In auditing a privately held entity, an auditor must follow the professional standards established by all of the following except:
Which of the following is not a Principle of Professional Conduct as defined by the Code of Professional Conduct?
What is meant by the Code of Professional Conduct's definition of "holding out"?
Informing a client about one's status as a CPA.
A violation of the profession's ethical standards would most likely have occurred when a CPA
Issued an unqualified opinion on the 2011 financial statements when fees for the 2010 audit were unpaid.
A violation of the profession's ethical standards would least likely have occurred when a CPA in public practice
Used a records-retention agency to store the CPA's working papers and client records.
A CPA, while performing an audit, strives to achieve independence in appearance in order to
Maintain public confidence in the profession.
The SEC has issued independence rules that differ from the AICPA's in all of the following areas except:
Working paper documentation.
Which of the following is not an element of quality control as defined by Statement of Quality Control Standards No. 8?
A basic objective of a CPA firm is to provide professional services that conform to professional standards. Reasonable assurance of achieving this basic objective is provided through
A system of quality control.
The quality control standards are concerned primarily with
A firm's monitoring of its practice.
Which of the following bodies ordinarily would have the authority to suspend or revoke a CPA's license to practice public accounting?
A state board of accountancy.
Which of the following statements best describes why the profession of certified public accountants has deemed it essential to promulgate a code of conduct and to establish a mechanism for enforcing observance of the code?
Ethical standards are established so that users of accounting services know what to expect, the professionals know what behaviors are acceptable, and overseers can take disciplinary action when appropriate.
A CPA's license to practice will ordinarily be suspended or revoked automatically for
Conviction of willful failure to file personal income tax return.
A CPA's retention of client records as a means of enforcing payment of an overdue audit fee is an action that is
Considered discreditable to the profession.
In which one of the following situations would a CPA be in violation of the AICPA Code of Professional Conduct in determining a fee?
A fee based on whether the CPA's report on the client's financial statements results in the approval of a bank loan.
In connection with a lawsuit, a third party attempts to gain access to the auditor's working papers. The client's defense of privileged communication will be successful only to the extent it is protected by the
The profession's ethical standards would most likely be considered to have been violated when the CPA represents that specific consulting services will be performed for a stated fee and it is apparent at the time of the representation that the
Actual fee would be substantially higher.
According to the ethical standards of the profession, which of the following acts is generally prohibited?
Retaining client records after an engagement is terminated prior to completion and the client has demanded its return.
According to the ethical standards of the profession, which of the following acts is generally prohibited?
Accepting a commission for recommending a product to an audit client.
In which of the following circumstances would a CPA who audits XM Corporation lack independence?
The CPA and XM's president each owns 25 percent of FOB Corporation, a closely-held company.
A CPA firm would be reasonably assured of meeting its overall responsibility to provide services that conform with professional standards by
Implementing an appropriate system of quality control.
What is the primary purpose of the acceptance and continuance of client relationships and specific engagements element of quality control?
Provide reasonable assurance that firms do not associate with clients whose management lacks integrity.
In order to achieve effective quality control, a firm of independent auditors should establish policies and procedures for
Deciding whether to accept or continue a client.
Following the issuance of a PCAOB draft report, how many days does the CPA firm have to respond to accusations?
When auditing a public company, which of the following impairs an auditor's independence?
The auditor has been a partner on the engagement for ten years.
Which of the following elements, if present, would support a finding of constructive fraud on the part of a CPA?
Gross negligence in applying generally accepted auditing standards.
Which of the following is not required for establishing an auditor's liability for negligence?
An undetected material misstatement.
Which of the following is the best statement of the general standard of performance owed by an accountant in his or her professional work?
To exercise the skill and care of the ordinarily prudent accountant in the same circumstances.
A CPA will most likely be negligent when the CPA fails to
Correct errors discovered in the CPA's previously issued audit reports.
A CPA's duty of due care to a client most likely will be breached when a CPA
Fails to follow generally accepted auditing standards.
I. Beckler was negligent in conducting the audit. II. Mac relied on the financial statements.
Both 1 & 2
The Securities Exchange Act of 1934
Regulates trading of securities subsequent to issuance.
What is the primary reason that Congress passed the Securities Litigation Uniform Standards Act of 1998?
As a result of concerns that plaintiff attorneys could get around the Private Securities Litigation Reform Act of 1995 by filing class action lawsuits involving nationally traded securities in state courts.
Why are plaintiffs motivated to bring actions under RICO?
It provides for treble damages.
Ritz Corporation wished to acquire the stock of Stale, Inc. In conjunction with its plan of acquisition, Ritz hired Fein, CPA, to audit the financial statements of Stale. Based on the audited financial statements and Fein's unqualified opinion, Ritz acquired Stale. Within 6 months, it was discovered that the inventory of Stale had been overstated by $500,000. Ritz commenced an action against Fein. Ritz believes that Fein failed to exercise the knowledge, skill, and judgment commonly possessed by CPAs in the locality, but is not able to prove that Fein either intentionally deceived it or showed a reckless disregard for the truth. Ritz also is unable to prove that Fein had any knowledge that the inventory was overstated. Which of the following two causes of action would provide Ritz with proper bases upon which Ritz would most likely prevail?
Negligence and breach of contract.
In a common law action against an accountant in a state following the Ultramares doctrine, lack of privity is a viable defense if the plaintiff
Is the client's creditor who sues the accountant for negligence.
While conducting an audit, Larson Associates, CPAs, failed to detect material misstatements included in its client's financial statements. Larson's unqualified opinion was included with the financial statements in a registration statement and prospectus for a public offering of securities made by the client. Larson knew that its opinion and the financial statements would be used for this purpose. In a suit by a purchaser against Larson for common-law negligence, Larson's best defense would be that the
Audit was conducted in accordance with generally accepted auditing standards.
Gold, CPA, rendered an unqualified opinion on the financial statements of Eastern Power Company. Egan purchased Eastern bonds in a public offering subject to the Securities Act of 1933. The registration statement filed with the SEC included the audited financial statements. Gold is being sued by Egan under Section 11 of the Securities Act of 1933 for the misstatements contained in the financial statements. To prevail, Egan must prove
Neither scienter nor reliance.
The Sarbanes-Oxley Act enhances prosecutorial tools available in major fraud cases by
Increasing criminal penalties for fraud and its cover-up. Expanding laws against fraud and obstruction of justice. Strengthening sentencing guidelines applicable to large-scale frauds.
A CPA who fraudulently performs an audit of a corporation's financial statements will
Probably be liable to any person who suffered a loss as a result of the fraud.
Requires that the auditor performs work with due care.
I. The plaintiff has justifiably relied on the CPA's misrepresentation. II. The CPA has acted in a grossly negligent manner.
Both 1 & 2
Quincy bought Teal Corp. common stock in an offering registered under the Securities Act of 1933. Worth & Co., CPAs, gave an unqualified opinion on Teal's financial statements that were included in the registration statement filed with the SEC. Quincy sued Worth under the provisions of the 1933 Act that deal with omission of facts required to be in the registration statement. Quincy must prove that
There was a material misstatement in the financial statements.
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
Neither the plaintiff's reliance on the registration statement nor the defendant's intent to deceive.
Under Section 11 of the Securities Act of 1933, which of the following standards may a CPA use as a defense?
Generally accepted auditing standards but not generally accepted fraud detection standards.
Which statement is correct concerning an auditor's statutory legal liability?
The auditor has a greater burden of defense under the Securities Act of 1933 than under the Securities Exchange Act of 1934.
Rule 10b-5 under Section 10(b) of the Securities Exchange Act of 1934 imposes liability on an accountant for violation of certain duties. Which of the following is an investor not required to prove to recover from a CPA?
The security price was artificially inflated as a result of the materially misstated financial statements.
West & Company, CPAs, was engaged by Sand Corporation to audit its financial statements. West issued an unqualified opinion on Sand's financial statements. Sand has been accused of making negligent misrepresentations in the financial statements that Reed relied upon when purchasing Sand's stock. West was not aware of the misrepresentations and was not negligent in performing the audit. If Reed sues West for damages based on Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, West will
Prevail, because some element of scienter must be proved.
Which of the following is something that the plaintiff must prove in order for an accountant to be liable for damages under Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934?
There was a material omission.
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?
Jay will be liable if the purchaser relied on Jay's unqualified opinion on the financial statements.
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