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California CPA Ethics Exam Answers – 249+ Questions & Answers Revealed
Please find the right questions & answers for the California CPA Ethics Exam which we divided into sample papers to make it easier for you.
Also, note that every practice exam bundle discussed below has around 50 questions & answers each.
California CPA Ethics Exam Answers Key – Sample Paper 1 [Free PDF]
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California CPA Ethics Exam Answers Key – Sample Paper 2
Q. Which category contains the ethical standards, a violation of which makes a member liable to disciplinary action?
Q. The Trial Board may, after a hearing, do two of the three things listed below. Mark the one that the Trial Board cannot do.
Ans: Suspend the member’s CPA certificate.
Q. Which of the following requires that any changes in them be approved by the members of the AICPA?
Ans: Principles and rules.
Q. The results of a guilty finding by a Trial Board will be:
Ans: published by the AICPA with the member’s name given.
Q. An interpretation or ethics ruling usually becomes effective:
Ans: the last day of the month in which it is published in the Journal of Accountancy.
Q. A CPA in public practice __ avoid operating under a code of professional ethics by choosing not to join either the AICPA or any state CPA society.
Ans: may not
Q. The accounting profession’s public includes
Q. Compliance with the AICPA Code of Professional Conduct depends primarily on:
Ans: Member’s understanding of the code and voluntary compliance with it.
Q. The Principles state that a member has a responsibility to:
Q. The Principles in the AICPA Code of Professional Conduct _______ enforceable under their own
Ans: are not.
Q. A distinguishing mark of a profession is:
Ans: Acceptance of its responsibility to the public.
Q. The AICPA Code of Professional Conduct provides guidance and rules for:
Ans: All members.
Q. Due care requires a member to:
Ans: Perform work for the clients with competence
Q. Jones & Barnes, a public accounting firm, has offices in Minneapolis, Chicago, and 10 other cities. The firm’s executive office and the managing partner are in Chicago. Each office does all the work and issues the audit reports for the clients of that office. Black & Co. is an audit client of the Minneapolis office. State whether, in the following situations, the individual would be a “covered member” with respect to the 2001 calendar year audit of Black & Co.
Ans: is not a covered member.
Q. Jones & Barnes, a public accounting firm, has offices in Minneapolis, Chicago, and 10 other cities. The firm’s executive office and the managing partner are in Chicago. Each office does all the work and issues the audit reports for the clients of that office. Black & Co. is an audit client of the Minneapolis office. State whether, in the following situations, the individual would be a “covered member” with respect to the 2001 calendar year audit of Black & Co. Larson, a consulting services partner, in the Minneapolis office who has not done any work for Black & Co.
Ans: is a covered member
Q. Porter is a partner in White & Co., CPAs. State whether, in the following situations, the person would be classified as a member of Porter’s immediate family. Porter’s dependent daughter is away at college.
Ans: is classified as part of Porter’s immediate family
Q. The AICPA Rules of the Code of Professional Conduct apply to which group?
Ans: All AICPA members.
Q. The Code of Professional Conduct says that with respect to the acts of others:
Ans: a member may be held responsible for compliance with the rule by all persons associated with him in the practice of public accounting whom the member has the authority or capacity to control.
Q. A member wishes to take action but is told that it would be against the rules in the Code of Professional Conduct. His secretary then offers to take action saying to the member, “I will do it since I am not a member of the AI CPA and their rules do not apply to me.” The member makes no comment and the secretary does carry out the action. Has the member violated the Code of Professional Conduct?
Q. Which, if any, of the following is not classified as a loan?
-letter of credit
-guarantee of a loan
-line of credit
Q. Daman & Co. is a one-office public accounting firm. In each of the following situations state whether the work Daman & Co. is doing would be classified as an attest engagement: Preparing a review report on the financial statements of Blakely Mfg. Co. for the calendar year.
Ans: This is an attest engagement
Q. Daman & Co. is a one-office public accounting firm. In each of the following situations state whether the work Daman & Co. is doing would be classified as an attest engagement: Reviewing prior year’s tax returns of Heft & Co. and reporting to Heft’s board of directors the results of such a review. The tax returns were prepared by another accounting firm. This is the first work that Daman & Co. will do for Heft & Co. Daman’s partners hope that this engagement will lead to annual audits or reviews and preparation of tax returns for this company.
Ans: This is not an attest engagement
Q. Carson is a partner in a one-office public accounting firm that is located in Illinois. In each of the following cases state whether the individual would be considered a close relative of Carson? Carson’s sister who lives in California
Ans: The sister is a close relative
Q. Carson is a partner in a one-office public accounting firm that is located in Illinois. In each of the following cases state whether the individual would be considered a close relative of Carson? Carson’s teenage son who lives at home and who is attending high school
Ans: The son is not a close relative
Q. Carson is a partner in a one-office public accounting firm that is located in Illinois. In each of the following cases state whether the individual would be considered a close relative of Carson? Carson’s father-in-law who lives next door to Carson
Ans: The father-in-law is not a close relative
Q. Carson is a partner in a one-office public accounting firm that is located in Illinois. In each of the following cases state whether the individual would be considered a close relative of Carson? Carson’s married daughter. She and her husband
Ans: The daughter is a close relative
Q. The general counsel for a client __ considered to have a key position in the client with respect to financial statements issued by the client.
Q. Mead & Mead, LLP is a one-office public accounting firm. Five years ago Wagner Mfg. Co. engaged them to be their public accountants. At that time an engagement letter was received, and two weeks later Mead and Mead began their first work for Wagner Mfg. Co. Each year they have received a new engagement letter from Wagner Mfg. Co. covering their preparation of a review report and the state and federal income tax returns for Wagner Mfg. Co. They expect that this scenario will be repeated this year. The engagement letters will be received in early November. The review report is delivered to Wagner Mfg. Co. by the first of March and the income tax returns by March 31 each year. Which of the following statements is correct with respect to the period of the professional engagement(s) Mead and Mead have with Wagner Mfg. Co.?
Ans: The engagement period started with receiving the first engagement letter and continues uninterrupted to this date.
Q. A member of a one-office firm is asked to audit the books of a corporation in which his partner’s wife is a stockholder. The member has no financial interest in the corporation. Is the fum independent of the corporation?
Q. A member has performed the procedures necessary to audit the financial statements of a privately held enterprise of which the member is a part owner. The report was carefully drawn and without bias. In this case, the member’s opinion must be
Ans: a compilation report with a disclaimer based on lack of independence.
Q. A staff person below the managerial level belongs to an investment club composed of 20 members. She is the only person in the one-office fum belonging to this club. Buy and sell decisions on investments are decided by majority vote, each member of the club having one vote. The members at their last meeting voted to purchase a minor number of shares of the
Jones Company, an audit client of the firm in which the staff person is located. Although she does not work on that engagement, the staff person voted against the purchase.
Ans: Since the staff person does not work on the engagement for this company, independence of the firm with Jones Company is not impaired.
Q. A retired partner of a one-office public accounting firm owns 1 percent of the outstanding stock of an audit client. The client represents about 2 percent of the firm’s revenues and net earnings. The retired partner is not active ill any way ill the fum, having been retired for five years. Under the firm’s retirement plan, she will receive for the rest of her life a fixed annual amount. Approximately one-fourth of her retirement pay is funded, and the balance is paid from the general funds of the accounting firm. The total annual payment is not material to the firm. Assume the same facts as in the question above except that the retired partner, during the busy season each year, works for about one month helping in the review of tax returns and unaudited financial statements. Traditionally, the firm has given her a $1,000 bonus for this work although they do not bill clients for her review time. Since
Ans: this month’s work each winter makes her active in the film, independence is impaired.
Q. 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?
Ans: To maintain independence with this client the $10,000 must be paid before the issuance of the report in 1996.
Q. In 1997, Jones, a manager in a one-office firm, was admitted into the partnership. Under the partnership agreement, he is required to contribute $10,000 as his share of partner’s capital which will be returned to him when he retires or in the event he resigns. He has $3,000 saved which he contributes and borrows in November 1997 the additional $7,000 on an unsecured note from a bank audit client. The $7,000 is material to Jones; however, the bank considers him an excellent credit risk because of his firm’s reputation in the community and Jones’ new status as partner. Jones has not
and will not work on the audit of the bank. Since
Ans: this type of loan from a bank audit client is prohibited; independence is impaired.
Q. Jones is a member of a country club that has a total membership of 250. Each member upon admission must buy one share of stock in the club for $5,000. Upon termination of his membership, he will be repaid the $5,000. Due to the pressures of his public accounting practice, Jones has refused to accept any officer, board, or committee position with the club. Jones is requested by the board of directors to perform the audit of the club for the next year. In this situation,
Ans: since membership in such a club is essentially a social matter, his equity interest is not considered a direct financial interest and thus he would be independent.
Q. Baylor & Associates, CPAs need a $25,000 bank loan for the four months of January through April 1997. The local bank is willing to loan them the money provided a third party guarantees the loan. At lunch one day, one of the partners mentioned their need for a guarantor to the president of Bilt-Rite Co. This company has been an audit client of the Baylor firm for the last few years. The president offers to have his company guarantee the loan. At a partners’ meeting where the offer is discussed, it is mentioned that borrowing from a client destroys independence with that client. However, in this situation Bilt-Rite would not be loaning the money, merely guaranteeing the bank loan. Further, the loan would be paid on May 1, which would be prior to the completion of work on the annual audit of Bilt-Rite’s financial statements for the year ended December 31, 1996. The offer is accepted, Bilt-Rite guarantees the loan, and the loan is paid in full on May 1, 1997. The audit of Bilt-Rite ‘s 1996 financial statements started on April 1, 1997, and the fieldwork was finished on May 15, 1997. Baylor & Associates __ independent of Bilt-Rite’s 1996 financial statements.
Ans: is not
Q. A member is told by the president of an audit client that she has named the member as executor of her estate. The president owns about 30 percent of the stock in the client. Being named as executor impairs the members’s independence with her company.
Ans: does not
Q. A member is told by the president of an audit client that she has named the member as executor of her estate. The president owns about 30 percent of the stock in the client. Being named as executor impairs the members’s independence with her company. The president (in the question above) dies, and the member starts functioning as the executor of the estate. Service as executor _ her independence
Q. James Stewart, a tax partner who works on the First Bank of Colombia engagement, has a $4,000 loan from First Bank of Colombia. He obtained the loan in September 1996 and it is due in September 1997. The loan is collateralized by the stock having a market value of $10,000. This loan _ Stewart’s film’s independence for the 1996 calendar year audit of the bank.
Q. A member, who is a partner in a one-office fum, loans $5,000 to a friend of hers, the president of Smith Company. Six months later, this president asked the member’s fum to audit Smith Company. The loan has not been paid. In order for the member’s firm to be independent of Smith Company, the loan must be paid before
Ans: the accounting film’s acceptance of the professional engagement by signing an engagement letter.
Q. In the situation described in 16 above, what if the engagement was handled by the Los Angeles office and the partner worked on the engagement? Then what is required to prevent an impairment of independence?
-The father not be dependent on the partner.
-The stock ownership not be material to the father.
-The father cannot exercise significant influence over the audit client.
Q. In a multi-office film, a manager located in office A is on the board of directors of audit client C of office B. Office A has nothing to do with the audit of client C. The accounting firm _ is independent of C.
Ans: is not
Q. A professional staff member was asked to join the board of directors of a charitable organization that is an audit client of her firm’s office. If she accepts this position, then for her firm to remain independent, which of the following actions are required?
-Her position as a board member is purely honorary.
-She does not vote at the board meetings.
-Whenever her name and board position are mentioned in the charitable organization’s externally circulated materials, such as letterheads, her board position is described as honorary.
-She does not participate in management functions.
Q. A one-office CPA film has a partner whose brother is treasurer and owns 26 percent of the stock of a company. The CPA film is, with respect to this company
Ans: not independent.
Q. A member has a joint closely held business investment with a director of one of his audit clients. In order for the member to be independent of this audit client, which of the following statements is correct?
Ans: The investment cannot be material to the member, but it could be material to the director.
Q. In a one-office accounting film, a partner’s husband’s brother is a member of the board of directors of a privately held audit client. The accounting film’s independence with this client is
Ans: not impaired.
Q. One of the partners in a one-office accounting film has a brother who is a member of the board of directors of an audit client. The accounting film’s independence with this client is
Q. 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
Ans: not independent with respect to his client since the allegation, though not proven, has been made that his audit was not adequate.
Q. A CPA’s client has threatened suit against the CPA and his furn for $2,000 claiming that due to faulty 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 the action. Total annual audit and tax fees from this client are approximately $45,000 a year. This threatened action by the client will
Ans: not impair independence with the client.
Q. An insurance company, under subrogation rights, has sued a CPA and her firm for $100,000. The insurance company paid $ 100,000 to a client of the furn because of an embezzlement of that amount by 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 federal prison upon being convicted of this theft. The 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 using normal audit procedures would not have been expected to discover the theft. In these circumstances
Ans: the CPA and her furn are independent of the client.
California CPA Ethics Exam Answers Key – Sample Paper 3
Q. A partner in a CPA firm purchases a limited partnership interest in an oil tax shelter. The amount is material to her net worth. She later finds out that the president of one of her audit clients and the 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 president and treasurer. Each of the three heard about this tax shelter from their broker. In this situation
Ans: independence is not impaired with respect to these two clients.
Q. A partner who has been retired for two years continues to serve on the governing board of the accounting firm. 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 become a director of an audit client. Acceptance of the director’s position would
Ans: impair independence with this client.
Q. 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
Ans: check signing is a management function, and independence is impaired
Q. In a one-office firm a partner’s wife works as a cashier for one of the firm’s audit clients. The partner does not work on the engagement for this client. The wife’s position as cashier impairs the firm’s independence with this client.
Ans: does not
Q. James Penna is a partner in the firm of Swenson & Swem, CPAs. He has a credit card from First Bank of Plainfield. His family charges all of their purchases using this credit card and his monthly credit card statement will be as high as $12,000. The balance is paid in full each month and thus he does not incur any interest charges. His firm has been asked to be the auditors for First Bank of Plainfield and he will be the partner in charge of the audit. His credit card account _ impairs the firm’s independence with the bank.
Ans: will not
Q. Merle Garth, CPA is a sole practitioner. A client of his owns 40% of a corporation. The investment is not material to his client. Garth wants to invest in this same corporation. The amount of the investment would not be material to Garth’s net worth. Garth’s investment __ impairs his independence with this client.
Ans: will not
Q. Landry, a Partner in Kimball & Co. (a one-office CPA firm), was formerly treasurer of Charlton & Co. Landry resigned from Charlton & Co. six months ago. Provided there is no independence problem, Charlton & Co. wants Kimball & Co. to perform their next audit. The period covered by the audit would include the six months when Landry had been treasurer of Charlton. Landry had completely disassociated himself from Charlton & Co. prior to accepting employment with Kimball. Landry would not work on the engagement. Kimball & Co. ____ independent of Charlton & Co. for this audit.
Ans: would be
Q. 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
Ans: has violated the ethics code.
Q. A retired partner who no longer does any work for the firm and whose retirement pay is fixed is furnished office space, secretarial, and telephone service in his former firm’s suite of offices. In which of the following situations would the furnishing of office space and amenities cause an independence problem?
Ans: He holds a position of significant influence with a client of his former firm.
Q. A firm’s client is designing and will supervise the construction of a warehouse for a non-client third party. It is a material contract for this client being some 25% of their expected revenues for this year. The firm has been engaged to prepare the inventory control system that will be used in this new facility. The firm and the client have separate contracts with the third party. Under the two contracts, neither is responsible for the actions of the other nor does either one have the authority to act as an agent or representative of the other. This joint activity __ impairs the firm’s independence from the client.
Ans: does not
Q. A firm performed non-attest services for an attest client during the 2004 calendar year. They did not document in writing their understanding with the client regarding the objectives of the engagement, services to be performed, the client’s acceptance of its responsibilities, the member’s responsibilities, and the limitations, if any, of the engagement. The lack
of such documentation in this case a violation of Rule 202 Compliance with Standards
Ans: is not
Q. A firm has been asked to perform a non-attest service for an attest client. The client has only one employee capable of overseeing the non-attest services. Due to lack of time, management does not want the employee to accept that responsibility; therefore, there will be no such oversight by the client. If the firm provides the non-attest service under these conditions, independence with the client_____impaired.
Ans: will be
Q. A public accounting firm uses an outside commercial storage company to store prior years’ audit and tax files for current and prior clients. The storage company is considered a third-party service provider. The firm _ is required to inform the clients whose records are so stored that they are using such a third-party service provider.
Ans: is not
Q. Hill, a member, performs some non-attest services for his attest client Smith & Co. In performing these services he complies with the General Requirements for Performing Non-attest Services contained in Interpretation 101-3, Performance of Non-attest Services. The non-attest services performed do not impair Hill’s independence with Smith & Co. under the AICPA Code of Professional Conduct. However, these services do impair Hill’s independence with Smith & Co. under the independence regulations of the authoritative regulatory body where Smith & Co. must file its audited financial statements. In performing these non-attest services for Smith & Co. Hill has
Ans: violated Interpretation 101-3.
Q. Which of the following best describes the difference between a direct financial interest and an indirect financial interest?
Ans: A direct financial interest is one where the financial interest is owned directly by the individual or by an entity that the individual controls or where he/she can supervise or participate in investment decisions. An indirect financial interest is one where the financial interest is owned beneficially through an intermediary and the beneficiary neither controls the intermediary nor can he/she supervise or participate in the investment decisions.
Q. Holmes, the president of Marvin Mfg. Co. was very pleased with the audit and tax work done by Jones & Co., CPAs. He was especially impressed with Jacobs’ work as a partner in charge of the engagement. Jacobs made some suggestions that reduced the company’s income taxes by a substantial amount. To show his appreciation he had a large Plasma Television delivered to Jacobs’ house. Holmes knows that Jacobs wanted such a set but that Jacobs felt the $7,000 cost was more than he could afford. If Jacobs accepts this gift of the television, Jones & Co.’s independence with Marvin Mfg. Co. be impaired.
Q. Bell Co. is being sued by one of its suppliers over non-payment of invoices for materials purchased by Bell. Bell has countersued stating that the materials received were faulty, and therefore Bell lost money due to returned merchandise and lost sales. Fisher, the partner in charge of Bell’s annual audit, has been asked by Bell’s president to furnish both litigation consulting services and to be an expert witness for Bell Co. in the litigation. If Fisher accepts these two roles what effect, if any, will it have on his firm’s independence with Bell Co?
Ans: Litigation consulting services will not impair independence while expert witness services will impair independence.
Q. Prior to a member signing and filing a tax return for a client, without impairing the member’s independence from that client, the member needs a signed statement authorizing him to make the filing. Which of the following are required to be enumerated in that statement?
-The person signing the statement is authorized to sign and file the return himself or herself.
-The person signing the statement has reviewed the tax return and it is correct and complete.
-The person signing the statement authorizes the member to sign and file the return.
Q. SEC independence rules apply to the __
Ans: audits of all publicly held companies.
Q. May a public accounting firm ever receive from a publicly held audit client a contingent fee or commission (as those terms are defined in the SEC rules) without impairing the accounting firm’s independence with that client?
Q. When the client is required to file its financial statements with the SEC
Ans: the outside auditor cannot prepare any of the accounting records.
Q. Which of the following groups in the public accounting field would not be called covered persons, as that word is defined by the SEC?
Ans: Professional staff below the managerial level who do not work on the audit engagement but have furnished 10 or more hours of non-audit services to the client during the year under audit.
Q. Company A and Company B, both SEC reporting companies, each owns 50% of Company C. The investment in Company C is not material to Company A but is material to Company B. Jones & Brown audit Company A while Smith and Co. audit Company C. A partner in Smith and Co. (a one-office CPA furn) has an immaterial direct investment in non-client Company B. Under SEC rules this investment impairs Smith and Co.’s independence with Company C.
Q. CPAs audit an entity that must file its audit reports with the Government Accountability Office. In addition to the audit, they provide some non-audit work that is neither significant nor material to the audited financial statements. Barnes, a semi-senior at Smith & Smith CPAs, did most of this non-audit work for 2002. He along with others is assigned to work on the 2002 annual audit for this entity. If Barnes works on the
Ans: The independence of Smith & Smith, CPAs would be impaired
Q. Jones & Co. audits an entity that files its audit reports with the Government Accountability Office. Management of the entity has asked Jones & Co. to provide payroll services for the calendar year 2004. They would be computing pay based on approved time cards, generating unsigned paychecks, and other clerical functions. The payroll is a material amount of the expenses of this entity. Doing this payroll work for 2004
Ans: will impair independence of Jones & Co. with this entity.
Q. A registered public accounting firm audits a publicly held company that is required to file its financial statements with the SEC. During the audit and professional engagement period, the public accounting firm may furnish tax services to the following persons connected with this company without impairing their independence with the company.
Ans: A member of the board of directors. She is also the dean of a large university
Q. Ethics rules promulgated by the PCAOB must be approved by:
Ans: The SEC
Q. In the member’s practice, he or she is bound by
Ans: the rules of more than one group.
Q. Stemper & Associates, LLP are the auditors of Cotter & Co. The financial statements of Cotter & Co. do not conform in one area with generally accepted accounting principles. The partners in Stemper agree that using generally accepted accounting principles in this area would make the financial statements misleading. In this situation, the auditors
Ans: may in their report describe the departure from generally accepted accounting principles, its approximate effects, and reasons why compliance with the principle would result in misleading statements.
Q. Mass, a member, is the treasurer of Brown’s Auto. In connection with Brown’s bank loan, she sends a copy of Brown’s quarterly financial statements to the bank. Her transmittal letter to the bank says that the statements are not audited, her staff has prepared them, and that they are in conformity with GAAP. The statements are, however, not in conformity with GAAP. Mass violated the Code of Professional Conduct.
Q. Which of the following is not one of the general standards?
Q. Karlson, a member, bids on a consulting job and has his bid accepted. He attempts to do the work and finds he lacks and cannot gain sufficient competence to complete the job. In such a situation he should:
-engage an associate who has the necessary skills to work with him on finishing the job
-withdraw from the engagement
Q. May a judge compel a member to divulge information about a client’s affairs?
Q. Do some states allow privileged communications between members and their clients?
Q. If a member knows a client has acted outside the tax laws, the member
Ans: might decide to withdraw from the engagement.
Q. Morton, a member, obtains a new tax client ABC Window Company. In reviewing the prior year’s tax return, which the company’s treasurer had prepared, she found that a fairly large expense item had been inadvertently omitted. She proposed to file an amended return for that year. Her fee for that would be 20% of the tax refund received. Charging this contingent fee is
Ans: a violation of the Code of Professional Conduct.
Q. Cornell, a member, wants to include in a sales brochure a list of some of his larger nonpublic audit clients. He believes this will increase his stature with potential clients. Does Cornell have to get the various client’s permission to list their names in his brochure?
Ans: No, he need not get their permission though it may be good public relations with these clients to do so.
Q. Generally, the law holds that the member’s working papers
Ans: belong to the member.
Q. Jane Kalley, CPA, a sole practitioner, has decided to retire and wishes to sell her practice. Her business consists of 50% tax and compilation reports, 30% tax and review reports and the balance tax and audit reports. Laughlin & Co., CPAs, are interested in purchasing the practice but wish to review her working papers and other client files before making a final decision. Which of the following statements is correct?
Ans: Laughlin & Co. may review the files without violating the Code of Professional Conduct. Permission for such a review from the clients is not required.
Q. Meier, a member, issued a review report in April for the prior calendar year on the financial statements for Erie Company. Two months before the review report is issued, his firm starts working on another engagement for Erie. The fee for this engagement will be a percentage of funds recovered from a review of purchase orders as compared to billings received. Has Meier’s firm violated the Code of Professional Conduct with this second engagement?
Ans: ‘Yes, since they were working on the contingent fee engagement and the review engagement at the same time.
Q. A CPA firm presents a seminar on the latest changes in 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 is a violation of the Code of Professional Conduct.
Ans: is not
Q. With respect to question 1 above, the content of the letters of invitation is a violation of the Code of Professional Conduct.
Ans: is not
Q. A CPA’s ad in a neighborhood newspaper states: Jane Jones, Certified Public Accountant; 1060 Walnut Street Western Springs- Telephone 244-6666 Practice limited to write-up work and income taxes. This ad a violation of the Code of Professional Conduct.
Q. A CPA firm placed the following ad in a newspaper: “We are pleased to announce that Frank Jones who spent the last twenty years with the Internal Revenue Service has joined our firm 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.
Q. A CPA is also an attorney who has been admitted to the bar. Under the AI CPA Code of Professional Conduct, on her letterhead,
Ans: she may indicate she is both a CPA and an attorney.
Q. A state wherein a CPA practices has just passed a law mandating that all municipalities over 10,000 population have annual audits. The CPA and his partners telephone all the council presidents and city managers of cities of that size soliciting their audit work. His and his partners’ actions ____a violation of the Code of Professional Conduct.
Ans: are not
Q. A CPA is approached by a bank president asking her to enter into a joint venture with the bank to provide services. The bank would advertise and solicit for this business. The CPA would do the personal income tax returns while the bank would handle trusts, estates, etc. There would be no sharing of fees or profits between the CPA and the bank, each billing the clients separately. It is a violation of the Code of Professional Conduct for the CPA to enter into such an agreement.
Ans: would not
Q. Two of the three partners in Scriba & Phillips, CPAs have received the AICPA-awarded designation, “Personal Financial Specialist.” In what way, if any, may this designation be used on their letterhead?
Ans: The individual partners who hold this designation may use it after their names
Q. Jones and Smith, a CPA firm, arranged with Connors & Hammer, a publisher, to purchase 500 copies of the publisher’s Annual Tax Guide. The tax partner, Smith, has reviewed the guide, and she believes that the information in it is not false, misleading, or deceptive. The following will be printed on the cover of the Guide: “We hope this Annual Tax Guide by Connors & Hammer will be of interest and useful to you. JONES & SMITH Ce1tified Public Accountants” Jones & Smith will distribute the 500 copies to clients and non-clients. This action by the CPA firm __ be a violation of the Code of Professional Conduct.
Ans: would not
Q. For many years, Mr. Jones, a CPA, has wished he had Smith Manufacturing Company as a client. This company has had for at least the last ten years Barnaby & Co. as its auditors. Mr. Jones makes an uninvited call on the president of Smith Manufacturing Company attempting to convince him to switch his work to Jones Company. Mr. Jones realizes that many CPAs believe his actions to be unprofessional and not in the best interests of either the public or the profession. However, he believes that his solicitation of the Smith Manufacturing Company account was ethical under the Code of Professional Conduct. Mr. Jones’ belief as to the ethical propriety of his actions is.
California CPA Ethics Exam Answers Key – Sample Paper 4
Q. 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 men, with these percentages holding true for each quartile of the grade point average of the graduating
class. Finn personnel interviewing on campus have let it be known that they do not wish to interview women applicants. The firm’s professional staff of approximately 140 people includes ten women. A woman denied an interview with the firm’s
recruiter filed a complaint with the AICPA Ethics Division charging discrimination by the firm against women. The probable action by the Ethics Division would be to
Ans: check to see if the matter has been litigated or if there has been a hearing on the matter before an administrative agency as the last step in its investigation.
Q. In January, a member obtains as a client a new business that has been in operation for a year. The company does not have a bookkeeper and for the year’s operation, they have only listings of the cash receipts, cash disbursements, and sales. Using these records, bank statements, etc., the member prepares the necessary accounting records, financial statements, and income tax returns for the business. Upon completing the engagement, the member submits a statement for his services. He is told by the owner that it is much too high, and the owner employs a new CPA to do the work for the next year. The owner then demands copies of the depreciation schedules and other schedules that support the figures shown in the financial statements. He refuses to pay the member for his services. The refusal to pay is not based on a shortage of funds but rather on a dispute as to the amount charged. In this situation, which of the following statements is correct?
Ans: He need not furnish the data until the former client has paid him.
Q. A CPA has been charged with bribing a city inspector. At her trial, the evidence clearly shows that she did pay a bribe to the inspector. However, the judge dismissed the case because of a legal technicality. In such a situation, which of the following statements is correct?
Ans: The Ethics Division may proceed with its own investigation of the matter and, if the facts warrant it, bring the member before a Trial Board.
Q. A member decides to retire and sells his practice to another member. The purchase price is set at 30 percent of the fees the purchaser collects from these clients over the next three years. Computing the sale price in such a manner is
Q. A small CPA furn has had a client for the last ten years. During this period the client’s business has grown to the point where the CPA furn can no longer adequately handle the work. They offer to “sell” the account to a larger CPA furn for 10 percent of the fees that the new firm collects from this client over the next three years. They will recommend the
new CPA furn to the client and will help in the transition of the work from one furn to the other. Such an arrangement be ethical if the terms of the sale were disclosed to the client.
Q. A small CPA firm has a client that they have serviced for a number of years. The client has continued to grow, and the CPA firm no longer has the capabilities to properly handle the client’s needs in audit, tax, and management consulting. The CPA firm tries in vain to sell this client to other larger CPA firms that could handle the work. Finally, in desperation they agree to sell this client’s account through a non-CPA broker, agreeing to pay this broker 30 percent of the sale price. Such an agreement is ethical with disclosure to the client of the broker’s fee.
Q. Hawn, a member, refers office supplies for a commission to some of his tax-only clients. A non-attest client furnishes the office supplies. Is this a violation of the Code of Professional Conduct
Ans: This is not a violation if Hawn discloses the commissions he receives to these clients.
Q. 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?
Ans: No, he has not violated the code if he tells these new clients that he paid a referral fee to obtain their work.
Q. A member is permitted or may be required to disclose confidential employer information when
Ans: Disclosure is required by law
Q. Technical Standards promulgated by the Management Consulting Services Executive Committee ___ enforceable under the Code of Professional Conduct.
Q. The AICPA’s Management Consulting Services Executive Committee the authority to proscribe the consulting services members may not engage in.
Ans: does not have
Q. A CPA, who is a consulting practitioner, is permitted to help a privately held client in the following areas:
Q. The AI CPA Management Consulting Services Executive Committee is authorized by AICPA Council to promulgate standards under
Ans: Rules 201 and 202
Q. If the engagement with the client limits the member’s efforts with respect to gathering relevant data the member ____ withdraw or decline the engagement.
Ans: is not required to
Q. A member could be tried and convicted by a trial board on a charge of violating one of the Statements on Standards for Tax Services. The preceding statement is
Q. Olson, a member, has been preparing Walker’s income tax return. Walker is the sole owner of a manufacturing plant. He insists that Olson take a position with respect to a material item on his tax return that Olson does not agree with. In fact, Olson believes that the position Walker is insisting on cannot be sustained if challenged on review either administratively or judicially. What action would Olson take?
Ans: He should not prepare or sign the return.
Q. Milano, a member, prepares the tax returns for the owners and various executives of a company. The owners are all related. The owners and other executives are in various other ventures. Ownership percentages vary and not all are in each investment. Provided it does not break any law or the Code of Professional Conduct, may Milano consider the information from one or more of these people in preparing the returns of others in this group?
Ans: Yes, he should consider such information.
Q. Macke, a member, is preparing Jacobs’ tax return from information submitted by Jacobs. The information appears to be correct and complete. How much verification of the information should Macke do?
Ans: He is not required to verify any of the information.
Q. Kanter, a tax client of Zeman, a member, received an unfavorable court decision some five years ago on a tax position he had taken with respect to some business expenses. Kanter wants to once more take the same position on business expenses that he did five years ago. Must Zeman insist that the earlier court decision be followed in filing this year’s tax return?
Q. Korzon, a member, does the annual audit of Bates & Co. He does not do the tax return. The return is prepared by Mitchell. In performing the year-end audit, Korzon finds a material error in the prior year’s income tax return that was filed for Bates & Co. Korzon should
Ans: advise management of Bates & Co. about the error and recommend that they talk to Mitchell about it.
Q. Who has the final responsibility for positions taken with respect to controversial matters on the tax return?
Ans: The taxpayer since the tax return is primarily the taxpayer’s representations of facts.
Q. What is a ” frivolous position”?
Ans: A position that is knowingly advanced in bad faith and is patently improper.
Q. Is a taxpayer bound to follow the tax treatment of an item as consented to in an earlier administrative proceeding?
Q. If reasonable grounds exist for omission of an answer to an applicable question on a tax return, is the member required to provide on the return an explanation of the reason for the omission?
Q. Stolfa, a member, finds that an error was made in the return that he prepared for Russo last year. The error is discovered as he is preparing the current year’s return. Stolfa should
Ans: tell Russo about the error and what steps are needed by way of amended returns to inform the taxing authorities about it.
Q. Which describes all of the forms of practice members are permitted to use?
Ans: Any form of organizations permitted by law or regulation whose characteristics conform to resolutions of council.
Q. Under partnership law
Ans: each partner is individually liable for all partnership obligations.
Q. In a mixed partnership of members (CPAs) and non-CPAs, the members be held ethically responsible for the acts of the non-CPAs.
Q. In a mixed partnership of CPAs and non-CPAs, the CPAs are all members of the AICPA. May this film designate itself as “Members of the American Institute of Certified Public Accountants”?
Q. The Ethics Committee the use of the term “&Company” after a CPA’s name when the CPA is a sole practitioner, and there is at least one other individual working with the practitioner.
Q. If a partner in a two-member partnership withdraws or dies, the remaining partner may continue to practice under the established firm title which includes the former partner’s name
Q. A public accounting film’s owners are six CPAs and four non-CPAs. The non-CPAs are in charge of the tax department. The most senior of the non-CPAs gives final review and approval to all tax returns and to the few compilation reports that are issued with the tax returns. The compilation reports do not disclose a lack of independence. If a client wants a review statement, then one of the CPAs must give the final review and approval to the review report. These procedures __ violate the Code of Professional Conduct.
Q. Could two CPAs who share an office and staff ethically have a joint letterhead?
Ans: No. The public would assume a partnership existed.
Q. For the next three questions, assume the firm is owned by both CPAs and non-CPAs. Ownership of the firm may be divided as follows:
Ans: CPAs must own a majority of financial and voting interests.
Q. For the next three questions, assume the firm is owned by both CPAs and non-CPAs. It is proposed that a 10% interest in the firm be sold to a local investor. This investor would share in the profits but would have nothing to do with servicing the clients. Operating the accounting business in this manner __ violate the Code of Professional Conduct.
Q. For the next three questions, assume the firm is owned by both CPAs and non-CPAs. If a member’s firm name is not considered misleading under AICPA ethics rules and interpretations but is considered misleading under applicable State Board of Accountancy rules and regulations, the film name would be considered
Q. A CPA will be expelled from the AI CPA for
-having his or her certificate as a CPA revoked by the authority of any state.
-being convicted of a crime punishable by imprisonment for more than one year.
Q. Can most state associations discipline members?
Q. Can the Institute expel a member for not paying dues and other obligations?
Ans: Yes, five months after the due date.
Q. Any sanctions applied against a member by the AI CPA or state CPA associations can involve
Ans: a fine only nor a fine and imprisonment.
Q. Mr. Robert Jones, a member of the AICPA and of a state society that is a member of the Joint Ethics Enforcement
Program, is found guilty by a Trial Board of violating the Code. The Trial Board’s punishment is a six-month suspension. This suspension will be effective for
-his AICPA membership.
-his state society membership.
Q. Assume the same set of facts as in question 5 above, except that the punishment is censure. Which of the following statements is true?
Ans: The public and members of the profession, via posting on the AI CPA website, will be informed that Robert Jones was found guilty by a Trial Board of violating the Code and that the Trial Board censured him.
Q. Albers, CPA, is a sole practitioner whose business consists of tax engagements, management consulting, write-up work, compilations and a few reviews. She does not perform audits of financial statements. Since she does an extensive amount of tax work, she prefers to use all of her CPE hours taking qualified tax update courses each year. Which of the following is collect?
Ans: If Albers takes only 80 hours of CPE, some of those hours must include topics other than tax.
Q. Brown, CPA, has several wealthy tax clients who regularly confer with her about tax planning, estate planning and tax compliance issues. She is very familiar with these clients’ financial situations. Assuming none of the clients are attest clients and all required disclosures would be made by Brown, may she sell a list of these clients to Mr. Nasdaq, a registered investment adviser (RIA), if she notifies her clients in advance and explains how Mr. Nasdaq could be of service in helping them meet their financial needs?
Ans: No, because selling a list of clients is not allowed in California.
Q. A CPA firm was found to have knowingly prepared materially misleading financial statements, for the second time. What is the maximum administrative penalty the firm can receive for this second offense?
Q. Mr. Hemp, CPA, has been convicted of illegal drug possession and use (a misdemeanor) and must pay a large fine. Because the amount of drugs involved was small and because he had no previous convictions, he was put on probation but did not have to serve any jail time. He is very embarrassed and ashamed of being caught and hopes the conviction will not affect his business. Must he notify the Board of Accountancy about his conviction?
Ans: No, because the conviction was a misdemeanor, not a felony.
Q. Charlie, CPA was engaged as a professional practice reviewer (i.e., a peer reviewer) by Smith & Jones, CPAs. While reviewing Smith & Jones’ files, Charlie became aware that one of their public clients had a strong possibility of being acquired soon by a larger company, and that the present stockholders of the client were likely to be paid handsomely for their shares. After the conclusion of the practice review, may Charlie purchase some stock of Smith & Jones’ client?
Ans: This action would be prohibited by the California Accountancy Act.
Q. Darrow is a CPA, but not a member of the AI CPA or Cal CPA. Is she bound by AI CPA pronouncements?
Ans: In many instances, California licensees must adhere to AI CPA pronouncements, whether or not they are members of the AICPA.
Q. Evans, CPA, retired as a partner in a San Francisco CPA furn. She wished to continue practicing public accounting as a sole practitioner, but could not do so within a 100-mile radius of her former furn because she signed a non-competition agreement as part of her retirement contract. Therefore, she moved to San Diego to live and to begin a practice as a sole practitioner. How long does she have to communicate her new address and business affiliation to the Board?
Ans: Evans must notify the Board, in writing, within 30 days of her move.
Q. Fuller, CPA, received a telephone call from an attorney who said he was looking for a CPA to act as an expert witness in one of his cases. The attorney then told Fuller some of the facts of the case and stated that the information was confidential. The attorney concluded the conversation by reminding Fuller that she had received confidential information and was thus precluded from working on the case for the opposing party. He hung up the telephone without engaging Fuller to work on the case. Which of the following responses is true?
Ans: Fuller may work on the case for the opposing party if she puts the attorney on notice that the information he is about to reveal is not confidential unless she is engaged to work on the case for him.
California CPA Ethics Exam Answers Key – Sample Paper 5
Q. Green, CPA, has been approached by Dewy Cheetum, an attorney, to act as an expert witness on one of Mr. Cheetum’s cases. Mr. Cheetum’s fee will be 40% of his client’s award, should his client prevail. Mr. Cheetum wishes to pay Green 5% of his client’s award if the client should prevail. May Green accept this fee arrangement?
Ans: No, because expert witness work may not be performed for a contingent fee.
Q. Hill, CPA, wrote an article about ethics for CPAs acting as expert witnesses and the article was published in the Journal of Accountancy. How much time may Hill allocate to writing the article as part of her CPE requirement?
Ans: Hill may claim the actual number of hours it took her to write the article, up to 20 hours.
Q. In March 2012, Iverson, CPA, had a $25,000 civil judgment entered against her for negligence in connection with her practice as a CPA. Since the judgment was less than $30,000, and since it was a civil, not criminal judgment, she believes that she is not under any obligation to notify the California Board of Accountancy about the judgment. Which of the following items is correct?
Ans: All judgments involving negligence must be reported, regardless of the amount.
Q. Jones, et al., an Accountancy Corporation, is owned by ten CPAs licensed in California and three non-CPAs. All of the owners practice exclusively in California. Are the non-CPA owners responsible for the rules of professional conduct applicable to accountancy firms?
Ans: Yes, and the furn must certify that the non-licensee owners have been informed about the rules of professional conduct applicable to accountancy corporations.
Q. Keller, CPA, was so busy she forgot to complete all of her required CPE. When it became time to renew her license she realized that she was 30 hours short of the hours required, and she had not taken enough accounting and auditing hours, and it was the renewal period in which she was required to have her California Regulatory Review course, but she had not taken one in the last six years. What must Keller do?
Ans: She should apply to have her license put on inactive status while she completes her CPE requirements. During that time she may not engage in the practice of public accounting.
Q. When Leung retired as managing partner of”Leung and Chang, CPAs,” she was entitled to a retirement annuity of $75,000 per year until she died. Is this arrangement allowed by the California Accountancy Act?
Ans: Yes, it is allowed by the California Accountancy Act
Q. Miller, CPA, received a phone call from Joe, a tax client, who just received a $500,000 distribution from the estate of his mother. Joe asked Miller for advice concerning what to do with the money. Miller reviewed with Joe various investment options, his risk tolerance, and the tax consequences of several potential investments, and ultimately decided that Joe’s best course of action would be to consult with Mr. Nasdaq, a registered investment adviser (RIA). If Miller refers Joe to Mr. Nasdaq, may she accept a commission from Mr. Nasdaq, assuming all required disclosures are made to Joe?
Ans: Yes, but these services may require that Miller be licensed by the California Department of Corporations or the SEC.
Q. According to the AICPA bylaws, which actions against a member are subject to required publication:
Ans: A trial board conviction against the member
Q. In California, which of the following licensees would be required to take 24 hours of accounting and auditing CPE?
-Kashani, CPA a personal Financial planner, who occasionally prepares reviews of his business clients’ financial statements
-Jones, CPA, is a tax practitioner, who occasionally prepares compiled Financial statements for her clients.
-Hernandez, CPA an audit partner in a regional accounting firm.
Q. 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 not work or consult 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?
Ans: The shares must be sold within thirty days of their receipt
Q. 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?
Ans: 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.
Q. Lisa Ledger, a California CPA practicing in California, uses HelpOut, Inc., a third-party service provider operating outside the United States, to assist her in furnishing bookkeeping and tax work for her clients. This necessitates Lisa Ledger disclosing confidential information to HelpOut, Inc. What is required with respect to the release of such information?
-Written permission to disclose must be obtained from the client prior to releasing the information to HelpOut, Inc
-Prior to using HelpOut, Inc.’s services, Lisa Ledger entered into a contractual agreement with HelpOut, Inc. to maintain
-Confidentiality of the information and Lisa Ledger is reasonably assured that HelpOut, Inc. has procedures that will prevent
-Unauthorized release of the information.
Q. 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 insigniÖcant effect on Temple Electric Leave a Message Co.’s tax liability for the prior year. What action, if any, should Klein take with respect to this error?
Ans: Klein should tell Temple Electric Co.’s management about the error.
Q. According to the Statement on Standards for Consulting Services, what is considered to be consulting services:
Ans: Controllership activities
Q. Arnesen & Co., a California CPA Örm, 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 with originals or copies of the depreciation schedules, and other material necessary to make their records complete, all of 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 statement is correct, according to the California Accountancy Rules and Regulations?
Ans: 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.
Q. Ms. Babbitt, the president of Prism Co., is considering hiring Suh & Sons, CPAs, a one-ofÖce Örm, 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 is 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.
Ans: not be the second signature on checks, but Yee could be named as executor in her will
Q. Morales, a member of public practice, begins an engagement with Seagar Company by providing a fee estimate of $2,000. At the time that Morales gave the fee estimate to Seagar Company, he was aware that the fees that would be incurred and charged to Seagar Company would be substantially higher, closer to $10,000. Which statement is correct about Morales’ actions:
Ans: Morales’ actions would be considered false, misleading, or deceptive
Q. 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. What is required of Alexis when she prepares and furnishes such statements to the bank?
-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.
-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.
Q. 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?
-Ginsberg must receive the consent of the board and the client to participate as a board member on this appeal.
-Ginsberg must disclose this relationship to the client and the board.
Q. Diana Roth is a California CPA practicing in California. She is a sole proprietor with three professional employees and two paraprofessional employees. Diana has owned her own firm for five years. Which name may Diana use for her practice without registration and approval from the Board of Accountancy?
Ans: Diana Roth, CPA
Q. Snow, a California CPA, has been convicted of illegal cocaine drug possession and use (a felony) and must pay a large fine. Because the amount of drugs involved was small and because he had no previous convictions, he was put on probation but did not have to serve any jail time. He is very embarrassed and ashamed of being caught and hopes the conviction will not affect his business. Which of the following is a true statement regarding Snow’s obligation to notify the Board of Accountancy about his conviction?
Ans: He must report it because the conviction was for a felony
Q. Molina, a California CPA practicing in California, was born on June 20, 19X6. She was originally licensed on November 30, 20X1. When is Molina’s first license renewal date?
Ans: June 30, 20X2
Q. Kale, a California CPA, is a sole practitioner who prepared 500 tax returns in 20X6. At the end of 20X6, she took over a tax practice from a close friend who died suddenly and will now prepare nearly 900 returns during 20X7. Due to the increased workload and her inability to hire qualified help, Kale became so busy that she forgot to complete all of her required continuing professional education. When it became time to renew her license in May 20X7 she realized that she was 30 hours short of the total hours required, she had not taken enough accounting and auditing hours, and it was the renewal period in which she was required to take her California Regulatory Review course which she had not completed within the previous six years. Given the situation, what must Kale do?
Ans: Kale should apply to have her license put on inactive status while she completes her CPE requirements. During that period of time, she may not engage in the practice of public accounting
Q. According to the California Accountancy Act, which of the following is acceptable as it relates to non-licensee ownership of firms engaged in the practice of public accountancy?
Ans: Licensees shall in the aggregate, directly or beneficially, comprise a majority of owners, except that firms with two owners may have one owner who is a non-licensee.
Q. Katey is a California CPA practicing in California. Katey has been licensed in California for 20 years, all of those years in active status. She is a partner in the firm of Perry & Sherry, CPA’s. Katey wants to renew her license in inactive status as she will be accepting a temporary position outside of public accounting. Which of the following applies to her renewal in inactive status?
Ans: Katey may continue to receive a share of the net profits from Perry & Sherry, CPA’s while her license is in inactive status.
Q. Klein & Marin, CPA’s has two offices located within 20 miles of each other. During the busy tax season period the firm hires a number of independent contractors and/or temporary employees to assist in tax preparation. Barbara is a controller at Gold Industries, an audit client of Klein & Marin, CPA’s. Before becoming the controller at Gold Industries, Barbara worked in public accounting and acquired a significant amount of tax preparation experience. Barbara has asked Seth, the tax partner at Klein & Marin, CPA’s, if she could assist with tax preparation at the firm during tax season, and Seth, believing that this would be a great idea, agrees to hire Barbara as a temporary employee to work on weekends preparing tax returns
during the busy tax season. Barbara will prepare tax returns exclusively for nonattest clients of the firm. In addition, Barbara will not work in the office that handles the audit of Gold Industries. Does the hiring of Barbara impair the firm’s independence with respect to Gold Industries?
Ans: No. The firm’s independence is not impaired because Barbara will only prepare tax returns for nonattest clients.
Q. David, a member, is a sole practitioner CPA. Based on the work that David does for Jackson Spine, Inc., he is not independent with respect to the company. Jackson Spine, Inc. requires audited financial statements for its line of credit with Graymore Bank. The company has hired Hanson & Potter, CPA’s to perform the audit and issue the audited statements to the bank. Hanson & Potter, CPA’s would like to utilize David on the audit of Jackson Spine, Inc. because of his extensive experience with the client and his knowledge of the books and records. Would Hanson & Porter, CPA’s use of David on the audit impair their independence with respect to Jackson Spine, Inc.?
Ans: David’s lack of independence would automatically impair Hanson & Potter, CPA’s independence with respect to Jackson Spine, Inc.
Q. According to the Code of Professional Conduct, a distinguishing mark of a profession is:
Ans: Acceptance of its responsibility to the public
Q. Which of the following is not considered to be a “cooperative arrangement” between a member firm and a client that would impair independence?
Ans: A prime/subcontractor arrangement to provide services or products to a third party where the arrangement is not material to the firm or to the client.
Q. Jordyn, a member, recently hired a new administrative assistant. During the hiring process, she interviewed at least a dozen candidates for the position. Subsequent to hiring her new administrative person, a lawsuit was filed against Jordyn alleging discrimination in hiring which is a violation of state law. At what point has Jordyn committed an act discreditable to the profession?
Ans: If and when Jordyn is finally determined by a court of competent jurisdiction to have violated the state anti-discrimination law.
Q. The Sarbanes-Oxley Act of 2002 gives the Public Company Accounting Oversight Board, under the oversight of the Securities and Exchange Commission, broad powers to do which of the following:
-Register public accounting firms
-Conduct inspections of public accounting firms
-Establish auditing standards
Q. Patel, a member, is a sole practitioner CPA who provides bookkeeping, financial statement, and tax preparation services to his clients. To assist Patel with his workload, he has hired a third-party service provider to enter client bookkeeping information (coded checks, and deposits) and to do bank reconciliations for some of his clients. In addition, Patel uses a different third-party service provider to provide cloud-based record storage, software application hosting, and e-file tax transmittal services. Which of the following statements is true regarding the disclosure(s), if any, that Patel is required
to provide to his clients regarding the use of the aforementioned third-party service providers?
Ans: Regarding the third-party service provider performing bookkeeping services, Patel should inform the client(s) involved, prior to disclosing con±dential client information and preferably in writing, that he may use a third-party service provider.
Q. Hanah, a member, is a sole practitioner who operates a practice that primarily handles bookkeeping for small business clients. Hanah uses a third-party service provider to assist with the input of client data. Which of the following should Hanah do before disclosing con±dential client information to the provider?
Ans: The member does not need to do anything. There is no need to let a client know about a third-party service provider
as it relates to con±dential client information.
Q. Goldberg, a member, has been asked to audit the financial statements of Zion Credit Union for the year ended December 31, 20X5. Goldberg is a member of the credit union and individually quali±es to be a member other than by virtue of the professional services provided to the client. Is Goldberg’s independence impaired with respect to the audit of Zion Credit Union solely by virtue of his membership?
Ans: As long as Goldberg individually quali±es to be a member of the credit union other than by virtue of the professional services provided to the client, his independence is not impaired solely by virtue of his membership.
Q. Adler, Grimes & Hastings, CPA’s has been in business for over 30 years. Barbara Adler, a long-time partner of the firm, died last year. The ±rm wants to admit Jones as a partner and go by the name Adler, Grimes, Jones & Hastings, CPA’s. Jones is a member of the State CPA Society but is not a member of the AICPA. Adler was a member of the AICPA and both Grimes and Hastings, the only other partners, are also members of the AICPA. Which of the following statements is true?
Ans: The firm may continue to use Adler’s name in the firm name since the new ±rm is considered to be a successor firm.
Q. Chip, a covered member, performs an attest engagement for Jo Jo, Inc. Chip leases office space from Jo Jo, Inc. and the lease was entered into during the term of the professional engagement. Which of the following safeguards must be met for the self-interest threat to be at an acceptable level and for independence not to be impaired:
Ans: All amounts are paid in accordance with the lease terms or provisions.
Q. Lazar, a member, is preparing a tax return for Polanski for 20X9. Lazar has prepared tax returns for Polanski for twenty years and a number of those returns have been audited, most recently for the year 20X7. There is a position on the 20X9 tax return that is at odds with a tax treatment consented to in an administrative proceeding conducted on Johnson’s 20X7 tax return. Is Polanski bound to follow the tax treatment of an item as consented to in an earlier administrative proceeding?
Ans: Polanski is not bound by the previous consent.
Q. A CPA discovers that a client has falsified financial statements. What should the CPA do first?
-Confront the client and ask them to correct the financial statements
-Contact the client’s board of directors and inform them of the situation
-Report the client to the appropriate authorities
Q. A CPA is working on a tax return for a client who is a close friend. The client asks the CPA to inflate their deductions in order to reduce their tax liability. What should the CPA do?
Ans: Refuse to inflate the deductions and explain to the client why it is unethical
Q. A CPA is working on a valuation of a company. The company’s CEO asks the CPA to inflate the valuation so that the CEO can sell their shares for a higher price. What should the CPA do?
Ans: Refuse to inflate the valuation and explain to the CEO why it is unethical
Q. Andrea, a CPA and professional staff member who has decided to leave Credit & Balance, CPAs for a position in the 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?
Ans: 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.
Q. Sloan and Baldwin are partners in Hope & Hope, CPAs, a one-ofÖce public accounting Örm. 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?
Ans: 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.
Q. Doyle, a member, performs bookkeeping services for Flair Shoes, Inc. Which of the following would impair Doyle’s independence with respect to Flair Shoes, Inc.?
Ans: Make changes to source documents without client approval.
Q. A San Diego partner’s father lives in San Diego. The partner does not furnish any Financial support for his father. This partner also has a cousin living in Los Angeles. He furnishes all the Financial support for this cousin. The father owns 400 shares of stock in Trojan Mfg. Co. The cousin owns 30 shares of stock in Trojan Mfg. Co. The San Diego office does all the work for this attest client, Trojan Mfg. Co. The shares owned by the father and the cousin are not material to either of them and neither of them have any influence with Trojan Mfg. Co. What effect, if any, do these stock holdings by the partner’s father and cousin have on the partner’s firm’s independence with Trojan Mfg. Co.?
Ans: The cousin’s stock ownership impairs independence but the father’s does not.
Q. 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 half of the fee for the 20X1 audit when they billed them for the 20X2 audit. Which of the following statements is correct?
Ans: Since they have not been paid for work that must have been done before March 10, 20X2, they are not independent.
Q. 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-
Ans: not required to inform Jackson about the change in the law.
Q. A public accounting firm has ofÖces in Portland and Sacramento. Members of the accounting Örm 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?
Ans: The Portland partner’s loan impairs independence and the Sacramento professional staff person’s loan does not impair independence.
Q. 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.?
Ans: The client’s person in management who is authorized to sign and Öle 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 authorized Dunn to sign and file it.
Q. When is it permissible to use estimated amounts in the preparation of tax returns?
-When the taxpayer’s records do not accurately reflect information related to small expenditures, the taxpayer’s estimate of the amount may be used.
-Unless prohibited by statute or rule, when it is not practical to obtain the exact data.
-Fire or computer failure has destroyed the records.
Q. 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.?
Ans: Robert Landry is independent of Multi Investment Co. and Susie Cue is independent of Sherman Mfg.
Things To Remember Before Taking California CPA Ethics Exam
The Professional Ethics for CPAs (PETH) exam is a mandatory exam for applicants who are applying for a California CPA license for the first time or have a canceled license and are seeking a reissue.
Even if you are licensed outside of California, you must pass the PETH before applying for a California license.
The exam covers professional conduct and accounting rules and tests how well you would handle professional, ethical questions you may encounter while in the accounting profession.
The exam consists of 50 multiple-choice questions that can be taken online or on paper.
If you choose to take the exam online, it will be graded immediately and you will have your score as soon as you submit it.
If you choose to take the exam on paper, you will have to mail the sheet to the AICPA grading center for scoring.
You will have 6 attempts to pass the exam with a grade of 90 percent or better, or no more than five missed questions.
All self-study and PETH exam questions are random. That means exam questions are issued in a random order each time the test is taken.
The exam must be completed within one year from the date of purchase.
Here are some tips to help you prepare for the PETH Exam:
- Purchase the self-study course. The self-study course is usually required by the state board. You don’t need to spend the full 10+ hours on the course, as long as you don’t skip around and don’t miss some important points.
- Study the materials provided by the American Institute of Certified Public Accountants (AICPA). The exam focuses on professional ethics questions that arise in the accounting profession. It tests your understanding of the conduct required of CPAs who serve the financial integrity of businesses and individuals.
- Take practice exams. Practice exams can help you get familiar with the format of the PETH Exam and identify areas where you need more study.
- Plan ahead. Make sure you give yourself enough time to study before taking the PETH Exam.
Please note that these tips are not exhaustive and may vary depending on your state board’s requirements. For more information, you can visit CalCPA’s website.
With these tips in mind, you should be well on your way to passing the California CPA Ethics exam.
Just remember to relax, take your time, and be prepared. With a little effort, you can enter the exciting world of driving in no time!
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