CPA Ethics EXAM 2024-2025 QUESTIONS AND ANSWERS 100 % PASS Litigation between client and member 3).
SOLUTION A+ GRADE
Ethics rules promulgated by the PCAOB must be approved A CPA's client has threatened suit against the CPA and his furn for $2,000 claiming that due to faulty
by: administrative procedures of the CPA's furn, their tax return was filed late. The $2,000 represents
interest and late penalties imposed by the government plus an amount for legal fees incurred in bringing
(a) The GAO the action. Total annual audit and tax fees from this client are approximately $45,000 a year. This
threatened action by the client will
(b) The SEC
(a) impair independence with the client.
(c) The IRS
(b) not impair independence with the client. - answer>>(b) is correct. Independence not impaired
( d) They do not need the approval of any other governmental agency. - answer>>(b) is correct. The SEC because
must approve PCAOB ethics
of the immaterial amount involved and the litigation would not involve an attest engagement
rules. (Interpretation 101-6, litigation between client and member 4)
Which category contains the ethical standards, a violation of which makes a member liable to An insurance company, under subrogation rights, has sued a CPA and her firm for $100,000. The
disciplinary action? insurance company paid $ 100,000 to a client of the furn becauseof an embezzlement of that amount by
(a) Ethics Rulings. one of the client's former employees. The former employee has admitted the theft, declared personal
bankruptcy, and is serving a three-year term in a federal prison upon being convicted of this theft. The
(b) Interpretations of the Rules. client's management, its board of directors, and its legal counsel have investigated the matter and
decided that since the fraud involved collusion with outside parties by the former employee, the CPA
(c) Rules. - answer>>(c) is the conect answer. Code of Professional using normal audit procedures would not have been expected to discover the theft. In these
circumstances
(a) the CPA and her furn are independent of the client.
A CPA and his firm have been threatened, in writing, with a lawsuit by an audit client who claims that his
(b) the CPA and her furn are not independent of the
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 client. - answer>>(a) is correct. Independence is not impaired because management is not accusing the
auditing firm of faulty procedures (Interpretation 101-6, Other third party litigation.).
faulty auditing procedures were responsible for thealleged understatement of inventory. The amount of
understated inventory at issue is $50,000. In this situation the CPA would be
A partner in a CPA firm purchases a limited partnership interest in an oil tax shelter. The amount is
(a) independent with respect to his client since it material to her net worth. She later finds out that the president of one of her audit clients and the
has not been proven that the auditing procedures treasurer of another audit client have also each purchased limited partnership interests. The general
partner who controls the partnership is a non-client. The interests are material to the net worth of the
were at fault. president and treasurer. Each of the three heard about this tax shelter from their broker. In this
situation
(b) not independent with respect to his client since
the allegation, though not proven, has been made
(a) independence is impaired with respect to these
that his audit was not adequate. - answer>>(b) is correct. Independence is impaired because of the
threat of faulty auditing (Interpretation 101-6, two clients.
,(b) independence is not impaired with respect to (b) does not - answer>>(b) is correct. Her position does not impair independence. The partner is a
covered member (Chapter 3, Definitions, Covered member d). His wife is immediate family (Chapter 3,
these two clients. - answer>>(b) is correct. Since the limited partners do not control the partnership, Definitions, Immediate family). Cashier is not a key position, (Chapter 3, Definitions, Key position). Thus
they are not in a joint closely held investment, and therefore independence is not impaired. The general independence is not impaired (Interpretation 101-1, Application of the Independence Rules to a
partner controls the partnership and the limited partners are merely investors (Chapter 3, Definitions, Covered Member's Immediate Family 1).
Joint closely held investment and Interpretation 101-1A.3).
In question 30, what if the partner worked on the engagement for this client? Would the wife's position
A partner who has been retired for two years continues to serve on the governing board of the as
accountingfirm. This group meets monthly and fulfills the role of a board of directors. The retired
partner has no client responsibilities and thus no chargeable time. The retired partner is asked to cashier impair the firm's independence with this client?
become a director of an audit client. Acceptance of the director's position would
(a) Yes, it would impair independence.
(a) impair independence with this client.
(b) No, it would not impair independence. - answer>>(b) is correct. Her position does not impair
(b) not impair independence with this client. - answer>>(a) is correct. The partner is still active in the independence. The partner is a covered member (Chapter 3, Definitions, Covered member a). His wife is
firm and thus independence would be impaired (Interpretation 101-2, 3). immediate family (Chapter 3, Definitions, Immediate family). Cashier is not a key position, (Chapter 3,
Definitions, Key position). Thus independence is not impaired (Interpretation 101-1, Application of the
Independence Rules to a Covered Member's Immediate Family 1).
A member has been asked to cosign checks with an employee of a client during the month of January
when the president is on vacation. The president has stated that with the CPA cosigning checks, she will
be confident that disbursements are being handled properly. Since A partner in the Milwaukee office of a CPA firm has
(a) the member will merely be countersigning, and a sister who is president of a Chicago-based company
thus not making the original decision to draw the that is a client of his firm's Chicago office. The Milwaukee
check, independence with the client will not be office does no work for this client. The CPA firm
impaired. ______ independent of his sister's Chicago company.
(b) the member is only a co-signer and for only one twelfth
of the year, independence is not impaired. (a) is
( c) check signing is a management function, independence (b) is not - answer>>(a) is correct. The fum is independent. The partner's
is impaired. - answer>>(c) is correct. Check signing impairs independence. sister is a close relative (Chapter 3, Definitions,
(Interpretation 101-3, Table, Non tax disbursement). Close relative). Independence impairment due to
close relatives relationships with a client apply only
In a one-office firm a partner's wife works as a cashier for one of the firm 's audit clients. The partner to partners who work on the engagement, who can influence the engagement or who is in the office
does not work on the engagement for this client. The wife's position as cashier impair the firm's where the partner in charge of the engagement is located (Interpretation 101-1, Application of the
Independence Rules to Close Relatives). Since this partner does not meet any of those criteria,
independence with this client. independence is not impaired.
(a) does
,James Penna is a partner in the firm of Swenson & (b) will not - answer>>(b) is correct. His investment will not impair independence with the client. The
investment may
Swem, CPAs. He has a credit card from First Bank
possibly be a joint closely held investment with
of Plainfield. His family charge all of their purchases
his client since the client, owning 40 percent of the
using this credit card and his monthly credit card
corporation may be able to control it (Chapter 3,
statement will be as high as $12,000. The balance
Definitions, Joint closely held investment). Even if
is paid in full each month and thus he does not incur
it meets those criteria it still does not impair independence since Garth's investment is immaterial to
any interest charges. His firm has been asked to be him. (Interpretation 101-1, 3.)
the auditors for First Bank of Plainfield and he will be
the partner in charge of the audit. Landry, a Partner in Kimball & Co. (a one-office
His credit card account _______ impair the firm's CPA firm), was formerly treasurer of Charlton & Co.
independence with the bank. Landry resigned from Charlton & Co. six months ago.
(a) will Provided there is no independence problem, Charlton
(b) will not - answer>>(b) is correct. His credit card account does not & Co. wants Kimball & Co. to perform their next audit.
impair independence. As partner in charge of the The period covered by the audit would include the
audit of the bank he is a covered member (Chapter six months when Landry had been treasurer of Charlton.
3, Definitions, Covered member a). Permitted loans Landry had completely disassociated himself from
that he may have with the bank without impairing Charlton & Co. prior to accepting employment with
independence include credit cards where the balance is reduced to $10,000 or less on a current basis Kimball. Landry would not work on the engagement.
(Interpretation 101-5, Other Permitted Loans). Since he pays the balance in full each month his balance
is reduced to zero on a current basis. Kimball & Co. ________________ independent of Charlton &
Co. for this audit.
Merle Garth, CPA is a sole practitioner. A client of his (a) would be
owns 40% of a corporation. The investment is not material (b) would not be - answer>>(a) is correct. They would be independent for this
to his client. Garth wants to invest in this same audit. Landry is a covered member since he is a
corporation. The amount of the investment would not partner in the office doing the audit (Chapter 3,
be material to Garth's net worth. Garth's investment Definitions, Covered member d). Since Landry will
______ impair his independence with this client. not do any work on the audit and he had completely severed his ties with Charlton before joining
Kimball & Co., his former employment does not cause an independence problem (Interpretation 101 -1,
(a) will Application of the Independence Rules to Covered Members Fom1erly Employed by a Client or
Otherwise
, Associated with a Client). ( c) He holds a position, but not one of significant
influence with a client of his former firm.
A branch manager instructs his controller, a member, (d) None of the above causes an independence
to increase the recorded value of the branch's year end problem.
inventory by $50,000, an amount that is material (e) They all cause an independence problem. - answer>>(b) is correct. If he holds a position of significant
to the firm's consolidated financial statements. There influence with a client independence would be impaired since furnishing him these amenities would
seem to mean he was still associated with the firm (Interpretation 101-2, 3).
is no basis for such an increase; however, it will raise
(a) is incorrect because direct financial interests in a client cause independence problems only if they are
the branch's profits enough so that the manager will held by a covered member, the covered member's immediate family or in some cases by the covered
member's close relatives. The retired partner does not meet any of the requirements for being classified
receive an incentive bonus of$5,000. The controller,
as a covered member (Chapter 3, Definitions, Covered member.)
afraid of being fired if he refuses, follows the
(c) is incorrect. Because the position held with the
manager's instructions and increases the recorded
client is not one of significant influence. He may be
inventory amount by $50,000. The controller
assumed to still be associated with the firm but that doesn't matter. Even a covered member's
immediate family is allowed to be employed in a non-key position by a client without impairing
independence (Interpretation
(a) has not violated the ethics code.
101-1 Application of the Independence
(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).) Rules to a Covered Member's Immediate Family).
A retired partner who no longer does any work for the A firm's client is designing and will supervise the
fum and whose retirement pay is fixed is furnished construction of a warehouse for a non-client third
office space, secretarial and telephone service in his party. It is a material contract for this client being
former firm 's suite of offices. In which of the following some 25% of their expected revenues for this year.
situations would the furnishing of office space The fum has been engaged to prepare the inventory
and amenities cause an independence problem? control system that will be used in this new facility.
The fum and the client have separate contracts with
(a) He has an immaterial interest in the stock of a the third patty. Under the two contracts, neither is
client of his former firm. responsible for the actions of the other nor does either
(b) He holds a position of significant influence with one have the authority to act as an agent or representative
a client of his former firm. of the other. This joint activity ______ impair
SOLUTION A+ GRADE
Ethics rules promulgated by the PCAOB must be approved A CPA's client has threatened suit against the CPA and his furn for $2,000 claiming that due to faulty
by: administrative procedures of the CPA's furn, their tax return was filed late. The $2,000 represents
interest and late penalties imposed by the government plus an amount for legal fees incurred in bringing
(a) The GAO the action. Total annual audit and tax fees from this client are approximately $45,000 a year. This
threatened action by the client will
(b) The SEC
(a) impair independence with the client.
(c) The IRS
(b) not impair independence with the client. - answer>>(b) is correct. Independence not impaired
( d) They do not need the approval of any other governmental agency. - answer>>(b) is correct. The SEC because
must approve PCAOB ethics
of the immaterial amount involved and the litigation would not involve an attest engagement
rules. (Interpretation 101-6, litigation between client and member 4)
Which category contains the ethical standards, a violation of which makes a member liable to An insurance company, under subrogation rights, has sued a CPA and her firm for $100,000. The
disciplinary action? insurance company paid $ 100,000 to a client of the furn becauseof an embezzlement of that amount by
(a) Ethics Rulings. one of the client's former employees. The former employee has admitted the theft, declared personal
bankruptcy, and is serving a three-year term in a federal prison upon being convicted of this theft. The
(b) Interpretations of the Rules. client's management, its board of directors, and its legal counsel have investigated the matter and
decided that since the fraud involved collusion with outside parties by the former employee, the CPA
(c) Rules. - answer>>(c) is the conect answer. Code of Professional using normal audit procedures would not have been expected to discover the theft. In these
circumstances
(a) the CPA and her furn are independent of the client.
A CPA and his firm have been threatened, in writing, with a lawsuit by an audit client who claims that his
(b) the CPA and her furn are not independent of the
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 client. - answer>>(a) is correct. Independence is not impaired because management is not accusing the
auditing firm of faulty procedures (Interpretation 101-6, Other third party litigation.).
faulty auditing procedures were responsible for thealleged understatement of inventory. The amount of
understated inventory at issue is $50,000. In this situation the CPA would be
A partner in a CPA firm purchases a limited partnership interest in an oil tax shelter. The amount is
(a) independent with respect to his client since it material to her net worth. She later finds out that the president of one of her audit clients and the
has not been proven that the auditing procedures treasurer of another audit client have also each purchased limited partnership interests. The general
partner who controls the partnership is a non-client. The interests are material to the net worth of the
were at fault. president and treasurer. Each of the three heard about this tax shelter from their broker. In this
situation
(b) not independent with respect to his client since
the allegation, though not proven, has been made
(a) independence is impaired with respect to these
that his audit was not adequate. - answer>>(b) is correct. Independence is impaired because of the
threat of faulty auditing (Interpretation 101-6, two clients.
,(b) independence is not impaired with respect to (b) does not - answer>>(b) is correct. Her position does not impair independence. The partner is a
covered member (Chapter 3, Definitions, Covered member d). His wife is immediate family (Chapter 3,
these two clients. - answer>>(b) is correct. Since the limited partners do not control the partnership, Definitions, Immediate family). Cashier is not a key position, (Chapter 3, Definitions, Key position). Thus
they are not in a joint closely held investment, and therefore independence is not impaired. The general independence is not impaired (Interpretation 101-1, Application of the Independence Rules to a
partner controls the partnership and the limited partners are merely investors (Chapter 3, Definitions, Covered Member's Immediate Family 1).
Joint closely held investment and Interpretation 101-1A.3).
In question 30, what if the partner worked on the engagement for this client? Would the wife's position
A partner who has been retired for two years continues to serve on the governing board of the as
accountingfirm. This group meets monthly and fulfills the role of a board of directors. The retired
partner has no client responsibilities and thus no chargeable time. The retired partner is asked to cashier impair the firm's independence with this client?
become a director of an audit client. Acceptance of the director's position would
(a) Yes, it would impair independence.
(a) impair independence with this client.
(b) No, it would not impair independence. - answer>>(b) is correct. Her position does not impair
(b) not impair independence with this client. - answer>>(a) is correct. The partner is still active in the independence. The partner is a covered member (Chapter 3, Definitions, Covered member a). His wife is
firm and thus independence would be impaired (Interpretation 101-2, 3). immediate family (Chapter 3, Definitions, Immediate family). Cashier is not a key position, (Chapter 3,
Definitions, Key position). Thus independence is not impaired (Interpretation 101-1, Application of the
Independence Rules to a Covered Member's Immediate Family 1).
A member has been asked to cosign checks with an employee of a client during the month of January
when the president is on vacation. The president has stated that with the CPA cosigning checks, she will
be confident that disbursements are being handled properly. Since A partner in the Milwaukee office of a CPA firm has
(a) the member will merely be countersigning, and a sister who is president of a Chicago-based company
thus not making the original decision to draw the that is a client of his firm's Chicago office. The Milwaukee
check, independence with the client will not be office does no work for this client. The CPA firm
impaired. ______ independent of his sister's Chicago company.
(b) the member is only a co-signer and for only one twelfth
of the year, independence is not impaired. (a) is
( c) check signing is a management function, independence (b) is not - answer>>(a) is correct. The fum is independent. The partner's
is impaired. - answer>>(c) is correct. Check signing impairs independence. sister is a close relative (Chapter 3, Definitions,
(Interpretation 101-3, Table, Non tax disbursement). Close relative). Independence impairment due to
close relatives relationships with a client apply only
In a one-office firm a partner's wife works as a cashier for one of the firm 's audit clients. The partner to partners who work on the engagement, who can influence the engagement or who is in the office
does not work on the engagement for this client. The wife's position as cashier impair the firm's where the partner in charge of the engagement is located (Interpretation 101-1, Application of the
Independence Rules to Close Relatives). Since this partner does not meet any of those criteria,
independence with this client. independence is not impaired.
(a) does
,James Penna is a partner in the firm of Swenson & (b) will not - answer>>(b) is correct. His investment will not impair independence with the client. The
investment may
Swem, CPAs. He has a credit card from First Bank
possibly be a joint closely held investment with
of Plainfield. His family charge all of their purchases
his client since the client, owning 40 percent of the
using this credit card and his monthly credit card
corporation may be able to control it (Chapter 3,
statement will be as high as $12,000. The balance
Definitions, Joint closely held investment). Even if
is paid in full each month and thus he does not incur
it meets those criteria it still does not impair independence since Garth's investment is immaterial to
any interest charges. His firm has been asked to be him. (Interpretation 101-1, 3.)
the auditors for First Bank of Plainfield and he will be
the partner in charge of the audit. Landry, a Partner in Kimball & Co. (a one-office
His credit card account _______ impair the firm's CPA firm), was formerly treasurer of Charlton & Co.
independence with the bank. Landry resigned from Charlton & Co. six months ago.
(a) will Provided there is no independence problem, Charlton
(b) will not - answer>>(b) is correct. His credit card account does not & Co. wants Kimball & Co. to perform their next audit.
impair independence. As partner in charge of the The period covered by the audit would include the
audit of the bank he is a covered member (Chapter six months when Landry had been treasurer of Charlton.
3, Definitions, Covered member a). Permitted loans Landry had completely disassociated himself from
that he may have with the bank without impairing Charlton & Co. prior to accepting employment with
independence include credit cards where the balance is reduced to $10,000 or less on a current basis Kimball. Landry would not work on the engagement.
(Interpretation 101-5, Other Permitted Loans). Since he pays the balance in full each month his balance
is reduced to zero on a current basis. Kimball & Co. ________________ independent of Charlton &
Co. for this audit.
Merle Garth, CPA is a sole practitioner. A client of his (a) would be
owns 40% of a corporation. The investment is not material (b) would not be - answer>>(a) is correct. They would be independent for this
to his client. Garth wants to invest in this same audit. Landry is a covered member since he is a
corporation. The amount of the investment would not partner in the office doing the audit (Chapter 3,
be material to Garth's net worth. Garth's investment Definitions, Covered member d). Since Landry will
______ impair his independence with this client. not do any work on the audit and he had completely severed his ties with Charlton before joining
Kimball & Co., his former employment does not cause an independence problem (Interpretation 101 -1,
(a) will Application of the Independence Rules to Covered Members Fom1erly Employed by a Client or
Otherwise
, Associated with a Client). ( c) He holds a position, but not one of significant
influence with a client of his former firm.
A branch manager instructs his controller, a member, (d) None of the above causes an independence
to increase the recorded value of the branch's year end problem.
inventory by $50,000, an amount that is material (e) They all cause an independence problem. - answer>>(b) is correct. If he holds a position of significant
to the firm's consolidated financial statements. There influence with a client independence would be impaired since furnishing him these amenities would
seem to mean he was still associated with the firm (Interpretation 101-2, 3).
is no basis for such an increase; however, it will raise
(a) is incorrect because direct financial interests in a client cause independence problems only if they are
the branch's profits enough so that the manager will held by a covered member, the covered member's immediate family or in some cases by the covered
member's close relatives. The retired partner does not meet any of the requirements for being classified
receive an incentive bonus of$5,000. The controller,
as a covered member (Chapter 3, Definitions, Covered member.)
afraid of being fired if he refuses, follows the
(c) is incorrect. Because the position held with the
manager's instructions and increases the recorded
client is not one of significant influence. He may be
inventory amount by $50,000. The controller
assumed to still be associated with the firm but that doesn't matter. Even a covered member's
immediate family is allowed to be employed in a non-key position by a client without impairing
independence (Interpretation
(a) has not violated the ethics code.
101-1 Application of the Independence
(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).) Rules to a Covered Member's Immediate Family).
A retired partner who no longer does any work for the A firm's client is designing and will supervise the
fum and whose retirement pay is fixed is furnished construction of a warehouse for a non-client third
office space, secretarial and telephone service in his party. It is a material contract for this client being
former firm 's suite of offices. In which of the following some 25% of their expected revenues for this year.
situations would the furnishing of office space The fum has been engaged to prepare the inventory
and amenities cause an independence problem? control system that will be used in this new facility.
The fum and the client have separate contracts with
(a) He has an immaterial interest in the stock of a the third patty. Under the two contracts, neither is
client of his former firm. responsible for the actions of the other nor does either
(b) He holds a position of significant influence with one have the authority to act as an agent or representative
a client of his former firm. of the other. This joint activity ______ impair
