
What are "grease" or "facilitating" payments, and how are they treated in the Foreign Corrupt Practices Act?
What penalties may be imposed on an entity, officers, directors, or stockholders for violating the Foreign Corrupt Practices Act?
The arguments offered by third parties in litigation against a practitioner for an assurance service are likely to involve:a. Joint-and-several liability.b. Privity of contract.c. Reliance on
A 1940 case, Maryland Casualty Co. v. jonathon Cook, illustrates that:a. Auditors are responsible to detect material embezzlements.b. Auditors are culpable to clients who carry surety bonds on
Reaffirmed in the 1980s and 1990s, the privity doctrine, first established in Ultramares Corp. V. Touche (1931), now requires a three-point linkage test established in a New York Court of Appeals
Among other things. Evergreen must show:a. Misstated financial statements.b. Scienter.c. Compliance with truth-in-lending laws.d. Gross negligence.Choose the correct answer.Gilmore, Inc., a privately
In this case. Evergreen is most likely a:a. Foreseeable third party.b. Foreseen beneficiary.c. Primary beneficiary.d. Client.Choose the correct answer.Gilmore, Inc., a privately owned manufacturer of
Alsap Corporation's April 1999, $35 million initial public offering included Singer & Revine's unqualified opinion on Alsap's December 31, 1998 audited financial statements. Owing to material
An auditor may be held liable under the Securities Act of 1933 for materially false or misleading financial statements if the security purchaser:a. Can establish reliance on the registration
Which of the following correctly portrays the scope of Section 10 (b) of the Securities Exchange Act of 1934?a. Section 10(b) protects shareholders of securities listed on a national stock
A client sues Jane Corning, an independent accountant, for negligence, alleging that, because she failed to apply generally/ accepted auditing standards, she failed to discover large thefts of
Accountants' liability to third parties under common law:a. Has not changed substantially over the years.b. Is identical to accountants' liability under the Securities Act of 1933.c. Is identical to
Columbus, Inc., a publicly traded corporation, is audited by Corrente & Corrente, CPAs. Because of inaccurate disclosures and serious losses from trading Columbus' securities, Columbus shareholders
Lincoln purchased Tally Corporation securities in a public offering subject to the Securities Act of 1933. Rosemere & Co., CPAs, issued an unqualified opinion on Tally Corporation's most recent
Which of the following, if material, would be a fraud?a. Errors in the application of accounting principles.b. Clerical errors in accounting data underlying the financial statements.c.
Which of the following is an inappropriate reaction to a material fraud detected in a publicly traded company?a. Report the matter to the SEC.b. Discuss the matter with at least one level of
Which of the following statements best describes an auditor's responsibility to detect fraud?a. The auditor is responsible for failing to detect fraud when the failure clearly results from not
If an auditor is certain a fraud has a material effect on financial statements and the client agrees to adjust the statements accordingly the auditor should:a. Withdraw from the engagement.b.
An auditor's responsibility for illegal acts by clients:a. Depends on any contingent monetary effects and loss contingencies resulting from the act.b. Requires that he or she assess the risk of
The Foreign Corrupt Practices Act requires that:a. Auditors of publicly held companies report all illegal payments to the SEC.b. Publicly held companies establish audit committees consisting only of
Reno Poll, chief executive officer of Lincoln Avenue Bank, phoned Valerie Valentine, an audit partner in Tally & Rosemere LLP and the engagement partner for Bloomfield Plating Company, an electrolyte
Milady's Fashions, Inc., a discount retailer of women's apparel, has an excessively large inventory on hand and is in urgent need of additional cash. The company is bordering on bankruptcy
Baldoni & Literick, LLP issued an unqualified opinion on the September 30, 1999 financial statements of Service Paper Company, a publicly owned paper products company. Owing both to an increasing
Gordon & Groton, CPAs, were the auditors of Jordan & Company, a brokerage firm and member of several national and international stock exchanges. Gordon & Groton audited and reported on the financial
Andrew Christie, a recently hired entry level staff accountant in Fallon & Goff, LLP, was assigned to audit the receivables at the Edgemere Company, a publicly traded manufacturer of roofing
Cragsmore & Company, LLP was engaged to audit the financial statements of Marlowe Manufacturing, Inc., a publicly traded corporation. Prior to preparing the audit report, Susan Cragsmore, a partner,
Jackson, an early career staff member in Harrison & Weeks, LLP, began but did not finish the audit of inventory in the Bosco Corporation, a manufacturer and marketer of expensive watches. During the
Several years ago. Dale Holden organized Holden Restaurants. Holden started with one small restaurant, but over time the restaurant became quite popular due largely to the quality of the food and
Several months prior to beginning an audit engagement of the Taunton Manufacturing Company, you point out to Taunton's CFO, Marsha Wade, that as part of your responsibilities, you will design the
The partner in charge of your firm is concerned that staff members may not be aware of current professional standards about communicating material errors, fraud, and illegal acts to parties other

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