Audit class 2 VM

2.1.1. Which AICPA Conduct Rule applies only to members in the practice of public accounting?

• General Standards

• Accounting Principles

• Independence

• Compliance with standards

2.1.2. The AICPA Code of Professional Conduct

• 1. Prohibits encroachment on the practice of another CPA.

• 1. Prohibits offers of employment to employees of another CPA without notice.

• 1. Expects the CPA to honor the public trust.

• 1. Encourages but does not require CPAs to refrain from advertising or engaging in other forms of solicitation.

Answer explanation

DISCUSSION: The nonbinding Principles state that members should act to benefit the public interest and honor the public trust

2.1.3. Which of the following statements best explains why the CPA profession has found it essential to establish ethical standards and means for ensuring their observance?

• 1. A distinguishing mark of a profession is its acceptance of responsibility to the public.

• 1. A requirement for a profession is to establish ethical standards that stress primarily a responsibility to clients and colleagues.

• 1. Ethical standards that emphasize excellence in performance over material rewards establish a reputation for competence and Character

• 1. Vigorous enforcement of an established code of ethics is the best way to prevent unscrupulous acts

Answer explanation

DISCUSSION: According to the Principles section of the AICPA Code of Professional Cay that, Members should accept the obligation toa trint, anay temomil serve the public. interest, honor the public trusts hing mariatrate commitment to professionalism. A distinguishing mark of a profession is acceptance of its responsibility to the public."

2.1.4. The AICPA Code of Professional Conduct contains both general ethical principles that are aspirational in character and also a

• 1. List of violations that would cause the automatic suspension of a member's license.

• 1. Set of specific, mandatory rules describing minimum levels of conduct a member must
     maintain.

• 1. Description of a member's procedures for responding to an inquiry from a trial board.

• 1. List of specific acts discreditable to the profession.

Answer explanation

DISCUSSION: The AICPA Code contains Principles and Rules. The principles are goal-oriented. The rules provide more specific guidance. The principles call for an unswervino commitment to honorable behavior but are not mandatory. The AICPA bylaws require members to adhere to the rules. Those who fail to comply with the rules may face disciplinary action.

2.1.5. The AICPA Code of Professional Conduct does not include enforceable Rules of Conduct on which of the following?

• 1. Independence and integrity and objectivity.

• 1. Professional competence and due professional care.

• 1. Accounting principles.

• 1. Responsibilities to colleagues.

Answer explanation

DISCUSSION: The Code previously included two rules regarding colleagues, but they were deleted after threats of antitrust actions against the profession by the Federal Trade Commission and the U.S. Justice Department. The principles express the profession's recognition of its responsibilities to colleagues as well as to the public and clients, but adherence to them is not mandatory

2.1.6. CPAs are required to complete engagements competently. Competence includes all of the following except

• 1. An unbiased mental attitude.

• 1. The technical qualifications of the CPA's staff.

• 1. The capacity to exercise judgment.

• 1. The ability to research subject matter and consult with others.

Answer explanation

DISCUSSION: The Code requires the CPA to maintain an unbiased mental attitude. A member in public practice must be independent in the performance of professional services as required by standards issued by bodies designated by Council.

2.1.7. When management refuses to disclose material noncompliance with laws and regulations identified by the independent auditor, the independent auditor may be charged with violating the AICPA Code of Professional Conduct for

• 1. Disclaiming an opinion.

• 1. Withdrawing from the engagement.

• 1. Failing to uncover the illegal activities during prior audits.

• Reporting these activities to those charged with governance.

Answer explanation

DISCUSSION: When the auditor concludes that noncompliance is material and has not been appropriately disclosed or accounted for, a normal disclaimer of opinion is not suitable. The auditor should disclose the problem in a report that includes either a qualified or an adverse opinion. If management or those charged with governance do not accept a modified opinion, the auditor may withdraw from the engagement. Moreover, the auditor may, in some circumstances, have a duty of disclosure outside the entity, e.g., in a report to the SEC on Form 8-K or in a response to a subpoena. The Private Securities Litigation Reform Act of 1995 also may apply.

2.2.1. Which of the following most completely describes how independence has been defined by the accounting profession?

• 1. Performing an audit from the viewpoint of the public.

• 1. Avoiding the appearance of significant interests in the affairs of an audit client.

• 1. Possessing the ability to act with integrity and objectivity

• 1. Accepting responsibility to act professionally and in accordance with a professional code of ethics

Answer explanation

DISCUSSION: Integrity, objectivity, and independence are overlapping concepts. Integrity requires honesty and candor within the limits of confidentiality. It also requires, among other things, observation of the Principle of objectivity and independence. Objectivity is impartiality, intellectual honesty, and freedom from conflicts of interest. Independence precludes relationships that "may appear to impair objectivity in rendering attestation services." Thus, in rendering services, a member in public practice should be independent in appearance as well as in fact

2.2.2. Jaye B. Honest, CPA, was offered the engagement to audit Wicket Corporation for the year ended June 30, Year 3. She had served as a director of Wicket Corporation until June 30, Year 1, and her spouse currently owns 600 of the 10,000 outstanding shares of Wicket Corporation. Jaye disassociated from Wicket prior to being offered the engagement. Moreover, the engagement does not cover any period that includes Jaye's association or employment with Wicket. Under the AICPA Code of Professional Conduct, she should

• 1. Accept the engagement.

• 1. Let a partner from the same office accept and conduct the engagement.

• 1. Refuse the engagement because she had served as director

• 1. Refuse the engagement because of her spouse’s stock ownership

Answer explanation

DISCUSSION: According to the Code, independence is impaired if, during the period of the professional engagement, a covered member had or was committed to acquire any direct or material indirect financial interest in a client. With some exceptions, the immediate family (spouse, spousal equivalent, or dependent) of a covered member is subject to the Code. Thus, the CPA should refuse the engagement to audit the company because her spouse's stock ownership is a direct interest that is ascribed to her. Materiality is not an issue.

2.2.3. The Conceptual Framework for AICPA

Independence Standards

• 1. Adopts a risk-based approach to analysis of independence matters.

• 1. Defines independence of mind as avoiding circumstances in which reasonable persons would conclude that integrity or objectivity has been compromised.

• 1. Describes threats to independence as circumstances that impair independence.

• 1. States that safeguards must eliminate threats to independence to be considered effective.

Answer explanation

DISCUSSION: The risk-based approach evaluates the risk that a PA is ned third party wior is perceived bya reasonable and informed third party with knowledge of al relevant information as not independent. That risk must be reduced to an acceptable level to establish independence.

Risk is acceptable when threats are acceptable. They may be acceptable because of the types of threats and their potential effect. Moreover, threats may be sufficiently mitigated or eliminated by safeguards. Threats are acceptable when is no reasonable to expect that they will compromise professional Judgment