1. The SEC has issued independence rules that differ from the AICPA's in all of the following areas except: (Points : 1)

Working paper documentation.
Provision of other professional services.
Human resource and compensation-related issues.
Required communication.

Question 2.2. In regards to the Foreign Corrupt Practices Act (FCPA), external auditors (Points : 1)

Are responsible for ensuring that sufficient internal controls are maintained.
Should immediately report any discovered violation of the FCPA to the client's management.
Should verify compliance with corporate codes of conduct.
Are not subject to any penalties.

Question 3.3. The Sarbanes-Oxley Act enhances prosecutorial tools available in major fraud cases by (Points : 1)

Expanding laws against fraud and obstruction of justice.
Increasing criminal penalties for fraud and its cover-up.
Strengthening sentencing guidelines applicable to large-scale frauds.
All of these are true.

Question 4.4. A CPA, while performing an audit, strives to achieve independence in appearance in order to (Points : 1)

Reduce risk and liability.
Comply with the generally accepted standards of fieldwork.
Become independent in fact.
Maintain public confidence in the profession.

Question 5.5. An auditor can be held criminally liable for (Points : 1)

Illegal acts under common law.
Illegal acts under statutory law.
Negligent acts when the third party has privity status.
Tort of contract for failing to follow due professional care.

Question 6.6. In general, the third-party (primary) beneficiary rule as applied to a CPA's legal liability in conducting an audit is relevant to which of the following causes of action against a CPA? (Points : 1)

Fraud and constructive fraud, but not negligence.
Fraud, but not constructive fraud or negligence.
Constructive fraud and negligence, but not fraud.
Negligence, but not fraud or constructive fraud.

Question 7.7. Which of the following is not one of the four general stages in the initiation and disposition of audit-related disputes? (Points : 1)

Discovery of fraud subsequent to issuance of the audit report.
Users of financial statements incur losses.
The legal process commencing with the filing of a lawsuit.
Final resolution of the dispute.

Question 8.8. In which one of the following situations would a CPA be in violation of the AICPA Code of Professional Conduct in determining a fee? (Points : 1)

A fee based on whether the CPA's report on the client's financial statements results in the approval of a bank loan.
A fee based on an estimate of the number of hours needed to complete the engagement by auditors of various levels of experience.
A fee based on the nature of the service rendered and the CPA's particular expertise instead of the actual time spent on the engagement.
A fee based on the fee charged by the prior auditor.

Question 9.9. Hark, CPA, failed to follow generally accepted auditing standards in auditing Long Corp.'s financial statements. Long's management had told Hark that the audited statements would be submitted to several banks to obtain financing. Relying on the statements, Third Bank gave Long a loan. Long defaulted on the loan. In a jurisdiction applying the Ultramares doctrine, if Third sues Hark, Hark will (Points : 1)

Win because there was no privity of contract between Hark and Third.
Lose because Hark knew that banks would be relying on the financial statements.
Win because there was contributory negligence on the part of Third in granting the loan.
Lose because Hark was negligent in performing the audit.

Question 10.10. In which of the following circumstances would a CPA be bound by ethics to refrain from disclosing any confidential information obtained during the course of a professional engagement? (Points : 1)

The CPA is issued a summons enforceable by a court order that orders the CPA to present confidential information.
A major stockholder of a client company seeks accounting information from the CPA after management declined to disclose the requested information.
Confidential client information is requested as part of a quality review of the CPA's practice by a review team authorized by the AICPA.
An inquiry by a disciplinary body of a state CPA society requests confidential client information.

Question 11.11. Which of the following is not within the class of foreseen users of an accountant's work product? (Points : 1)

A prospective shareholder of the client.
A lender bank when the accountant knows only that the client will use the financial statements to obtain a loan from an unspecified source.
A bank when the accountant knows the client will rely on the financial statements as the basis for a loan from the bank.
An investor if the accountant knows that the client is seeking capital from a select group of investors.

Question 12.12. To be successful in a civil action under Section 11 of the Securities Act of 1933 concerning liability for a misleading registration statement, the plaintiff must prove (Points : 1)

The plaintiff's reliance on the registration statement and the defendant's intent to deceive.
Neither the plaintiff's reliance on the registration statement nor the defendant's intent to deceive.
The plaintiff's reliance on the registration statement but not the defendant's intent to deceive.
The defendant's intent to deceive but not the plaintiff's reliance on the registration statement.

Question 13.13. The Securities Exchange Act of 1934 (Points : 1)

Established a voluntary disclosure mechanism for issuers of publicly traded securities.
Primarily relates to initial sales of securities to the public.
Regulates all sales of securities.
Regulates trading of securities subsequent to issuance.

Question 14.14. With respect to ethics, the rights-based approach (Points : 1)

Suggests that auditors should always verify ownership of a client's material tangible assets.
Is primarily concerned with equity and impartiality.
Suggests that an individual's actions should not violate the rights of any individual.
Recognizes that decisions involve trade-offs between costs and benefits.

Question 15.15. With respect to ethics, the utilitarian theory (Points : 1)

Suggests that auditors should always verify ownership of a client's material tangible assets.
Is primarily concerned with equity and impartiality.
Suggests that an individual's actions should not violate the rights of any individual.
Recognizes that decisions involve trade-offs between costs and benefits.

Question 16.16. Which of the following is not required for establishing an auditor's liability for negligence? (Points : 1)

An undetected material misstatement.
Failure to exercise due care.
A connection between the auditor's negligence and a plaintiff's loss.
A duty to conform to a standard of care.

Question 17.17. Jay and Co., CPAs, audited the financial statements of Maco Corp. Jay intentionally gave an unqualified opinion on the financial statements even though material misstatements were discovered as a result of the audit. The financial statements and Jay's unqualified opinion were included in a 10-K (annual report filed with the SEC) for the company. Which of the following statements is correct regarding Jay's liability to a purchaser of the offering under Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934? (Points : 1)

Jay will be liable if the purchaser relied on Jay's unqualified opinion on the financial statements.
Jay will be liable if Jay was negligent in conducting the audit.
Jay will not be liable if the purchaser's loss was under $500.
Jay will not be liable if the misstatement resulted from an omission of a material fact by Jay.

Question 18.18. Following the issuance of a PCAOB draft report, how many days does the CPA firm have to respond to accusations? (Points : 1)

10 days.
30 days.
50 days.
90 days.

Question 19.19. Within the context of quality control, the primary purpose of continuing professional education and training activities is to enable a CPA firm to provide personnel within the firm with (Points : 1)

Technical training that ensures proficiency as an auditor.
Opportunities for career advancement outside the accounting firm.
Knowledge required to fulfill assigned responsibilities.
Knowledge required to perform a peer review.

Question 20.20. Mavis, CPA, has audited the financial statements of South Bay Sales Incorporated for several years and had always been paid promptly for services rendered. Last year's audit invoices have not been paid because South Bay is experiencing cash flow difficulties and the current year's audit is scheduled to commence in one week. With respect to the past due audit fees, Mavis should (Points : 1)

Perform the scheduled audit and allow South Bay to pay when the cash flow difficulties are alleviated.
Perform the scheduled audit only after arranging a definite payment schedule and securing notes signed by South Bay.
Inform South Bay's management that the past due audit fees are considered an impairment of auditor independence.
Inform South Bay's management that the past due audit fees may be considered a loan on which interest must be imputed for financial statement purposes.

Question 21.21. Which of the following is allowable for a CPA? (Points : 1)

A used car loan from a banking client where the client has a lien on the car.
An uncollateralized signature loan from a client.
Owning more than five percent of the outstanding shares of client stock in a retirement account.
The audit engagement partner serves on the client's audit committee.

Question 22.22. Why are plaintiffs motivated to bring actions under RICO? (Points : 1)

It pertains exclusively to auditors' actions.
It guarantees that cases will be heard in state courts.
It provides for treble damages.
It holds auditors to standards that exceed reasonable assurance.

Question 23.23. A CPA firm would be reasonably assured of meeting its overall responsibility to provide services that conform with professional standards by (Points : 1)

Adhering to generally accepted accounting principles.
Implementing an appropriate system of quality control.
Joining professional societies that enforce ethical conduct.
Maintaining an attitude of independence in its engagements.

Question 24.24. What is meant by the Code of Professional Conduct's definition of "holding out"? (Points : 1)

Informing a client about one's status as a CPA.
Withholding an audit report until the fee is paid.
Not sharing audit documentation with a successor auditor.
Not suggesting that management make an adjusting entry that is deemed immaterial.

Question 25.25. In which of the following circumstances would a CPA who audits XM Corporation lack independence? (Points : 1)

The CPA and XM's president are both on the board of directors of COD Corporation.
The CPA and XM's president each owns 25 percent of FOB Corporation, a closely-held company.
The CPA has an automobile loan from XM, which is a savings and loan organization and the loan is collateralized by the automobile.
The CPA reduced XM's usual audit fee by 40 percent because XM's financial condition was unfavorable.