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Professional Ethics for CPAs (Exam for

Candidates and Reissuance) I PETHOL13
Question1

For how long must a California auditing firm maintain audit documentation?

0 A) No specific time frame is specified, but the firm must maintain a written documentation retention and destruction policy that
sets forth the firm's practices and procedures.
0 B) A minimum of five years.

0 C) A minimum of three years.

0 D) A minimum of seven years.

Question2

Before performing nonattest services for an attest client, a member should establish and document in writing nis or her
understanding with the client about such services. Which, if any, of the following is not required in such documentation?

0 A) Services to be performed

0 B) Client's acceptance of its responsibilities

0 C) Objective of the engagement

0 D) Any limitations of the engagement

0 El All of the above are required

Question3

Jen Walters, a member, ls controller of Usher Company. Grey & Grey, CPAs are the auditors of Usher Company. On the last day of
the field work of the Usher Company audit, Robert Wright, the manager of the audit team asks Jen Walters if she is aware of any
additional items that have not been disclosed to the auditors that could have a material effect on the financial statements. Jen
Walters says she is not aware of any such items. Jen Walters, however, knows t hE H h
ow may we e1p you.7 E:J nts

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has not been paid and the accounting department has not as yet received an invoice for that work. She suspects that the president
of the company is holding the invoice and will continue to do so until after the current year's audit is completed. The repairs to the
plant were completed a couple of months ago and the cost of them would have a material effect on the current year's earnings.

0 A) Since Jen Walters' statement to Robert Wright was a general one, i.e., she was not aware of any undisclosed items, and it was
not in writing, Jen Walters has not violated the Code of Professional Conduct.

0 B) Since the Code of Professional Conduct applies only to members in the practice of public accounting, its rules do not apply to
Jen Walters.

0 C) The Code of Professional Conduct does not cover this type of situation.

0 D) Jen Walters has violated the Code of Professional Conduct by failing to disclose to Grey & Grey, CPAs the unrecorded
Ii ability for the repair work.

Question4

Dunn, a member, in a telephone conversation with the president of Brooks Co. is asked to prepare, sign, and mail a tax return for
his company. There is no tax due with the return. The taxing authority involved has not prescribed any procedures for a client to
permit a member to sign and file a tax return on behalf of a client.What is required for Dunn to be able to comply with the
president's request without impairing his independence with Brooks Co.?

0 A) The president's request is all Dunn needs since there is no payment due with the return.

0 B) The client's person who oversees tax services, reviews and approves the tax return.

0 C) Since this is purely a tax matter, there is no effect on Dunn's independence with Brooks Co. Thus nothing is needed.

0 D) The client's person in management who is authorized to sign and file the return gives Dunn a signed statement saying he
has reviewed the return, he is the person authorized to sign and file the return, and he authorizes Dunn to sign and file it.

0 E) The client's person in management who is authorized to sign and file the return reviews the return and then phones Dunn
and tells him to sign and file the return.

Questions

Oates, a partner in the one-office firm of Bole & Bole, CPAs, has been asked by Ingrid, a business associate, to be treasurer of her
campaign organization. Another person is treasurer of the Independent Political Party. Ingrid is running for mayor of her village,
Sutter Home, on the Independent slate. If Oates accepts this position, which of the following statements is true with respect to the
independence of Bole & Bole, CPAs?

0 A) They are not independent of the village of Sutter Home, Ingrid's campaign organization or the Independent Political Party.

0 B) They are independent of Ingrid's campaign organization and the Independent political party.

0 C) They are independent of the village of Sutter Home and Ingrid's campaign organization

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0 D) They are independent of the Independent political party and the village of Sutter Home

Question6

Sloan and Baldwin are partners in Hope & Hope, CPAs, a one-office public accounting firm.Sloan has invested in a Section 529
savings plan for the benefit of his son who will be starting college in a couple of years. Baldwin's wife has invested in a Section 529
prepaid tuition plan for the benefit of her daughter who will be starting college next year.Both of the plans have invested in stock
of Mata Co. If Mata Co. became an audit client of Hope & Hope, CPAs, which of the following statements is correct as to these
investments?

0 A) The investment by the prepaid tuition plan, but not the investment by the savings plan in Mata Co. stock would be
considered a direct financial interest in Mata Co.

0 B) The investment by the savings plan, but not the investment by the prepaid tuition plan in Mata Co. stock would be
considered a direct financial interest in Mata Co.

0 C) The investments by the prepaid tuition plan and the savings plan in Mata Co. stock would not be considered direct financial
interests in Mata Co.

0 D) The investments by the prepaid tuition plan and the savings plan in Mata Co. stock would be considered direct financial
interests in Mata Co.

Question7

A California CPA has been engaged by Silver Lining Inc. to review their systems and recommend business software to meet their
specific needs. The CPA does not perform any attest work for Silver Lining. The CPA wishes to receive a commission from the
software company he ultimately recommends. May he do so?

0 A) Yes, provided he tells the client he is receiving a commission.

0 B) No, commissions are not allowed in California.

0 C) Yes, provided he discloses the commission in writing on his letterhead, or he signs the disclosure statement. In addition, the
client must sign and date the disclosure statement, acknowledging that the client has read and understands it.

0 D) Yes, provided he discloses the commission in writing to the client

Question8

Alexis, a member, is a sole practitioner. She is also treasurer of Bourne Industries. The local bank, which has loaned $25,000 to
Bourne Industries, requests financial statements from Bourne Industries. Which of the following are required of Alexis when she
prepares and furnishes such statements to the bank?

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0 A) If the transmittal says the statements are in accordance with generally accepted accounting principles, Alexis must follow
Rule 203 of the Code of Professional Conduct.

0 B) If they are on Bourne Industries stationery, she must clearly indicate her position as treasurer of the company, and she
should not imply that she is independent of the company.

0 C) If the statements are on her public accounting practice stationery, she does not have any requirement to disclose her lack
of independence.

0 D) a and bare required

Question 9

Dolan, a member, prepares the state and federal income tax returns for his attest client, South Park, Inc. If this is considered a
nonattest service, it would be subject to the general requirements of Interpretation 101-3 requiring the member to document in
writing the member's understanding with the client with respect to the tax service. Preparing the income tax returns __
considered a nonattest service.

O A) ls not

O B) ls

Question 10

Sharma Management, Inc. is closely held, and it is the general partner for Mining #1 and Mining #2. Sharma Management lnc.'s
financial interest in these two limited partnerships is immaterial to it. Sherry Solomon, a member, has an investment that is not
material to his net worth in the limited partnership Mining #1. Sherry Solomon has no investment in either Sharma Management
or Mining #2. Which of the following statements is correct?

0 A) Sherry Solomon is not independent of Mining #2 or Sharma Management, Inc.

0 B) Sherry Solomon is independent of Mining#2 but not of Sharma Management, Inc.

0 C) Sherry Solomon is independent of both Mining #2 and Sharma Management, Inc.

0 D) Sherry Solomon is independent of Sharma Management, Inc. but not of Mining#2

Question 11

Arnesen & Co., a California CPA firm, installed a new inventory control system for their manufacturing client, Tower, Inc., a privately
held company. They also prepared the state and federal income tax returns and did the annual audit of Tower, Inc. After the report
on the audit and the tax returns were delivered to the company, they billed the client $35,000, of which $15,000 was for the
inventory control system and $20,000 for the audit and tax returns.Tower, Inc. refused to pay the bill, claiming that the inventory
control system performed worse than their prior system. Further, they were hiring new accountants and asked Arnesen & Co. to
furnish them originals or copies of the depreciation schedules, and other material necessary to make their records complete, all of

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which had been prepared by Arnesen & Co. They also asked that their new accountants be allowed to review the Arnesen & Co.
work papers for the prior year.Which of the following statements is correct, according to the California Accountancy Rules and
Regulations?

0 A) Arnesen & Co. may insist that the $35,000 be paid before they furnish the depreciation and other records necessary to make
their records complete.

0 B) Arnesen & Co. may insist that the $20,000 portion of the fee for the audit and tax returns be paid before they furnish the
depreciation and other records necessary to make their records complete.

0 C) Arnesen & Co. must give them copies of the depreciation schedules and other data necessary to make their records complete
even though they have not paid the $35,000 fee.

0 D) If the entire fee of $35,000 is paid, Arnesen & Co. must allow the new accountants to review their prior year's workpapers.

Question 12

Robin is a sole practitioner. Her spouse is an insurance agent His insurance office is 'five miles from her accounting office. Neither
one is active in the other's business. In March 20X3 her husband sold a life insurance policy on the life of the president of
Bluebird Holdings to that company. He received a relatively small commission for the sale and will continue to receive
commissions on future years' renewal premiums. In December 20X3, Robin was asked by the board of directors of Bluebird
Holdings to be the company's auditor for 20X3 and for future years. She has considered and believes that there is no conflict of
interest created by his sale of the policy and her doing the auditWhich of the following statements is correct?

0 A) Due solely to the commission being received prior to her being engaged to do the audit; she may do the audit for this year
and future years without violating the Code of Professional Conduct

0 B) Since her spouse received a commission this year and will receive commissions in future years, she cannot perform the
audits for this year or future years without violating the Code of Professional Conduct.

0 C) She can perform the audits for this year and future years without violating the Code of Professional Conduct.

0 D) The commission is deemed to be received only in the year the insurance policy is sold, even though commissions will
continue to be paid in future years. Therefore she cannot perform the audit for this year, but she can perform the audits in future
years without violating the Code of Professional Conduct.

Question 13

Klein, a member, in preparing this year's tax return for his new client, Temple Electric Co., discovers that an error was made in the
prior year's tax return. Cohen, a member, prepared that return. The error had more than an insigni'ficant effect on Temple Electric
Co:s tax liability for the prior year.What action, if any, should Klein take with respect to this error?

0 A) Klein should tell Temple Electric Co.'s management about the error.

0 B) Klein should tell Temple Electric Co.'s management, the taxing authority, and Cohen about the error.

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0 C) Klein should tell Cohen and Temple Electric Co.'s management about the error.

0 D) Klein should make sure the error is not repeated this year. Cohen need take no action with respect to the prior year's tax
return.

0 E) Klein should tell Temple Electric Co.'s management and the taxing authority about the error.

Question 14

When is it permissible to use estimated amounts in the preparation of tax returns?

0 A) When the taxpayer's records do not accurately reflect information related to small expenditures, the taxpayer's estimate
of the amount may be used.

0 B) Unless prohibited by statute or rule, when it is not practical to obtain the exact data.

0 C) Fire or computer failure has destroyed the records.

0 D) Use of estimates is permitted for all of the above reasons.

Question 15

Morton, a partner in the Seattle office of Pine & Birch, CPAs, is the lead engagement partner for the audit of Northwest Wholesale.
Fifty percent of the work is handled by the Seattle office; and ten percent, by the Portland office. Deutsch, a partner and the firm's
technical audit expert, is located in the Portland office. Deutsch spends about 30 to 40 hours each year consulting on the Northwest
Wholesale auditWhich of the following statements is correct?

0 A) Morton's partners in the Seattle office who do not work on the Northwest Wholesale account are covered members with the
Northwest Wholesale audit.

0 B) Morton's partners in the Portland office who do not work on the Northwest Wholesale account are covered members with
respect to the Northwest Wholesale audit.

0 C) Neither of the above statements are correct.

0 D) Both of the above statements are correct.

Question 16

Levine, a member, has had two lawsuits filed against him. The first suit by the management of Maroon Mfg. alleges that due to
faulty auditing procedures Maroon's financial statements for 20X3 were materially overstated. The second suit by Pink & Co. is
forthe amount of interest and penalties that the company paid the IRS and state authorities for being late in filing income tax
returns. The amount being claimed in this second suit is not material to Levine. Which one of the following statements is correct
as to the effect of the lawsuits on Levine's independence with these clients?

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0 A) Both lawsuits impair Levine's independence with these clients.

0 B) The lawsuit by the management of Maroon Mfg. impairs Levine's independence but the lawsuit by Pink & Co. does not.

0 C) The lawsuit by the management of Maroon Mfg. does not impair Levine's independence but the lawsuit by Pink & Co. does.

0 D) Neither lawsuit impairs Levine's independence with these clients.

Question 17

Hamilton, a member in public practice, is a sole-practitioner who operates her accounting practice as a corporation and has been in
practice since 2005. Which of the following would be considered an act discreditable to the profession:

0 A) Hamilton filed her personal tax return for 2013 prior to the filing deadline of April 15, 2014

0 B) Hamilton filed the corporate tax return for 2013 for her business prior to the filing deadline of March 15, 2014

0 C) Hamilton put her personal tax return for 2012 on extension and filed it prior to the extended filing due date of October 15,
2013

0 D) Hamilton filed an extension for her 2010 personal tax return but did not file it by the extended due date of October 15, 2011.
When she received a delinquency notice from the IRS in April 2012, she immediately filed the return and paid all taxes, interest,
and penalties due

0 E) None of the above would be considered an act discreditable to the profession

Question 18

Under the Principles in the Code of Professional Conduct, which of the following is the benchmark against which a member must
ultimately test all decisions?

0 A) Objectivity

0 B) Independence

0 C) Competence and Due Care

0 D) Public Interest

0 E) Integrity

Question 19

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Best Co. is required to file their audited fi na nci aI statements with the Government Accountability Office and Cole & Dierks, CPA's
have been hired to perform the engagement Under the Government Accountability Office rules, which of the following services
related to preparing accounting records, if performed by Cole & Dierks, will always impair independence?

0 A) recording transactions for which management has determined or approved the appropriate account classification, or posting
coded transactions to an audited entity's general ledger

0 B) preparing financial statements based on information in the trial balance

0 C) posting entries that have been approved by an audited entity's management to the entity's trial balance

0 D) All of these services will always impair independence

0 E) None of these services will always impair independence if the proper conditions are met

Question20

When a member performs nonattestservices for an attest client, certain things are required from the client with respect to such
nonattest services. Which, if any, of the following is not one of the general requirements from the client?

0 A) Accept responsibility for the resu Its of the services.

0 B) Evaluate the results of the services

0 C) Designate an individual who possesses suitable skill, knowledge, and/or experience, preferably with senior management to
oversee the services.

0 D) All of the above are required.

Question21

Howard Beale, a member, uses Outsource Inc., a third-party service provider, to assist him in furnishing bookkeeping and tax work
for his clients. This necessitates Howard Beale disclosing confidential client information to Outsource Inc. Howard Beale is not a
California licensee, and he practices outside of California. In addition to informing his clients that he is using a third-party service
provider which of the following is required with respect to the release of such information?

0 A) Prior to using Outsource lnc.'s services, Howard Beale enters into a contractual agreement with Outsource Inc. to maintain
the confidentiality of the information, and Howard Beale is reasonably assured that Outsource Inc. has procedures that will
prevent unauthorized release of the information.

0 B) Specific client consent is obtained prior to releasing the information to Outsource Inc.

0 C) The client must contact Outsource, Inc. to ensure that their confidential information will not be disclosed.

0 D) Either a orb is required.

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0 E) All of the above are required.

Question22

Williams owns 18% of First Mfg. Co. Williams has filed a lawsuit against management of First Mfg. Co., but not against its
auditors, claiming that management reported at December 31 three times the number of physical units in inventory than actually
existed. Unit costs used to value the inventory are not at issueJones, partner in charge of the First Mfg. Co. audit, is called on to
testify as to the amount of inventory First Mfg. Co. had at December 31. He testifies before the trier of facts as to his audit staff's
observation of the inventory taken by First Mfg. Co:s personnel on December 31 and his audit staff's test counts of more than
50% of the units in inventory. As he finishes his testimony, the trier of facts asks whether in Jones' opinion First Mfg. Co:s
procedures for controlling inventory are adequate. Jones answers the question giving his opinion on First Mfg. Co.'s controls over
inventory.What effect does Jones' testimony, both as to the auditor's observation of the inventory at December 31 and his
opinion on the adequacy of First Mfg. Co's internal controls over inventory have on his firm's independence with First Mfg. Co.?

0 A) Testimony on the observation of inventory impairs independence. Testimony on his opinion of First Mfg. Co:s inventory
controls does not impair independence

0 B) Testimony on the observation of inventory does not impair independence. Testimony on his opinion of First Mfg. Co.'s
inventory controls impairs independence.

0 C) Both the testimony on the observation of inventory and his opinion on First Mfg. Co.'s inventory controls impair
independence.

0 D) Neither the testimony on the observation of inventory or the testimony on his opinion on First Mfg. Co.'s inventory
controls impair independence.

Question23

Ms. Babbitt, the president of Prism Co., is considering hiring Suh & Sons, CPAs, a one-office firm, to be Prism Co:s auditors. She asks
Yee, a partner in the firm, if in addition to the annual audit, Suh & Sons, CPAs could do either or both of the following. Be the second
signature on all checks issued by Prism Co. while she is out of town on her two-week vacation. Yee being named in her will as
executor of her estate. Yee should tell Babbitt that in addition to the audit, the Suh firm could ___ without violating the Code of
Professional Conduct.

0 A) neither be the second signature on checks nor Yee be named as executor in her wil I

0 B) not be the second signature on checks, but Yee cou Id be named as executor in her will

0 C) be the second signature on checks and Yee could be named as executor in her will

0 D) be the second signature on checks, but Yee could not be named as executor in her will

Question24

Morales, a member in public practice, begins an engagement with Seagar Company by providing a fee estimate of $2,000. At the

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0 B) did not violate any rule in the Code of Professional Conduct.

0 C) violated Rule 501,Acts Discreditable and Rule 301, Confidential Client Information.

0 D) violated only Rule 301, Confidential Client Information

Question27

Delano Co. is required to file its annual audited financial statements with the Government Accountability Office and Smith & Olson,
CPAs have been hired to perform the engagement. Which of the following nonaudit services, if provided by Smith & Olson, CPA's,
would not impair the firm's independence?

0 A) accepting responsibility for designing, implementing, or maintaining internal control

0 B) accepting responsibility for the management of an audited entity's project

0 C) directing and accepting responsibility for the actions of the audited entity's employees in the performance of their routine,
recurring activities

0 D) All of these services will impair the firm's independence

0 E) None of these services will impair the firm's independence

Question28

In a one-office public accounting firm, a partner's spouse is employed as a receptionist by an audit client. She participates in this
client's retirement plan. The plan is offered to all employees in similar positions. Some of the plan's assets are invested in the
client's stock. Her share of the plan's assets is not material to her or her husband. Her husband does not do any work for this
client. Which of the following statements is correct with respect to the accounting firm's independence with this client?

0 A) Even if the spouse were employed in a key position, independence would still not be impaired.

0 B) Independence is not impaired.

0 C) Independence is impaired.

0 D) The AICPA independence rules and interpretations do not cover this type of situation.

Question29

According to the AICPA bylaws, which of the following actions against a member is subject to required publication:

0 A) A malpractice claim

0 B) A lawsuit filed against a member by a client

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0 C) A negative review posted on line by a client

0 D) A trial board conviction against the member

Question30

Andrea, a CPA and professional staff member who has decided to leave Credit & Balance, CPAs for a position in industry, wishes
to submit to possible future employers a list of names of private and publicly held companies on whose engagements she has
worked during the eight years she has been with Credit & Balance, CPAs. What does the Code of Professional Conduct require
Andrea to do before she may show such a list to a future employer?

0 A) The Code of Professional Conduct has no requirements in this area since it has no jurisdiction once you leave the field of
public accounting. Andrea is free to disclose anything she desires to obtain a job outside of public accounting.

0 B) Andrea must get each client's permission to be on such a list.

0 C) The only requirement is that Andrea makes sure that revealing the name of a client engagement she has worked on does
not entail the release of confidential client information.

0 D) Andrea need not get permission from the publicly held companies since it is public knowledge who their auditors are. She
must get permission from the privately held companies since the fact that they engage CPAs is not public information.

Question31

In January 20X3 Black and White, CPAs., a one-office public accounting firm, obtained a new client, Hooper Mfg. Co. The
engagement letter with Hooper Mfg. Co. calls for Black and White, CPAs to issue a report on Hooper Mfg. Co.'s financial statements
for the 20X3 calendar year and prepare all of Hooper Mfg. Co.'s 20X3 tax returns. The 20X31inancial statement, with the
accountant's report thereon, will be sent to some banks and Hooper Mfg. Co.'s suppliersAlso Black and White, CPAs are to review
during 20X3, Hooper Mfg. Co's 20X2 billings to their customers to see if any additional amounts should be billed. Black and White,
CPAs' fee for this portion of their work will be 40% ofsuch additional amounts billed and collected.Which of the following
statements is correct?

0 A) Black and White, CPAs cannot issue any type of report on Hooper Mfg. Co.'s 20X31inancial statements.

0 B) A compilation report, including the statement that Black and White, CPAs are not independent of Hooper Mfg. Co., may be
issued on the 20X31inancial statements.

0 C) Since, in 20X3, Black and White, CPAs will be reviewing the billings for 20X2, they may issue an audit, review or compilation
report on the 20X3 financial statements.

0 D) A review or compilation report may be issued on the 20X3 financial statements but not an audit report.

Question32

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In California, which of the following licensees would be required to take 24 hours of accounting and auditing CPE?

0 A) Kashani, CPA a personal financial planner, who occasionally prepares reviews of his business clients' financial statements

0 B) Jones, CPA, a tax practitioner, who occasionally prepares compiled financial statements for her clients.

0 C) Hernandez, CPA an audit partner in a regional accounting firm.

0 D) All of the above

Question33

Some CPAs and non-CPAs form a partnership to practice public accounting. Which, if any, of the following would be permitted or
required by the AICPA for such a partnership?

0 A) A non-CPA banker who will be an owner will not be actively engaged in the practice. He is providing the financing to get the
partnership formed and operating.

0 B) Non-CPA owners, other than the banker, who are actively engaged as members of the firm would have to complete the same
number of work-related CPE requirements as the CPA members.

0 C) Non-CPA owners could have the title "shareholder"

0 D) All of the above would be permitted or required by the AICPA.

0 E) None of the above would be permitted or required by the AICPA.

Question34

Gamba, a member in public practice, wants to increase the size of her practice. To facilitate this process, she purchases business
lists and hires two telemarketers to contact the people on the lists to offer Gamba's professional services. Which of the following
statements is correct:

0 A) Telemarketing is unprofessional and should not be undertaken by a member in public practice

0 B) Telemarketing is a direct violation of the Code of Professional Conduct

0 C) Written communication is the only allowable form of client solicitation per the Code of Professional Conduct

0 D) There is no prohibition regarding the use of telemarketing as long as any statements being made are not false, misleading,
or deceptive.

Question35

Howland & Howland, CPAs, a public accounting 1i rm has offices in Las Vegas and Reno. The Las Vegas office acquired a new attest

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client, Bruin Company. The Las Vegas office using Las Vegas office personnel will do all the work for this client. Bruin Company has
2,500,000 shares of common stock outstanding. Latest market value was $30 a share.Howland & Howland, CPAs personnel report
the following stock ownership by them or their kin. Which, if any, of them will impair Howland & Howland, CPAs' independence with
Bruin Company?

0 A) A partner in the Reno office owns 100 shares. This $3,000 investment is not material to the partner.

0 B) A Las Vegas staff person's spouse owns 10 shares. The staff person will work about 20 hours on the Bruin audit.

0 C) Both of these investments will impair Howland & Howland, CPAs' independence with the Bruin Company

0 D) Neither of these investments will impair Howland & Howland, CPAs' independence with the Bruin Company.

Question36

A public accounting firm has offices in Portland and Sacramento. Members of the accounting firm have the following loans to or
from officers or directors of a Sacramento audit client. The Sacramento office handles all of the work for this client. A Portland
partner has loaned $5,000 to a member of the board of directors. A Sacramento professional staff person, who does no work for
this client, has borrowed $3,000 from the president of this company.Which one, if any, of the above loans would impair the firm's
independence with this client?

0 A) The Portland partner's loan does not impair independence and the Sacramento professional staff person's loan impairs
independence

0 B) Both the Portland partner's and the Sacramento professional staff person's loans would impair independence.

0 C) Neither the Portland partner's nor the Sacramento professional staff person's loans would impair independence.

0 D) The Portland partner's loan impairs independence and the Sacramento professional staff person's loan does not impair
independence

Question37

Green & Green, CPAs plan on dating and issuing their report on March 15, 20X3 on Gearty Mfg.'s calendar year financial statements
for 20X2. Their audit report for this company was dated and issued on March 10, 20X2 for the calendar year 20X1. Due to a cash
shortage caused by major capital expenditures, Green & Green, CPAs billed and were paid in 20X2 for one half of their fee for the
20X1 audit. They had agreed with Gearty Mfg. to bill the other halfof the fee for the 20X1 audit when they billed them for the 20X2
audit. Which of the following statements is correct?

0 A) Since Green & Green, CPAs and Gearty Mfg. had agreed to this plan of payment for the 20X1 audit, they are independent.

0 B) Green & Green, CPAs' fees for the 20X1 audit have no bearing on whether or not they are independent of the Gearty Mfg.
20X2 financial statements.

0 C) Since Green & Green, CPAs has not billed Gearty Mfg. for the second halfofthe 20X1 audit fee, they are independent.

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0 D) Since they have not been paid for work that must have been done before March 10, 20X2, they are not independent.

Question38

Multi Investment Co:s investment in Sherman Mfg. accounts for 40% of Multi Investment Co.'s annual earnings and 30% of Multi
Investment Co.'s assets.Robert Landry has an opportunity to audit Multi Investment Co., and he owns an immaterial amount of
stock in Sherman Mfg.'s stock.Susie Cue has an opportunity to audit Sherman Mfg. and she owns an immaterial amount of Multi
Investment Co.'s stock.What effect do the stock investments of Robert Landry and Susie Cue have on their independence with
the prospective audit clients Multi Investment Co. and Sherman Mfg.?

0 A) Robert Landry is not independent of Multi Investment Co. and Susie Cue is not independent of Sherman Mfg.

0 B) Robert Landry is not independent of Multi Investment Co. and Susie Cue is independent of Sherman Mfg.

0 C) Robert Landry is independent of Multi Investment Co. and Susie Cue is not independent of Sherman Mfg.

0 D) Robert Landry is independent of Multi Investment Co. and Susie Cue is independent of Sherman Mfg.

Question39

Butler, a partner in a one-office firm, inherits 15 shares of Jeeves Services stock. The stock has a market value of $25 per share, and
there is a ready market for the shares. There are 300,000 shares outstanding. Jeeves Services is an audit client of the firm. Butler
does no work or consulting on the Jeeves Services engagements. With respect to the receipt of this stock and maintaining the firm's
independence with Jeeves Services company which of the following statements is correct?

0 A) As long as Butler does not work on the engagements for Jeeves Services nothing need be done. If he works on the
engagements for Jeeves Services then the shares must be promptly sold to preserve the firm's independence.

0 B) Since the shares are worth only $375 and they were inherited, nothing need be done.

0 C) If Butler transfers the shares to a blind trust where he is the beneficiary, independence with Jeeves Services will not be
impaired.

0 D) The shares must be sold within thirty days of their receipt

Question40

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Freeman, managing partner of the Freeman & Co., LLP, public accounting firm has been asked to become an honorary member of
the board of directors of a local charity. The charity has been, and will continue to be, an audit client of Freeman & Co., LLP. His
name, along with the names of the other nineteen directors, would be listed on the charity's letterhead under the heading,
"Board of Directors." After his name it would say "Honorary Director:'The board meets quarterly for lunch and a business
meeting. At the meeting they hear reports from committee chairmen and approve the executive committee's actions that have
been taken since the last meeting of the board. The executive committee handles the day to day operations.Which of the
fol lowing statements is correct?

0 A) Freeman being listed on the charity's letterhead as an honorary director impairs independence with the charity.

0 B) Freeman voting to approve the actions of the executive committee impairs independence with the charity

0 C) Both {a) and (b) are incorrect statements.

0 D) Both (a) and (b) are correct statements.

Question41

Levy & Levy, CPAs are, and have been for many years, the auditors of Ace Mfg. Co., a publicly held company whose financial
statements are filed with the Securities and Exchange Commission. John Carlson the president and chief executive officer of First
State Bank is a member of the Ace Mfg. Co. board of directors. This is his only connection with Ace Mfg. Co. John Carlson has asked
Levy & Levy, CPAs to prepare his and his wife's income tax returns. Marie Scribner, chief financial officer of Ace Mfg. Co. has also
asked Levy & Levy, CPAs to prepare her income tax returns. Under the Public Company Accounting Oversight Board rules which of
the following statements is correct?

0 A) Levy & Levy, CPAs preparing the income tax returns for John Carlson will not cause them to lose their independence with Ace
Mfg. Co. However, preparing the income tax returns for Marie Scribner would cause Levy & Levy, CPAs to lose their independence
with Ace Mfg. Co.

0 B) Levy & Levy, CPAs preparing income tax returns for John Carlson and for Marie Scribner would not cause Levy & Levy, CPAS
to lose their independence with Ace Mfg. Co.

0 C) If Levy & Levy, CPAs prepares the income tax returns for John Carlson, they will not be independent of Ace Mfg. Co. Similarly,
preparing the income tax returns for Marie Scribner would cause Levy & Levy, CPAs to be not independent of Ace Mfg. Co.

0 D) If Levy & Levy, CPAs prepares the income tax returns for John Carlson, they will not be independent of Ace Mfg. Co. However,
preparing the income tax returns for Marie Scriber would not cause Levy & Levy, CPAs to lose their independence with Ace Mfg.
Co.

Question42

Ramirez, a member, obtains a new client Atlantic Medical as an audit and tax client. She finds that prior year's tax returns have
understated taxable income by a substantial amount. The management of Atlantic Medical refuses to file amended returns
correcting these errors, and as a result, Ramirez withdraws from the engagement. Another CPA, Stern, is hired by Atlantic
Medical. Stern calls Ramirez and asks why she withdrew from the engagement and if there is anything he should know about this

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new client. Which of the following possible responses by Ramirez to Stern is the best?

0 A) Ramirez should tell Stern that she did not get along with client's management and thus withdrew from the engagement.

0 B) Ramirez should suggest that Stern obtain from Atlantic Medical management, permission for Ramirez to discuss all
matters freely with Stern.

0 C) Ramirez should refuse to talk to Stern

0 D) Ramirez should tell Stern about the understatement of taxable income.

Question43

Carey, in 20X2, gave tax advice in a letter to Jackson, a tax only client. For reasons other than the advice given, Jackson engages
Urban for her tax work in 20X3. Carey had not been engaged to assist in the implementation of the actions called for by the advice
or to inform Jackson if subsequent tax law changes would adversely affect the advice given. In 20X3, the tax law changes and the
advice Carey gave in 20X2 if followed again in 20X3 and subsequent years would increase the amount of taxes Jackson will pay.
Carey is-

0 A) not required to inform Jackson about the change in the law.

0 B) required to inform Jackson about the change in the law.

0 C) required to inform Urban about the tax advice given to Jackson

0 D) required to recall the letter to Jackson because the tax law changed

Question44

According to the Statement on Standards for Consulting Services, which of the following are considered to be consulting
services:

0 A) Bookkeeping services

0 B) Personal financial planning

0 C) Controllership activities

0 D) Tax return preparation

Question45

Under the Securities and Exchange Commission rules, which if any of the following will impair a member's independence with an
audit client?

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0 A) Preparing the client's financial statements that are filed with the commission.

0 B) Preparing source data underlying the client's financial statements

0 C) Both of the above will impair independence.

0 D) Neither one of the above will impair independence.

Question46

Ginsberg, a manager, serves on the board of tax appeals. A tax client of her firm appears before the board appealing the assessed
value of his property. Since he is solely a tax client, independence is not required. What must Ginsberg do to avoid violating the
Code of Professional Conduct?

0 A) Ginsberg must receive the consent of the board and the client to participate as a board member on this appeal.

0 B) Ginsberg must disclose this relationship to the client and the board.

0 C) Neither (a) nor (b) is required of Ginsberg

0 D) Ginsberg is required to do both (a) and (b)

Question47

Logan, controller of Lone Mfg., wanted to leave that company and join the firm's auditors, Greg Popper, CPAs, a one-office public
accounting firm. The accounting firm agreed to take him in as a partner provided they did not lose their independence with Lone
Mfg. because of his employment. In order to insure that they remain independent of Lone Mfg. several things would be
required.Which if any, of the following is NOT one of the requirements?

0 A) Logan must cease to participate in an employee benefit plan sponsored by Lone Mfg. since there is no legal requirement
allowing Logan to participate in the plan.

0 B) Logan must dispose of all material indirect financial interests in Lone Mfg.

0 C) Logan cannot be involved on the attest engagement team when the engagement covers any period during which he was
employed by Lone Mfg.

0 D) Logan must dispose of all immaterial indirect financial interests in Lone Mfg.

0 E) All of the above are required.

Question48

Jones & Jones, CPAs, a one-office public accounting firm, has been asked to audit Majestic Mfg. Co. for the 20X2 calendar year.
Majestic Mfg. Co. is not a public interest entity as that term is defined in the Conceptual Framework for AICPA Independence
StandardsA survey of Jones & Jones, CPAs personnel revealed several instances where relationships of partners and staff with

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Majestic Mfg. Co. might impair independence. The partners of Jones & Jones, CPAs want the audit engagement, but they will not
terminate any staff person or ask any partner to resign to obtain the work.With the restriction on non-termination of partners or
staff, which, if any, of the following threats to Jones and Jones, CPAs independence with Majestic Mfg. Co. cannot be eliminated
or sufficiently mitigated so that independence is not impaired?

0 A) Olson, a professional staff person, below the rank of manager, has been employed on a full time basis with Jones & Jones,
CPAs since August 20XO. Olson was also a director of Majestic Mfg. Co. for the first six months of 20X2.

0 B) Swanson is a manager with Jones & Jones CPAs. He had been treasurer of Majestic Mfg. Co. from January 20XO through
March 20X2. He resigned his position as treasurer and accepted employment as a manager with Jones &Jones, CPAs on April 1,
20X2.

0 C) Anderson, a Jones & Jones, CPAs partner, is a close personal friend of the president of Majestic Mfg. Co.

0 D) All of the preceding threats to independence can be eliminated or mitigated.

0 E) None of the above threats to independence can be eliminated or mitigated.

Question49

Which, if any, of the following services would impair independence with a client?

0 A) Design or develop a client's information system that is unrelated to the client's financial statements or accounting records.

0 B) Provide training and instruction to client employees on an information and control system.

0 C) Design or develop a client's financial information system.

0 D) Assist in setting up the client's chart of accounts and financial statement format with respect to the client's financial
information system.

Question SO

House & Wine, CPAs is a one-office CPA firm that has audited Cabernet Enterprises for many years. James Vine, son of the owner
of Cabernet Enterprises, graduated from college this year and was hired as a staff accountant by House & Wine, CPAs. James
Vine is not dependent on his father. With respect to continuing audits of Cabernet Enterprises by House & Wine, CPAs, which of
the following statements is incorrect?

0 A) There is an independence problem in continuing to audit Cabernet Enterprises if James Vine works on the audit of this
company.

0 B) If James Vine does not work on the audit of Cabernet Enterprises, House & Wine, CPAS may continue to audit that
company as independent auditors.

0 C) If James Vine advances to the rank of manager, House & Wine, CPAs would not, because of that promotion, lose their
independence with respect to Cabernet Enterprises.

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0 D) Since they are no longer independent, House & Wine, CPAs may no longer perform an audit of Cabernet Enterprises.

D I affirm that I answered these questions on my own, without help from others.

SUBMIT

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(800) 922-5272
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