FAC FAC Ethics, Compliance & Professional Standards 1 — Questions and Answers
Question 1: Which organization establishes and maintains the Code of Professional Conduct governing U.S. Certified Public Accountants (CPAs)?
- IRS
- SEC
- AICPA (Correct answer)
- FASB
Correct answer: AICPA
The American Institute of CPAs (AICPA) establishes the Code of Professional Conduct that governs CPA ethical behavior in the United States.
Question 2: What does auditor independence fundamentally require?
- Working alone without a team
- Freedom from bias or conflicts of interest affecting professional judgment (Correct answer)
- Refusing all direct communication with management
- Limiting audit procedures to low-risk areas
Correct answer: Freedom from bias or conflicts of interest affecting professional judgment
Auditor independence requires both independence in fact (actual freedom from bias) and independence in appearance (appearing unbiased to reasonable observers).
Question 3: Under the Sarbanes-Oxley Act (SOX), which section requires management to assess and report on the effectiveness of internal controls over financial reporting?
- Section 302
- Section 404 (Correct answer)
- Section 806
- Section 101
Correct answer: Section 404
SOX Section 404 requires management to assess internal controls over financial reporting and the external auditor to attest to that assessment.
Question 4: Which ethical principle requires a CPA to be straightforward and honest in all professional and business relationships?
- Objectivity
- Confidentiality
- Integrity (Correct answer)
- Professional competence
Correct answer: Integrity
Integrity requires CPAs to be honest and not allow bias, conflicts of interest, or undue influence to override professional judgment.
Question 5: If a CPA discovers that a client has a material misstatement in previously issued financial statements, what is the appropriate action?
- Ignore it if it was immaterial at the time of original issuance
- Advise the client to correct the misstatement and consider informing appropriate parties (Correct answer)
- Resign immediately without explanation
- Issue an unmodified opinion on the current year and move on
Correct answer: Advise the client to correct the misstatement and consider informing appropriate parties
Professional standards require CPAs to advise correction of material misstatements and potentially disclose to regulatory authorities if the client refuses.
Question 6: The IMA Statement of Ethical Professional Practice identifies four overarching standards. Which standard prohibits disclosing confidential information except when legally obligated to do so?
- Competence
- Integrity
- Credibility
- Confidentiality (Correct answer)
Correct answer: Confidentiality
The IMA's confidentiality standard requires management accountants to refrain from disclosing confidential information acquired in the course of their work unless legally required.
FAC FAC Ethics, Compliance & Professional Standards 1
Which organization establishes and maintains the Code of Professional Conduct governing U.S.
Certified Public Accountants (CPAs)?