CA Regulatory Compliance & Ethics 2 — Questions and Answers
Question 1: Under the AICPA Code of Professional Conduct, which threat arises when a CPA audits financial statements that they helped prepare?
- Advocacy threat
- Self-review threat (Correct answer)
- Familiarity threat
- Intimidation threat
Correct answer: Self-review threat
A self-review threat occurs when a CPA must evaluate their own prior work, impairing objectivity.
Question 2: The Sarbanes-Oxley Act Section 302 requires which of the following from public company CEOs and CFOs?
- Annual peer review of audit workpapers
- Personal certification of the accuracy of financial reports (Correct answer)
- Mandatory rotation of audit partners every 3 years
- Disclosure of all non-audit services performed by auditors
Correct answer: Personal certification of the accuracy of financial reports
SOX Section 302 requires CEOs and CFOs to personally certify the accuracy and completeness of financial reports filed with the SEC.
Question 3: Which of the following best describes the 'conceptual framework' approach used in professional ethics?
- A checklist of prohibited behaviors
- A rules-based system with specific prohibitions for each scenario
- A principles-based approach requiring identification and evaluation of threats and safeguards (Correct answer)
- A set of mandatory disclosures required in all client engagements
Correct answer: A principles-based approach requiring identification and evaluation of threats and safeguards
The conceptual framework requires professionals to identify threats to compliance, evaluate their significance, and apply safeguards to reduce them to an acceptable level.
Question 4: A CPA firm discovers that a client has materially misstated revenue in previously issued financial statements. What is the firm's primary obligation?
- Immediately notify the SEC without informing the client
- Advise the client to restate the financials and withdraw the audit report if the client refuses (Correct answer)
- Issue a qualified opinion on the next year's statements
- Disclose the misstatement to all shareholders directly
Correct answer: Advise the client to restate the financials and withdraw the audit report if the client refuses
The CPA must advise the client to restate the financials; if the client refuses, the auditor should withdraw the report and notify appropriate parties.
Question 5: Under PCAOB standards, how long must audit firms retain audit documentation?
- 3 years from the report date
- 5 years from the report date
- 7 years from the report date (Correct answer)
- 10 years from the report date
Correct answer: 7 years from the report date
PCAOB AS 1215 requires audit firms to retain audit documentation for at least 7 years from the report release date.
Question 6: Which body sets independence standards for auditors of public companies in the United States?
- AICPA
- FASB
- PCAOB (Correct answer)
- GAO
Correct answer: PCAOB
The PCAOB (Public Company Accounting Oversight Board), established by SOX, sets auditing and independence standards for public company audits.
Question 7: A CPA's client asks them to recommend the client's business to the CPA's other clients in exchange for a referral fee. Which ethical concern is MOST relevant?
- Confidentiality
- Objectivity and conflicts of interest (Correct answer)
- Competence
- Due professional care
Correct answer: Objectivity and conflicts of interest
Accepting referral fees can create a conflict of interest that compromises the CPA's objectivity when advising clients.
CA Regulatory Compliance & Ethics 2
Under the AICPA Code of Professional Conduct, which threat arises when a CPA audits financial statements that they helped prepare?