CERTIFIED PUBLIC ACCOUNTANT {CPA} ETHIC REAL EXAM
180 QUESTIONS AND CORRECT DETAILED ANSWERS
2025//ALL YOU NEED T PASS YOUR CPA EXAM
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 fum'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 fum'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. Since
(a) the partner is completely retired, there is no independence
impairment due to her stock-holdings.
(b) three-fourths of the partner's retirement pay is
not funded and must be paid from current operations,
independence is impaired with this client.
(c) she is receiving payments from the firm and will
do so for the rest of her life, independence is
i - ANSWER-(a) is correct, independence is not impaired. The
retired partner is not a covered member (Chapter 3,
Definitions, Covered member). Her stock holding
does not impair the fum' s independence.
(b) is incorrect since she is completely retired, i.e.,
she has no influence in the firm, does no work for
the fum etc. If she did any work for the fum, then
she would be considered an active partner in the
,firm and her stock holdings would impair independence.
(c) is incorrect. The fact that she is receiving fixed
retirement payments does not make her an active
partner so that her stock holdings would impair
independence.
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 fum'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 fum'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 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
(a) there isn't any a - ANSWER-(b) is correct, independence is impaired. This work
makes her an active partner. Since this is a one office
fum, she is a covered member and independence
is impaired. (Chapter 3, Definitions, Covered
member d and Interpretation 101-1A.1).
(a) is incorrect because there is no requirement that
,one work full time to be considered an active partner.
(c) is incorrect because it makes no difference
whether they bill clients for her work or not. She is
doing work for clients.
( d) is incorrect. The fact that they pay her for the
work has no bearing on whether she is an active
partner or not. It does reinforce the fact that she's
working for the firm, the fum values her work and
compensates her for it
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?
(a) To maintain independence wit - ANSWER-(b) is correct. The past due fee must be paid before
the report is issued. Prior year 's work that the client
, has not paid for was finished in February 1996.
Sixteen months later in June 1997 they will issue
the report on the current work. A ruling says that
independence is impaired if fees for work performed more than one year prior are unpaid when the
report for the current year is issued (Ruling 52).
(a) is incorrect. If the $10,000 is paid before the
report is issued in June there is no independence
impairment.
( c) is incorrect since the significance to Andrew &
Co. CPAs of the amount of the unpaid fee does not make any difference.
( d) is incorrect since the ruling says billed or unbilled fees or a note receivable arising from such fees
that are unpaid impair independence. An agreement to pay in four equal payments is equivalent to a
note. (Ruling 52)
In 1997, Jones, a manager in a one-office firm, is
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
(a) this is a normal lending situation for the bank and
Jones is not receiving any favoritism by way of
rates; independence with the bank is not impaired.
(b) this type of loan from a bank audit client is prohibited;
independence is impaired.
