AICPA Ethics, Governance & Business Law 2 — Questions and Answers
Question 1: Under the AICPA Code of Professional Conduct, which threat to independence arises when a CPA has a close personal relationship with a client's management?
- Self-review threat
- Familiarity threat (Correct answer)
- Advocacy threat
- Self-interest threat
Correct answer: Familiarity threat
A familiarity threat occurs when a CPA becomes too sympathetic to a client's interests due to a close personal or long-standing relationship.
Question 2: Under the Sarbanes-Oxley Act, who is directly responsible for establishing and maintaining internal controls over financial reporting?
- External auditors
- The audit committee
- Company management (CEO and CFO) (Correct answer)
- The board of directors
Correct answer: Company management (CEO and CFO)
SOX Section 302 and 404 place direct responsibility on the CEO and CFO to certify and maintain adequate internal controls over financial reporting.
Question 3: A CPA firm that performs bookkeeping services for an audit client and then audits those same records faces which primary independence threat?
- Self-review threat (Correct answer)
- Familiarity threat
- Adverse interest threat
- Undue influence threat
Correct answer: Self-review threat
A self-review threat occurs when a CPA audits records or systems they or their firm previously prepared.
Question 4: Under the UCC Article 2, when does title to goods pass from seller to buyer in the absence of a specific agreement?
- When the contract is signed
- When payment is received in full
- When the seller completes delivery obligations (Correct answer)
- When the buyer takes physical possession
Correct answer: When the seller completes delivery obligations
Under UCC Article 2, title passes to the buyer at the time and place the seller completes performance of delivery obligations.
Question 5: Which corporate governance principle requires that board members act in the best interest of shareholders rather than personal gain?
- Duty of care
- Duty of loyalty (Correct answer)
- Business judgment rule
- Duty of disclosure
Correct answer: Duty of loyalty
The duty of loyalty requires directors and officers to prioritize corporate and shareholder interests over their own personal financial interests.
Question 6: An accountant discovers a client is engaged in a material fraud. Under the AICPA's ethical standards, what is the accountant's primary obligation regarding current-year audit findings?
- Report directly to the SEC immediately
- Withdraw from the engagement if the client refuses to correct the fraud (Correct answer)
- Issue an unmodified opinion with a supplemental fraud disclosure
- Notify the client's competitors as a public interest measure
Correct answer: Withdraw from the engagement if the client refuses to correct the fraud
If management refuses to correct a material fraud, the CPA should withdraw from the engagement to avoid association with fraudulent financial statements.
Question 7: Under agency law, which type of authority is created when a principal's words or conduct reasonably lead a third party to believe the agent has authority to act?
- Express authority
- Implied authority
- Apparent authority (Correct answer)
- Ratified authority
Correct answer: Apparent authority
Apparent authority (also called ostensible authority) arises when the principal's representations cause a third party to reasonably believe the agent is authorized.
AICPA Ethics, Governance & Business Law 2
Under the AICPA Code of Professional Conduct, which threat to independence arises when a CPA has a close personal relationship with a client's management?