AUDITING - CHAPTER 4

1. Society has attached a special meaning to the term "professional." A professional is

a. someone who has passed a qualifying exam to enter the job market.

b. a person who is expected to conduct himself or herself at a higher level than the requirements of society's laws or regulations.

c. any person who receives pay for the services performed.

d. someone who has both an education in the trade and on-the-job experience received under an experienced supervisor.

2. Interpretations of the Rules of Conduct do not prohibit an auditor from serving as

a. a director or officer of an audit client company.

b. an underwriter for the sale of client's bonds.

c. a trustee of a client's pension fund.

d. an honorary director for a not-for-profit charitable or religious organization.

3. Which of the following best describes why publicly traded corporations follow the practice of having the outside auditor appointed by the board of directors or elected by the stockholders?

a. To comply with the regulations of the Financial Accounting Standards Board.

b. To emphasize auditor independence from the management of the corporation.

c. To encourage a policy of rotation of the independent auditors.

d. To provide the corporate owners with an opportunity to voice their opinion concerning the quality of the auditing firm selected by the directors.

4. Which of the following is not one of the four parts of the AICPA's Code of Professional Conduct?

a. Depositions.

b. Rules of Conduct.

c. Interpretations.

d. Principles.

5. Although it is possible to take the extreme position that anything affecting either independence in fact or in appearance must be eliminated to ensure a high level of respect in the community, the difficulty with this position is that it is likely to restrict significantly

a. the services offered to clients.

b. the freedom of CPAs to practice in the traditional manner.

c. the ability of CPA firms to hire competent staff.

d. all three of the above.

6. Which one of the following statements is not true?

a. The auditor's responsibility to act in accordance with professional standards is greater than the responsibility for confidentiality.

b. Information obtained by a CPA from a client is not privileged.

c. When a CPA firm conducts an AICPA-authorized peer review of the quality controls of another CPA firm, permission of the client is not needed in order to examine the working papers.

d. A CPA firm which observes substandard working papers of another firm cannot initiate a complaint of substandard performance with the Ethics Division Trial Board because of the confidentiality of the working papers.

7. The Independence Standards Board was formed to provide a conceptual framework for independence issues related to audits of

a. privately held companies.

b. governmental entities.

c. public companies.

d. charitable organizations.

8. The Independence Standards Board, formed in 1997, operates

a. as a division of the Securities and Exchange Commission.

b. as a division of the American Institute of Certified Public Accountants.

c. as a governmental body independent of the Securities and Exchange Commission and American Institute of Certified Public Accountants.

d. as a private-sector body independent of the Securities and Exchange Commission and American Institute of Certified Public Accountants.

9. The AICPA Code of Professional Conduct requires compliance with accounting principles promulgated by the body designated by AICPA Council to establish such principles. The pronouncements comprehended by the code include all of the following except

a. opinions issued by the Accounting Principles Board.

b. interpretations issued by the Financial Accounting Standards Board.

c. AICPA Accounting Research Studies.

d. AICPA Accounting Research Bulletins.

10. In connection with a lawsuit, a third party attempts to gain access to the auditor's working papers. The client's defense of privileged communication will be successful only to the extent it is protected by the

a. auditor's acquiescence in use of this defense.

b. common law.

c. AICPA Code of Professional Conduct.

d. state law.

11. In which of the following instances would the independence of the CPA not be considered to be impaired? The CPA has been retained as the auditor of a

a. charitable organization in which an employee of the CPA serves as treasurer.

b. municipality in which the CPA owns $250,000 of the $2,500,000 indebtedness of the municipality.

c. cooperative apartment house in which the CPA owns an apartment and is not part of the management.

d. company in which the CPA's investment club owns a one-tenth interest.

12. The interpretations of the Rules of Conduct define "materiality" for investee-investor relationships as

a. 5% of client's total assets.

b. 5% of client's operating income before taxes.

c. either 5% of total assets or 5% of income before taxes, whichever is more restrictive.

d. 5% of net income after taxes.

13. Which of the following statements regarding professional and regular corporations is not true?

a. Shareholders in both professional corporations and regular corporations are individually liable in litigation against the CPA firm.

b. The shareholders, officers, and employees must comply with all Code of Professional Conduct requirements.

c. Stock in a public accounting corporation must be held by only those CPAs who are qualified to practice.

d. The firm name must meet the same requirements as those for a single proprietorship and partnership.

14. Rule 302 of the Rules of Conduct prohibits the charging of a fee which is determined based upon a specified finding or result being obtained. Under a recent agreement between the AICPA and the Federal Trade Commission, which one of the following would still be a violation of this rule?

a. To charge fees as an expert witness which would be determined by the amount awarded to the plaintiff.

b. To base consulting fees on a percentage of a bond issue.

c. To determine the audit fee on the type of opinion that is expressed.

d. To determine the tax fee based on the percentage of tax savings when a tax return is filed.

15. It is not a violation of the AICPA's Code of Professional Conduct for a CPA to

a. charge fees as an expert witness determined by the amount awarded to the plaintiff, even though CPA performs a Compilation for client use also.

b. base consulting fees on a percentage of a bond issue, even though CPA performs a Review for client also.

c. base his or her fee for a tax service on the amount of the refund that client will receive.

d. base consulting fees on a percentage of a bond issue, even though CPA performs an audit for client also.

16. Which of the following is not defined as an act discreditable in either the Rules or the Interpretations of the AICPA's Code of Professional Conduct?

a. The CPA firm has issued the standard unqualified audit report after auditing a governmental agency, although GAAS was not followed because the government required procedures different from GAAS.

b. The CPA firm discriminates in its hiring practices based on the age of the applicant.

c. The CPA retains the client's books and records to enforce past-due payment of the CPA's bill, even after the client has demanded they be returned.

d. The CPA firm's partner-in-charge was arrested recently on his way home from the firm's holiday party. He was a passenger in a car driven by his wife and she was charged with "driving while intoxicated." He was also arrested and charged with "lewd and indecent gestures towards an officer of the law" and rowdy behavior.

17. Four of the six Ethical Principles in the AICPA's Code of Professional Conduct are equally applicable to all members of the AICPA, regardless of whether the members practice in a CPA firm or work for business or government. Which of the following Principles applies only to members in public practice?

a. Scope and Nature of Services.

b. Integrity.

c. Due Care.

d. The Public Interest.

18. Interpretations of the AICPA Code of Professional Conduct are dominated by the concept of

a. independence.

b. compliance with standards.

c. accounting.

d. acts discreditable to the profession.

19. Rule 505 of the AICPA's Code of Professional Conduct permits CPA firms to organize as

a. single proprietorships or partnerships only.

b. single proprietorships, partnerships, or professional corporations.

c. single proprietorships, partnerships, professional corporations, or regular corporations if permitted by state law.

d. single proprietorships, partnerships, professional corporations if permitted by state law, or regular corporations.

20. A CPA is allowed to accept a referral fee for recommending a client to another CPA if

a. the client approves of the transaction either before or after the event.

b. the client pre-approves the transaction.

c. payment of the referral fee is disclosed to the client.

d. None of the above are true. Referrals are never acceptable.

21. An example of an "indirect ownership interest in a client" would be ownership of a client's stock by a member's

a. dependent child.

b. spouse.

c. grandfather.

d. None of the above are "indirect" interests.

22. One of the AICPA's Ethical Principles deals with the public interest. It states that members should accept the obligation to act in a way that will

a. serve the public interest.

b. honor the public trust.

c. demonstrate commitment to professionalism.

d. do all of the above.

23. The AICPA's Code of Professional Conduct states that a CPA should maintain integrity and objectivity. The term "objectivity" in the Code refers to a CPA's ability

a. to choose independently between alternate accounting principles and auditing standards.

b. to distinguish independently between accounting practices that are acceptable and those that are not.

c. to be unyielding in all matters dealing with auditing procedures.

d. to maintain an impartial attitude on all matters that come under the CPA's review.

24. Which of the following is required for a firm to designate itself "Member of the American Institute of Certified Public Accountants" on its letterhead?

a. At least one of the partners must be a member.

b. The partners whose names appear in the firm name must be members.

c. All partners must be members.

d. A majority of the partners must be members.

25. According to the Principles section of the Code of Professional Conduct,

a. all members should be independent in fact and in appearance at all times.

b. all members in public practice should be independent in fact and in appearance at all times.

c. all members in public practice should be independent in fact and in appearance when providing auditing and other attestations services.

d. all members in public practice should be independent in fact and in appearance when providing auditing, tax, and MAS services.

26. When determining whether independence is impaired because of an ownership interest in client company, materiality will affect whether ownership is a violation of Rule 101

a. in all circumstances.

b. only for direct ownership.

c. only for indirect ownership.

d. under no circumstances.

27. Hilgar, CPA, wishes to express an opinion that the financial statements of York Co. are presented in conformity with generally accepted accounting principles; however, the financial statements contain a departure from APB No. 5.

a. Under any circumstances, Hilgar would be in violation of the Code of Professional Conduct if he were to issue such an opinion.

b. Hilgar should disclaim any opinion.

c. Hilgar may issue the opinion he desires if he can demonstrate that due to unusual circumstances the financial statements of York Co. would otherwise have been misleading.

d. This specific situation is not covered by the rules established by the Code of Professional Conduct.

28. Of the various parts of the Code of Professional Conduct,

a. the Principles are enforceable.

b. the Ethical Rulings are enforceable.

c. the Interpretations are enforceable.

d. the Rules of Conduct are enforceable.

29. Interpretations of Rule 101 regarding a "direct financial interest" have presumed that a violation exists in the following circumstance, unless other circumstances offset such a presumption.

a. When close kin such as nondependent children, brothers, and sisters have a significant financial interest.

b. When close kin such as nondependent children, brothers, and sisters have any financial interest.

c. When the CPA owns shares in a mutual fund which has an ownership interest in the client.

d. When close kin such as brother, sister, or in-laws are employed by client.

30. According to the profession's ethical standards, an auditor would be considered independent in which of the following instances?

a. The auditor's checking account, which is fully insured by a federal agency, is held at a client financial institution.

b. The auditor is also an attorney who advises the client as its general counsel.

c. An employee of the auditor donates service as treasurer of a charitable organization that is a client.

d. The client owes the auditor fees for two consecutive annual audits.

31. An audit committee, made up of members of client's board of directors who are not a part of company management, is required for all companies

a. that have audits performed by AICPA member firms.

b. that must file 10-K reports with the SEC.

c. listed on the New York Stock Exchange.

d. in all circumstances.

32. If a nonpublic company asks an accountant to perform a review engagement, and the accountant has an immaterial direct financial interest in the company, the accountant is

a. independent because the financial interest is immaterial and, therefore, may issue a review report.

b. not independent and, therefore, may not issue a review report.

c. not independent and, therefore, may not be associated with the financial statements.

d. not independent and, therefore, may issue a review report, but may not issue an auditor's opinion.

33. Which of the following statements best describes the enforceability of the Interpretations of the Rules of Conduct?

a. The Interpretations are not enforceable.

b. The Interpretations are enforceable.

c. The Interpretations may be enforceable if they have been reviewed and approved by the AICPA's Division of Professional Ethics.

d. The Interpretations are not enforceable, but a practitioner must justify departure.

34. Jeff Thompson, a CPA in public practice, contacts Mark Johnson, an employee of Jackson & Jackson, LLP, and makes him an offer of employment without first notifying Jackson & Jackson, LLP. According to the AICPA's Code of Professional Conduct, such practice

a. is a violation of the Code of Professional Conduct.

b. is a violation only if Johnson is a CPA.

c. is a violation only if Jackson & Jackson LLP is a CPA firm.

d. is not a violation.

35. Which of the following circumstances would ordinarily not impair the auditor's independence?

a. Litigation by client against auditor related to tax services.

b. Litigation by client against auditor claiming a deficiency in the previous audit.

c. Litigation by CPA firm against client claiming management fraud or deceit.

d. Intent to start a lawsuit at some future date, after the current audit is completed, claiming a deficiency in the previous audit.

36. Of the four parts of the AICPA's Code of Professional Conduct, which part is enforceable?

a. Ethical Rulings.

b. Rules of Conduct.

c. Principles.

d. Interpretations.

37. The interpretations to the Rules of Conduct permit a CPA firm to do both bookkeeping and auditing for the same client if three important requirements are satisfied. Which of the following is not one of those requirements?

a. The client must accept full responsibility for the financial statements, and must be sufficiently knowledgeable about the activities, financial condition, and the accounting principles so that client can accept that responsibility.

b. The client is required to file an annual report, including audited financial statements, with the Securities and Exchange Commission.

c. The CPA must not assume the role of employee or of manager.

d. The CPA must conform to generally accepted auditing standards.

38. Which of the following most completely describes how independence has been defined by the CPA profession?

a. Performing an audit from the viewpoint of the public.

b. Avoiding the appearance of significant interests in the affairs of an audit client.

c. Possessing the ability to act with integrity and objectivity.

d. Possessing the ability to act professionally and in accordance with a professional code of ethics.

39. When a CPA firm is requested to provide a written or oral opinion on the application of accounting principles or the type of audit opinion that would be issued for a specific or hypothetical transaction relating to an audit client of another CPA firm, primary among the requirements set forth is that

a. client is entitled to confidentiality, so the consulting CPA firm is forbidden from communicating with the CPA firm which does the audit.

b. the consulted CPA firm should communicate with the entity's existing auditors to ascertain all the available facts relevant to forming a professional judgment on the matters the firm has been requested to report on.

c. client is entitled to confidentiality, so the CPA firm which does the audit should refuse to share any information with the consulting CPA firm under any circumstances.

d. client is not entitled to confidentiality under these circumstances, so the existing auditors should share all information with the consulting CPA firm.

40. The Code of Professional Conduct is established by the membership of the AICPA, and the Interpretations of the Rules of Conduct are prepared by

a. the Financial Accounting Standards Board.

b. the Securities and Exchange Commission.

c. the CPA licensing agencies within each state.

d. the Division of Professional Ethics of the AICPA.

41. Generally, loans between a CPA firm or its members and an audit client are prohibited because they create a financial relationship. Which of the following is not an exception to this rule?

a. Automobile loans.

b. Loans fully collateralized.

c. Home mortgages.

d. Unpaid credit card balances not exceeding $10,000.

42. Generally, loans between a CPA firm or its members and an audit client are prohibited because it is a financial relationship. Which of the following, made under normal lending procedures, is not an exception to this rule?

a. Immaterial loans.

b. Home mortgages.

c. Material loans.

d. Secured loans.

43. The confidential relationship will be violated if, without client's permission, the CPA provides working papers about client to

a. a court of law which subpoenas them.

b. another CPA firm as part of an AICPA peer review program.

c. another CPA firm which has just purchased the CPA's entire practice.

d. an investigative or disciplinary body of the AICPA which is conducting a review of the CPA's practice.

44. In which of the following circumstances would a CPA be bound by ethics to refrain from disclosing any confidential information obtained during the course of a professional engagement?

a. The CPA is issued a summons enforceable by a court order which orders the CPA to present confidential information.

b. A major stockholder of a client company seeks accounting information from the CPA after management declined to disclose the requested information.

c. Confidential client information is made available as part of a quality review of the CPA's practice by a peer review team authorized by the AICPA.

d. An inquiry by a disciplinary body of a state CPA society requests confidential client information.

45. Rule 301 of the AICPA's Code of Professional Conduct states that a member in public practice shall not disclose any confidential client information without the specific consent of the client. This rule would be violated if CPA disclosed information without client's consent as a result of

a. a subpoena or summons.

b. a peer review.

c. a complaint filed with the trial board of the Institute.

d. a request by client's largest stockholder.

46. A member firm of the AICPA is not only responsible itself for compliance with the Rules of Conduct, but also responsible for compliance by

a. employees.

b. partners.

c. shareholders.

d. all of the above.

47. In a code of conduct, the advantage of general statements of ideal conduct, as opposed to specific rules of behavior, is

a. the emphasis on positive activities.

b. the ability to enforce the ideals.

c. the enforceability of minimum behavior and performance standards.

d. the tendency to define the rules as maximum rather than minimum standards.

48. To emphasize auditor independence from management, many corporations

a. appoint a partner of the CPA firm conducting the examination to the corporation's audit committee.

b. establish a policy of discouraging social contact between employees of the corporation and the staff of the independent auditor.

c. have the independent auditor report to an audit committee of outside members of the board of directors.

d. request that a representative of the independent auditor be on hand at the annual stockholders' meeting.

49. The AICPA's Code of Professional Conduct derives its authority from the

a. bylaws of the American Institute of CPAs.

b. Financial Accounting Standards Board.

c. federal government.

d. Securities and Exchange Commission.

50. When a certified public accountant who is not independent is associated with financial statements, he would be precluded from expressing an opinion because

a. the public would be aware of his lack of independence and would place little or no faith in his opinion.

b. he would place himself in the position of suffering an adverse decision in a possible liability suit.

c. he would be in the position of auditing his own work.

d. any auditing procedures he might perform would not be in accordance with generally accepted auditing standards.

51. Ethical Rulings

a. are issued by the AICPA's Board of Governors.

b. are explanations relating to specific factual circumstances.

c. are explanations relating to broad hypothetical circumstances.

d. are enforceable.

52. For CPA firms that choose to join the SEC Practice Division of the AICPA, which one of the following is not a requirement for maintaining membership?

a. Rotation of the partner in charge of a client.

b. Mandatory peer reviews.

c. Restrictions on management services.

d. Rotation of the senior auditor and staff who do the audit fieldwork.

53. In determining independence with respect to any audit engagement, the ultimate decision as to whether or not the auditor is independent must be made by the

a. auditor.

b. client.

c. audit committee.

d. public.

54. A CPA firm should decline an offer to perform management advisory services engagement if

a. the CPA firm audits the financial statements of a subsidiary of the prospective client.

b. recommendations made by the CPA firm are to be subject to review by the client.

c. acceptance would require the CPA firm to make management decisions for an audit client.

d. the proposed engagement is not accounting-related.

55. The members of a client's "audit committee" must all be

a. members of management.

b. directors who are not a part of company management.

c. non-directors and non-managers.

d. directors and managers.

56. The AICPA's Code of Professional Conduct requires independence for

a. attestation engagements only.

b. all services performed by accountants in public practice.

c. all accounting and auditing services performed.

d. all professional work performed by CPAs.

57. Which of the following statements best describes why the profession of certified public accountants has deemed it essential to promulgate a code of ethics and to establish a mechanism for enforcing observance of the code?

a. A distinguishing mark of a profession is its acceptance of responsibility to the public.

b. A prerequisite to success is the establishment of an ethical code that stresses primarily the professional's responsibility to clients and colleagues.

c. A requirement of most state laws calls for the profession to establish a code of ethics.

d. An essential means of self-protection for the profession is the establishment of flexible ethical standards by the profession.

58. An increasing number of companies require stockholders to approve the selection of a new CPA firm or the continuation of the existing CPA firm because

a. stockholders are more objective than management.

b. the SEC requires it.

c. the AICPA requires it.

d. the stockholders are in a better position to evaluate the performance of previous or potential auditors.

59. The Rules of Conduct contained in the AICPA's Code of Professional Conduct apply to all AICPA members for all services provided, whether or not the member is in the practice of public accounting,

a. in all circumstances.

b. for non-attestation services.

c. except for the single exception of a tax practice.

d. unless it is specifically stated otherwise in the Code.

60. Which of the following statements is true when the CPA has been engaged to do an attestation engagement?

a. The CPA firm is engaged and paid by the client; therefore, the firm has primary responsibility to be an advocate for the client.

b. The CPA firm is engaged and paid by the client, but the primary beneficiaries of the audit are the statement users.

c. Should a situation arise where there is no convincing authoritative standard available, and there is a choice of actions which could impact client's financial statements either positively or negatively, the CPA is free to endorse the choice which is in the client's interests.

d. As long as CPA firms are competent, it is not required that they remain unbiased.

61. The underlying reason for a code of professional conduct for any profession is

a. the need for public confidence in the quality of service of the profession.

b. that it provides a safeguard to keep unscrupulous people out.

c. that it is required by federal legislation.

d. that it allows licensing agencies to have a yardstick to measure deficient performance.

62. When the question arises whether a CPA firm may do both bookkeeping and auditing services for the same client, the Interpretations of the AICPA's Code of Professional Conduct

a. allow it.

b. prohibit it.

c. are silent and allow each firm to determine the answer.

d. are in agreement with the requirements of the Securities and Exchange Commission.

63. The disadvantage of the general statements in the Code of Professional Conduct is

a. the emphasis on positive activities.

b. that they identify ideal conduct.

c. the difficulty of enforcing general ideals without minimum standards of behavior.

d. that there are too many to remember.

64. The CPA must not subordinate his or her professional judgment to that of others

a. in every engagement.

b. in every audit engagement.

c. in every engagement except tax services.

d. in every engagement except management advisory services.

65. Rule 101 (Independence) of the AICPA's Rules of Conduct requires that a member in public practice shall be independent in the performance of professional services as required by standards promulgated by bodies designated by Council. To which of the following services does Rule 101 apply?

a. Management advisory services.

b. Tax returns.

c. Audits of financial statements.

d. All three of the above.

66. Which of the following would be a violation of Rule of Conduct 102 requiring "objectivity" by the CPA?

a. The auditor believes that accounts receivable may not be collectible but accepts management's opinion without an independent evaluation.

b. In preparing client's tax return, the CPA encourages client to take a deduction which the CPA believes is valid but for which there is some, but not complete, support.

c. Both a and b above would be violations.

d. Neither would be violations.

67. "Independence" in auditing means

a. remaining aloof from client.

b. not being financially dependent on client.

c. taking an unbiased viewpoint.

d. being an advocate for the client.

68. Several months after an unqualified audit report was issued, the auditor discovers the financial statements were materially misstated. The client's chief executive officer agrees that the statements are misstated, but refuses to issue a correction, and claims that "confidentiality" prevents the CPA from informing anyone.

a. CEO is correct. Auditor must maintain confidentiality.

b. CEO is wrong, but since auditor's report is issued, it is too late to retract.

c. CEO is correct, but to be ethically correct the auditor should violate the confidentiality rule and disclose the error.

d. CEO is wrong, and auditor has an obligation to issue a revised correct audit report, even if CEO will not revise and correct the financial statements.

69. When CPAs are able to maintain an independent attitude in fulfilling their responsibility, it is referred to as independence

a. in fact.

b. in appearance.

c. in conduct.

d. in total.

70. A member in public practice may perform for a contingent fee any professional services for a client for whom the member or member's firm performs

a. an audit.

b. a review.

c. a compilation used only by management.

d. an audit of prospective financial information.

71. Which of the following statements is not true? The CPA firm will lose its independence

a. if any of the partners or shareholders acquires stock in a client.

b. if any of the non-partners or non-shareholders working in the office doing the audit should acquire stock in a client.

c. if anyone working on the audit should acquire stock in client.

d. if any owner or employee of a national CPA firm acquire client's stock.

72. Which of the following activities is not prohibited for the CPA firm's attestation service clients?

a. Competitive bidding on audit jobs.

b. Contingent fees on audit jobs.

c. Commissions for obtaining client services on audit jobs.

d. Referral fees on audit jobs.

73. Interpretations of Rule 101 prohibit CPAs in public accounting from owning any stock or other direct investment in audit clients. Rule 101 applies to

a. partners and shareholders for all clients of the CPA firm.

b. non-partners or non-shareholders when they are involved in the audit of the client.

c. non-partners or non-shareholders when the audit is performed by other staff in the same office.

d. all of the above.

74. A member in public practice shall neither receive from, nor pay to, a client a commission when the member or member's firm also performs for that client

a. an audit or review.

b. a compilation that will be used by a third party.

c. an audit of prospective financial information.

d. all of the above.

75. In some situations, the interpretations of the Rules of Conduct permit former partners or former shareholders to have relationships with a client of the firm without affecting the firm's independence. Which of the following situations would not cause a loss of independence?

a. The former partner severs relations with the firm and accepts employment with the firm's client.

b. The former partner uses the CPA firm's office space and has a significant influence over a client.

c. The former partner receives benefits from the CPA firm which are dependent upon the firm's profitability.

d. The former partner was held out as an associate of the firm and took part in the firm's business activities.

76. If the Board of Accountancy in the state in which a CPA firm is licensed has rules which are either more or less restrictive than the AICPA's, the CPA firm must follow

a. the rules of the AICPA.

b. the rules of the state's Board of Accountancy.

c. whichever rules are less restrictive.

d. whichever rules are more restrictive.

77. Not included as a "direct financial interest" of the CPA would be financial interests of a

a. spouse.

b. dependent child.

c. relative supported by the CPA.

d. CPA in a Mutual Fund which had an ownership interest in client company.

78. Jackson, CPA, has a public accounting practice. He wishes to establish a separate partnership to offer data processing services to the public and other public accountants.

a. Jackson cannot be a partner in any separate partnership that offers data processing services.

b. Jackson may form a separate partnership.

c. Jackson may form a separate partnership as long as partners are CPAs.

d. Jackson may form a separate partnership, but he must give up his public accounting practice.

79. Each of the following five situations involves a possible violation of Rule 101-Independence-of the AICPA's Code of Professional Conduct. For each situation, (1) decide whether the Code has been violated, and (2) briefly explain how the situation violates (or does not violate) the Code.

a. Samantha Matthews, CPA, is a partner in the Houston office of Dell & Bates, CPAs. Samantha's brother is employed as the controller of Scotch Appliances, a large, publicly held company in Georgia. Scotch Appliances is one of Dell & Bates' audit clients. Neither Samantha nor the Houston office of Dell & Bates is involved in the audit of Scotch Appliances.

Violation? Yes No

Explanation:

b. Erin Phillips, CPA, is a partner in the Los Angeles office of Sells & Franks, CPAs. Erin's brother, Fred, owns a material amount of bonds issued by Lednicky Industries, a company based in Nebraska. Lednicky Industries is one of Sells & Franks' audit clients. Neither Erin nor the Los Angeles office of Sells & Franks is involved in the audit of Lednicky.

Violation? Yes No

Explanation:

c. Deanna Sweeny, CPA, owns an immaterial amount of stock in The Rose Garden Corp. The Rose Garden is not an audit client of Deanna's. However, Deanna audits The Farmers' Bureau Corp., which owns a material amount of stock in The Rose Garden.

Violation? Yes No

Explanation:

d. Chris Halvorson, CPA, is a partner assigned to a review engagement. Chris has a dependent daughter who is employed by the review client as a machine operator - a non-audit-sensitive position.

Violation? Yes No

Explanation:

e. On August 5, 1995, Page Dane, CPA, issued the audit report on Borhut Corporation's June 30, 1995 financial statements. On August 30, 1995, Borhut paid Page's audit fee with stock rather than cash. Page sold the stock on September 15, 1995, two months prior to the beginning of the planning phase for the audit of the June 30, 1996 financial statements.

Violation? Yes No

Explanation:

80. Each of the following five situations involves a possible violation of the AICPA's Code of Professional Conduct. For each situation, (1) determine the applicable rule number from the Code, (2) decide whether or not the Code has been violated, and (3) briefly explain how the situation violates (or does not violate) the Code.

a. In 1988, Freeman, CPA, Gerik, CPA, Lemmerman, CPA, and Shamburger, CPA, decided to form a CPA practice and call it "Freeman, Gerik, Lemmerman, & Shamburger, CPAs." In 1989, Gerik died, but Freeman, Lemmerman, and Shamburger continued to call the firm "Freeman, Gerik, Lemmerman, & Shamburger, CPAs." In 1992, both Freeman and Shamburger retired. Since that time, Lemmerman has operated as a sole practitioner, and has continued to use the name "Freeman, Gerik, Lemmerman, & Shamburger, CPAs."