B. Acy Bachelor of Accountancy Ethics and Professional Responsibility 2 — Questions and Answers
Question 1: Under the AICPA independence rules, a CPA is considered to lack independence if:
- They have taken a continuing education course on the client's industry
- They own a direct financial interest in an attest client (Correct answer)
- They attended a client's product launch event
- They have a friend who works at the client
Correct answer: They own a direct financial interest in an attest client
Owning even a small direct financial interest in an attest client impairs independence under the AICPA Code.
Question 2: The concept of 'materiality' in accounting ethics means information is material if:
- It relates to fixed assets only
- Its omission or misstatement could influence decisions of financial statement users (Correct answer)
- It exceeds 10% of net income
- It requires disclosure in the footnotes
Correct answer: Its omission or misstatement could influence decisions of financial statement users
Materiality is a judgment-based threshold focused on whether information could affect the economic decisions of users.
Question 3: Which act established the Public Company Accounting Oversight Board (PCAOB)?
- Securities Act of 1933
- Securities Exchange Act of 1934
- Sarbanes-Oxley Act of 2002 (Correct answer)
- Dodd-Frank Act of 2010
Correct answer: Sarbanes-Oxley Act of 2002
SOX created the PCAOB in 2002 to oversee audits of public companies and set auditing standards for registered firms.
Question 4: An accountant who discovers a material misstatement that management refuses to correct should:
- Immediately resign from the engagement
- Ignore it if immaterial to the auditor
- Evaluate the effect on the audit report and consider reporting to governance or regulators (Correct answer)
- Accept management's explanation without further action
Correct answer: Evaluate the effect on the audit report and consider reporting to governance or regulators
Uncorrected material misstatements require the auditor to modify the audit opinion and potentially escalate to audit committee or regulators.
Question 5: The principle of 'due professional care' under professional standards requires CPAs to:
- Be infallible and make no errors
- Exercise the care and diligence of a reasonably competent professional (Correct answer)
- Accept only engagements within their exact area of expertise
- Complete work faster than industry averages
Correct answer: Exercise the care and diligence of a reasonably competent professional
Due professional care requires the same level of care as a reasonably competent CPA, not perfection.
Question 6: Which of the following situations represents a self-review threat to independence?
- An auditor reviews work performed by a junior colleague
- An auditor audits financial statements they helped prepare (Correct answer)
- An audit partner reviews the engagement file
- A reviewer checks tax returns for errors
Correct answer: An auditor audits financial statements they helped prepare
A self-review threat occurs when a CPA audits their own work, compromising objectivity because they may not identify their own errors.
B. Acy Bachelor of Accountancy Ethics and Professional Responsibility 2
Under the AICPA independence rules, a CPA is considered to lack independence if: