MODULE 21 PROFESSIONAL RESPONSIBIUTlES 87

time of communication. Answer (a) is incorrect because may be purchased for a percentage of fees to be received.
working papers may be obtained by third parties without the Answer (d) is incorrect because the Code of Professional
client's consent when they appear to be relevant to issues Conduct does not prohibit arrangements with financial in-
raised in litigation (through a subpoena). stitutions to collect notes issued by a client in payment of
professional fees.
52. (d) The working papers are owned by the CPA, but
the CPA must preserve confidentiality. They cannot be 58. (b) A CP A must not disclose confidential informa-
transmitted to another party unless the client consents or tion of a client unless the client gives consent to disclose it
unless the CP A is required to under a valid court or govern- to that third party. Answer (a) is incorrect because state
mental agency subpoena. Answers (a) and (c) are incorrect agencies need a subpoena before the CPA must comply.
because these do not preserve the confidentiality. An- Answer (c) is incorrect because the IRS does not have the
right to force a CP A to turn over confidential information of
swer (b) is incorrect because the CP A retains the working a client without either the client's consent or an enforceable
papers as evidence of the work done. subpoena. Answer (d) is incorrect because although the
53. (c) Any of the partners of a CPA partnership can
have access to the partnership's working papers. Third par- CP A can use the client information to defend a lawsuit, the
ties outside the firm need to have the client's consent or a CP A is not normally requested to disclose confidential in-
legal subpoena. formation to comply with generally accepted accounting
principles.
C.2. Privileged Communications between Accountant E. Responsibilities of Auditors under Private Securities
and Client Litigation Reform Act

54. (d) To preserve confidentiality, a CPA (including a 59. (c) Under the Private Securities Litigation Reform
CP A partnership) may not allow transmission of information Act, the auditor should inform first the audit committee or
in the working papers to other parties. Exceptions are con- the board of directors. Answer (a) is incorrect because the
sent of the client or the production of an enforceable sub- Securities Litigation Reform Act does not require that the
poena. There are no exceptions for the IRS or the FASB, SEC be informed unless after the audit committee or board
thus making answers (a), (b), and (c) incorrect. ' cif directors is informed, no remedial action is taken. An-
swer (b) is incorrect because the Justice Department need
55. (d) In a jurisdiction having an accountant-client not be informed of this under the Private Secu 'ties Litiga-
privilege statute, the CPA generally may not turn over tion Reform Act. Answer (d) is incorrect because inclusion
workpapers without the client's permission. It is allowable of the problem in a note of the financial statements is not
to do so, however, for use in a quality review under AICP A enough; the audit committee or the board of directors should
authorization or to be given to the state CPA society quality be informed.
control panel. Answers (a), (b), and (c) are incorrect be-
cause the client would have to give permission for the CPA 60. (a) The Private Securities Litigation Reform Act
to turn over the confidential workpapers to the purchaser of requires that auditors of firms covered under the Securities
the CP A practice, as well as to another CP A firm in regard Exchange Act of 1934 establish procedures to do the items
to suspected tax return irregularities. in. (b), (c), and (d). Developing a comprehensive internal
control system is not specifically mentioned, although part
56. (a) Privileged communications between the ac- of this would be helpful in accomplishing the three stated
countant and client are recognized only in a few states. items.
Therefore, if a state statute has been enacted creating such a
.,.
privilege, Ivor will be able to prevent Thorp from testifying.
61. (d) Under the Private Securities Litigation Reform
Answer (b) is incorrect because federal law does not recog-
Act, an auditor who audits financial statements under the
nize accountant-client privileged communication. An-
Federal Securities Exchange Act of 1934 is required to es-
tablish procedures to (1) detect illegal acts, (2) identify ma-
swer (d) is incorrect because Ivor will not be able to prevent
terial related-party transactions, and (3) evaluate the ability
Thorp from testifying about the nature of the work per- \.
of the firm to continue as a going concern.
formed in the audit unless a privileged communication stat-
ute has been enacted in that state. Answer (c) is incorrect 62. (b) Under the Private Securities Litigation Reform
because privileged communication does not exist at common Act, he is required to report this to the audit committee of
law but must be created by state statute. Criminal law is the firm or the board of directors. Answer (a) is incorrect
based on common law and varies by state. However, as a because he need not report this to the shareholders but to the
general rule, in states that recognize accountant-client privi- audit committee or the board of directors. Answers (c)
lege, it can be claimed in both civil and criminal suits.
and (d) are incorrect because he is required under the Re-
57. (a) The requirement is to identify the situation in
form Act to inform the audit committee or the board of di-
which it is most likely that a violation of the profession's
rectors.
ethical standards would have occurred. Answer (a) is cor-
rect because independence is impaired if fees remain unpaid 63. (c) The Private Securities Litigation Reform Act
for professional services of the preceding year when the amends both the 1933 and 1934 Acts. Answer (a) is incor-
report on the client's current year is issued. Accordingly, no rect because it applies to the 1933 and 1934 Acts which ap-
report should have been issued on the 2002 financial state- ply to stocks sold on a stock exchange. Answers (b) and (d)
ments when fees for the 2001 audit were unpaid. An- are incorrect because this Reform Act applies to securities
covered under the 1933 and 1934 Acts which may include
swer (b) is incorrect because CP As may recommend a posi- both common and preferred stock of a publicly held corpo-
. tion description (ET 191) without violating the profession's ration.
ethical standards. Answer (c) is incorrect because a practice
64. (b) Bran is liable under the Private Securities Litiga-
tion Reform Act for her proportionate fault of the liability
since she acted unknowingly. Answer (a) is incorrect be-
cause Bran was determined to be 20% at fault. Answers (c)
and (d) are incorrect because the Reform Act changes the
joint and several liability for unknowing conduct and sub-
stitutes proportionate liability.
65. (c) The Sarbanes-Oxley Act of 2002 established a
number of nonattest services that may not be performed by
the auditor for a public company. Tax services may be per-
formed but must be approved by the company's audit com-
mittee.

66. (c) The Sarbanes-Oxley Act established the Public

Accounting Oversight Board to regulate CP A firms that
audit public companies.