California CPA Ethics Examination with
Practice Questions And Correct Answers
(Verified A
1. A California CPA firm provides bookkeeping and payroll services to an audit client.
Under the AICPA Code and CBA Regulations, which of the following best describes
the independence implications?
A. Independence is not impaired if the client is a private company and management
accepts responsibility.
B. Independence is impaired because the firm is performing management functions.
C. Independence is impaired only if the services are material to the financial statements.
D. Independence is not impaired if the firm documents the services in an engagement
letter.
Answer: B. Independence is impaired because the firm is performing management
functions.
Rationale: Performing bookkeeping and payroll services for an audit client generally
impairs independence because the firm assumes management responsibilities, violating the
AICPA Code and CBA Regulations. Documentation or materiality does not cure the
impairment. The correct answer is B.
2. Which of the following actions by a California CPA would most likely constitute a
violation of the California Accountancy Act's prohibition on unprofessional conduct?
A. Failing to file a tax return for a client by the due date without an extension.
B. Using a professional designation that implies specialized expertise not possessed.
C. Providing accounting services for a contingent fee in a tax matter.
D. Declining to provide services to a client due to lack of expertise.
Answer: B. Using a professional designation that implies specialized expertise not
possessed.
Rationale: Under the California Accountancy Act, using a professional designation that
falsely implies expertise is considered unprofessional conduct. Contingent fees for tax
matters are permitted with disclosure, and declining services is acceptable. The correct
answer is B.
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,3. A CPA is offered a gift from a client that is not lavish but could be perceived as
influencing judgment. Under the AICPA conceptual framework, what is the most
appropriate course of action?
A. Accept the gift because it is not lavish and therefore not a threat.
B. Decline the gift and document the offer in the engagement file.
C. Accept the gift but disclose it to the client's board of directors.
D. Evaluate the threat and apply safeguards if necessary, or decline if threats are not at an
acceptable level.
Answer: D. Evaluate the threat and apply safeguards if necessary, or decline if threats
are not at an acceptable level.
Rationale: The conceptual framework requires evaluating threats to independence and
applying safeguards. A gift may create a familiarity or self-interest threat, so the CPA must
assess and address it appropriately. The correct answer is D.
4. Under California law, which of the following is required for a CPA firm to perform
attest services for a client?
A. The firm must have a peer review within the last three years.
B. The firm must be registered with the CBA and have a quality control system.
C. The firm must carry professional liability insurance of at least $1 million.
D. The firm must have at least one CPA with a master's degree in accounting.
Answer: B. The firm must be registered with the CBA and have a quality control
system.
Rationale: California requires CPA firms performing attest services to be registered with
the CBA and maintain a quality control system. Peer review is required for firms
performing audits of certain entities, but not universally. The correct answer is B.
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,5. A CPA discovers a material error in a client's previously issued financial
statements. The client refuses to correct the error. What is the CPA's ethical
obligation?
A. Resign from the engagement and notify the CBA.
B. Disclose the error to the SEC if the client is public.
C. Inform the client's board of directors or audit committee and consider withdrawing.
D. Take no action because the statements are already issued.
Answer: C. Inform the client's board of directors or audit committee and consider
withdrawing.
Rationale: The CPA should first discuss the matter with the client's board or audit
committee. If the client fails to take appropriate action, the CPA should consider
withdrawing and may need to notify regulatory bodies. The correct answer is C.
6. Which of the following best illustrates a self-review threat to independence?
A. A CPA firm designs and implements an accounting information system for an audit
client.
B. A CPA firm provides tax preparation services for an audit client.
C. A CPA firm provides consulting services on a matter unrelated to the audit.
D. A CPA firm's partner owns a small financial interest in the audit client.
Answer: A. A CPA firm designs and implements an accounting information system for
an audit client.
Rationale: Designing and implementing an accounting information system creates a
self-review threat because the firm would later audit its own work. Tax preparation and
unrelated consulting may be permissible with safeguards. The correct answer is A.
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, 7. Under the AICPA Code, which of the following is true regarding the use of
confidential client information?
A. Confidential information may be disclosed to comply with a valid subpoena.
B. Confidential information may be shared with other clients for benchmarking.
C. Confidential information may be disclosed to the CPA's spouse.
D. Confidential information may be sold to third parties for marketing.
Answer: A. Confidential information may be disclosed to comply with a valid
subpoena.
Rationale: The AICPA Code permits disclosure of confidential client information when
required by law, such as a valid subpoena. Sharing for benchmarking, with family, or
selling is prohibited without client consent. The correct answer is A.
8. A California CPA is considering advertising that includes a testimonial from a
client. Under CBA Regulations, which of the following is required?
A. The testimonial must be from a current client.
B. The advertisement must be filed with the CBA before publication.
C. The advertisement must not be false, misleading, or deceptive.
D. The testimonial must include a disclaimer that results may vary.
Answer: C. The advertisement must not be false, misleading, or deceptive.
Rationale: CBA Regulations prohibit false, misleading, or deceptive advertising.
Testimonials are allowed if they comply with this standard; no pre-filing or specific
disclaimers are required. The correct answer is C.
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Practice Questions And Correct Answers
(Verified A
1. A California CPA firm provides bookkeeping and payroll services to an audit client.
Under the AICPA Code and CBA Regulations, which of the following best describes
the independence implications?
A. Independence is not impaired if the client is a private company and management
accepts responsibility.
B. Independence is impaired because the firm is performing management functions.
C. Independence is impaired only if the services are material to the financial statements.
D. Independence is not impaired if the firm documents the services in an engagement
letter.
Answer: B. Independence is impaired because the firm is performing management
functions.
Rationale: Performing bookkeeping and payroll services for an audit client generally
impairs independence because the firm assumes management responsibilities, violating the
AICPA Code and CBA Regulations. Documentation or materiality does not cure the
impairment. The correct answer is B.
2. Which of the following actions by a California CPA would most likely constitute a
violation of the California Accountancy Act's prohibition on unprofessional conduct?
A. Failing to file a tax return for a client by the due date without an extension.
B. Using a professional designation that implies specialized expertise not possessed.
C. Providing accounting services for a contingent fee in a tax matter.
D. Declining to provide services to a client due to lack of expertise.
Answer: B. Using a professional designation that implies specialized expertise not
possessed.
Rationale: Under the California Accountancy Act, using a professional designation that
falsely implies expertise is considered unprofessional conduct. Contingent fees for tax
matters are permitted with disclosure, and declining services is acceptable. The correct
answer is B.
Page 1 of 87
,3. A CPA is offered a gift from a client that is not lavish but could be perceived as
influencing judgment. Under the AICPA conceptual framework, what is the most
appropriate course of action?
A. Accept the gift because it is not lavish and therefore not a threat.
B. Decline the gift and document the offer in the engagement file.
C. Accept the gift but disclose it to the client's board of directors.
D. Evaluate the threat and apply safeguards if necessary, or decline if threats are not at an
acceptable level.
Answer: D. Evaluate the threat and apply safeguards if necessary, or decline if threats
are not at an acceptable level.
Rationale: The conceptual framework requires evaluating threats to independence and
applying safeguards. A gift may create a familiarity or self-interest threat, so the CPA must
assess and address it appropriately. The correct answer is D.
4. Under California law, which of the following is required for a CPA firm to perform
attest services for a client?
A. The firm must have a peer review within the last three years.
B. The firm must be registered with the CBA and have a quality control system.
C. The firm must carry professional liability insurance of at least $1 million.
D. The firm must have at least one CPA with a master's degree in accounting.
Answer: B. The firm must be registered with the CBA and have a quality control
system.
Rationale: California requires CPA firms performing attest services to be registered with
the CBA and maintain a quality control system. Peer review is required for firms
performing audits of certain entities, but not universally. The correct answer is B.
Page 2 of 87
,5. A CPA discovers a material error in a client's previously issued financial
statements. The client refuses to correct the error. What is the CPA's ethical
obligation?
A. Resign from the engagement and notify the CBA.
B. Disclose the error to the SEC if the client is public.
C. Inform the client's board of directors or audit committee and consider withdrawing.
D. Take no action because the statements are already issued.
Answer: C. Inform the client's board of directors or audit committee and consider
withdrawing.
Rationale: The CPA should first discuss the matter with the client's board or audit
committee. If the client fails to take appropriate action, the CPA should consider
withdrawing and may need to notify regulatory bodies. The correct answer is C.
6. Which of the following best illustrates a self-review threat to independence?
A. A CPA firm designs and implements an accounting information system for an audit
client.
B. A CPA firm provides tax preparation services for an audit client.
C. A CPA firm provides consulting services on a matter unrelated to the audit.
D. A CPA firm's partner owns a small financial interest in the audit client.
Answer: A. A CPA firm designs and implements an accounting information system for
an audit client.
Rationale: Designing and implementing an accounting information system creates a
self-review threat because the firm would later audit its own work. Tax preparation and
unrelated consulting may be permissible with safeguards. The correct answer is A.
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, 7. Under the AICPA Code, which of the following is true regarding the use of
confidential client information?
A. Confidential information may be disclosed to comply with a valid subpoena.
B. Confidential information may be shared with other clients for benchmarking.
C. Confidential information may be disclosed to the CPA's spouse.
D. Confidential information may be sold to third parties for marketing.
Answer: A. Confidential information may be disclosed to comply with a valid
subpoena.
Rationale: The AICPA Code permits disclosure of confidential client information when
required by law, such as a valid subpoena. Sharing for benchmarking, with family, or
selling is prohibited without client consent. The correct answer is A.
8. A California CPA is considering advertising that includes a testimonial from a
client. Under CBA Regulations, which of the following is required?
A. The testimonial must be from a current client.
B. The advertisement must be filed with the CBA before publication.
C. The advertisement must not be false, misleading, or deceptive.
D. The testimonial must include a disclaimer that results may vary.
Answer: C. The advertisement must not be false, misleading, or deceptive.
Rationale: CBA Regulations prohibit false, misleading, or deceptive advertising.
Testimonials are allowed if they comply with this standard; no pre-filing or specific
disclaimers are required. The correct answer is C.
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