CPA ETHICS EXAM WITH CORRECT SOLUTIONS
A bank has agreed to refer to Hecht its customers who need income tax advice and preparation
of tax returns. The bank will receive a referral fee from Hecht for each client he obtains. Has
Hecht, a member,violated the Code of Professional Conduct by paying these fees?
(a) Yes, he has violated the Code by paying such a fee to a person not in the practice of public
accounting.
(b) No, he has not violated the code if he tells these new clients that he paid a referral fee to
obtain their work. - ANSWER-(b) is correct. He may pay a referral fee to obtain a client. He must
disclose the referral fee to the client (Rule 503 C and Staff Responses to Inquires).
A branch manager instructs his controller, a member,to increase the recorded value of the
branch's year end inventory by $50,000, an amount that is material to the firm's consolidated
financial statements. There is no basis for such an increase; however, it will raise the branch's
profits enough so that the manager will receive an incentive bonus of$5,000. The controller,
afraid of being fired if he refuses, follows the manager's instructions and increases the recorded
inventory amount by $50,000. The controller
(a) has not violated the ethics code.
(b) has violated the ethics code. - ANSWER-(b) is correct. The controller violated the ethics code
by making a materially false entity in the financial records (Interpretation 102-1 (a).)
A calendar-year privately held review client of Andrew & Co. CPAs, has paid only $15,000 of the
$25,000 fees billed to them in March 1996. Andrew & Co. 's records show that $18,000 of the
time charges and expenses were incurred in 1995 and the balance of $7 ,000 was time charges
and expenses for January and February 1996. The work consisted of review of the 1995 financial
statements, 1995 federal and state income tax returns and some management consulting
services. The unpaid balance of $10,000 is not significant to Andrews & Co.
,In May 1997, Andrews & Co. started and completed their work on the client's 1996 financial
statements. They plan on issuing their report on these financial statements during the early part
of June 1997. A staff person questions, in light of the unpaid fees, whether or not they are
independent. In answer to her query which of the following statements is true?
(a) To maintain independence wit - ANSWER-(b) is correct. The past due fee must be paid before
the report is issued. Prior year 's work that the client
has not paid for was finished in February 1996.
Sixteen months later in June 1997 they will issue
the report on the current work. A ruling says that
independence is impaired if fees for work performed more than one year prior are unpaid when
the report for the current year is issued (Ruling 52).
(a) is incorrect. If the $10,000 is paid before the
report is issued in June there is no independence
impairment.
( c) is incorrect since the significance to Andrew &
Co. CPAs of the amount of the unpaid fee does not make any difference.
( d) is incorrect since the ruling says billed or unbilled fees or a note receivable arising from such
fees that are unpaid impair independence. An agreement to pay in four equal payments is
equivalent to a note. (Ruling 52)
A CPA and his firm have been threatened, in writing,
with a lawsuit by an audit client who claims that his
prior year's inventory was understated and as a result
his firm was not able to obtain the financing it needed
to expand operations. His letter states that he believes
faulty auditing procedures were responsible for the
alleged understatement of inventory. The amount of
,understated inventory at issue is $50,000. In this situation
the CPA would be
(a) independent with respect to his client since it
has not been proven that the auditing procedures
were at fault.
(b) not independent with respect to his client since
the allegation, though not proven, has been made
that his audit was not adequate. - ANSWER-(b) is correct. Independence is impaired because of
the threat of faulty auditing (Interpretation 101-6,
Litigation between client and member 3).
A CPA firm placed the following ad in a news paper:
"We are pleased to announce that Frank Jones who
spent the last twenty years with the Internal Revenue
Service has joined our fum as a partner. The
influence of friends Mr. Jones has in the Internal
Revenue Service will prove invaluable in handling
investigations by that department. Why not see us
with respect to your tax problems?"
This _______________ ad a violation of the Code of
Professional Conduct.
(a) is
(b) is not - ANSWER-(a) is correct. This ad is not allowed since it
implies the ability to influence the IRS (Interpretation 502-2,2).
A CPA firm presents a seminar on the latest changes
, in the federal income tax laws. Invitations to attend
the seminar are sent by letter to both clients and
non-clients. A portion of the letter reads: "James
Smith of om firm 's Washington, D.C. office will
chair the seminar. He has been a partner in our firm
for more than 20 years and during that period has
specialized in the income tax area. Mr. Smith is a
recognized expert in the income tax field and has
given talks on the subject to many national groups.
Currently he is a member of the AICPA Federal
Taxation Executive Committee and Chairman of our
State CPA Society's Committee on Taxation." The
presentation of such a seminar a violation
of the Code of Professional Conduct.
(a) is
(b) is not - ANSWER-(b) is correct. There are no prohibitions against
inviting non clients to seminars presented by a
member's firm (Rule 502). The only prohibitions are
against false, misleading or deceptive advertising or solicitation.
A CPA firm that hires from 15 to 20 new staff people
a year obtains 90 percent of its new people from
the four colleges in the area. For the last three years,
the graduating classes of these colleges have been
composed of 50 percent women and 50 percent
A bank has agreed to refer to Hecht its customers who need income tax advice and preparation
of tax returns. The bank will receive a referral fee from Hecht for each client he obtains. Has
Hecht, a member,violated the Code of Professional Conduct by paying these fees?
(a) Yes, he has violated the Code by paying such a fee to a person not in the practice of public
accounting.
(b) No, he has not violated the code if he tells these new clients that he paid a referral fee to
obtain their work. - ANSWER-(b) is correct. He may pay a referral fee to obtain a client. He must
disclose the referral fee to the client (Rule 503 C and Staff Responses to Inquires).
A branch manager instructs his controller, a member,to increase the recorded value of the
branch's year end inventory by $50,000, an amount that is material to the firm's consolidated
financial statements. There is no basis for such an increase; however, it will raise the branch's
profits enough so that the manager will receive an incentive bonus of$5,000. The controller,
afraid of being fired if he refuses, follows the manager's instructions and increases the recorded
inventory amount by $50,000. The controller
(a) has not violated the ethics code.
(b) has violated the ethics code. - ANSWER-(b) is correct. The controller violated the ethics code
by making a materially false entity in the financial records (Interpretation 102-1 (a).)
A calendar-year privately held review client of Andrew & Co. CPAs, has paid only $15,000 of the
$25,000 fees billed to them in March 1996. Andrew & Co. 's records show that $18,000 of the
time charges and expenses were incurred in 1995 and the balance of $7 ,000 was time charges
and expenses for January and February 1996. The work consisted of review of the 1995 financial
statements, 1995 federal and state income tax returns and some management consulting
services. The unpaid balance of $10,000 is not significant to Andrews & Co.
,In May 1997, Andrews & Co. started and completed their work on the client's 1996 financial
statements. They plan on issuing their report on these financial statements during the early part
of June 1997. A staff person questions, in light of the unpaid fees, whether or not they are
independent. In answer to her query which of the following statements is true?
(a) To maintain independence wit - ANSWER-(b) is correct. The past due fee must be paid before
the report is issued. Prior year 's work that the client
has not paid for was finished in February 1996.
Sixteen months later in June 1997 they will issue
the report on the current work. A ruling says that
independence is impaired if fees for work performed more than one year prior are unpaid when
the report for the current year is issued (Ruling 52).
(a) is incorrect. If the $10,000 is paid before the
report is issued in June there is no independence
impairment.
( c) is incorrect since the significance to Andrew &
Co. CPAs of the amount of the unpaid fee does not make any difference.
( d) is incorrect since the ruling says billed or unbilled fees or a note receivable arising from such
fees that are unpaid impair independence. An agreement to pay in four equal payments is
equivalent to a note. (Ruling 52)
A CPA and his firm have been threatened, in writing,
with a lawsuit by an audit client who claims that his
prior year's inventory was understated and as a result
his firm was not able to obtain the financing it needed
to expand operations. His letter states that he believes
faulty auditing procedures were responsible for the
alleged understatement of inventory. The amount of
,understated inventory at issue is $50,000. In this situation
the CPA would be
(a) independent with respect to his client since it
has not been proven that the auditing procedures
were at fault.
(b) not independent with respect to his client since
the allegation, though not proven, has been made
that his audit was not adequate. - ANSWER-(b) is correct. Independence is impaired because of
the threat of faulty auditing (Interpretation 101-6,
Litigation between client and member 3).
A CPA firm placed the following ad in a news paper:
"We are pleased to announce that Frank Jones who
spent the last twenty years with the Internal Revenue
Service has joined our fum as a partner. The
influence of friends Mr. Jones has in the Internal
Revenue Service will prove invaluable in handling
investigations by that department. Why not see us
with respect to your tax problems?"
This _______________ ad a violation of the Code of
Professional Conduct.
(a) is
(b) is not - ANSWER-(a) is correct. This ad is not allowed since it
implies the ability to influence the IRS (Interpretation 502-2,2).
A CPA firm presents a seminar on the latest changes
, in the federal income tax laws. Invitations to attend
the seminar are sent by letter to both clients and
non-clients. A portion of the letter reads: "James
Smith of om firm 's Washington, D.C. office will
chair the seminar. He has been a partner in our firm
for more than 20 years and during that period has
specialized in the income tax area. Mr. Smith is a
recognized expert in the income tax field and has
given talks on the subject to many national groups.
Currently he is a member of the AICPA Federal
Taxation Executive Committee and Chairman of our
State CPA Society's Committee on Taxation." The
presentation of such a seminar a violation
of the Code of Professional Conduct.
(a) is
(b) is not - ANSWER-(b) is correct. There are no prohibitions against
inviting non clients to seminars presented by a
member's firm (Rule 502). The only prohibitions are
against false, misleading or deceptive advertising or solicitation.
A CPA firm that hires from 15 to 20 new staff people
a year obtains 90 percent of its new people from
the four colleges in the area. For the last three years,
the graduating classes of these colleges have been
composed of 50 percent women and 50 percent
