Code of ethics - with MCQs

AUDITING THEORY Red Sirug

CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS IN THE PHILIPPINES

(with Multiple Choice Questions)

Code of Ethics for Professional Accountants in the Philippines:The Code of Ethics for CPAs in the Philippines is the document that contains the norms

and principles governing the practice of the accountancy profession in the highest standards of ethical conduct.

Preface to the Code of Ethics: Based on the revised Code of Ethics developed by the International Federation of

Accountants (IFAC), with certain modifications Approved by the Board of Directors of PICPA and recommended for adoption by the BOA Adopted by the BOA and approved by the PRC as part of the rules and regulations of the

BOA for the practice of the accountancy profession Sets the fundamental principles and provides guidance as to the application of such

fundamental principles to typical situations Compliance with the Code is mandatory for all CPAs and is applicable to all professional

services performed in the Philippines In case of noncompliance: Failure to comply with Code may result in an investigation

into the CPA’s conduct. When provision of the Code is in conflict with Philippine statutory requirement the

Philippine statutory requirement shall prevail.

Reasons why the Code was adopted:a. To ensure the highest quality of performance; andb. To maintain public confidence in the profession

Parts of the Code of Ethics:1. Part A – general application of the Code and it applies to all professional accountants

Part A establishes the fundamental principles of professional ethics for professional accountants and provides a conceptual framework that serves as a guide for applying those principles

2. Part B – applies to professional accountants in public practice3. Part C – applies to professional accountants in business

Fundamental Principles:The fundamental principles are the basic ethical requirements which are required to be

observed and complied with by professional accountants in order to achieve the objectives of the accountancy profession.

1. Integrity – A professional accountant should be straightforward and honest in all professional and business relationships.

Integrity implies not merely honesty but also fair dealing and truthfulness. To maintain integrity, a professional accountant should avoid association with

information (reports, returns, communications and other information) that contains materially false, incomplete or misleading information or information that contains statements or information furnished recklessly

2. Objectivity – A professional accountant should not allow bias, conflict of interest or undue influence of others to override or compromise his professional or business judgment.

Objectivity is a combination of impartiality, intellectual honesty and a freedom from conflicts of interest.

Relationships that bias or unduly influence the professional judgment of the professional accountant should be avoided.

3. Professional competence and Due care:a. Professional competence. A professional accountant has a continuing duty to

maintain professional knowledge and skill at the level required to ensure that a client or employer receives competent professional service. Competent professional service requires the exercise of sound judgment in applying professional knowledge and skill in the performance of such service.

Two phases of professional competence: a. Attainment of professional competence: A professional accountant

AT – Code of Professional Ethics Red Sirug Page 1

should have initially a high standard of general education, followed by specific education, training, examination, and work experience

b. Maintenance of professional competence: A professional accountant has a continuing duty to maintain professional knowledge and skill at the level required to ensure that a client or employer receives competent professional service based on current developments in practice, legislation and techniques. The maintenance of professional competence requires a continuing

awareness and an understanding of relevant technical professional and business developments.

Continuing professional development develops and maintains the capabilities that enable a professional accountant to perform competently within the professional environments.

Professional accountants should not portray themselves as having expertise or experience they do not possess.

b. Due care. A professional accountant should act diligently and in accordance with applicable technical and professional standards when providing professional services.

In addition, CPAs should conform with the technical and professional standards of the following:

Board of Accountancy (BOA) / Professional Regulation Commission (PRC) Securities and Exchange Commission (SEC) Financial Reporting Standards Council (FRSC) Auditing and Assurance Standards Council (AASC) Relevant legislation

Diligence encompasses the responsibility to act in accordance with the requirements of an engagement, carefully, thoroughly and on a timely basis.

4. Confidentiality: A professional accountant should:a. Respect the confidentiality of such information acquired as a result of professional and

business relationshipsb. Not disclose any such confidential information to third parties without proper and specific

authority there is a legal or professional right or duty to disclose.c. Not use such confidential information to the his personal advantage or the advantage of

third parties (or to the disadvantage of the client or employer)

Confidentiality also requires taking all reasonable steps to ensure that staff and persons (such as experts) from whom advice and assistance are obtained respect the CPA’s duty of confidentiality.

A CPA should maintain confidentiality of information:a. Even in a social environmentb. Even after the end of relationships between a CPA and a client or employerc. Even for information disclosed by a prospective client or employer d. Even within the firm or employing organization

Circumstances where disclosure by a CPA is allowed:1. When disclosure is permitted by law and authorized by the client/employer; 2. When disclosure is required by law:

a. To produce documents or to give evidence in the course of legal proceedings; or

b. To disclose to the appropriate public authorities infringements of the law that come to light

3. When there is a professional duty or right to disclose, when not prohibited by law: a. To comply with the quality review of a member body or professional bodyb. To respond to an inquiry or investigation by a member body or regulatory

body c. To protect the professional interests of the CPA in legal proceedings, or d. To comply with technical standards and ethics requirements

5. Professional behavior: A professional accountant should comply with relevant laws and regulations and should avoid any action that discredits the profession.

Professional behavior requires a professional accountant to:a. Act in a manner consistent with the good reputation of the profession, and


b. Refrain from any conduct/action that may bring discredit to the profession

Independence: In an assurance engagement, members of assurance teams, firms and, when applicable,

network firms be independent of assurance clients.

Conceptual approach to independence requires: 1. Independence of Mind (in fact) – The state of mind that permits the expression of a

conclusion without being affected by influences that compromise professional judgment, allowing an individual to act with integrity, and exercise objectivity and professional skepticism.

2. Independence in Appearance – The avoidance of facts and circumstances that are so significant that a reasonable and informed third party, having knowledge of all relevant information, including safeguards applied, would reasonably conclude a firm’s, or a member of the assurance team’s, integrity, objectivity or professional skepticism had been compromised.

The Code of Ethics does not only require the professional accountants to maintain independence in mental attitude because professional accountants are required to avoid situations that would lead the public to doubt their independence.

“Independence” does not mean that a person exercising professional judgment ought to be free from all economic, financial and other relationships. It means free from significant economic, financial and other relationships. The independence requirements depend on the following:a. Assurance client – independence is requiredb. Non-assurance client – independence is not required

Independence requirements for assurance engagements:

Type of Assurance Engagement

Required to be independent of the client

Audit Assurance team, firm and network firms Non-audit – not restricted for use by identified users

Assurance team and firm

Non-audit – restricted use by identified users

Assurance team and firm have no material financial interest

Categories of Threats to Compliance with Fundamental Principles:Compliance with the fundamental principles may potentially be threatened by a broad range

of circumstances or relationships. Many threats fall into the following categories:

1. Self-interest threats – may result from financial or other interests of a CPA or of an immediate or close family member Financial interest – an interest in an equity or debt security (debenture, loan or

other debt instrument) of an entitya. Direct financial interest – a financial interest owned directly and under the

control or beneficially owned and under the controlb. Indirect financial interest – if beneficially owned but the individual or entity

has no control Immediate family – a spouse or dependent Close family – a parent, non-dependent child or sibling

Examples of self-interest threats for a CPA in public practice:a. A financial interest in a client or jointly holding a financial interest with a client

Direct financial interest or material indirect financial interest in an assurance clientb. Undue dependence on total fees from an assurance client c. Concern about the possibility of losing a clientd. Having a close business relationship with a client (for example, a partner and the

audit client has common material financial interest in a joint venture)e. Potential employment with a clientf. Contingent fees relating to an assurance engagement

2. Advocacy threats – may occur when a CPA promotes a position or opinion to the point that subsequent objectivity may be compromised

Examples of advocacy threats for a CPA in public practice:


a. Promoting shares or other securities in a listed entity when that entity is a financial statement audit client.

b. Acting as an advocate on behalf of an assurance client in litigation or disputes with third parties.

3. Self-review threats – may occur when a previous judgment needs to be re-evaluated by the CPA responsible for that judgment

Examples of self-review threats for a CPA in public practice:a. The discovery of a significant error during a re-evaluation of the work of the

professional accountant in public practice. b. Reporting on the operation of financial systems after being involved in their design or

implementation. c. Having prepared the original data used to generate records that are the subject

matter of the engagement. d. A member of the assurance team being, or having recently been, a director or officer

of that client. e. A member of the assurance team being, or having recently been, an employee of the

client in a position to exert direct and significant influence over the subject matter of the engagement.

f. Performing a service for a client that directly affects the subject matter of the assurance engagement.

4. Familiarity threats – may occur when, because of a close relationship, a CPA becomes too sympathetic to the interests of others

Examples of familiarity threats for a CPA in public practice:a. A member of the engagement team having a close or immediate family member or

close family relationship who is a director or officer of the client.b. A member of the engagement team having a close or immediate family relationship

with an employee of the client who is in a position to exert direct and significant influence over the subject matter of the assurance engagement.

c. A former partner of the firm being a director or officer of the client or an employee in a position to exert direct and significant influence over the subject matter of the engagement.

d. Accepting gifts or preferential treatment from a client, unless the value is clearly insignificant

e. Long association of senior personnel with the assurance client.

5. Intimidation threats – may occur when a CPA may be deterred from acting objectively by threats, actual or perceived

Examples of familiarity threats for a CPA in public practice:a. Being threatened with dismissal or replacement in relation to a client engagement. b. Being threatened with litigation. c. Being pressured to reduce inappropriately the extent of work performed in order to

reduce fees.

Obligations of CPA firms and members of the assurance teams in case of potential threats to fundamental principles:

a. Identify any threat to compliance with fundamental principlesb. Evaluate the significance of the threat (by considering quantitative and qualitative

factors)c. Respond to threat by applying safeguards if the threat is other than clearly insignificant to

eliminate the threat or reduce it to an acceptable level

If a professional accountant cannot implement appropriate safeguards, the professional accountant should:

a. Decline or discontinue the specific professional service involved, orb. Decline or discontinue the relationship

(1) Resign from the client (in the case of a professional accountant in public practice) or

(2) Resign from the employing organization (in the case of a professional accountant in business).

Safeguards to Address Threats to Compliance with Fundamental Principles:Safeguards that may eliminate or reduce such threats to an acceptable level fall into two

broad categories:


1. Safeguards created by the profession, legislation or regulation Educational, training and experience requirements for entry into the profession Continuing education requirements Corporate governance regulations Professional standards and monitoring and disciplinary processes External review of the firm’s quality control system Legislation governing the independence requirements of the firm

2. Safeguards in the work environmenta. Firm-wide safeguards andb. Engagement specific safeguards

Illustrations – How to address a threatto compliance with fundamental principles (including independence)

Illustration 11. Identify any threat to independence – for example, a member of the audit team has a

financial interest in the audit client2. Evaluate the significance of the threat – evaluate:

The role of person holding the financial interest The type of financial interest (direct or indirect) Materiality

3. Take appropriate action, either: If direct – dispose of the direct financial interest prior to the individual becoming a

member of the assurance team, If indirect – dispose of the indirect financial interest in total or dispose of a sufficient

amount to make the remaining interest not material prior, or Remove the member of the assurance team from the assurance engagement if the

financial interest cannot be disposed of or reduced to an acceptable level

Illustration 21. Identify any threat to independence – for example, the CPA firm has a financial

interest in the audit client2. Evaluate the significance of the treat – evaluate

Type of financial interest (direct or indirect) Materiality

3. Take appropriate action, either: If direct – dispose of the direct financial interest, or If indirect – dispose of the indirect financial interest in total or dispose of a

sufficient amount to make the remaining interest not material prior, or Withdraw from/refuse to perform the audit engagement

DEFINITION OF TERMS

Advertising – The communication to the public of information as to the services or skills provided by professional accountants in public practice with a view to procuring professional business.

Assurance engagement – An engagement in which a professional accountant in public practice expresses a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the outcome of the evaluation or measurement of a subject matter against criteria.

Assurance team – All professionals participating in the assurance engagement and all others within a firm who can directly influence the outcome of the assurance engagement.

Clearly insignificant – A matter that is deemed to be both trivial and inconsequential. Close family – A parent, child or sibling, who is not an immediate family member.

Contingent fee – A fee calculated on a predetermined basis relating to the outcome or result of a transaction or the result of the work performed. A fee that is established by a court or other public authority is not a contingent fee. Direct financial interest – A financial interest owned directly by and under the control of an individual or entity (including those managed on a discretionary basis by others); or beneficially owned through a collective investment vehicle, estate, trust or other intermediary over which the individual or entity has control.


Director or officer – Those charged with the governance of an entity, regardless of their title, which may vary from country to country.

Engagement partner – The partner or other person in the firm who is responsible for the engagement and its performance, and for the report that is issued on behalf of the firm, and who, where required, has the appropriate authority from a professional, legal or regulatory body.

Engagement quality control review – A process designed to provide an objective evaluation, before the report is issued, of the significant judgments the engagement team made and the conclusions they reached in formulating the report.

Engagement team – All personnel performing an engagement, including any experts contracted by the firm in connection with that engagement.

Existing accountant – A professional accountant in public practice currently holding an audit appointment or carrying out accounting, taxation, consulting or similar professional services for a client.

Financial interest – An interest in an equity or other security, debenture, loan or other debt instrument of an entity, including rights and obligations to acquire such an interest and derivatives directly related to such interest.

Financial statement audit client – An entity in respect of which a firm conducts a financial statement audit engagement. When the client is a listed entity, financial statement audit client will always include its related entities.

Financial statement audit engagement – A reasonable assurance engagement in which a professional accountant in public practice expresses an opinion whether financial statements are prepared in all material respects in accordance with an identified financial reporting framework, such as an engagement conducted in accordance with Philippine Standards on Auditing. This includes a Statutory Audit, which is a financial statement audit required by legislation or other regulation.

Firm –(a) A sole proprietor or partnership of professional accountants; (b) An entity that controls such parties through ownership, management or other means;

and (c) An entity controlled by such parties through ownership, management or other means.

Immediate family – A spouse (or equivalent) or dependent.

Independence of mind – the states of mind that permits the provision of an opinion without being affected by influences that compromise professional judgment, allowing an individual to act with integrity, and exercise objectivity and professional judgment

Independence in appearance – the avoidance of facts and circumstances that are so significant a reasonable and informed third party, having knowledge of all relevant information, including any safeguards applied, would reasonably conclude a firm’s, or a member of the assurance team’s, integrity, objectivity or professional skepticism had been compromised.

Indirect financial interest – A financial interest beneficially owned through a collective investment vehicle, estate, trust or other intermediary over which the individual or entity has no control.

Listed entity – An entity whose shares, stock or debt are quoted or listed on a recognized stock exchange, or are marketed under the regulations of a recognized stock exchange or other equivalent body.

Network – A larger structure: (a) That is aimed at co-operation, and (b) That is clearly aimed at profit or cost sharing or shares common ownership, control or management, common quality control policies and procedures, common business strategy, the use of a common brand-name, or a significant part of professional resources.

Network firm – A firm or entity that belongs to a network.


Office – A distinct sub-group, whether organized on geographical or practice lines.

Professional accountant – An individual who holds a valid certificate issued by the Board of Accountancy (i.e., Certified Public Accountant), whether he/she be in public practice, industry, commerce, the public sector or education.

Professional accountant in public practice – A sole proprietor, or each partner or person occupying a position similar to that of a partner and each staff in a practice providing professional services to a client irrespective of their functional classification (e.g., audit, tax or consulting) and professional accountants in a practice having managerial responsibilities. This term is also used to refer to a firm of professional accountants in public practice.

Publicity – The communication to the public of facts about a professional accountant which are not designed for the deliberate promotion of that professional accountant.

MULTIPLE CHOICE QUESTIONS

1. 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. An essential means of self-protection for the profession is the establishment of flexible

ethical standards by the profession.b. A distinguishing mark of a profession is its acceptance of responsibility to the

public.c. A prerequisite to success is the establishment of an ethical code that stresses primarily

the professional's responsibility to clients and colleagues.d. The law requires an establishment of a code of ethics.

2. The underlying reason for a code of professional conduct for any profession isa. That it allows Professional Regulation Commission to have a yardstick to measure

deficient performance.b. The need for public confidence in the quality of service of the profession.c. That it provides a safeguard to keep unscrupulous people out.d. That it is required by congress.

3. Professionals are expected to conduct themselves at a higher level thana. Anyone else.b. Their clients.c. Most other members of their profession.d. Most other members of society.

4. Which statement is incorrect regarding the Code of Ethics for Professional Accountants in the Philippines?a. Where a national statutory requirement is in conflict with a provision of the

IFAC Code, the IFAC Code requirement prevails.b. Professional accountants refer to persons who are Certified Public Accountants (CPA) and

who hold a valid certificate issued by the Board of Accountancy.c. The Code of Ethics for Professional Accountants in the Philippines is mandatory for all

CPAs and is applicable to professional services performed in the Philippines on or after January 1, 2004.

d. Professional accountants should consider the ethical requirements as the basic principles which they should follow in performing their work.

5. The requirement of which fundamental principle is of particular importance in an assurance engagement in ensuring that the conclusion of the professional accountant has value to the intended user?a. Confidentialityb. Integrityc. Objectivityd. Professional competence

6. Existing accountant, as defined in the Code of Ethics, meansa. Those persons who hold a valid certificate issued by the Board of Accountancy.b. A professional accountant employed in industry, commerce, the public sector or

education.c. A professional accountant in public practice currently holding an audit


appointment or carrying out accounting, taxation, consulting or similar professional services for a client.

d. A sole proprietor, or each partner or person occupying a position similar to that of a partner and each staff in a practice providing professional services to a client irrespective of their functional classification (e.g., audit, tax or consulting) and professional accountants in a practice having managerial responsibilities.

7. When a professional accountant performs services in a country other than the home country and differences on specific matters exist between ethical requirements of the two countries, the following provisions should be applied:a. When the ethical requirements of the country in which the services are being performed

are less strict than the Code of Ethics of the Philippines, then the Code of Ethics of the Philippines should be applied.

b. When the ethical requirements of the country in which services are being performed are stricter than the Code of Ethics of the Philippines, then the ethical requirements in the country where services are being performed should be applied.

c. When the ethical requirements of the home country are mandatory for services performed outside -that country and are stricter, then the ethical requirements of the home country should be applied.

d. Any of the above

8. How did the Code of Ethics define public interest?a. A distinguishing mark of a profession is the acceptance of its responsibility to the public.b. The collective well-being of the community of people and institutions the

professional accountant serves.c. The accountancy profession's public consists of clients, credit grantors, governments,

employers, employees, investors, the business and financial community, and others who rely on the objectivity and integrity of professional accountants.

d. The standards of the accountancy profession are heavily determined by the public interest.

9. Professional accountants may encounter problems in identifying unethical behavior or in resolving an ethical conflict. When faced with significant ethical issues, professional accountants should do the following, excepta. Follow the established policies of the employing organization to seek a resolution of such

conflict.b. Review the conflict problem with the immediate superior if the organization's policies do

not resolve the ethical conflict.c. If the problem is not resolved with the immediate superior and the professional

accountant determines to go to the next higher managerial level, the immediate superior need not be notified of the decision.

d. Seek counseling and advice on a confidential basis with an independent advisor or the applicable professional accountancy body or regulatory body to obtain an understanding of possible courses of action.

10. Which of the following is incorrect regarding professional competence?a. The attainment of professional competence requires initially a high standard of general

education.b. The maintenance of professional competence requires a continuing awareness of

development in the accountancy profession.c. Professional competence may be divided into two separate phases.d. Professional accountants may portray themselves as having expertise or

experience they do not possess.

11. Which of the following is the least required in attaining professional competence?a. High standard of general education.b. Continuing awareness of development in the accountancy profession.c. Specific education, training and examination in professionally relevant subjects.d. Period of meaningful work experience.

12. It is essential that users regard CPA firms asa. Competent.b. Unbiased.c. Technically proficient.d. All of the above

13. Which of the following is prohibited by the Code of Professional Ethics for CPAs?a. Announcement in a newspaper of the opening of a public accounting office.


b. Use of a firm name which includes the name of a retired partner.c. Engaging in civic activities during business hours.d. Accepting an engagement or employment which one cannot reasonably expect

to complete or discharge with professional competence.

14. The Code of Professional Ethics states, in part, that a CPA should maintain integrity and objectivity. Objectivity refers to the CPA's ability toa. Insist on all matters regarding audit procedures.b. Maintain an impartial attitude on all matters which come under his review.c. Determine accounting practices that were consistently applied.d. Determine the materiality of items.

15. Which of the following is a violation of the code of professional ethics for CPAs?a. A CPA permits his/her name to be used in a client's advertising as having verified financial

data and/or statistical facts with respect to the client's products.b. Based on information obtained in an audit, a CPA reports an illegal act of his

client to government authorities.c. Three years after a partner has retired, the remaining partners continue to practice under

a firm name that includes the name of the retired partner. The retired partner has severed all connections with the CPA firm.

d. A CPA running for public office uses the professional designation "CPA" after his name on posters employed in connection with his election campaign.

16. A professional accountant may be associated with a tax return thata. Omits or obscures information required to be submitted and such omission or obscurity

would mislead the revenue authorities.b. Uses of estimates if such use is generally acceptable or if it is impractical under

the circumstances to obtain exact data.c. Contains a false or misleading statement.d. Contains statements or information furnished recklessly or without any real knowledge of

whether they are true or false.

17. The CPA should not undertake an engagement if his fee is to be based upona. Per diem rates plus expenses.b. A percentage of audited net income.c. The findings of a tax authority.d. The complexity of the service rendered.

18. If the firm is involved in the preparation of accounting records or financial statements and those financial statements are subsequently the subject matter of an audit engagement of the firm, this will most likely create __________Self-review threat

19. It occurs when a firm or a member of the assurance team could benefit from a financial interest in, or other self-interest conflict with, an assurance client. _____________Self-interest threat

20. The provision of services by a firm or network firm to an audit client that involve the design and implementation of financial information technology systems that are used to generate information forming part of a client's financial statements may most likely create ___________Self-review threat

21. Occurs when a firm, or a member of the assurance team, promotes, or may be perceived to promote, an assurance client's position or opinion to the point that objectivity may, or may be perceived to be, compromised. Such may be the case if a firm or a member of the assurance team were to subordinate their judgment to that of the client. __________Advocacy threat

22. A CPA-lawyer, acting as a legal counsel to one of his audit client, is an example of ___________Advocacy threat

23. Occurs when, by virtue of a close relationship with an assurance client, its directors, officers or employees, a firm or a member of the assurance team becomes too sympathetic to the client's interests. ____________Familiarity threat

24. Eman, a CPA, has a law practice. Eman has recommended one of his clients to Noel, a CPA. Noel has agreed to pay Eman 10% of the fee for services rendered by Noel to Eman's client.


Who, if anyone, is in violation of the Code of Ethics?a. Both Eman and Noelb. Eman onlyc. Neither Eman and Noeld. Noel only

25. Immediate family includesa. Parent.b. Spouse.c. Sibling.d. Non-dependent child.

26. One difference between auditors and other professionals is that most professionalsa. Do not have requirements for continuing education beyond college.b. Do not have to pass a rigorous examination.c. Are not expected to act in public interest.d. Need not be concerned about remaining independent.

27. The Code of Professional Conduct would be violated if a member accepted a fee for services and the fee wasa. Fixed by a public authority.b. Based on a price quotation submitted in competitive bidding.c. Based on the result of judicial proceedings.d. Payable after a specified finding was attained.

28. For which of the following services is a CPA professional required to be independent?a. Audits of historical financial statementsb. Review servicesc. Examination of prospective financial statementsd. All of the above

29. For which of the following services is a CPA professional not required to be independent?a. Audits of historical financial statementsb. Tax returns preparationc. Review engagementd. Examination of a forecast

30. Examples of circumstances that may create self-interest threat include:a. Contingent fees relating to assurance engagements.b. A direct financial interest or material indirect financial interest in an assurance client.c. A loan or guarantee to or from an assurance client or any of its directors or officers.d. All of the above

31. Which of the following least likely create "self-interest threat"?a. Pressure to reduce inappropriately the extent of work performed in order to

reduce fees.b. Undue dependence on total fees from an assurance client.c. Concern about the possibility of losing the engagement.d. Having a close business relationship with an assurance client.

32.A director, an officer or an employee of the assurance client in a position to exert direct and significant influence over the subject matter of the assurance engagement has been a member of the assurance team or partner of the firm. This situation least likely create __________Advocacy threat

33.A former officer, director or employee of the assurance client serves as a member of the assurance team. This situation will least likely create ___________Intimidation threat

34. If the firm is involved in the preparation of accounting records or financial statements and those financial statements are subsequently the subject matter of an audit engagement of the firm, this will most likely create ___________Self-review threat

35. The provision of services by a firm or network firm to an audit client that involve the design and implementation of financial information technology systems that are used to generate information forming part of a client's financial statements may most likely create __________


Self-review threat

36. Which of the following is not likely a threat to independence?a. Acting as an advocate on behalf of an assurance client in litigation or in resolving disputes

with third parties.b. Owning immaterial indirect financial interest in an audit client.c. Long association of a senior member of the assurance team with the assurance client.d. Threat of replacement over a disagreement with the application of an accounting

principle.

37. If a member of the assurance team, or their immediate family member receives, by way of, for example, an inheritance, gift or, as a result of a merger, a direct financial interest or a material indirect financial interest in the assurance client, a self-interest threat would be created. The following safeguards should be applied to eliminate the threat or reduce it to an acceptable level:a. Disposing of the financial interest at the earliest practical date.b. Removing the member of the assurance team from the assurance engagement.c. Either a or bd. Neither a nor b

38. If a firm, or a network firm, has a direct financial interest in an audit client of the firm, the self-interest threat created would be so significant no safeguard could reduce the threat to an acceptable level. The action appropriate to permit the firm to perform the engagement would be toa. Dispose of the financial interest.b. Dispose of a sufficient amount of it so that the remaining interest is no longer material.c. Either a or bd. Neither a nor b

39. The following loans and guarantees would not create a threat to independence, except:a. A loan from, or a guarantee thereof by, an assurance client that is a bank or a similar

institution, to the firm, provided the loan is made under normal lending procedures, terms and requirements and the loan is immaterial to both the firm and the assurance client.

b. A loan from, or a guarantee thereof by, an assurance client that is a bank or a similar institution, to a member of the assurance team or their immediate family, provided the loan is made under normal lending procedures, terms and requirements.

c. Deposits made by, or brokerage accounts of, a firm or a member of the assurance team with an assurance client that is a bank, broker or similar institution, provided the deposit or account is held under normal commercial terms.

d. If the firm, or a member of the assurance team, makes a loan to an assurance client that is not a bank or similar institution, or guarantees such an assurance client's borrowing.

40. Which of the following is least likely considered to create a threat to independence?a. The provision of services by a firm or network firm to an audit client which involve either

the design or the implementation of financial information technology systems that are used to generate information forming part of a client's financial statements.

b. The provision of services in connection with the assessment, design and implementation of internal accounting controls and risk management controls.

c. The lending of staff by a firm, or network firm, to an audit client when the individual is in a position to influence the preparation of a client's accounts or financial statements.

d. The provision of litigation support services, to an audit client, which include the estimation of the possible outcome and thereby affects the amounts or disclosures to be reflected in the financial statements.

41. Which of the following will impair the independence of a CPA in public practice?a. He has his name and address listed on a one-page section of the telephone book.b. He holds one share of the client's capital stock.c. He obtained a loan from a bank under the normal lending procedures, terms and

requirements of that bank.d. He failed to disclose a client's departure from GAAP.

42. When the users of financial statements have confidence in the independence of the CPA, it is referred to as in independence ina. Fact.b. Appearance.c. Conduct.d. Total.


43. When CPAs are able to maintain an independence attitude in fulfilling their responsibility, it is referred to as independence ina. Appearance.b. Conduct.c. Fact.d. Total.

44. Which of the following statements is incorrect?a. CPAs lose their independence if they acquire any direct financial interest in a client.b. CPAs lose their independence if they acquire any indirect financial interest in a

client.c. CPAs lose their independence if they have a material direct financial interest in a client.d. CPAs lose their independence if they acquire a material indirect financial interest in a

client.

45. When determining whether independence is impaired because of an ownership interest in client company, materiality will affect whether ownership is a violation of rule of independencea. In all circumstances.b. Only for indirect ownership.c. Only for direct ownership.d. Under no circumstances.

46. A successor auditor is required to communicate with the previous auditor. The primary concern in this communication isa. To learn about client by examining predecessor's working papers.b. Information which will help the successor auditor determine whether the client

management has integrity.c. To enable successor auditor to perform a more efficient audit.d. To save successor auditor time and money in gathering data.

47. A professional accountant has a professional duty or right to disclose confidential information in each of the following, except:a. To comply with technical standards and ethics requirements.b. To comply with the quality review of a member body or professional bodyc. To disclose to BIR fraudulent scheme committed by the client on payment of

income tax.d. To respond to an inquiry or investigation by a member body or regulatory body.

48. Which of the following best describes the passing of confidential information from a client to its auditor? The information:a. Should in no circumstances be conveyed to third parties.b. Is not legally protected and can be subpoenaed by a competent court.c. Can only be released for peer reviews after receiving permission from the client.d. Should be conveyed to the public if it affects the "correctness" of the financial

statements.

49. The CPA must not subordinate his/her professional judgment to that of others in everya. Engagement.b. Audit engagement.c. Engagement except tax services.d. Engagement except management advisory services.

50. Which of the following is an indication of lack of objectivity of an auditor?a. 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.b. The auditor believes that accounts receivable may not be collectible, but

accepts management's opinion without an independent evaluation.c. Both a and b above would be a violationd. Neither would be a violation

51. A CPA in public practice shall not disclose any confidential client information without the specific consent of the client. The confidentiality rule is violated if CPA disclosed information without client's consent as a result of aa. Subpoena or summons.b. Request by client's largest stockholder.c. Peer review.


d. Complaint filed with the trial board of the board of accountancy.

52. The confidential relationship applies toa. All services provided by CPAs.b. Only audit and attestation services.c. Audit and tax services, but no MAS services.d. Audit and MAS services, but not tax services.

53. The confidential relationship will be violated if, without client's permission, the CPA provides working papers about client toa. A court of law which subpoenas them.b. Another CPA firm as part of a peer review.c. An investigative or disciplinary body which is conducting a review of the CPA's practice.d. Another CPA firm which has just purchased the CPA's entire practice.

54. 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.

55. 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 performsa. An audit.b. A review.c. A compilation used only by management.d. An audit of prospective financial information.

56. Solicitation consists of the various means that CPA firms use to engage new clients. Which one-of the following would not be an example of solicitation?a. Taking prospective clients to lunch.b. Offering seminars on current tax law changes to potential clients.c. Accepting new clients that approach the firm.d. Advertisements in the yellow pages of a phone book.

57. If requested to perform a review engagement for a nonpublic entity in which an accountant has an immaterial direct financial interest, the accountant isa. Independent because the financial interest is immaterial and, therefore, may issue a

review report.b. Not independent and, therefore, may not be associated with the financial statements.c. Not independent and, therefore, may not issue a review report.d. Not independent and, therefore, may issue a review report, but may not issue an auditor's

opinion.

58. 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 accordance with a professional code of

ethics.

59. 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 thea. Auditor.b. Client.c. Audit committee.d. Public.

60. 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 Accounting Standards Council.


b. To encourage a policy of rotation of the independent auditors.c. To emphasize auditor independence from the management of the corporation.d. To provide the corporate owners with an opportunity to voice their opinion concerning the

quality of the auditing firm selected by the directors.

61. A violation of the ethical standards would most likely have occurred when a CPAa. Made arrangement with a bank to collect notes issued by a client in payment of fees due.b. Joined an accounting firm made up of three non-CPA practitioners.c. Issued an unqualified opinion on the 2009 financial statements when fees for

the 2008 audit were unpaid.d. Purchased a bookkeeping firm's practice of monthly write-ups for a percentage of fees

received over a three-year period.

62. Which of the following is a violation Confidentiality rule of the Code of Professional Conduct?a. The CPA, in response to a court subpoena, submits auditor-prepared workpapers as

evidence of possible illegal acts perpetrated by the client.b. The CPA discloses to the board of directors a scheme concocted by top management to

intentionally inflate earnings.c. The CPA, when questioned in court, admits to knowledge of certain illegal acts

perpetrated by the client.d. The CPA warns Client B as to the inadvisability of acquiring Client A. The CPA

bases this warning on knowledge of Client A's financial condition and a belief that the management of Client A lacks integrity. This knowledge was obtained by the CPA as a result of auditing Client A during the past several year is.

63. In determining estimates of fees, an auditor may take into account each of the following, except the:a. Value of the service to the clientb. Degree of responsibility assumed by undertaking the engagement.c. Skills required to perform the service.d. Attainment of specific findings.

64. A CPA, while performing an audit, strives to achieve independence in appearance in order toa. Reduce risk and liability.b. Comply with the generally accepted standards of fieldwork.c. Become independent in fact.d. Maintain public confidence in the profession

65. A client company has not paid its 2006 audit fees. According to the IFAC Code of Professional Conduct, for the auditor to be considered independent with respect to the 2007 audit, the 2006 audit fees must be paid before thea. 2006 report is issued.b. 2007 report is issued.c. 2008 fieldwork is started.d. 2008 fieldwork is started.

66. The IFAC Code of Professional Conduct will ordinarily be considered to have been violated when the member represents that specific consulting services will be performed for a stated fee and it is apparent at the time of the representation that thea. Actual fee would be substantially higher.b. Fee was a competitive bid.c. Actual fee would be substantially lower than the fees charged by other members for

comparable services.d. Member would not be independent.

67. 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 brokerage firma. Which owes the CPA audit fees for more than one year.b. In which the CPA has a large active margin account.c. In which the CPA's brother is the controller.d. Which owes the CPA audit fees for services in the current year and has just

filed a petition for bankruptcy.

68. In performing an audit, Jackson, CPA, discovers that the professional competence necessary for the engagement is lacking. Jackson informs management of the situation and recommends another local firm, and management engages this other firm. Under these circumstances,a. Jackson may request compensation from the other firm for any professional


services rendered to it in connection with the engagement.b. Jackson may accept a referral fee from the other firm.c. Jackson has violated the AICPA Code of Professional Conduct because of nonfulfillment of

the duty of performance.d. Jackson's lack of competence should be construed to be a violation of generally accepted

auditing standards.

69. Which of the following fee arrangements is in violation of the Code of Professional Conduct?a. A fee based on the outcome of a bankruptcy proceeding.b. A fee based on the nature of the service rendered and the CPA's particular expertise

instead of the actual time spent on the engagement.c. A fee based on whether the CPA's report on the client's financial statements

results in the approval of a bank loan.d. A fee based on the fee charged by the prior auditor.

70. Alex, CPA, performs accounting services for Mega Corporation. Mega wishes to offer shares to the public and asks Alex to audit the financial statements. Alex refers Mega to Rene, CPA, who is more competent in the area of registration statements. Rene performs the audit of Mega's financial statements and subsequently thanks Alex for the referral by giving Alex a portion of the audit fee. Alex accepts the fee. Who, if anyone, has violated professional ethics?a. Only Alexb. Both Alex and Renec. Only Cruzd. Neither Alex nor Rene


Documents

Code of ethics - with MCQs