Module B + C HW

Question 1

1. Which of the following is not one of the guidelines for advertising for CPAs practicing public accounting?
   A. Advertising should be informative and objective.
   B. Advertising should be restricted in frequency, size, style, etc.
   C. Advertising should not create expectations of favorable results.
   D. Advertising may not contain fee estimates when a CPA knows they are not representative.

Answer 1

Advertising should be restricted in frequency, size, style, etc.

Question 2

2. The Securities and Exchange Commission document that governs reporting of all business, analytical, and supplementary disclosures in
   reports required to be filed with the SEC is
   A. Regulation S-X.
   B. Regulation S-K.
   C. Form 10-K.
   D. Financial Reporting Releases.

Answer 2

Regulation S-K.

Question 3

3. Rule 201 of the Rules of Conduct contains no requirement that members of the AICPA comply with which of the following standards and
   interpretations designated by the AICPA Council?
   A. Independence.
   B. Due professional care.
   C. Professional competence.
   D. Planning and supervision.

Answer 3

Independence.

Question 4

4. The primary defense for auditors against a claim of ordinary negligence is to offer evidence that the
   A. audit was conducted in accordance with GAAS.
   B. plaintiff contributed to the negligence.
   C. financial statements did not contain a material misstatement.
   D. plaintiff was not in privity or not foreseen.

Answer 4

audit was conducted in accordance with GAAS.

Question 5

5. In general, which of the following parties would have the lowest burden of proof in bringing suit against an auditor?
   A. A lender who meets the definition of a primary beneficiary.
   B. A lender who meets the definition of a foreseen third party.
   C. A third-party investor under the Securities Act.
   D. Clients.

Answer 5

A third-party investor under the Securities Act.

Question 6

6. Which of the following is not one of the ideals expressed in the Principles of Professional Conduct?
A. Responsibilities.
B. Due care.
C. Self-regulation.
D. Public interest.

Answer 6

Self-regulation.

Question 7

7. The basic rationale for permitting CPAs to accept commissions is that
   A. state boards of accounting permit commissions and contingent fees.
   B. professional liability insurance policies permit commission work.
   C. it does not affect independence in attest functions.
   D. other professionals charge commissions in personal financial planning engagements.

Answer 7

other professionals charge commissions in personal financial planning engagements.

Question 8

8. The landmark case that stated criteria for auditors’ liability to third parties for gross negligence or fraud, but not ordinary negligence, was
   A. 1136 Tenants’ Corp. v. Max Rothenberg & Co.
   B. Smith v. London Assurance Corp.
   C. Ultramares Corp. v. Touche.
   D. McKesson & Robbins Inc.

Answer 8

Ultramares Corp. v. Touche.

Question 9

9. Under section 11 of the Securities Act of 1933, a plaintiff suing for damages must prove
   A. a privity relationship with auditors.
   B. materially misstated financial statements caused the damages or loss.
   C. reliance on the financial statements in registration statement.
   D. damages or loss from the purchase of securities.

Answer 9

damages or loss from the purchase of securities.

Question 10

10. Which of the following would be permitted by the AICPA?
    A. Non-CPAs own 25% of the firm. The non-CPAs do not have a college degree.
    B. Fred Smith, a non-CPA, owns 10% of the firm. Mr. Smith has a full-time job separate from the firm and views the ownership
    purely as an investment.
    C. Non-CPAs own 40% of the firm and follow all AICPA requirements.
    D. John Smith, CPA owns 50% of the firm and Joan Jones, non-CPA, owns 50%.

Answer 10

Non-CPAs own 40% of the firm and follow all AICPA requirements

Question 11

11. Which of the following is a third party that is known by name to the auditor and for whose purpose the audit is conducted?
A. Foreseen third party.
B. Subrogee.
C. Primary beneficiary.
D. Foreseeable third party.

Answer 11

Primary beneficiary.

Question 12

12. The Private Securities Litigation Reform Act adopted the doctrine of
A. joint and several liability.
B. foreseen third parties.
C. foreseeable third parties.
D. proportionate liability.

Answer 12

proportionate liability.

Question 13

13. Since the Ernst & Ernst v. Hochfelder court decision, plaintiffs suing for damages under Rule 10b-5 must prove
    A. ordinary negligence on the part of auditors.
    B. scienter on the part of auditors.
    C. the financial statements contained a material misstatement.
    D. the reliance on the materially misstated financial statements caused the damages and loss.

Answer 13

scienter on the part of auditors

Question 14

14. A CPA firm’s independence will be impaired if a retired partner is a director of a non‑SEC client and the retired partner
    A. has fixed retirement benefits.
    B. is no longer active in the firm.
    C. retains only office privileges with the firm.
    D. is no longer associated with the firm.

Answer 14

retains only office privileges with the firm.

Question 15

15. Plaintiffs bringing action under common law need not prove that
    A. the financial statements contained a material misstatement.
    B. they have a “reliance letter” from auditors.
    C. they were damaged or suffered a loss.
    D. auditors failed to exercise the appropriate level of professional care and were responsible for the damages.

Answer 15

they have a “reliance letter” from auditors.

Question 16

16. Most state boards of accountancy do not
    A. limit the attest function to license holders.
    B. regulate tax practice.
    C. administer an ethics examination.
    D. issue licenses to practice accounting.

Answer 16

regulate tax practice.

Question 17

17. A member in public practice can receive a contingent fee for
    A. an audit or review of a financial statement.
    B. a compilation of a financial statement.
    C. an examination of prospective financial statements.
    D. representing a client in an IRS tax audit.

Answer 17

representing a client in an IRS tax audit.

Question 18

18. If a CPA refuses a client because there would be a potential violation of the AICPA Code of Professional Conduct, the CPA is following the
ethical philosophy of
A. the utilitarianism principle.
B. the imperative principle.
C. virtue ethics.
D. the generalization principle.

Answer 18

the imperative principle.

Question 19

19. Under generally accepted auditing standards, auditors are responsible for detecting
    A. material misstatements of financial statements.
    B. all manners of fraud.
    C. theft and illegal acts.
    D. violations of auditing standards.

Answer 19

material misstatements of financial statements.

Question 20

20. If a CPA has violated a Rule of Conduct, the AICPA trial board panel does not have the power to
    A. suspend membership in AICPA and state society.
    B. acquit the CPA.
    C. revoke CPA certificate.
    D. admonish the CPA.

Answer 20

revoke CPA certificate.