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CHAPTER
3
The CPA's
Professional
Responsibilities
A. Code of Ethics for Professional Accountants in the
Philippines
1. Th~ Code of Ethics for Professional Accountants in the Philippines consists of three parts. Part A
A. Applies to professional accountants in public practice.
B. Establishes the fundamental principles for professional
accountants.
C. Applies to professional accountants in business.
D. Provides a conceptual framework for the application of
fundamental principles and illustrates how the framework is to be applied in specific sityations.
l/20
CPA EXAM/NATION REVIEWER: AUDITING THEORY
The Code of Ethics for Professional Accountants in the Philippines consists of three parts. Part A establishes the fundamental principles for professional accountants and provides a conceptual framework for their application. Parts B
and C illustrate how the conceptual framework is to be applied in specific situations. Part B applies to professional
accountants in public practice. Part C applies to professional accountants in business.
2. Which part of the Code of Ethics applies to professional accountants in public practice?
A. Part A
C. Part C
B. Part B
D. Part D
3. Which of the following fundamental ethical principles requires a professional accountant to be straightforward and
honest in all professional and business relationships?
A. Objectivity
B. Professional behavior
C. Professional competence and due care
D. Integrity
Part A of the Code establishes the following fundamental
ethical principles:
1. Professional Behavior
- A professional accountant should comply with relevant
laws and regulations and should avoid any action that
discredits the profession.
2. Integrity
- A professional accountant should be straightforward
and honest in all professional and business relation·
ships.
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121
3. Confidentiality
- A professional accountant should respect the confidentiality of information acquired as a result of profess'ional and business relationships. Such information
should not be disclosed to third parties without proper
and specific authority unless there is a legal or professional right or duty to disclose. Also, it should not be
used for the personal advantage of the professional accountant or third parties.
4. Objectivity
- A professional accountant should not allow bias, conflict of interest or undue influence of others to override professional or business judgments.
5. Professional Competence and Due Care
- 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.
When rendering professional services, a professional
accountant should act diligently and in accordance
with applicable technical and professional standards.
4. The following statements relate to the fundamental principies of professional ethics:
A
Integrity implies fair dealing and
True
truthfulness.
The priQciple of objectivity imposes
an obligation on all professional
accountants to maintain professional
knowledge and skill at the level
True
required.
B
c
D
True
False
False
False
True
False
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CPA EXAMINATION REVIEWER:. AUDITING THEORY
The principle of professional behavior
requires all professional accountants
to act diligently and in accordance with
applicable technical and professional
standards when rendering professional
services.
False
False
True
True
5. Competence as a certified public accountant includes all of
the following except
A. Having the technical qualifications to perform an engagement.
B. Possessing the ability to supervise and to evaluate the
quality of staff work.
C. Warranting the infallibility of the work performed.
D. Consulting others if additional technical information is
needed.
6. Which of the following fundamental ethical principles prohibits association of professional accountants with reports, returns, communications or other information that is believed
to contain a materially false or misleading statement?
A. Integrity
B. Objectivity
c. Professional competence and due care
D. Confidentiality
Under the principle of integrity, professional accountants
are required to be straightforward and honest in professional and business relationships.
A professional accountant shall not knowingly be associa~ed
with reports, returns, communications or other informatwn
where the professional accountant believes that the information:
1. Contains a materially false or misleading statement;
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3
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123
2. Contains statements or information furnished
recklessly; or
3. Omits or obscures required information where
such omission or obscurity would be misleading.
There will be no violation of the above provision if a modified report is issued in respect of a matter described in the
foregoing paragraph.
7. The principle of professional competence and due care imposes which of the following obligations on professional accountants?
A. To maintain professional knowledge and skill at the level
required to ensure that clients or employers receive
competent professional service.
B. To refrain ·from disclosing confidential information obtained as a result of professional and business relationships without proper and sp~cific authority unless there
is a legal or professional right or duty to disclose.
C. To comply with relevant laws and regulations and avoid
any situation that may bring discredit to the profession.
D. Not to compromise professional or business judgment
because of bias, conflict of interest or undue influence of
others.
8. According to the Code of Ethics, professional competence
may be divided into two phases: attainment of professional
competence and maintenance of professional competence.
The attainment of professional competence requires the following, except
A. A high standard of general education.
B. Specific -education·, training, and examination in profes~
sionally relevant subjects.
.
·.
c. Whether prescribed or not, a period of work experience.
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CPA EXAMINATION REVIEWER: AUDITING THEORY
D. A continuing awareness and an understanding of relevant technical professional and business developments.
According to the Code, "The maintenance of professional
corppetence requires a continuing awareness and an understanding of relevant technical, professional and business
developments. Continuing professional development ena·
hies a professional accountant to develop and maintain the
capabilities to perform competently within the professional
environment."
Answers A, 8, and Care the requirements to attain profes·
sional competence.
9. The Code of Ethics provides a Conceptual Framework for
applying the fundamental ethical principles. This framework
requires a professional accountant to
I. Identify threats to compliance with the fundamental
principles.
II. Evaluate the significance of the identified threats.
III. Apply safeguards to elir.1inate the threats or reduce
them to an acceptable level.
A.
B.
C.
D.
I and II only
I and III only
II and III only
I, II, and III
The Code of Ethics provides a conceptual framework to
identify, evaluate, and respond to threats to compliance
with the fundamental ethical principles.
10. Which of the following threats to compliance with the tun·
damental principles may occur as a result of the financial or
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3
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125
other interests of a professional accountant or of an immediate or close family member?
A. Self-interest
B. Self-review
C. Advocacy
D. Familiarity
The Code of Ethics identifies the following threats to compliance with the fundamental principles:
1.
Sel~interestthreat
- the threat that a financial or other interest will inappropriately influence the professional· accountant's
judgment or behavior.
2. Self-review threat
- the threat that a professional accountant will not appropriately evaluate the results of a previous judgment
made or service performed by the professional ac- ·
countant, or by another individual within the professional accountant's firm or employing organization, on
which the accountant will rely when forming a judgment as part of providing a current service.
3. Advocacy threat
- the threat that a proff;ssional accountant will promote
a client's or employer's position to the point th~t {he
professional accountant's objectivity is compromised.
4. Familiarity threat
- the threat that due to a long or close relationship with
a client or employer, a professional accountant will be
too sympathetic to their interests or too accepting of
their work.
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CPA EXAMINATION REVIEWER: AUDITING THEORY
5. Intimidation threat
- the threat that a professional accountant will be deterred from acting objectively because of actual or
perceived pressures, including attempts to exercise
undue influence over the professional accountant.
11. Which of the following may be considered by a professional
accountant to eliminate or reduce identified threats to an acceptable level?
I. Safeguards created by the profession, legislation or
regulation.
II. Safeguards in the work environment.
III. Resign from the client or the employer.
IV. Decline or discontinue the professional engagement.
A.
B.
C.
D.
I and II only
III and IV only
I and IV only
II and III only
The Code states that when a professional accountant identifies threats to compliance with the fundamental principles
and, based on an evaluation of those threats, determines
that they are not at" an acceptable level, the professional ac·
countant shall determine whether appropriate safeguards
are available and can be applied to eliminate the threats or
redu~e them to an acceptable level.
The Code states further that in making the determination,
the professional accountant shall exercise professional
judgment and take i·nto account whether a reasonable and
informed third party, weighing all the specific facts and circumstances available to the professional accountant at the
time, would be likely to conclude that the threats would be
eliminated or reduced to an acceptable lev~I by the applica-
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3
The CPA's Professional Responsibilities
tion of the safeguards, such that compliance w_ith· the fundamental principles is not compromised.
Safeguards are categorized into:
1. Safeguards created by the profession, legislation and
regulation; and
2. Safeguards in the work environment.
If appropriate safeguards are not available or cannot be applied, a professional accountant shall:
1. Decline or discontinue the specific professional service involved; or
2. When necessary, resign from the engagement (if in
public practice) or the employing organization (if in
business).
12. The Code of Ethics allows an auditor to perform whi.ch of the
following services for an audit client that is not a public interest entity?
A. Performance of bookkeeping services for the client.
B. Authorization of transactions for the ~lient.
C. Preparation of client source documents.
D. Preparation and posting of journal entries without the client's apprd~al.
The Code states that a CPA may render services related to .
the preparation of accounting records and financial statements to an audit client that is not a public interest entity .
where the services are of a routine or mechanical nature,
·provided that any self-review threat created is reduced to
ao acceptable level.
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CPA EXAMINATION REVIEWER: AUDITING THEORY
The following are examples of such services:
• Providing payroll services based on client-prepared
data.
• Recording transactions for which the client has determined or approved the appropriate account classification.
• Posting transactions coded by the client to the general ledger.
• Posting client-approved entries to the trial balance;
and
• Preparing financial statements based on information
in the trial balance.
13. A CPA provides audit services to a large company. .Almost
eighty-five percent of the CPA's revenues come from this di·
ent. Which statement is most likely to be true?
A. Appearance of independence may be lacking.
B. The CPA firm does not have the competence to perform
the audit.
C. The situation is satisfactory if the auditor exercises due
skeptical negative assurance care in the audit.
D. The auditor should provide an "other matter paragraph"
to his/her audit report adequately disclosing this information and then it may issue an unmodified opinion.
14. Safeguards created by the profession, legislation or regula·
tion include the following, except
A. Continuing professional development requirements.
B. Professional standards.
C. Firm-wide and engagement specific safeguards.
D. Educational, training and experience requirements for
entry into the prqfession.
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129
Firm-wide and engagement .specific safeguards are safeguards in the work environment.
According to the Code ot Ethics, safeguards created by the
profession, legislation or regulation include:
1. Educational, training and experience requirements
for entry into the profession.
2. Continuing professional development requirements.
3. Corporate governance regulations.
4. Professional standards. ·
5. Professional or regulatory monitoring and disciplinary procedures.
6. External review by a legally empowered third party
of the reports, returns, communications or information produced by a professional accountant.
15. Which of the following circumstances may create selfinterest threat for a professional accountant 1n public practice?
A. A member of tlile assurance team having a direct financial interest in the assurance client.
B. Performing a service for an assurance client that c;Jirectly
affects the subject matter information of the assurance
engagement.
C. Being threatened with litigation by the client.
D. Acting as an advocate on behalf of an audit client in litigation or disj)utes with third parties.
The Code of Ethfcs gives the following examples o_f circumstances that may create self-interest threats .for a professional accountant in public p_ractice:
1. A member of the assurance team having a direct finan- ·
cial interest in the assurance client.
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CPA EXAMINATION REVIEWER: AUDITING THEORY
Financial interest is defined in the Code as "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 di~ectly related to such interest."
2. A firm having undue dependence on total fees from a
client.
3. A member of the assurance team having a significant
close business relationship with an assurance client.
4. A firm being concerned about the possibility of losing a
significant client.
5. A member of the audit team entering into employment
negotiations with the audit client.
.6. A firm entering into a contingent fee arrangement relating to an assurance engagement.
7. A professional accountant discovering a significant er·
ror when evaluating the results of a pre~ious profes·
sional service performed by a member of the profes·
sional accountant's firm.
As defined in the Code, a contingent fee is "a fee calculated
on a predetermined basis relating to the outcome of a trans·
action or the result of the services performed by the firm."
A fee that is established by a court or other public authority
is not a contingent fee.
In· an ~ssurance engagement, ~ professional accountant in
public practice expresses a conclusion designed to enhance
the degree of confiQ.ence of the intended users other than
the responsible party about the outcome of the evaluation
or measurement of a subject matter aga'i nst criteria.
CHAPTER
3
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131
Performing a service for an assurance client that directly affects the subject matter information of the assurance engagement (Answer B) ·may create self-review threat.
Being threatened with litigation by the client (Answer
may create intimidation threat.
CJ
Acting as an advocate on behalf of an audit client in litigation or disputes with third parties (Answer D) may create
advocacy threat.
16. The following are examples of circumstances that may create familiarity threat, except
A. The firm promoting shares in an audit client.
B. Long association of senior personnel with the assurance
client.
C. A member of the engagement team having a close or
immediate family member who is a director or officer of
the client.
D. A director or officer of the client or an employee in a position to exert significant influence over the subject matter of the engagement having recently served as the engagement partner.
In addition to the circumstances described in Answers B, C,
and D, the following may also create familiarity threat:
•
A member of the engagement team having a close or
immediate family member who is .an employee of the ·
client who is in a position to exert significant influence.over the subject matter of the engagement.
•
A professional accountant accepting gifts .or preferential treatment from a client, unless the value is
trivial or inconsequential.
CPA EXAMINATION REVIEWER: AUDITING THEORY
AS defined in the Code, immediate family refers to "a
spouse (or equivalent) or dependent." Close family refers to "a parent, child or sibling who is not an immediate family member.''
Promoting shares in an audit client may create advocacy
threat.
17. The following circumstances may create intimidation threat,
except
A. A firm being. threatened with dismissal from a client engagement.
il. A firm being pressured to reduce inappropriately the extent of work performed in order to reduce fees.
C. A firm meing threatened with litigation by the client.
D. A member of the assurance team being, or having recently been, a director or officer of the client.
The following are examples of circumstances that may ere·
ate self-review threat:
1. The discovery of a significant error during a reevaluation of the work of the professional accountant in public practice.
2. A firm issuing an assurance report on the effectiveness
of the operation of financial systems after designing or
implementing the systems.
3. A firm having prepared _the original data used to gen·
erate records that are the subject matter of the assur·
a-nee engagement.
4. A member of the as~urance team being, or having
recently been, a director or officer of the client.
5. A member of the assurance team being, or having re·
cently been, employed by the client in a position to ex·
CHAPTER
3
The CPA's Professional Responsibilities
133
ert significant tnfluence· over the subject matter of the
engagement.
6. The firm performing a service for an assurance client
that directly affects the subject matter information of
the assurance engagement.
18. On which of the following safeguards a professional ac.;
countant in public prac;tice cannot rely solely to reduce
threats to an acceptable level?
A. Safeguards created by the profession, legislation or regulation.
B. Firm-wide safeguards.
C. Engagernent specific safeguards.
D. Safeguards within the client's systems and procedures.
Safeguards to eliminate or reduce threats to an acceptable
level are categorized into:
1. Safeguards created by the profession, legislation, or
regulation; and
2. Safeguards in the work environment which include
firm-wide safeguards and engagement specific saf-eguards.
The Code provides that, depending on the nature of the engagement, a professional accountant in public practice may
also be able to rely on safeguards within the client's systems
and procedures. However, a professional accountant cannot rely solely on such safeguards to reduce threats to an
acceptable level.
The Code gives the following examples of safeguards wit.b-
in the cli~nt'.s systems and procedures:
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CPA EXAMINATION REVIEWER: AUDITING THEORY
1. The client requires persons other than management to
ratify or approve the appointment of a firm to perform
an engagement.
2. The client has competent employees with experience
and seniority to make manageria.I decisions.
3. The client has implemented internal procedures that
ensure objective choices in commissioning nonassurance engagements.
4. The .client has a corporate governance structure that
provides appropriate oversight and communications
regarding the firm's services.
19. Which of the following is an example of engagement-specific
safeguards in the work environment?
A. Advising partners a.nd professional staff of those assurance clients and related entities from which they must be
independent.
B. Disclosing to those charged with governance of the client
the nature of services provided and extent of fees
charged .
C. A disciplinary mechanism to promote compliance with
the firm's policies and procedures.
D. Published policies and procedures to encourage and empower staff to communicate to senior levels within the
firm any issue relating to compliance with the fundamental principles that concerns them.
In addition to the examples in Answers A, c. and D. firJJl·
wide safeguards in the work environment may include:
1. Leadership ofthe firm that stresses the importance of
compliance with the fundamental principles.
2. Leadership of the firm that establishes the expectation
that members of an assurance team will act in the public interest.
CHAPTER
3
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135
3. ~olicies and procedures to implement and monitor
quality control of engagements.
4. Documented policies regarding the need to identify
threats to compliance with the fundamental principles,
evaluate the .significance of those threats, and apply
safeguards to eliminate or reduce the threats to an acceptable level or, when appropriate safeguards are not
available or cannot be applied, terminate or decline
the relevant engagement.
5. Documented internal polities and procedures requiring compliance with the fundamental principles.
6. Policies and procedures that will enable the identification of interests or relationships. between the firm or
members of engagement teams and clients.
?. Policies and procedures to monitor and, if necessary,
manage the reliance on revenue received from a single
client.
8. Using different partners and engagement teams with
separate reporting lines for the provision of nonassurance services to an assurance client.
9. Policies and procedures to prohibit individuals who
are not members of an engagement team from inappropriately influencing the outcome of the engagement.
10. Timely communication of a firm's policies .and procedures, including any changes to them, to all partners
and professional staff, and appropriate training and
education on such policies and procedures.
11. Designating a member of senior management to be responsible for overseeing the adequate functioning of
the firm's quality control system.
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CPA EXAM/NATION REVIEWER: AUDITING THEORY
12. Advising partners and professional staff of assurance
clients and related entities from which independence
is required.
13. A disciplinary mechanism to promote compliance with
policies and procedures.
14. Published policies and procedures to encourage and
empower staff to communicate to senior levels within
the firm any issue relating to compliance with the fun·
damental principles that concerns them.
Engagement~specific
safeguards in the work environment
may include:
1. Having a professional accountant who was not in·
valved with the non-assurance service review the non·
assurance work performed or otherwise advise as
necessary.
2. Having. a professional accountant who was not a mem·
her of the assurance team review the assurance work
performed or otherwise advise as necessary.
3. Consulting an independent third party, such as a com·
mittee of independent directors, a professional regula·
tory body or another professional accountant.
4. Discussing ethical issues with those charged with gov·
ernance of the client.
5. Disclosing to those charged with governance oftb~
client the nature of services provided and extent 0
fees charged.
6. Involving another firm to perform or re-perform part
of the engagement.
7. Rotating senior assurance team personnel.
CHAPTER
3 The CPA's Professional Responsibi~ties
137
20. If the fee quoted for a professional service is so low, it may
be difficult for the CPA to perform the engagement tn accordance with applicable technical and professional standards for that price. This situation may create a self-if1terest
threat to
A. Professional competence and due care
B. Objectivity
C. Integrity
D. P~ofessional behavior
21. According to Section 240 of the Code of Ethics, fees charged ·
for assurance engagements should be a fair reflection of the
value of the work involved. In determining professional
fees, the following should be taken into account, except
A. The time necessarily occupied by each person engaged
on the work.
B. The outcome or result of a transaction or the result of
the work performed.
C. The skill and knowledge required for the type of work involved.
D. The level of training and experience of the persons necessarily engaged on the work.
A fee computed on a predetermined basis relating to the
outcome or result of a transaction or the result of the work
performed is a contingent fee. Contingent fees may create
threats to compliance with the fundamental ethical principles, for example, a self-interest threat to objectivity.
22. Which of the following is not a contingent fee?
A. A fee that is dependent upon the approval of the assurance client's loan application.
B. An audit fee that is based on 5% of the client's adjusted
net income for the current year.
c. A fee that is fixed by a court or other publi~ authorlty.
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CPA EXAMINATION REVIEWER: AUDITING THEORY
D: An arrangement whereby no fee 'will be charged unless a
specified finding or result is attained.
According to the Code of Ethics, a fee established by a court
or other public authority is not a contingent fee.
23. Th.e Code of Ethics requires that members of assurance
teams, firms and, when appli~able, network firms be independent of assurance clients. Independence requires
A. Independence of mind only
B. Independence in appearance only
C. Both independence of mind and independence in appearance
D. Either independence of mind or independence in appear-
am:e
24. Which of the following most completely describes how independence has been defined by the accountancy profession?
A. Possessing the ability to act with integrity, and exercise
objectivity and professional skepticism.
B. Accepting responsibility" to act professionally and in accordance with laws and regulations.
C. Avoiding the appearance of significant interests in the affairs of an assurance client.
D. Performing an ·assurance service from the viewpoint of
the public.
·
Independence, as stated in the Code of Ethics, requires:
Independence of mind - the state of mind that permits the
expression of a conclusion without being affected by influences that compr:omise professional judgment, thereby allowing an individual to act with integrity, and exercise ob·
jectivity and professional skepticism.
·
CHAPTER
3
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139
Independence in appearance - the avoidance of facts and
circumstances that are so significant that a reasonable and
informed third party, would be likely to conclude, weighing
all the specific facts and circumstances, that a firm's, or a
member of the audit team's, integrity, objectrvity or professional skepticism had been compromised.
Answer B is incorrect because one's acceptance of responsibility to act professionally and in accordance with laws and
regulations does not necessarily require independence.
Answer C is incorrect because to be independent, one
should be independent both of mind and in appearance.
Answer D is incorrect because professional standards require objectivity, not the adoption of any viewpoint.
25. Which of the following is a misunderstanding created by the
use of the word "independence?"
A. Possessing the ability to act with integrity and objectivity.
B. Independence precludes relationships that may appear
to impair objectivity in rendering assurance services.
C. A person exercising professional judgment should be free
from all economic, financial and other relationships.
D. Possessing the ability to express a conclusion without being affected by influences that compromise professional
judgment.
It is impossible for a person exercising professional judgment to be free from all economic, financial and other relationships as every member of society has relationships with
others. The significance of economic, financial and other re-
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CPA EXAMINATION REVIEWER: AUDITING THEORY
lationships should be evaluated to identify threats that may
exist.
26. Which of the following would not, in itself, create a network? .
A. A larger structure where the entities within the structure
share costs that are limited only to those costs related to
the development of audit methodologies, manuals, or
training courses.
B. A larger structure that is aimed at cooperation and the
entities within the structure share common ownership,
control or management.
C. A larger structure that is aimed at cooperation and the
entities within the structure share common quality con·
trol policies and procedures.
D. A larger structure that is aimed at cooperation and it is
clearly aimed at profit or cost sharing among the entities
within the structure.
The Code of Ethics defines a network as a larger strucwre
that is:
• Aimed at cooperation, a nd
• Clearly aimed at profit or cost sharing or shares
common ownership, control or management, common quality control policies and procedures, com·
mon business strategy, the use of a common brand
name, or a significa nt part of professional resources.
27. !he_ Code of Ethics ~rovides that where the larger structure
1s aimed at cooperation and the entities within the structure
share a significant part of professional resources it is con·
sidered to be a network. Professional resources lnclude the
following, except
A. Audit methodology or audit manuals
B. Training courses and facilities
CHAPTER
3 The CPA's Professional Responsibilities
141
C. Brand name
D. Partners and staff
According to the Code, professional resources include:
• Common systems that enable firms to exchange information such as client data, billing and time records;
• Partners and staff;
• Technical 'departments to consult on technical or industry specific issues, transactions or eve,nts for assurance
engagements;
• Audit methodology or audit manuals; and
• Training courses and facilities.
28. In cases when the threat to independence is significant and
no safeguards are available to reduce it to an acceptable
level, which of the following actions should be taken?
I. Eliminating the activities or interests creating the threat.
II. Refusing to accept or continue the assurance engagement.
A.
B.
C.
D.
I only
II only
Neither I nor II
Either I or II
29. When identified threats to independence are significant and
the firm ·decides to accept or continue the assurance engagement, the decision should be documented. The firm's
documentation should include
I. A description of the threats identified.
II. The safeguards applied to eliminate or reduce the
threats to an acceptable level.
A. I only
B. II only
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CPA EXAMINATION REVIEWER: AUDITING THEORY
C. Neither I nor II
D.
Bo~h
I and II
30. Which of the following threats to independence would most
likely be created by a financial interest in an assurance client?
A. Self-interest threat
B. Self-review threat
C. Familiarity threat
D. Intimidation threat ·
31. A self-interest threat may be created when a member of the
assurance team knows that his close family member has a
direct financial interest or a material indirect financial interest in the assurance client. Which of the following should be
considered in evaluating the significance of the identified
threat to independence?·
I. The nature of the relationship between the member of
the assurance team and the close family member.
II. The materiality of the financial interest.
A. I only
B. II only
C. Neither I nor II
D. Both I and II
32. In which of the following circumstances would a CPA be
considered independent when performing the audit of the ft·
nancial statements of a new client for the year ended oe·
cember 31, 20XS?
A. The CPA resigned on January 17, 20XS from the board ~f
directors of the client, prior to accepting the new audit
engagement.
B. The CPA continues to hold an immaterial indirect finan·
cial interest in the client.
CHAPTER
3
The CPA's Professional Responsibilities
143
C. The CPA continues to serve as a trustee for the client's
pension plan and has the authority to make investment
decisions.
D. The CPA's spouse owns an immaterial amount of ordinary shares in the client.
33. A loan, or guarantee of a loan, to the firm from an assurance client that is a bank or a similar institution; would not
create a threat to independence provided
I. The loan, or guarantee, is made under normal lending
procedures, terms and requirements.
II. The loan is immaterial to both the firm and the assurance client.
A. I only
B. II only
C. Neither I nor II
D. Both I and II
34. A loan, or a guarantee of a loan, from an assurance client
that is a bank or a similar institution, to a member of the assurance team or his immediate family, would not create a
threat to independence provided the loan, or guarantee, is
A. Material to the member of the assurance team or his
immediate family.
B. Material to the assurance client.
C. Material to both the member of the assurance team or
his immediate family and the assurance client.
D. Made under normal lending procedures, terms and requirements.
According to the Code of Ethics, a loan, or a guarantee of a
loan, from an assurance client that is a bank or a similar institution, to a member of the assurance team or his immediate family would not create a threat to independence pro-
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CPA EXAMINATION REVIEWER: AUDITING THEORY
vided the loan, or guarantee, is made under normal lending
procedures, terms and requirements. Examples of such
loans include credit card obligations which are normally
available to other credit card holders and fully secured car
loans and housing loans which are not past due.
35. Which of the following would not create a threat to independence?
A. A loan, or a guarantee of a loan, to the firm from an as·
surance client that is a bank or a similar institution and
the loan or guarantee is made under normal lending pro·
cedures, terms and requirements and it is material to the
assurance client or firm receiving the loan.
B. A loan, or a guarantee of a loan, to the firm from an as·
surance client that is a bank or a similar institution and
the loan or guarantee is material to both the firm and
the assurance client.
C. A deposit made by the firm or a member of the assur·
ance team with an assurance client that is a bank and
such deposit is held under normal commercial terms.
D. A loan, or a guarantee of a loan, to a member of the as·
surance team from an assurance client that is a bank or
a similar institution and the loan or guarantee is not
made under normal ·lending procedures.
The Code of Ethics states that if a firm or a member of the
assurance team, or a member of that individual's immediate
family, has c!eposits or a brokerage account with an assur·
ance client that is a bank, broker, or similar institution, a
threat to independence is not created if the deposit or ac·
count is held under normal commercial terms.
36. A self-interest threat would be created if the firm, or a
ur·
member of the assurance team, makes a loan to an ass r·
ance client that is not a bank or similar institution, or gua
CHAPTER
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145
antees such an assurance client's borrowing. The selfinterest threat created would be so significant that no safeguard could reduce the threat to an acceptable level unless
the loan or guarantee is
A. Made under normal lending terms, procedures and requirements.
B. Immaterial to the firm or the member of the assurance
team.
C. Immaterial to both the firm or the member of the assurance team and the assurance client.
D. Made under normal lending terms, procedures and requirements and the loan or guarantee is immaterial to
both the firm or the member of the assurance team and
the assurance client.
37.
A self-interest threat would be created if the firm, or a
member of the assurance team, accepts a loan from, or has
borrowing guaranteed by, an assurance client that is not a
bank or similar institution. The self-interest threat created
would be so significant that no safeguard could reduce the
threat to an acceptable level unless th~ loan or guarantee is
A. Made under normal lending terms, procedures and requirements.
B. Immaterial to the firm or the member of the assurance
team.
C. Immaterial to both the firm or the member of the assurance team and the assurance client.
D. Made under normal lending terms, procedures and requirements and the loan or guarantee is immaterial to
both the firm or the member of the assurance team and
the assurance client.
38. A close business relationship between a firm or a member of
the asst,Jrance team and the assurance client or its manage-
146
CPA EXAMINATION REVIEWER: AUDITING THEORY
ment, ·or between the firm, a network firm and financial
statement audit client may create
A. Self-iriterest and intimidation threats
B. Self-review and familiarity threats
C. Advocacy and self-review threats
D. Self-interest and self-review threats
The Code of Ethics states that a close business relationship
between a firm or a member of the assurance team and the
assurance client or its management, or between tlt~ firm, a
network firm and a financial statement audit client, will in·
volve a commercial or common financial interest and may
create self-interest and intimidation threats.
The Code gives the following examples of such relation·
ships:
•
Having a material financial interest in a joint venture
with the assurance client or a controlling owner, di·
rector, officer or other individual who performs sen·
ior managerial functions for that client.
•
Arrangements to combine one or more services or
products of the firm with one or more services or
products of the assurance client and to market the
package with reference to both parties.
•
Distribution or marketing arrangements under
which the firm acts as a distributor or marketer of
the assurance client's products or services, or the 35£
surance client acts as the distributor or marketer 0
the products or services of the firm.
CHAPTER
3
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147
39. Which of the following threa~ to independence may be created by family and personal relationships between a member
of the assurance team and a director, an officer, or an employee of the assurance client in a position to exert direct
and significant influence over the subject matter information
of the ·assurance engagement?
A. Self-interest, familiarity or intimidation threats
B. Self-review, familiarity, or advocacy threats
C. Advocacy, familiarity or intimidation threats
D. Self-interest, advocacy or self-review threats
40. When an immediate family member of a member of the as·surance team is a director, an officer, or an employee of the
assurance client in a position to exert direct and significant
influence over the subject matter information of the assurance engagement, or was in such a position during the period covered by the engagement, the threats to independence
can only be reduced to an acceptable level by
A. Where possible, structuring the responsibilities of the assurance team so that the professional does not deal with
matters that are within the responsibility of the immediate family member.
B. Withdrawing from the assurance engagement.
C. Removing the individual from the assurance team.
D. Discussing the issue with those charged with governance, such as the audit committee.
According to the Code of Ethics, the only safeguard that can
reduce the threats to independence is by removing the individual from the assurance team. If this safeguard is not
used, the m1ly course of action is to withdraw from the assurance engagement.
41. When a close family member of a member of the assurance
team is a dir:ector, an officer, or an employee of the assur-
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CPA EXAMINATION REVIEWER: AUDITING THEORY
•
ance client in a position to exert direct and significant influence over the subject matter information of the assurance
engagement, threats to independence may be created. If
the threats are other than clearly insignificant, which of the
following safeguards can be applied to reduce the threats to
an acceptable level?
I. Removing the individual from the assurance team.
II. Where possible, structuring the responsibility of the assurance team so that the professional does not deal
with matters that are within the responsibility of the
close family member.
A. I only
B. II only
C. Either I or II
D. Neither I nor II
42. Which of the following threats to independence is created
when a member of the assurance team participates in the
assurance engagement while knowing, or having reason to
believe, that he is to, or may, join the assurance client
sometime in the future?
A. Intimidation threat
B. Self-interest threat
C. Self-review threat
D. Familiarity threat
According to the Code of Ethics, firm policies and pro~e·
dures shall require members of an assurance team to notify
the firm when entering employment negotiations with th~
client. The significance of the threat shali be evaluated an
safeguards applied when necessary to eliminate the threat
or reduce it to an acceptable level. Examples of sueh 5afe·
guards include:
1. Removing the individual from the assurance team; or
CHAPTER
3 The CPA's Professional Responsibilities
149
2. A review of any significant judgments made by that
individual while on the team.
43. Using the same engagement partner or the same individual
for the engagement quality control review on a financial
statement audit over a prolonged period may create a
A. Self-review threat
B. Intimidation threat
C. Familiarity threat
D. Self-interest threat
44. CPAs may provide bookkeeping services to their non-publicinterest audit clients, but there are a number of conditions
that must be satisfied if the auditor is to maintain independence. Which of the following conditions is not necessary?
A) The CPA must not assume a management role or function.
B) The client must hire an external CPA to approve all of
the journal entries prepar~d by the auditor.
C) The auditor must comply with GAAS when auditing work
prepared by his/her firm.
D) The client must accept responsibility for the financial
statements.
45. Several months after an unmodified audit report was issued,
the auditor discovers the financial statements were materially misstated. The client's CEO agrees that there are misstatements, but refuses to correct them. She claims that
"confidentiality" prohibits the CPA from informing anyone. Is
the CEO correct?
A) Yes. The auditor must maintajn confidentiality.
B) No. But because the audit report has been issued it is
too late.
C) Yes. But to be ethically correct, the auditor should violate
the confidentiality rule and disclose the error.
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CPA EXAMINATION REVIEWER: AUDITING THEORY
D) No. The auditor has an obligation to issue a revised audit
report, even if the CEO will not correct the financial
statements.
46. Which of the following would not generally create a threat
to independence?
A. The purchase of goods and services from an assurance
client by the firm (or from a financial statement audit client by a network firm) or a member of the assurance
team provided that the transaction is in the normal
course of business and on an arm's length basis.
B. A partner or employee of the firm or a network firm
serves as Company Secretary for a financicil statement
audit client.
C. Determining which recommendations of the firm should
be implemented.
D. Reporting, in a management role, to those charged with
governance.
Serving as the Company Secretary for a financial statement
audit client may create self-review and advocacy threats
(Answer B).
Determining which recommendation of the firm should be
implemented (Answer l) and reporting, in a management
role, to those charged with governance (Answer D) would
generally create self-interest or self-review threats.
47. The following activities may create self-interest or self·
review threats, except
A. Preparing source documents or originating data evidenc·
ing the occurrence of a transaction.
.
B. S\,Jpervising assurance client employees In the perfor
mance of their normal recurring activities.
C. Having custody of an assurance client's assets.
CHAPTER
3
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151
D. Using the same senior personnel on an assurance engagement over a long period of time.
Using the same engagement partner on an assurance engagement over a long period of time may create a familiarity
threat. In evaluating the significance of the threat, the following factors are to be considered:
• The length of time that the individual has been a
member of the assurance team;
• The role of the individual on the assurance team;
• The structure of the firm; and
• The nature of the assurance engagement.
48. The following forms of assistance to a financial statement
audit client do not generally threaten the firm's independence, except
A. Analyzing and accumulating information for regulatory
reporting.
B. Assisting in resolving account reconciliation problems.
C. Authorizing or approving transactions.
D. Assisting in the preparation of consolidated financial
statements.
The provision to audit clients of technical assistance and ~d­
vice on accounting principles is an appropriate means to
promote the fair presentation of the financial statements
and does not generally threaten the firm's independence.
The following services are considered to be a normal part of
the audit process and, under normal circumstances, do not
threaten the firm's independence:
• Assisting an audit client in resolving account reconciliation problems.
• Analyzing and accumulating information for regulatory reporting.
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CPA EXAMINATION REVIEWER: AUDITING THEORY
•
•
•
•
Assisting in the preparation of consolidated financial
statements.
Drafting disclosure items.
Proposing adjusting journal entries.
Providing assistance and advice in the preparation of
local statutory accounts of subsidiary entities.
49. As defined in the Code, "a valuation comprises the making of
assumptions with regard to future developments, the application of certain methodologies and techniques, and the
combination of both in order to compute a certain value, or
range of values, for an asset, a liability or for a busine~s as a
whole." Which of the following threats may be created
when a firm or a network firm performs valuation for an audit client that is to be incorporated in the client's financial
statements?
A. Advocacy threat
B. Familiarity threat
C. Self-review threat
D. Intimidation threat
50. A firm provides valuation services to an audit client. The
service involves valuation of matters material to the financial
statements and involves a significant degree of subjectivity.
Which of the following safeguards should be applied to elim·
inate the self-review threat created, or reduce it to an ac·
ceptable level?
A. Confirming with the audit client their understanding of
the underlying assumptions of the valuation and th~
methodology to be used and obtaining approval for their
use.
.
B. Obtaining the audit client's acknowledgment of responsibility for the results of the work performed by the firrTl·
CHAPTER
3
The CPA's Professional Responsibilities
153
C. Making arrangements so that personnel providing such
services do not participate in the audit engagement.
D. The self-review threat created could not be reduced to
an acceptable level by the application of any safeguard.
The Code states, "If the valuation services involves the valuation of matters material to the financial statements and the
valuation involves a significant degree of subjectivity, the
self-review threat could not be reduced to an acceptable
level by the application of any safeguard. Accordingly, such
valuation services should not be. provided or, alternatively,
the only course of action could be to withdraw from the audit engagement."
If the valuation services (either separately or in the aggregate) are not material to the financial statements, or do not
involve a significant degree of subjectivity, the self-review
threat created could be reduced to an acceptable level by
the application of the safeguards described in answers A, B,
and C.
51. The following statements relate to the provision of taxation,
internal audit or IT Systems services to audit clients. Which
is false?
A. Tax return preparation services may create a self-review
threat.
B. A self-review threat may be created when a firm, or
network firm, provides internal audit services to an audit
client.
C. 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 create a self-review threat.
i
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CPA EXAMINATION REVIEWER: AUDITING THEORY
D. The provision of services in connection with the assessment, design, and implementation of internal accounting
controls and risk management controls does not create a
threat to independence provided that firm or network
firm personnel do not perform management functions.
Providing tax return preparation services does not generally
create a threat to independence if management takes responsibility for the returns including any significant judgments made.
52. Litigation support services include the following activities,
except
A. Acting as an expert witness.
B. Providing assistance to an audit client's internal legal department.
C. Calculating estimated damages or amounts that might
become receivable or payable as the result of litigation
or other legal dispute.
D. Assistance with document management and retrieval in
relation to a dispute or litigation.
The provision of assistance to an audit client's internal legal
department is a legal service, not a litigation support service.
53. What threat to independence is created when the litigatio~
support services provided to an audit client include the estimation of the possible outcome and thereby affects the
amounts or disclosures to be reflected in the financial statements?
A. Self-review threat
B. Advocacy threat
C. Intimidation threat
D. Familiarity threat
CHAPTER
3 The CPA's Professional Responsibilities
155
54. According to the Code, legal services encompass a wide and
diversified range of areas including both corporate and
commercial services to clients--such as contract support; litigation; mergers, and acquisition advice and support; and the
provision of assistance to a client's internal legal department. The provision of legal services by a firm, or network
firm, to an audit client may create
A. Self-interest threat
B. Self-review and advocacy threats
Advocacy and intimidation threats
D. Familiarity and intimidation threats
t.
55. The following statements relate to the provision of legal services to an audit client. Which is incorrect?
A. The provision of legal services to an audit client involving
matters that would not be expected to have a material
effect on the financia.1 statements may create a selfreview threat.
B. Legal services to support an audit client in the execution
of a transaction (e.g., contract support) may create a
self-review threat. ·
C. Acting for an audit 'client in the resolution of a dispute or
litigation in such circumstances when the amounts involved are material in relation to the financial statements
of the audit client would create advocacy and self-review
threats so significant no safeguards could reduce the
threats to an acceptable level.
D. The appointment of a partner or an employee of the firm
or network firm as General Counsel for legal affairs to an
audit client would create self-review and advocacy
threats that are so significant no safeguards could reduce the th_
reats to an acceptable level.
According to the Code, the provision of legal services to an
audit client involving matters that would not be expe·c ted to
156
CPA EXAMINATION REVIEWER: AUDITING THEORY
have a material effect on the financial statements is not considered to create an unacceptable threat to independence.
56. The recruitment of senior management for an audit client
may create the following current or future threats to independence, except
A. Self-interest threat
B. Familiarity threat
C. Intimidation threat
D. Self-review threat
57. The provision of corporate finance services, advice or assis·
tance to an audit client may create
A. Self-interest threat
B. Self-interest and intimidation threats
C. Advocacy and self-review threats
D. Advocacy and intimidation threats
58. When the total fees generated by an assurance client represent a large proportion of a firm's total fees, the dependence
on that client or client group ar.d concern about the possibUity of losing the client may create a/an
A. Self-interest threat
B. Self-review threat
C. Intimidation threat
D. Advocacy threat
59. What threat to independence may be created when the fees
generated by the assurance client represent a large propor·
tion of the revenue of an individual of the firm?
A. Self-review threat
B. Familiarity threat
C. Self-interest threat
D. Advocacy threat
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157
60. What threat to independence may be created if fees due
from an assurance client for professional services remain
unpaid for a long time, especially if a significant part is not
paid before the issue of the assurance report for the following year?
A. Advocacy threat
B. Self-interest threat
C. Intimidation threat
D. Self-review threat
61. These are fees calculated on a predetermined basis relating
to the outcome or result of a transaction or the result of the
work performed.
A. Contingent fees
B. Fixed fees
C. Predetermined fees
D. Commissions.
..
62. What threats to independence are created when a contingent fee is charged by a firm in respect of an assurance engagement?
A. Self-review and intimidation threats
B. Self-interest and advocacy threats
C. Familiarity and intimidation threats
D. Self-interest and self-review threats
63. Accepting gifts or hospitality (unless inconsequential or trivi-:
al) may create
A. Self-interest and familiarity threats
B. Advocacy and intimidation threats ·
C. Familiarity and self-review threats
D. Self-intere51: and self-review threats
64. Which of the following threats to independence may be created when litigation takes place, or appears likely, between
158
CPA EXAMINATION REVIEWER: AUDITING THEORY
the firm or a member of the assurance team and the assurance client?
A. Self-interest or advocacy threat
B. Advocacy or intimidation threat
C. Self-interest or intimidation threat
D. Familiarity or self.. review threat
65. After evall:lating the significance of the threat created by an
actual or threatened litigation, the following safeguards
should be applied to reduce the threat to an acceptable level, except
A. Disclosing to the audit committee, or· others charged
with ·governance, the extent and nature of the litigation.
B. If the litigation involves a member of the assurance
team, removing that individual from the assurance team.
C. Ir.valving an additional professional accountant in the
firm who was not a member of the assurance team to
revi~w the work or otherwise advise as necessary.
D. Withdraw from, or refuse to accept, the assurance engagement.
The withdrawal from, or refusal to accept, the assurance en·
gagement is the only appropriate action to take when the
safeguards described in answers A, B, and C do not reduce
the threat to an acceptable level.
66. Which of the following is not a factor to consider in dete~­
mining the professional fee of a professional accountant in
public practice?
·
A. The skill and knowledge required for the type of profes·
sional services involved.
B. The result of the assurance work.
C. The level of training and experience of the persons. nee·
essarily engaged in performing the professional services.
CHAPTER
3
The CPA's Professional Responsibilities
159
D. The time necessarily occupied by each person engaged
in performing the professional services.
An assurance engagement should not be performed for a fee
that is contingent on the result of the assurance work or on
items that are the subject matter of the assurance engagement.
In addition to the factors mentioned in answers A, C, and D,
the professional accountant should also take into account
the degree of responsibility the performance of the professional services entails.
67. Janus de Belen, CPA, was offered the engagement to audit
the financial statements ·of Cobra Co. for the year ended December 31, 2015. Janus had served as a director of Cobra
until December 31, 2013, and his spouse currently owns
1,000 of 200,000 outstanding shares of Cobra. Janus disassociated from Cobra prior to being offered the en·gagement.
Moreover, the engagement does not cover any period that
includes Janis's association or employment with Cobra. Under the Code of Ethics, Janus should
A. Decline the engagement because of his spouse's stock
ownership.
B. Accept the engagement.
C. Decline the engagement because he had served as director.
D. Accept the engagement because his spouse's stock ownership is an indirect financial ·interest.
68. Under the Code of Ethics,
A. An immediate family member of a professional accountant, whether or not in. public practice, may not. accept a
gift from a client.
·
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CPA EXAMINATION REVIEWER: AUDITING THEORY
B. A close relative of a professional accountant not in public
practice may not accept a gift from a client.
C. A professional accountant in public practice may accept
an inconsequential gift from a client.
D. A professional accountant, whether or not in public practice, may not accept a gift from a client.
69. A client company has not paid its 20X5 audit fees. According
to the Code of Professional Ethics, in order for the auditor to
be considered independent with respect to the 20X6 audit,
the 20X5 audit fees must be paid before the:
A. 20X5 report is issued.
B. 20X6 fieldwork is started.
C. 20X6 report is issued.
D. 20X7 fieldwork is started.
70. As defined in the Code of Ethics,
is the commu·
nication 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.
A. Advertising
B. Publicity
C. Solicitation
D. Marketing professional services
is the comm~:
71. As defined in the Code of Ethics,
nication to the public of facts about a professional ac~oun f
ant which are not designed for the deliberate promotion
that professional accountant.
A. Advertising
B. Publicity
C. Solicitation
D. Marketing professional services
°
CHAPTER
3
The CPA's Professional Responsibilities
16.1
72. The following statements relate to the provisions of the Code
of Ethics that deal with the professional accountant's marketing of professional services. Which is false?
A. When a professional accountant in public practice solicits
new work through advertising or other forms of marketing, a self-interest threat to compliance with the principle
of professional behavior may be created.
B. The professional accountant should be honest and truthful when marketing professional services.
C. Advertising and publicity are generally unacceptable.
·o. W~en marketing professional services, the professional
accountant should not make exaggerated claims for services offered, qualifications possessed or experience
gained.
The Board of Accountancy Resolution No. 126, Series of
2008 (Adoption of the Rules and Regulations on Advertising
for the Philippine Accountancy Profession) states that, generally, advertising and publicity in any medium are acceptable, provided:
a) l.t has as its objective the notification to the public or
such sectors of the public as are concerned, of matters of fact (e.g., name, address, contact numbers,
services offered) in a manner that is not false, misleading or deceptive;
b) It is in good taste;
c) It is professionally dignified; and
d) It avoids frequent repetition of, and any undue
prominence being given to, the name of the firm or
professional accountant in public practice.
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CPA EXAMINATION REVIEWER: AUDITING THEORY
73. A professional accountant in public practice is allowed to
A. Refer to, use or cite actual or purported testimonials by
third parties.
·
B. Publish services in billboard (e.g., tarpaulin, streamers,
etc.) advertisements.
C. Publish and compar.e fees with other CPAs or CPA firms
or compare those services with those provided by another firm or CPA practitioner.
D. Inform interested parties through any medium that a
partnership or salaried employment of an accountancy
nature is being sought.
According to the BOA Resolution No. 126, Series of 2008
(Adoption of the Rules and Regulations on Advertising for
the Philippine Accountancy Profession), the following shaU
not be allowed:
a) Self-laudatory sta~ements.
b) Discrediting, disparaging, or attacking other firms or
CPA prac;titioners.
c) Referring to, using or citing actual or purported testimonials by third parties.
d) Publishing and comparing fees with other CPAs or
CPA firms or comparing those services with those
provided by another firm or CPA practitioner.
e) Giving too much emphasis on competitive differences.
t)
Using words or phrases which are hard to define and
even more difficult to substantiate objectively.
g) Publishing services in billboard (e.g., tarpaulin.
streamers, etc.) advertisements.
CHAPTER
3
The CPA's Professional Responsibilities
163
74. Which of the following statements concerning publicity is
incorrect?
A. Booklets and other documents bearing the name of a
professional accountant and giving technical information
for the assistance of staff or clients may be issued to
such persons, other professional accountants or other interested parties.
B. Professional accountants who' author books .or articles on
professional subjects may state their name and professional qualifications; give the name of their organization;
and give any· information as to the services that the firm
,
provides.
C. Appropriate newspapers or magazines may be used to
inform the public of the establishment of a new practice,
of changes in the composition of a partnership of professional accountants in public practice, or of any altera.tion
in the address of a practice.
,
D. A professional accountant may develop and maintain a
website in the Internet in such suitable length and style
which may also include announcements, press releases,
publications and such other necessary and factual information.
According to the Code, professional accountants who author
books or articles on professional subjects may state their
name and professional qualifications and give the name of
their organization but shall not give any information as to
the services that the firm provides.
75. The holding of media-covered events undertaken only to
commemorate a professional accountant's anniversaries in
public practice does not violate the rules on advertising and
solicitation provided that such undertaking should be done
years of celebration.
only every
CPA EXAMINATION REVIEWER: AUDITING THEORY
164
A. 5
B. 10
c.
20
D. 25
76. A professional accountant in public practice may issue to clients or, in response to an unsolicited request, to a non-client
I. A factual and objectively worded brochure of the services provided.
II. A directory. setting out names of partners, office addresses and names and addresses of associated firms ·
and correspondents.
A. I Ollly
B. II only
C. Both I and II
D. Neither I nor II
77. Which of the following statements concerning publicity is
incorrect?
A. A professional accountant may write a letter or make a
dired approach to another professional accountant when
seeking employment or professional business.
B. Genuine vacancies for staff may be communicated to the
public through any medium in which comparable staff
vacancies normally appear.
C. Professional accountants are prevented from providi~9
training services to other professional bodies, associations or educational institutions which run courses for
their members or the public.
D. In publications such as those specifically directed to
schools and other places of education to inform students
and graduates of career opportunities in the profession,
services offered to the public may be described in a
business-like way.
CHAPTER
3
The CPA's Professional Responsibilities
165
B. Other Professional Responsibilities
QUALITY CONTROL
78. A firm should establish and maintain a system of quality control to provide it with reasonable assurance that:
I. The firm . and its personnel compJy with professional
standards and applicable legal and regulatory requirements.
II. Reports issued by the firm or engagement partners are
appropriate in the circumstances.
A. I only
B. II only
C. Both I and II
D. Neither I nor II
79. The firm's system of quality control should include policies
and procedures that address each of the following elements,
except
A. Monitoring
B. Control environment
C. Relevant ethi~al requirements
D. Human resources
According to PSQC 1, the firm should establish and maintain
a system of quality control that includes policies and procedures that address each of the following elements:
a) Leadership responsibilities for quality within the
firm.
b) Relevant ethical requirements.
c) Acceptance and continuance of client relationships
and specific engagements.
d) Human resources.
e) Engagement performance.
166
CPA EXAMINATION REVIEWER: AUDITING THEORY
f)
Monitoring.
Control environment is a component of an entity's internal
control system.
80. Which of the following are elements of a CPA firm's quality
control that should be considered in establishing Jts quality
control policies and procedures?
A.
6.
c.
D.
Ethical
Reguirements
No
Yes
Yes
No ·
Human
Resources
Yes
No
Yes
No
Engagement
Performance
No
No
Yes
Yes
81. Which of the following is an element of a CPA firm's quality
control system that should be considered in establishing its
quality control policies and procedures?
A. Considering audit risk and materiality.
B. Managing human resources. ·
C. Using statistical sampling techniques.
D. Complying with laws and regulations.
82. Which of the following quality control elements is most
closely associated with the requirement to promote a culture
of quality?
A. Monitoring
B. Leadership responsibilities for quality within the firm
C. Engagement performance
D. Human resources
83. The statement, "Quality control policies and p~oced~~~;
~hould be relevant, adequate, effective, and compiled wi~t?
1s most closely associated with what quality control eleme
CHAPTER
3
The CPA's·Professional Responsibilities
167
A. Engagement performance
B. Leadership responsibilities for quality within the firm
C. Monitoring
D. Relevant ethical requirements
84. This quality control element requires a firm to establish policies and procedures to provide it with reasonable assurance
that engagements are performed in accordan.ce with professional standards and regulatory and legal requirements, and
that the firm or the engagement partner issue reports that
are appropriate in the circumstances.
A. Ethical requirements
B. Engagement performance
C. Monitoring
D. Human resources
85. In pursuing a firm's quality control objectives, a firm should
adopt policies and procedures to enable it to identify and
evaluate circumstances and relationships that create threats
to independence, and to take appropriate action to eliminate
those threats or reduce them to an acc.eptable level by ap. plying safeguards, or, if considered appropriate, to withdraw
from the engagement. Which quality.control element would
this be most likely to satisfy?
A. Et'1ical requirements
B. Monitoring
C. Human resources
D. Leadership responsibilities for quality within the ffrm
86. The primary purpose of establishing quality contro! policies
and procedures for deciding whether to accept a new client
is to
A. Anticipate before performing any fieldwork whether an
unmodified opinion can be expressed.
168
CPA EXAMINATION REVIEWER: AUDITING THEORY
B. Enable the CPA firm to attest to the reliability of the client.
Satisfy the CPA firm's duty to the public concerning the
acceptance of new clients.
D. Minimize the likelihood of association with clients whose
management lacks integrity.
c.
According to PSQC 1, a firm should establish policies and
procedures for the acceptance and continuance of client re·
lationships and specific engagements, designed to provide it
with reasonable assurance that it will only undertake or
continue relationships and engagements where the firm:
a) Has considered the integrity of the client and does
not have information that would lead it to conclude
that the client lacks integrity;
b) Is competent to perform the engagement and has the
capabilities, time and resources to do so; and
c) Can comply with ethical requirements.
87. As defined in PSQC 1,
is a process comprising
an ongoing consideration and evaluation of the firm's system
of quality control, including a periodic inspection of a selec·
tion of completed engagements, designed to provide the
firm with reasonable assurance that its system of quality
control is operating effectively.
A. Monitoring
B. Inspection
C. Engagement quality control review
D. Supervision
88.
!he fir~ shall obtain written confirmation of compliance with
its pohc1es an~ procedures on independence from all firTTl
pe~onnel required to be independent by relevant ethical requirements
CHAPTER
3
The CPA's Professional Responsibilities
169
A. At least annually
B. At least monthly
C. At least semi-annually
D. At the completion of each engagement
89. Which element of a system of quality control is addressed by
the establishment of policies and procedures designed to
provide the firm with reasonable assurance that it has sufficient personnel with the competence, capabilities, and commitment to ethical ·principles?
A. Monitoring
B. Leadership responsibilities for quality within the firm
C. Human resources
D. Engagemeot performance
90. The firm shall establish policies and procedures designed to
provid~ it with reasonable assurance that the firm and its
personnel comply with relevant ethical requirements. The
Code of Ethics for Professional Accountants in the Philippines
establishes the fundamental principles of professional ethics
which include the following, except
A. Integrity
B. Objectivity
C. Relevance
D. Professional behavior
The Code of Ethics for Professional Accountants in the Philippines establishes the fundamental principles of professional ethics, which include:
a)
b)
c)
d)
e)
Integrity;
Objectivity;
Professional competence and due care;
Confidentiality; and
Professional behavior.
170
CPA EXAMINATION REVIEWEW AUDITING THEORY
91. The audit work performed by each assistant should be reviewed by personnel of at least equal competence to determine whether it was adequately performed and to evaluate
whether the
A. Firm's system of quality control has been maintained at a
high level.
B. Work performed and the results obtained have been ad·
equately documented.
C. Audit procedures performed are approved in the profes·
sional standards.
D. Audit procedures performed are in accordance with Phil·
ippine Standards on Auditing (PSAs).
The work performed by each assistant•should be reviewed
to consider whether:
a) The work has been performed in accordance with
the audit program;
b) The work performed and the results obtained have
been adequately documented;
c) All significant audit matters have been resolved or
are reflected in audit conclusions·
d) The objectives of the audit procedures have been
-achieved; and
·
1
e) The conclusions expressed are consistent w\th the
re~u~ts of the work performed and support the audit
opm10n.
92. The nature, timing, and extent of an audit firm's quality con·
trol policies and procedures depend on
The CPA
A.
firm's Size
Yes
The Nature
of the CPA
, Firm's Practice
Yes
Appropriate
Cost-Benefit
Considerati~
No
CHAPTER
B.
c.
D.
3
The CPA's Professional Responsibilities
Yes
No
Yes
171
Yes
Yes
No
No
No
Yes
The nature, timing, and extent of an audit firm's quality control policies and procedures depend on a number of factors
such as the size and nature of its practice, its geographic
dispersion, its organization, and appropriate cost/benefit
considerations.
93. An audit firm should implement quality control policies and
procedures designed to ensure that all audits are conducted
in accordance with PSAs or relevant national standards or
practices. These policies a·nd procedures should be implemented
A. At the audit firm level only.
B. On individual audits only.
C. Either at the audit firm level or on individual audits.
D. Both at the audit firm level and on individual audits.
94. For audits of financial statements of listed entities, the engagement partner should not issue the auditor's report until
the completion of the .
A. Engagement Quality Control Review
B. Management Review
C. Engagement Team Review
D. Engagement Partner Review
Engagement quality control review, as defined in the Standard, is "a process designed to provide an objective evaluation, on or before the date of the report, of the significant
judgments the engagement team made and the conclusions
it reached in formulating the report." The Standard provides further that an engagement quality control review is
for audits of financial statements of listed entities, and those
172
CPA EXAMINATION REVIEWER: AUDITING THEORY
· other engagements, if any, for which the firm has determined an ~ngagement quality control review is required.
95. The following statements relate to the engagement partner's
responsibility' to conduct timely reviews of the audit documentation to be satisfied that sufficient appropriate evidence
has been obtained to support the conclusions reached and
for the auditor's report to be issued. Which is false?
A. The engagement partner's review of the audit documentation allows significant matters to be resolved on a
timely basis to his/her satisfaction before the auditor's
report is issued.
B. The engagement partner should review all audit documentation.
C. The engagement partner should document the extent
and timing of the reviews.
D. The reviews cover critical areas of judgment, especially
those relating to difficult or contentious matters identified during the course of the engagement, significant
risks, and other areas the engagement partner considers
important.
The engagement partner is not required to review all audit
documentation.
96. The engagement partner should be satisfied that appropriat.e
procedures regarding the acceptance and continuance of di·
ent relationships and specific audit engagements have- bee~
followed,. and that conclusions reached in this regard are ap
propriate and have been documented. Acceptance and con:
tinuance of client relationships and specific audit engage
ments include considering:
I. The integrity of the principal owners, key managernent,
and those charged with governance of the entity.
CHAPTER
3
The CPA's Professional Responsibilities
173
II. Whether the engagement team is competent to perform
the audit engagement and has the necessary time and
resources.
III. Whether the firm and the engagement team can comply
with ethical requirements.
A. I only
B. I and II only ·
C. II and III only
D. I, II, and III
97. The engagement partner should take responsibility for the
direction, supervision, and performance of the audit engagement in compliance with professional standards and
regulatory and legal requirements, and for the auditor's report that is issued to be appropriate in the circumstances.
Supervision includes the following, except
A. Tracking the progress of the audit engagement.
B. Addressing significant issues arising during the audit engagement, considering their significance, and modifying
the planned approach appropriately.
C. Informing the members of the engagement team of their
responsi bi Iities.
D. Identifying matters for consultation or consideration by
more experienced engagement team members during
the audit engagement.
The engagement partner directs the audit engagement by
informing the members of the engagement team gf their responsibilities; the nature of the entity's business; riskrelated issues; problems that may arise; and the detailed
approach to the performance of the engagement.
In addition to those activities described in answers A; 8, and
D, supervision also includes considering the capabilities and
174
CPA EXAMINATION REVIEWER: AUDITING THEORY
competence of individual members of the engagement team,
whether they have signfficant time to carry out their work,
whether they understand theiF instructions, and Whether
the work is be'in·g carried out in accordance with the
planned approach to the audit engagement.
98. Who should take responsibility for the overall quality on each
audit engagement?
A. Engagement quality control reviewer
B. Eng.agement ·partner
C. Engagement team
D. CPA firm
PSA 220 provides that the engagement partner should take
responsibility for the overall quality on each audit engage·
ment to which that partner is assigned. As defined in this
Standard, the engagement partner is "the partner or the
person in the firm who is responsible for the audit engage·
ment and its performance, and for the auditor's report that
is issued on behalf of the fi'rtn, and who, where required, has
the appropriate authority from a professional, legal or regu·
latory body."
99. The implementation of quality control procedures that are
applicable to the individual audit engagement is the responsibility of the
A. CPA firm
B. Engagement quality control reviewer
C.. Engagement team .
D. Expert contracted. by the firm in connection with the audit engagement
PSA 220 states that the engagement team should ;mple·
ment quality control procedures that are applicable to the
CHAPTER
3
The CPA's Professional Responsibilities
175
individual audit engagement. The engagement team is composed of all personnel (partners and staff) performing an
audit engagement, including any experts contracted by the
firm in connection with that audit engagement.
A CPA firm has an obligation to establish a system of quality control designed to provide it with reasonable assurance
that the firm and its 13ersonnel comply with professional
standards and regulatory and legal requirements, and that
the auditors' reports issued by the firm or engagement
partners are appropriate in the circumstances. (PSQC 1)
THE AUDITOR'S RESPONSIBILITIES RELATING TO FRAUD IN AN
AUDIT OF FINANCIAL STATEMENTS
100. Misstatements in the fir:iancial statements can arise from
fraud or error. The distinguishing factor between fraud and
error is · whether the underlying action that .results in the
misstatement of the financial statements is
A. Simple or complex
B. Intentional or unintentional
C. Voluntary or involuntary
D. Planned or unplanned
The term "error" refers to an unintentional misstatement in
statements. The term "fraud" refers to an intentional act by one or more individuals among management,
those charged with governance, employees, or third parties,
involving the use of deception to obtain an unjust or illegal
advantage.
financi~l
CPA EXAMINATION REVIEWER: AUDITING THEORY
176
101. "Error" includes
A. Engaging in complex transactions that are structured to
misrepresent the financial position or financial performance of the entity.
B. Concealing, or not disclosing, facts that could affect the
amounts recorded in the financial statements.
C. An incorrect accounting estimate arising from ove~ight
or misinterpretation of facts.
D. Intentional misapplication of accounting policies relating
to amounts, classification, manner of presentation, or
disclosure.
The term "error" refers to an unintentional misstatement
in financial statements, including the omission of an amount
· or a disclosure, such as the following:
• A mistake in gathering or processing data from
which financial statements are prepared.
• An incorrect accounting estimate arising from over·
sight or misinterpretation of facts.
• A mistake in the application of accounting principles
relating to measurement, recognition, classification,
presentation, or disclosure.
I
102. Fraud involving one or more members of management or
those charged with governance is referred to as
A. Management fraud
B. Employee fraud
C. Fraudulent financial reporting
D. Misappropriation of assets
103. The auditor is concerned with fraud that causes a material
0
misstatement in the financial statements. There are tw
types of intentional misstatements that are relevant to the
CHAPTER
3 The CPA's Professional Responsibilities
177
auditor: misstatements resulting from fraudulent financial
reporting and misstatements resulting from
A. Management fraud
B. Employee fraud
C. Misappropriation of assets
D. Collusion within the entity or with third parties
104. Fraudulent financial reporting involves intentional misstatements including omissions of amounts or disclosures in financial statements to deceive finaocial statement users. It
may be accomplished in a number of-ways, including
A. Embezzling receipts.
B. Stealing physical assets or intellectual property.
· C. Using an entity's assets for personal use.
D. Manipulation, falsification, or alteration of accounting
records or supporting documentation from which the financial statements are prepared
Fraudulent financial reporting may be accomplished by
the following:
• Manipulation, falsification (including forgery), or alteration of accounting records or supporting documentation from which the financial statements are
prepared.
• Misrepresentation in, or· intentional omission from,
the financial statements of events, transactiqns, or
other significant information.
• Intentional misapplication of accounting pri~ciples
relating to amounts, classification, manner of presentation, or disclosure.
The answers in A, B, and C involve misappropriation of as-
sets.
178
CPA EXAMINATION REVIEWER: AUDITING THEORY
105. Which of the following conditions are generally present when
misstatements due to fraud occur?
I. Incentive or pressure
II. Perceived opportunity
III. Rationalization
A. I and II only
B. II and III only
C. l and III only
D. I, II, and III
Fraud involves the incenti.ve or pressure to commit fraud, a
perceived opportunity ~o do so, and some rationalization of
the act. ·
106. Individuals may have an incentive or be under pressure to
commit fraud, or circumstances may provide an opportunity.
Also, certain individuals may have an attitude, character, or
set of values that allow them to rationalize fraud. Tue audi·
tor's concern about the risk of material misstatement is least
likely to be increased if management
A. Is interested in inappropriate means of minimizing re·
ported earnings for tax purposes.
B. Commits to unduly aggressive forecasts.
C. Operating a.nd financing decisions are made by numer·
ous individuals.
D. H~s an excessive interest in increasing the entity'~ sha~
price through the application of unduly aggressive a
counting practices.
107. Three conditions are generally present when fraud occurs·
Which of the following is not one of them?
A. Attitude or rationalization about the act of fraud.
B. Opportunity to commit fraud.
C. Professional skepticism about the likelihood of fraud.
CHAPTER
3
The CPA's Professional Responsibilities
179
D. Incentive or pressure to commit fraud.
108. Which of the following is a required audit planning procedure concerning potential fraud?
A. Consider whether estimates prepared and recorded by
management could indicate a biased reporting.
B. Consider the nature of journal entries, particularly those ·
made near the end of the reporting period.
C. Document the results of procedures used to address the
risk of fraud.
D. Conduct discussions among the members of the audit
team regarding the risks of material misstatement due to
fraud or error.
109. Which of the following is a false statement concerning
fraud?
A. Fraud generally involves incentive or pressure to commit
fraud, a perceived opportunity to' do so, and some rationalization of the act.
B. Two types of misstatements relevant to · the auditor include material misstatements arising from fraudulent financial reporting and material misstatements arising
from misappropriation of assets.
C. Fraud involves actions of management but excludes the
·
actions of employees or third parties.
D. An audit rarely involves the authentication of documentation; thus, fraud may go undetected by the auditor.
The term "fraud" refers to an intentional act by one or more
individuals among·management, employees, or third parties,
which results in a misrepresentation of financial statements.
110. What is one common way to conceal a theft?
A. By charging the stolen item to an expense account.
B. By creating cash through inter.;bank cash transfers.
180
.CPA EXAMINATION REVIEWER: AUDITING THEORY
c.
By stealing cash from customer A and then using customer B's balance to pay custom~r A's accounts receivable.
D. By the conversion of stolen assets into cash.
111. Why is computer fraud often much more difficult to detect
than other types of fraud?
A. Perpetrators can commit a fraud and leave little or no
evidence.
B. Perpetrators usually only steal very small amounts of
money at a time, thus requiring a long period of time to
have elapsed before they are discovered.
C. Most computer criminals are older and are considered to
be more cunning when committing such a fraud.
0. Most perpetrators invest their illegal income rather than
spend it, thus concealing key evidence.
112. A ·classification of fraud where the perpetrator causes a
company to pay too much for ordered goods, or to pay for
goods never ordered is called
A. Payroll fraud
B. Disbursement fraud
C. Cash receipts fraud
D. Inventory fraud
113. In payroll fraud, funds can be stolen by
I. Paying a fictitious or ghost employee.
II. Increasing pay rates without permission.
III. Keeping a_real but terminated employee on the payroll.
A. I and II only
B. I and III only
C. II and III only
D. I, II, and III
114. Ste~lin~ a master list of customers and selling it to a corn·
pet1tor 1s an example of what classification of fraud?
~HAPTER
A.
B.
C.
D.
3
The CPA's Professional Responsibilities
181
Output theft
Data theft
Disbursement fraud
Cash receipt fraud
115. The primary responsibility for the prevention and detection
of fraud rests with
A. Those charged with governance of the entity.
B. Management of the entity.
C. Both those charged with governance of the entity and
management.
D. The auditor.
116. The following are examples of misappropriation of assets,
except
A. The treasurer diverts customer payments to his personal
due, concealing his actions by debiting an expense account, .thus overstating expenses.
B. An employee steals inventory and the "shrinkage" is recorded in cost of goods sold.
C. An employee steals small tools from the company and
neglects to return them; the cost is reported as·a miscellaneous operating expense.
D. Company managem~nt changes inventory count tags
and overstates ending inventory, while understating cost
of goods sold.
Changing inventory count tags resulting in misstatement of
inventory and cost of goods sold is an example of fraudulent
financial reporting.
117. Which of the following statements best describes an auditor's responsibility regarding misstatements?
182
CPA EXAM/NAT/ON REVIEWER: AUDITING THEORY
A. An auditor should obtain reasonable assurance that the
fin~ncial statements taken as a whole are free from material misstatement, whether caused by fraud or error.
B. An auditor should obtain absolute assurance that material misstatements in the financial statements will be detected.
C. An auditor is responsible to detect material errors but
has no responsibility to detect material fraud that is con·
cealed through employee collusion or management override of internal control.
D. An auditor's failure to detect a material misstatement resulting from fraud is an indication of noncompliance with
the requirements of the Philippine Standards on Auditing
(PSAs).
PSA 240 states, "An audit conducted in accordance with
PSAs is designed to provide reasonable assurance that the
financial statements taken as a whole are free from material
misstatement, whether caused by fraud or error."
118. When obtaining an understanding of the entity and its envi·
ronment, including its internal control, the auditor may iden·
tify events or conditions that indicate an incentive or pres·
sure to commit fraud or provide an opportunity to commit
fraud. Such events or conditions are referred to as
A. Fraud conditions
B. Fraud risk factors
C. Fraudulent activities
D. Fraud environment
1~19. The following are examples of fraud risk factors relating to
·
misstatements arising from misappropriation of assets, ef.'
cept
A. Recurring negative cash flows from operating
While reporting earnings and earnings growth.
.
activities
CHAPTER
3
183
The CPA's Professional Responsibilities
B. Inadequate physical safeguards over cash, investments,
inventory, or fixed assets.
C. Inadequate segregation of duties or independent checks.
D. Adverse relationship between the entity and employees
with access to cash or other assets susceptible to theft
created by recent changes made to employee compensation or benefit plans.
Recurring negative cash flows while reporting earnings and
earnings growth is a fraud risk factor relating to fraudulent
financial reporting.
120. Opportunities to misappropriate assets increase when there
are
A. Known or anticipated future employee layoffs.
B. Promotions, compensation, or other rewards inconsistent
with expectations.
C. Recent or anticipated changes. to employee compensation or benefit plans.
D. Inventory items that are small in size, of high value, or in
· high demand.
Fraud risk factors are classified according to the three conditions generally present when fraud exists: (1) incentives/pressures, (2) opportunities, and (3) attitudes/rationalizations.
Opportunities to misappropriate assets increase when
there are:
·
• Inventory items that are small in size, of high value,
or in high demand.
• Large amounts of cash on hand.
• Easily convertible assets, such as bearer bonds,
computer chips, or diamonds .
•
CPA EXAMINATION REVIEWER: AUDITING THEORY
184
•
Fixed assets which are small in size, marketable, or
lacking observable identification of ownership.
Answers A, 8, and C are incorrect because they may create
adverse relationships between the entity and employees
that may motivate them to misappropriate the entity's as·
sets.
121. Which of the following conditions or events may create in·
centives/pressures to commit fraud?
A. Inadequate system of authorization and approval of
transactions.
B. Lack of mandatory vacations for employees performing
key control functions.
C. Excessive pressure on management or operating person·
nel to meet financial targets established by those
charged with governance, including sales or profitability
incentive goals.
D. Inadequate access controls over automated records.
Answers A, B, and D are incorrect because they create oppor.tunities to commit fraud.
122. Because of the risk of material misstatement an audit of
financial statements in accordance with PSAs should be
planned and performed with an attitude of
. A. Impartial conservatism
B. Objective judgment
C. Independent integrity
D. Professional skepticism
As r.equ~red by PSA 2.00, the auditor plans and performs ~he
audit ~Ith an attitude of professional skepticism recognizJO~
that circumstances may exist that cause the financial state
:~
CHAPTER
3
The CPA's Professional Responsibilities
185
ments to be materially misstated. Professional skepticism
includes a questioning mind and critical assessment of audit
evidence.
123. Which of the following statements describes why an audit
that is properly planned and performed in accordance with
PSAs may not detect a material misstatement resulting from
fraud?
A. Fraud may involve carefully laid out plans of concealment.
B. The auditor did not consider audit risk factors for accounts having pervasive effects on the financial statements.
C. An audit is designed to provide reasonable assurance of
detecting misstatements arising from errors, but there is
no similar responsibility concerning material misstatements resulting from fraud.
D. The risk of the auditor not detecting a material misstatement resulting from employee fraud is greater than
for management fraud.
PSA 240 states, "The risk of not detecting a material misstatement resulting from fraud is higher than the risk of not
detecting a material misstatement resulting from error because fraud may involve sophisticated and carefully organized schemes to conceal it, such as forgery, deliberate failure to record transactions, or intentional misrepresentations being made to the auditor. Such attempts at concealment may be even more difficult to detect when accompanied· by collusion. Collusion may cause the auditor to believe that evidence is persuasive when it is, in fact,. false."
124. When planning the audit, the auditor should make inquiries
of management. Such inquiries should address the following, except
186
CPA EXAMINATION REVIEWER: AUDITING TH~ORY
A. Management's assessment of the risk that the financial
statements may be misstated due to fraud.
B. Management's process for identifying and responding to
the risks of fraud in the entity.
C. Management's consideration of how an element of unpredictability will be incorporated into the nature, timing,
and extent of the audit procedures to be performed.
D. Management's communication, if any, to those charged
with governance regarding its processes for identifying
and responding to the risks of fraud in the entity.
The consideration of how an element of unpredictability will
be incorporated into the nature, timing, and extent of the
audit procedures to be performed is a matter to be dis·
cussed by the auditor with other members of.the audit team.
125. Which of the following circumstances most likely would
· cause an auditor to consider whether material misstatements exist in an entity's financial statements?
A. Those charged with governance exercise oversight of
management's processes for identifying and responding
to the risks of fraud in the entity and the internal control
that management has established to mitigate these risks.
B. Significant, unusual, or highly complex transactions, especially those close to an entity's financial year-end that
pose difficult "substance .over form" questions.
C. Operating profits making the threat of bankruptcy, foreclosure, or hostile takeover remote.
D. Low vulnerability to changes in technology, product ob·
solescence, or interest rates.
Significant, unusual, or highly complex year-end transac~
tions may provide opportunities to engage in fraudulent fi
nancial reporting.
CHAPTER.
3
187
The CPA's Professional Responsibilities
126. Which of the following characteristics most likely would
heighten an auditor's .concern about the risk of material misstatement arising from fraudulent financial reporting?
·A. Excessive interest by management in increasing stock
price or earnings trend through aggressive accounting .
practices.
B. Effective accounting and internal control systems.
C. Low turnover of senior management, l~gal counsel, or
those charged with governance.
D. Management is dominated by a single person or a small
group with compensating controls such as effective oversight by those charged with governance.
127. When the auditor encounters circumstances that may indicate that there is a material misstatement in the financial
statements resulting from fraud or error, the auditor should
perform procedures to determine whether the financial
statements are materially misstated. The nature, timing,
and extent of the procedures to be performed depend on
the auditor's judgment as to the
A
Type of fraud or error indicated
Likelihood of occurrence
Likelihood that a particular type of
fraud or error could have a
material effect on the financial
statements
~
~
D
No Yes . Yes · No
Yes No Yes No
Yes
No
Yes
No
128. When the. .auditor identifies a misstatement in the financial
statementS, the auditor should consider whether such a misstatement may be indicative of fraud and if there is such an
indication, the auditor should
A. Consider the implications of the misstatement in relation
to other aspects of the audit.
188
CPA EXAMINATION REVIEWER: AUDITING THEORY
B. Withdraw from the engagement.
C. Communicate the information to regulatory and enforcement authorities.
D. Report the matter to the person or persons who made
the audit appointment.
PSA 240 requires the auditor to consider the implications of
the misstatement in relation to other aspects of the audit,
particularly the reliability of management representations.
129. PSA 230 (Audit Documentation) requires the auditor to doc·
ument matters which are important in providing evidence to
support the audit opinion, and states that the working pa·
pers include the auditor's reasoning on all significant matters
which require the auditor's judgment, together with the au·
ditor's conclusion thereon. Which of the following should be
documented by the auditor?
A. Fraud risk factors identified as being present during the
auditor's risk assessment process.
B. Auditor's responses to identified fraud risk factors.
C. Both fraud risk factors identified as being present during .
the auditor's risk assessment process and the auditor's
response to any such factors.
D. The standard poes not require documentation of the ·
identified fraud risk factors and the auditor's responses ·
to them.
.
.k
PSA 240 states that because of the importance of frau~ fl~f
factors in the assessment of the inherent or control nsk. k
· I misstatement,
·
matena
the auditor documents fra ud ns
. te
factors identified and the response considered appropna
by the auditor.
·
0un·
130. Because of the nature of fraud and the difficulties en.c tf1e
tered by auditors in detecting material misstatements in
CHAPTER
3 The CPA's Professional Responsibilities
189
financial statements resulting from fraud, the auditor should
obtain written representations from management. The following should be confirmed by management in its written
representations, except
A. It is not responsible for the implementation and operations of internal control that is designed to prevent and
detect fraud.
B. It has disclosed to the auditor its knowledge of any allegations of fraud or suspected fraud, affecting the entity's
financial statements communicated by employees, former employees, analysts, regulators, or others.
C. It has disclosed to the auditor its knowledge of fraud or
suspected fraud affecting the entity.
D. It has disclosed to the auditor the results of its assessment of the risk that the financial statements may be
materially misstated as a result of fraud.
The standard states that in addition to acknowledging its responsibility for the financial statements, it is important that,
irrespective of the size of the entity, management acknowledges its responsibility for internal control designed and
implemented to prevent and detect fraud.
131. Which of the following statements concerning the auditor's
responsibility to detect conditions relating to financial stress
of employees or adve·rse relationships between a company
and its employees is correct?
A. The auditor is required to plan the audit to detect these
conditions whenever they may result in misstatements.
B. The auditor is required to plan the audit to detect these
conditions on all audits.
C. These conditions relate to fraudulent financial reporting,
and an auditor is required to plan the audit to detect
these conditions when the client is exposed to a risk of
misappropriation of assets.
190
CPA.EXAMINATION REVIEWER: AUDITING THE.ORV
D. The auditor is not required to plan the audit to cUscover
these conditions, but should consider them if he/she becomes aware of them during the audit.
The financial stress of employees or adverse relationships
betWeen a company and its employees are conditions that
indicate an incentive or pressure to commit fraud. PSA 240
states that using the auditor's knowledge of the business,
the auditor may identify events or conditions that provide an
opportunity, a motive, or a means to commit fraud, or indicate that fraud may already have occurred. Such events or
conditions are referred to as "fraud risk factors."
In designing the substantive procedures, the C\Uditor should
address the fraud risk factors that he/she has identified as
being present.
The standard, therefore, does not specifically require the
auditor to plan the audit to discover fraud risk factors, but
should consider them if he/she becomes aware of them during the au~it.
132. The following statements relate to communication of mis·
statements resulting from fraud to management and to
those charged with governance. Which is false?.
A. The auditor need not bring to the attention of th~se
charged with governance any material weaknesses. in inf
ternal control related to the prevention and detection
fraud.
B. If the auditor has identified a fraud whether or not it re·
suits in a material misstatement i~ the financial state·
ments, the auditor should communicate these matters ~o
the appropriate level of management on a timely basis,
°
cH•PTER ] . The CPA's Professional Responsibilities
191
and' consider the need to report such matters to . those
charged with governance.
C. If the auditor has obtained evidence that indicates that
fraud may exist (even if the potential effect on the financial statements would 11ot be material), the auditor
should communicate these matters to the appropriate
level of management on a timely basis, and consider the
need to report ·such matters to those chargeo with governance.
D. The auditor's communication with those charged with
governance may be made orally or in writing.
The standard states that the auditor should make those
charged with governance and management aware, as soon
as practicable, and at the appropriate level of responsibility,
of material weaknesses in the design and implementation of
internal control to prevent and detect fraud which may have
come to the auditor's attention.
CONSIDERATION OF LAWS AND REGULATIONS IN AN AUDIT OF FINANCIAL STATEMENTS
133. As used in PSA 250, this term refers to acts of pmission or
commission by the entity being audited, either intentional or
unintentional, which are contrary to prevailing laws or regulations.
A. Noncompliance
B. Illegal acts
C. Dep.lorable acts
D. Unforgivable acts
134. According to PSA 250, the term "noncompliance" as used ·in
the standard refers to acts of omission or commission by the
entity being audited, · either intentional or unintentional,
192
CPA EXAMINATION REVIEWER: AUDITING THEORY
which are contrary to the prevailing laws or regulations.
Such acts do not include
A. Transactions entered into by the entity.
B. Transactions entered into in the name of the entity.
C. Transactions entered into on the entity's behalf by its
management or employees.
D. Personal misconduct (unrelated to the entity's business
activities) by the entity's management or empk)yees.
135. The responsibility for the prevention and detection of noncompliance rests with
A. The auditor
B. Management
C. The auditor's lawyer
D. The client's lawyer
PSA 250 states that it is management's responsibility to ensure that the entity's operations are conducted in accordance with laws and regulations.
136. Which of the following statements best describes why the
auditor's examination cannot reasonably be expected to
bring all acts of noncompliance with existing laws and regulations by the client to the auditor's attention?
A. Acts of noncompliance by clients often relates to ac~ounting aspects rather than operating aspects.
B. Noncompliance may involve conduct designed to conceal
it, such as collusion, forgery, deliberate failure to record
transactions, senior management override of controls, ~r
intentional misrepresentations being made to the auditor.
C. Nonc~mp~iance m~y ~e perpetrated by the only person i~
the client s organization with access to both assets an
the accountin'l records.
CHAPTER
o.
3 The CPA's Professional Responsibilities
193
The client's internal control may be so strong that the
auditor performs only minimal substantive testing.
137. PSA 250 states that in order to plan the audit, the auditor
should obtain a general understanding of the legal and regulatory framework applicable to the entity and the industry
and how the entity is complying with that framework. To
obtain this understanding, the following procedures would
ordinarily be considered by the auditor, except
A. Use the existing understanding of the entity's industry,
regulatory, and other external factors.
B. Inquire of management concerning the entity's policies
and procedures regarding compliance with laws and regulations.
C. Inquire of management as to the laws and regulations
that may be expected to have a fundamental effect on
the operations of the entity.
D. Inspect correspondence with relevant licensing or regulatory authorities.
Inspecting correspondence with the relevant licensing or
regulatory authorities is a procedure to identify instances of
noncompliance with laws and regulations.
138. When the auditor becomes aware of information concerning
a possible instance of noncompliance, the auditor should obtain an understanding of
8
The nature of the act
The circumstances in which it has
occurred
Sufficient other information to
evaluate the possible effect on
financial statements
~
b
D
No
Yes Yes
No
No
Yes
No
Yes
Yes Yes
No
No
194
CPA EXAMINATION REVIEWER: Al,.JDITING THEORY
139. Which of the following statements is incorrect concerning
reporting of noncompliance?
.
A. The auditor, as soon as practicable, either communicate
with those charged with governance, or obtain evidence
that they are-appropriately informed, regarding noncom·
pliance that comes to the auditor's attention.
B. If the auditor suspects that members of senior manage·
ment, including member~ of the· boa(d of directors, are
involved in noncompliance, the auditor should report the
matter to the next higher level of authority at the entity,
if it exists, such as an audit committee or a supervisory
board.
C. The auditor should, as soon as practicable, communicate
with those charged with governance regarding noncom·
pliance, including matters that are clearly inconsequen·
tial or trivial.
D. If in the auditor's judgment, the noncompliance is believed to be intentional and material, the auditor should
communicate the finding without delay.
140. I~ the auditor concludes that the noncompliance has a mate·
nal effect on the financial statements and has not been
properly reflected in the financial statements, the auditor
should express
A. A qual~fied or an adverse opinion
B. A q~ah~ed opinion or a disclaimer of opinion
C. A d1scla1mer of opinion
D. An unmodified opinion
141. 1: the auditor .is precluded by the entity from obtaining $Uffi~
cient ~ppropnate audit evidence to evaluate whether non
compha~c~ that may be material to the financial statements,
has, or is ~ikely to have, occurred the auditor should express
:· A qual~fied op~n~on or an adv~rse opinion .
· A qualified opinion or a disclaimer of opinion
CHAPTER
3
The CPA's Professional Responsibilities
195
C. An unmodified opinion
D. An adverse opinion or a disclaimer of opinion
142. Under which of the circumstances below would the auditor
conclude that withdrawal from the engagement is necessary?
A. The auditor concludes that the noncompliance has a material effect on the financial statements and has not been
properly .reflected in the financial statements.
B. The auditor is precluded by the entity from obtaining sufficient appropriate audit evidence to evaluate whether
noncompliance that may be material to the financial
statements, has, or is likely to have, occurred.
C. The auditor is unable to determine whether noncompliance has occurred because of .limitations imposed by the
circumstances rather than by the entity.
D. The entity does not take the remedial action that the auditor considers necessary in the circumstances.
According to PSA 250, the auditor may consider that withdrawal from the engagement is necessary when the entity
does not take the remedial action that the auditor considers
necessary. in the circumstances, even when the noncompliance is not material to the financial statements.
COMMUNICATION WITH THOSE CHARGED WITH GOVERNANCE
143. Under PSA 260, this term is used to describe the role of persons entrusted with the supervision, control, and direction of
an entity.
A. Oversight
B. Governance
C. Direction
D. Control
196
CPA EXAMINATION REVIEWER: AUDITING THEORY
According to PSA 260 (Comm·u nication with those Charged
with Governance), "governance" is the term used to describe
the role of persons entrusted with the supervision, control,
and direction of an entity. Those charged with governance
ordinarily are accountable for ensuring that the entity
achieves its objectives with regard to reliability of financial
reporting, effectiveness and efficiency of operations, compliance with applicable laws, and reporting to interested
parties.
144. According to PSA 260, those matters that arise from the audit of financial statements and, in the opinion of the auditor,
are both important and relevant to those charged with governance in overseeing the financial report.ing and disclosure
process are called
A. Audit matters of governance interest
B. Significant audit matters
C. Auditor's findings
D. Material misstatements in the financial statements
145. Which of the following statements relating to communication
of audit matters of governance interest is incorrect?
A. Audit matters of governance interest include only those
matters that have come to the attention of the auditor as
a result of the performance of the audit.
B. In an audit in accordance with PSAsI the auditor should
design audit procedures for the specific purpose of identifying matters of governance interest.
C. The auditor should identify · relevant persons who are
charged with governance and with whom audit matters
of governance ·interest are to be communicated.
D. The auditor's communications with th~se charged with
governance may be made orally or in writing.
CHAPTER
3
The CPA's Professional Responsibilities
197
PSA 260 states that audit matters of governance interest include only those matters that have come to the attention of
the auditor as a result of the performance of the audit. The
auditor is not required to design audit procedures for the
specific purpose of identifying matters of governance interest.
146. Audit matters of governance interest to be communicated to
those charged with governance ordinarily include
I. Audit adjustments, whether or not recorded by the entity that have, or could have, a material effect on its financial statements.
II. Expected modifications to the auditor's report.
III. Material uncertainties related ltJ events and conditions
that may cast significant doubt on the entity's ability to
continue as a going concern.
A.
B.
C.
D.
I only
II and III only
I and III only
I, II, and III
In addition to those described in answets A, B, and C, audit
matters of governance i::lterest include the following:
•
The general approach and overall scope of the audit,
including any expected limitations thereon, or any
additional requirements.
•
The se)ection of, or changes in, significant accounting
policies and practices that have, or could have, a material effect on the entity's financial statements.
198
CPA EXAMINATION REVIEWER: AUDITING THEORY
•
The potential effect on the financial statements of
any material risks and exposures, such as pending
litigation, that are required to be disclosed in the fi.
nancial statements.
•
Disagreements with management about matters
that, individually or in aggregate, could be significant
to the entity's financial statements or the auditor's
report. These . communications include considera·
tion of whether the matter has, or has not, been re·
solved and the significance of the matter.
•
Other matters warranting attention by those charged
with governance, such as material weaknesses in in·
ternal control, questions regarding management in·
tegrity, and fraud involving management.
•
Any other matters agreed upon in the terms of the
audit engagement.
147. PSA 260 requires the auditor to determine the relevant per·
sons who·are charged with governance and with whom audit
matters of governance interest are communicated. For cor·
porations covered by the SEC Code of Corporate Govern·
ance, which of the following is primarily responsible for cor·
porate governance?
A. President
B. . Controller
C. Board of Directors
'P. Management
The Code of Corporate Governance promuigated by the Sed
curities and Exchange Commission (SEC) states, "The soar
CHAPTER
3
The CPA's Professional Responsibilities
19,9
of Directors is primarily responsible for the governance of
the corporation."
148. The audit~r -shall communicate with those charged with governance his/her responsibilities in relation to the audit of the
entity's financial statements, including that
I. The auditor is responsible for forming and expressing an
opinion on the financial statements.
II. The audit of the financial statements does not relieve
management or those charged with governance of their
responsibi Iities.
A. I only
B. II only
C. Neither I nor II
O. Both I and II
149. Which of the following matters will an auditor most likely
communicate to those charged with governance?
A. The level of responsibility assumed by management for
the preparation of the financial statement:S.
B. The effects of significant accounting policies adopted by
management in emerging areas for which there is no authoritative guidance.
C. A list of negative trends that may lead to working capital
deficiencies and adverse financial ratios.
D. Difficulties encountered in achieving a satisfactory r~­
sponse rate from the entity's customers in confirming
accounts receivables . .
150. Which of the following matters is -an auditor required to
communicate to those charged with governance?
CPA EXAMINATION REVIEWER: AUDITING THEORY
200
I. Disagreements with management about matters signifi·
cant to the entity's financial statements that have been
satisfactorily resolved.
II. Material weaknesses in internal control.
A. I only
B. II only
C. Both I and II
D. Neither I nor II
TRUE OR FALSE
1. Familiarity threat is the threat that a CPA will promote a client's or employer's position to the point that his/her objectivity is compromised.
2. Safeguards fall into two broad categories: safeguards in the
work environment and firm-wide safeguards.
3. The principle of professional behavior imposes an obligation
on all CPAs to comply with relevant laws and regulations and
avoid any action that m~y discredit the profession.
4. When identified threats are not at an acceptable level, a CPA
may rely solely on safeguards that his/her client has imple·
mented.
5. A primary purpose for establishing a code of professional
ethics is to demonstrate acceptance of responsibility to the
interests of those served by the profession.
6. Safeguards impl.emented by the firm, including policies a~
procedures to implement professional and regulatorY ts
quirements, may be applied to mitigate or eliminate threa
to independence and other ethical principles.
CHAPTER
3
The CPA's Professional Responsibilities
201
7. The auditor must be independent of the audit client unless
the lack of independence does not influence his or her professional judgment.
8. With regard to detecting fraud, auditing standards require
auditors to issue an unmodified opinion only when the auditor is satisfied that no instances of fraud have occurred.
9. Due professional care requires auditors to plan and perform
their duties with the skill and care that is commonly expected of accounting professionals.
10. Fraud is either an intentional or unintentional misstatement
of the financial statements, depending on materiality and
consistency.
11. A factor that relates to opportunities to commit fraudulent
financial reporting is lack of controls relating to the calculation and approval of accounting estimates.
12. When determining whether independence is impaired because of an ownership interest in a client company, materiality will affect ownership only for direct ownership.
13. A direct financial interest violates independence when close
relatives such as a brother, sister, or in-laws are employed
by the client.
14. If an entity asks a CPA to perform a review engagement,
and the CPA has an immaterial direct financial· interest in the
entity, the CPA is not independent and, therefore, may not
issue a review report.
15. A CPA would be ethically bound to refrain from disclosing
any confidential client information when a major shareholder
202
CPA EXAMINATION REVIEWER: Al,JDITING THEORY
of a client company seeks accounting information from the
CPA after management declined to disclose the requested information.
16. According to the Fundamental Principles section of the Code
of Ethics, all CPAs should maintain independence of mind
and in appearance at all times.
17. Misappropriation of assets is normally. perpetrated by employees at lower levels of the organization.
18. The Code of Ethics requires independence for all assurance
engagements.
19. A factor that relates to incentives or pressures to commit
fraudulent financial reporting is excessive pressure for management to meet dept repayment requirements.
20. The term "ethics" relates to an individual's propensity to
abide by the laws of the land.
21. The profession of Certified Public Accountants has deemed it
essentia'I to promulgate a code of conduct and to establish a
mechanism for enforcing observance of the code because a
prerequisite to success is the establishment of an ethical
code that stresses primarily the CPA's responsibility to clients
and colleagues.
22. The CPA's independence would not be considered to be irn·
paired when the CPA has been retained as the auditor of a
restaurant where the CPA dines frequently.
23. In determining ~stimates of fees, an auditor may take into
account the attainment of specific findings.
CHAPTER
3
The CPA's Professional Responsibilities
203
24. The CPA's independence would not be considered to be impaired when the CPA has been retained as the auditor of a
brokerage firm in which the CPA's brother is the controller.
2s.
Except in emergency situations, a CPA firm is prohibited
from providing accounting and bookkeeping services to public-interest audit clients.
204
C~A EXAMINATION REVIEWER:
KEY
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
B
B
D
B
c
A
A
D
D
A
A
A
A
c
A
A
D
D
B
A
B
c
c
A
c
A
c
D
D
A
AUDITING THEORY
ANSWERS
31.
32.
33.
34.
35.
36.
37.
38.
39.
40.
41.
42.
43.
44.
45. '
46.
47.
48.
49.
50.
51.
52.
53.
54.
SS.
56.
57.
58.
59.
60.
D
B
D
D
A
c
c
61.
62.
63.
64.
65.
66.
67.
68.
69.
70.
71.
A
B
B
72.
c
c
A
73. D
74. B
75. A
76. c
D
77.
c
c
c
78 ..
79.
80.
81.
82.
C
c
83.
c
84.
85.
86.
87.
88.
89.
90.
B
A
c
c
c
A
A
B
D
D
A
B
A
B
A
D
c
A
c
B
8
A
c
D
B
A
c
c
B
B
B
D
A
A
c
c
91.
9·2.
B
B
93.
94.
95.
96.
97.
98.
99.
100.
101.
102.
103.
104.
105.
106.
107.
108.
109.
110.
·111.
112.
113.
114.
115.
116.
117.
118.
119.
120.
D
A
B
D
c
B
c
B
c
A
c
D
D
c
c
D
c
A
A
B
D
B
c
D
A
B
A
D
141.
122.
123.
124.
125.
126.
127.
128.
129.
130.
131.
132.
133.
134.
135.
136.
137.
138.
139.
140.
141.
142.
143;
144.
145.
146.
147.
c
D
A
c
B
A
c
A
c
A
D
A
A
D
B
B
D
B
c
A
B
D
B
A
B
D
c
148. D
149. B
1so.
c
CHAPTER
3
205
The CPA's Professional-Responsibilities
TRUE OR FALSE
1. False
6. True
11. True
16. False
21. False
2. False
7. False
12. False
17. True
22. True
3. True
8. False
13. False
18. True
23.
4. False
9. True
14. True
19. True
24. False
10. False
15. True
20. False
25. True
s.
True
False