Certified Public Accountant Ethics & Professional Responsibilities 2 — Questions and Answers
Question 1: Under Circular 230, what is the minimum standard for a tax position a CPA can recommend to a client?
- Absolute certainty of success
- A realistic possibility of being sustained (Correct answer)
- A frivolous argument with merit
- Guaranteed audit protection
Correct answer: A realistic possibility of being sustained
Circular 230 requires that a tax practitioner have a reasonable basis for a position and, for signing a return, that the position have at least a realistic possibility (approximately 1-in-3 chance) of success.
Question 2: What does the AICPA's concept of 'due professional care' require of a CPA?
- Guarantee the accuracy of all work product
- Exercise the skill and diligence of a reasonably competent professional (Correct answer)
- Accept only engagements within their area of expertise
- Consult with legal counsel on all tax matters
Correct answer: Exercise the skill and diligence of a reasonably competent professional
Due professional care requires CPAs to act diligently and competently, applying the skill level of a reasonably competent CPA — not guaranteeing perfect results.
Question 3: A CPA firm is being peer reviewed. Which type of peer review evaluates a firm's system of quality control for all its accounting and auditing engagements?
- Engagement review
- System review (Correct answer)
- Compliance review
- Practice inspection
Correct answer: System review
A system review assesses a firm's system of quality control for its accounting and auditing practice, whereas an engagement review only examines selected work products.
Question 4: Which AICPA standard addresses a CPA's responsibility when they know a colleague has violated the Code of Professional Conduct?
- Rule 102 requires immediate reporting to state board
- There is no reporting obligation under the AICPA Code (Correct answer)
- Rule 501 requires filing a complaint with the AICPA
- CPAs must report violations under the whistleblower rule
Correct answer: There is no reporting obligation under the AICPA Code
The AICPA Code of Professional Conduct does not impose an affirmative duty on CPAs to report another member's violations, though members may choose to report them.
Question 5: What is the primary purpose of the Public Company Accounting Oversight Board (PCAOB)?
- Set GAAP standards for public companies
- Oversee auditors of public companies to protect investors (Correct answer)
- Regulate the SEC's enforcement actions
- Issue ethics standards for all CPAs
Correct answer: Oversee auditors of public companies to protect investors
The PCAOB was established by SOX to oversee the audits of public companies and broker-dealers in order to protect investors and the public interest.
Question 6: A CPA lacks the competence to complete a specific engagement. Under AICPA standards, what should the CPA do?
- Complete the work and disclose limitations in the report
- Decline the engagement or obtain necessary competence (Correct answer)
- Hire a subcontractor without telling the client
- Accept the engagement and charge a lower fee
Correct answer: Decline the engagement or obtain necessary competence
A CPA should not accept engagements they cannot competently perform; they must either acquire the necessary knowledge/skills or refer the client to a competent practitioner.
Certified Public Accountant Ethics & Professional Responsibilities 2
Under Circular 230, what is the minimum standard for a tax position a CPA can recommend to a client?