Certified Public Accountant Professional Standards & Competencies 4 — Questions and Answers
Question 1: A CPA discovers during fieldwork that the client's CEO has been embezzling funds. The CPA's primary obligation is to:
- Report the embezzlement directly to law enforcement
- Withdraw from the engagement without explanation
- Communicate the finding to those charged with governance (Correct answer)
- Issue a qualified opinion and continue the engagement
Correct answer: Communicate the finding to those charged with governance
AU-C Section 265 and 240 require the auditor to communicate significant fraud findings to those charged with governance (e.g., the audit committee).
Question 2: Under the AICPA Code, a CPA firm that performs bookkeeping for an attest client creates a threat to independence classified as a:
- Self-interest threat
- Familiarity threat
- Self-review threat (Correct answer)
- Advocacy threat
Correct answer: Self-review threat
Providing bookkeeping services to an attest client creates a self-review threat because the CPA would be auditing their own work.
Question 3: Which AICPA standard governs review engagements for historical financial statements of nonpublic entities?
- AU-C Section 930
- AR-C Section 90 (Correct answer)
- AT-C Section 105
- SSARS No. 12
Correct answer: AR-C Section 90
AR-C Section 90 (part of SSARS) governs review engagements for nonpublic entities under the Accounting and Review Services standards.
Question 4: A CPA issues a report on prospective financial statements. If the statements are for general use, which type is appropriate?
- Projection
- Forecast (Correct answer)
- Partial presentation
- Pro forma financial information
Correct answer: Forecast
Forecasts (based on expected conditions) are appropriate for general distribution, while projections (based on hypothetical assumptions) are restricted to limited use.
Question 5: The 'due care' principle in AICPA General Standards requires CPAs to:
- Guarantee the accuracy of all financial statements reviewed
- Discharge responsibilities with competence and diligence (Correct answer)
- Obtain peer review every two years
- Document all judgments in writing
Correct answer: Discharge responsibilities with competence and diligence
Due care requires CPAs to perform services with competence, diligence, and adequate planning and supervision — not to guarantee outcomes.
Question 6: Under SAS No. 145, the auditor's risk assessment procedures must include:
- Confirmation of all significant accounts receivable balances
- Analytical procedures and inquiries of management as a minimum (Correct answer)
- Physical observation of all material inventory
- Inspection of all significant contracts
Correct answer: Analytical procedures and inquiries of management as a minimum
SAS No. 145 requires risk assessment procedures including analytical procedures and inquiries as a baseline to understand the entity and identify risks of material misstatement.
Question 7: A CPA who serves on the board of directors of an audit client most likely creates which independence impairment?
- Familiarity threat that can be mitigated by disclosure
- Management participation threat that impairs independence (Correct answer)
- Self-interest threat eliminated by recusal from financial decisions
- No threat if the CPA is a non-executive board member
Correct answer: Management participation threat that impairs independence
Serving on a client's board is a management participation threat under ET Section 1.295 that generally impairs independence regardless of the role type.
Certified Public Accountant Professional Standards & Competencies 4
A CPA discovers during fieldwork that the client's CEO has been embezzling funds.
The CPA's primary obligation is to: