Unit 1: Ethics, Professional Responsibilities, and General Principles

• Topic 01

  AICPA Code of Professional Conduct

  40 questions
• Topic 02

  Independence Rules

  58 questions
• Topic 03

  PCAOB Standards and SEC Requirements

  40 questions
• Topic 04

  Quality Management

  25 questions
• Topic 05

  Engagement Acceptance and Continuance

  64 questions
• Topic 06

  Terms of Engagement and Communication with Management and Those Charged with Governance

  24 questions
• Topic 07

  Overall Objectives of the Independent Auditor

  39 questions

A few questions from this unit, with the answer and a full explanation. The complete bank is available when you start practising.

1. A firm registered with the PCAOB that audits 120 issuers per year is also an AICPA member and enrolled in the AICPA Peer Review Program. Which oversight mechanisms apply to this firm, and how do they interact?

   • A
     The firm is subject only to AICPA peer review because PCAOB inspections apply only to the firm's quality control system, not to individual engagements
   • B
     The firm is exempt from AICPA peer review because PCAOB inspections serve as the equivalent program and a firm cannot be subject to both oversight mechanisms simultaneously
   • C
     The firm is subject to PCAOB inspections only for issuer engagements and AICPA peer review only for non-issuer engagements, and the two programs are entirely independent with no coordination
   • D
     The firm is subject to annual PCAOB inspections for its issuer engagements and is also subject to AICPA peer review every three years; the programs are separate but coordinated to reduce duplication, and PCAOB inspection may be considered in connection with peer review requirements
     Correct answer
   Explanation

   A PCAOB-registered firm that is also an AICPA member is potentially subject to both oversight mechanisms. PCAOB inspections are mandatory for registered firms and occur annually for firms auditing more than 100 issuers. AICPA peer review occurs every three years for AICPA member firms. The programs serve different purposes: PCAOB inspections are regulatory and focus on issuer audits; peer review is a profession-administered program covering the firm's broader accounting and auditing practice. The AICPA and PCAOB have coordinated their programs to reduce duplication (e.g., PCAOB inspection findings may be taken into account in administering peer review). A firm cannot avoid one program because it is enrolled in the other.

2. An auditor is considering accepting a new client. Which of the following factors is most relevant to evaluating the integrity of management during client acceptance procedures?

   • A
     Whether management has used a large national accounting firm in prior years, indicating sophisticated financial reporting
   • B
     Whether the engagement would generate significant fees for the accounting firm, indicating a desirable client
   • C
     Whether management has a history of disputes with prior auditors, regulatory enforcement actions, or litigation regarding financial reporting
     Correct answer
   • D
     Whether the client operates in a complex industry, suggesting management has strong technical expertise
   Explanation

   During client acceptance procedures, the auditor evaluates the integrity of management by reviewing background information, including the entity's history of disputes with prior auditors, regulatory enforcement actions, litigation involving financial reporting, and the reasons for changing auditors. A history of disputes or enforcement actions raises concerns about management integrity. The size of the firm, public listing status, or complexity of the industry are not direct indicators of management integrity.

3. Under AICPA rules (for non-issuers), is there a mandatory rotation period for the lead engagement partner?

   • A
     No, AICPA rules do not mandate partner rotation for non-issuer engagements; long association is evaluated as a familiarity threat under the conceptual framework
     Correct answer
   • B
     No, there are no restrictions on partner tenure for any type of engagement under AICPA rules
   • C
     Yes, but only for non-issuer entities with more than $10 million in revenues
   • D
     Yes, AICPA rules require lead partner rotation every seven years for non-issuer engagements
   Explanation

   Unlike SEC/PCAOB rules for issuers (which mandate lead partner rotation under SOX Section 203), AICPA standards do not impose mandatory rotation periods for non-issuer attest engagements. Instead, long association with a client is identified as a familiarity threat that must be evaluated under the conceptual framework. If the threat is significant, the firm must apply safeguards (such as involving an additional independent reviewer) or, in extreme cases, rotate the partner. But rotation is not automatically required after any fixed number of years.