Chapter 3: The CPA’s Professional Responsibilities Show A. Code of Ethics for Professional Accountants in the Philippines 1. The Code of Ethics for Professional Accounts 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 illustrate how the framework is to be applied in specific situations 2. Which part of the Code of Ethics applies to professional accountants in public practice? a. Part A b. Part B c. Part C 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 4. The following statements relate to the fundamental principles of professional ethics: A B C D Integrity implies fair dealing and truthfulness True True False False The principle of objectivity imposes an obligation on all professional accountants to maintain professional knowledge and skill at the level required True False True False 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. 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 6. 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 specific 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 7. According to the Code of Ethics, professional competence may be divided into two phase: attainment 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 professionally relevant subjects c. Whether prescribed or not, a period of work experience d. A continuing awareness and an understanding of relevant technical professional and business developments 8. The Code of Ethics provides a Conceptual Framework for applying the fundamental ethical principles. This framework requires a professional accountant to I. Identifying threats to compliance with the fundamental principles II. Evaluate the significance of the identifies threats III. Apply safeguards to eliminate the threats or reduce them to an acceptable level a. I and II only b. I and III only c. II and III only d. I, II, and III 9. Which of the following threats to compliance with the fundamental principles may occur as a result of the financial or other interest of a professional accountant or of an immediate of close family member? a. Self-interest b. Self-review c. Advocacy d. Familiarity 10. 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 professional, legislation of regulation II. Safeguards in the work environment III. Resign from the client or the employer IV. Decline or discontinue the professional engagement a. I and II only b. III and IV only c. I and IV only d. II and III only 11. Safeguards created by the profession, legislation or regulation 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 profession 12. Which of the following circumstances may create self-interest threat for a professional accountant in public practice? a. A member of the assurance team having a direct financial interest in the assurance clients b. Performing a service for an assurance client that assurance client that directly 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 disputes with third parties 13. 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 14. The following circumstances may create intimidation threat, EXCEPT a. A firm being threatened with dismissal from a client engagement b. A firm being pressured to reduce inappropriately the extent of work performed in order to reduce fees c. A firm being 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 15. On which of the following safeguards a professional accountant in public practice cannot rely solely to reduce threats to an acceptable level? a. Safeguards created by the profession, legislation or regulation b. Firm-wide safeguard c. Engagement specific safeguards d. Safeguards within the client’s system and procedures 16. Which of the following is an example of engagement-specific safeguards in the work environment? a. Advising partners and 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 concern them 17. If the fee quoted for a professional service is a low, it may be difficult for the CPA to perform the engagement in accordance with applicable technical and professional standards for that price. This situation may create a self-interest threat to a. Professional competence and due care b. Objectivity c. Integrity d. Professional behavior 18. 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 19. Which of the following is NOT a contingent fee? a. A fee that is dependent upon the approval of the assurance client’s load 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 public authority d. An arrangement whereby no fee will be charged unless a specified finding or result is attained 20. The Code of Ethics requires that members of assurance teams, firms and, when applicable, 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 appearance 21. 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 interest in the affairs of an assurance client d. Performing an assurance service from the viewpoint of the public 22. 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 professional judgment 23. 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 control 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 24. The Code of Ethics provides that where the larger structure is aimed at cooperation and the entities within the structure share a significant part of professional resources, it is considered to be a network. Professional resources include the following, EXCEPT a. Audit methodology or audit manuals b. Training courses and facilities c. Brand name d. Partners and staff 25. 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 interest creating the threat II. Refusing to accept or continue the assurance engagement a. I only b. II only c. Neither I nor II d. Either I or II 26. When identifies 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 c. Neither I nor II d. Both I and II 27. 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 28. A self-interest threat may be created when a member of the assurance team knows that is 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 29. A loan, or guarantee of a loan, to the firm from an assurance client that is a bank or s 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 30. A loan, or a guarantee of a loan, from an assurance client that is a ban 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, on 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 leading procedures, terms and requirements 31. 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 assurance client that is a bank or a similar institution and the loan or guarantee is made under normal lending procedures, 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 assurance 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 assurance 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 assurance 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 32. A self-interest threat would be created if the firm, or a member of the assurance team, makes a loan to an assurance client that is NOT a bank or similar institution, or guarantees such an assurance client’s borrowing. The self-interest 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 of the member of the assurance team and the assurance client 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 load or guarantee is immaterial to both the firm or the member of the assurance team and the assurance client 33. 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 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 of 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 and the assurance client 34. A close business relationship between a firm or a member of the assurance team and the assurance client or its management, or between the firm, a network firm and financial statement audit client may create a. Self-interest and intimidation threats b. Self-review and familiarity threats c. Advocacy and self-review threats d. Self-interest and self-review threats 35. Which of the following threats to independence may be created by family and personal relationships between a member of the assurance team and 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 36. When an immediate family member of a member of the assurance 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 37. When a close family member of a member of the assurance team is a director, an officer, or an employee of the assurance client in a position to extent 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 38. 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 39. Using the same engagement partner or the same individual of 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 40. In the financial statement audit of listed entities, the engagement partner and the individual responsible for the engagement quality control review should be rotated after serving in either capacity, or a combination thereof, for a pre-defined period, normally no more than a. 5 years b. 7 years c. 10 years d. 6 years 41. The Code states that when a financial statement audit client becomes a listed entity, the length of the time the engagement partner or the individual responsible for the engagement quality control review has served the audit client in that capacity should be considered in determining when the individual should rotated. Before rotating off the engagement, the person is allowed to continue to serve as the engagement partner or as the individual responsible for the engagement quality control review for a. 3 additional years b. 1 additional years c. 2 additional years d. 4 additional years 42. Which of the following would NOT generally create a threat to independence? a. The purchase of goods and services from an assurances 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 financial statement audit client c. Determining which recommendations of the frim should be implemented d. Reporting, in a management role, to those charged with governance 43. The following activities may create self-interest of self-review threats, EXCEPT a. Preparing source documents or originating data evidencing the occurrence of a transaction b. Supervising assurance client employees in the performance of their normal recurring activities c. Having custody of an assurance client’s assets d. Using the same senior personnel on an assurance engagement over a long period of time 44. 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 45. 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 business 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 46. 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 eliminate self-review threat created or reduce it to an acceptable level? a. Confirming with the audit client their understanding of the underlying assumptions of the valuation and 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 firm. 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 evaluation services involves the valuation of matters material to the financial statements and the valuation involves significant degree of subjectivity, the self review threat could not be reduced to an acceptable level by application of any safeguard. Accordingly, such valuation services should not be provided or, alternatively, the only course of action could be to withdraw from 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. 47. 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 networking firm, provides internal audit services to an 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. d. The provision of services in connection with the assessment, design, and implementation of internal accounting controls 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. 48. Litigation support services include the following activities, except a. Acting an expert witness b. c. d. Providing assistance to an audit client’s internal legal department. Calculating estimated damages or amounts that might become receivable or payable as the result of litigation or other legal dispute. 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. 49. What threat to independence is created when the litigation support services provided 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. b. c. d. Self-review threat Advocacy threat Intimidation threat Familiarity threat 50. 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; and the provision of assistance to a client’s internal legal department. The provision of legal services by a firm, or a network firm, to an audit client may create a. b. c. d. Self-interest threat Self review and advocacy threats. Advocacy and intimidation threats. Familiarity and intimidation threats 51. The following statements relate to the provision of legal services to an audit client. Which is incorrect? a. b. c. d. The provision of legal services to an audit client involving matters that would not be expected to have material effect on the financial statements may create a self review threat. Legal services to support an audit client in the execution of a transaction (eg. contract support) may create a self-review threat. 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. 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 threats to acceptable level. According to the Code, provision of legal services to an audit client involving matter that would not be expected to have a material effect on the financial statements is not considered to create an unacceptable threat to independence. 52. The recruitment of senior management for an audit client may create the following current or future threats to independence except a. b. c. d. Self -interest threat Familiarity threat Intimidation threat Self review threat 53. The provision of corporate finance services, advice or assistance 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 54. 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 concern about the possibility of losing the client may create a/an a. Self-interest threat b. Self-review threat c. Intimidation threat d. Advocacy threat 55. What threat to independence may be created when the fees generated by the assurance client represent a large proportion of revenue of an individual of the firm? a. Self-review threat b. Familiarity threat c. Self-interest threat d. Advocacy threat 56. 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 of the following year? a. b. Advocacy threat Se-interest threat c. d. Intimidation threat Self-review threat 57. These are fees calculated on a predetermined basis relating to the outcome or result of the transaction or the result of the work performed. a. b. c. d. Contingent fees Fixed fees Predetermined fee Commissions 58. What threats to independence are created when a contingent fee is charged by a firm in respect of an assurance engagement? a. b. c. d. Self-interview and intimidation threats Self-interest and advocacy threats Familiarity and intimidation threats Self -interest and self-review threats It should be noted that the self-interest and advocacy threats created cannot be reduced to an acceptable level by application of any safeguard. Therefore, a firm should not accept an assurance engagement if the fee is contingent on the result of the assurance work or on items that are the subject matter of the assurance engagement. 59. Accepting gifts or hospitality (unless inconsequential or trivial) may create a. b. c. d. Self-interest and familiarity threats Advocacy and intimidation threats Familiarity and self-review threats Self-interest and self-review threats 60. Which of the following threats to independence may be created when litigation takes place, or appears likely, between the firm or a member or the assurance team and the assurance client? a. Disclosing to the audit committee, or others charged with governance, the extent and nature of litigation. b. c. d. If the litigation involves a member of the assurance team removing that individual from the assurance team. Involving an additional professional accountant in the firm who was not a member of the assurance team to review the work or otherwise advise as necessary Withdraw from, or refuse to accept, the assurance engagement. The withdrawal from, or refusal to accept, the assurance engagement 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. 62. Which of the following is not a factor to consider on determining the professional fee of a professional accountant in public practice. a. b. c. d. The skill and knowledge required for the type of professional services involved. The result of the assurance work The level of training and experience of the persons necessarily engaged in performing the professional services. 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. 63. Janus de Belen, CPA, was offered the engagement to audit the financial statements of Cobra Co. for the year ended December 31, 2013. Janus had served as a director of Cobra until December 31, 2011, and his spouse currently owns 1000 of 200,000 outstanding shares of Cobra. Janus disassociated from Cobra prior to being offered the engagement. 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. b. c. d. Decline the engagement because of his spouse’s stock ownership. Accept the engagement. Decline the engagement because he had served as director. Accept the engagement because his spouse’s stock ownership is an indirect financial interest. 64. Under the Code of Ethics a. b. c. d. An immediate family member of a professional accountant, whether or not in public practice, may not accept a gift from client. A close relative of a professional accountant not in public practice may not accept a gift from a client. A professional accountant in public practice may accept an inconsequential gift from a client. A professional accountant, whether or not in public practice, may not accept a gift from a client. 65. As defined in Code of Ethics,_______is the communication to the public information as to the services or skills provided professional accountants in public practice with a view to procuring professional business. a. b. c. d. Advertising Publicity Solicitation Marketing professional services 66. As defined in the Code of Ethics,_______is the communication to the public of facts about professional accountant which are not designed for the deliberate promotion of that professional accountant. a. b. c. d. Advertising Publicity Solicitation Marketing professional services 67. The following statements relate to the provisions of the Code of Ethics that deal with the professional accountant’s marketing professional services. Which is false? a. b. c. d. 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. The professional accountant should be honest and truthful when marketing professional services. Advertising and publicity are generally acceptable. When 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) b) c) d) It has 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; It is in good taste; It is professionally dignified; and It avoids frequent repetition of, and any undue prominence being given to, the name of the firm or professional accountant in public practice. 68. A professional accountant in public practice is allowed to a. b. c. d. Refer to use or cite actual or purported testimonials by third parties. Publish services in billboard (e.g. tarpaulin, streamers, etc.) advertisements. Publish and compare fees with other CPA’s or CPA firms or compare those services with those provided by another firm or CPA practitioner. Inform interested parties through any medium that a partnership or salaried employment of an accountancy nature is being sought. According to BOA Resolution No.126 Series of 2008, the following shall not be allowed. a) b) c) d) e) f) g) Self--laudatory statements. Discreting, disparaging, or attacking other firms or CPA practitioners. Referring to using or citing actual or purported testimonials by third parties. Publishing and comparing fees with other CPAs or CPA firms or comparing these services with those provided by another firm or practitioner. Giving too much emphasis on competitive differences. Using words or phrases which are hard to define and even more difficult to substantiate objectively. Publishing services in billboard (e.g. Tarpaulin streamers etc.)Advertisements. 69. Which of the following statements concerning publicity is incorrect? a. Booklets and other documents bearing the name of 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 partied. b. Professional accountants who author books or articles on professional qualifications; give the name of their organization; and give any information as to the services that the firm provides. c. Appropriate newspaper or magazines may be used to inform the public of the establishment of a new practice, or of any alteration 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. 70. The holding of media-covered events undertaken only to commemorate a professional accountants anniversaries in public practice does not violate the rules on advertising and solicitation provided that such undertaking should be done only every ___years of celebration. a. b. c. d. 5 10 20 25 71. A professional accountant in public practice may issue to clients or response to an unsolicited request, to a non-client I. II. a. b. c. d. A factual and objectively worded to brochure of the services provided. A directory setting out names of partners, office addresses and names and addresses of associated firms and correspondents. I only II only Both I and II Neither I nor II 72. Which of the following statements concerning publicity is incorrect? a. A professional accountant may write a letter or make a direct 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 providing 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. B. OTHER PROFESSIONAL RESPONSIBILITIES I. II. The firm and its personnel comply with professional standards and applicable legal and regulatory requirements. Reports issued by the firm or engagement partners are appropriate in the circumstances. a. b. c. d. I only II only Both I and II Neither I nor II 74. The firm’s system of quality control should include policies and procedures that address each of the following elements, except a. b. c. d. Monitoring Control environment Relevant ethical requirements 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) b) c) d) e) f) Leadership responsibilities for quality within the firm Relevant ethical requirements. Acceptance and continuance of client relationships and specific engagements. Human resources Engagement performance Monitoring Control environment is a component of an entity’s internal control system. 75. 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? Ethical requirements No Yes Yes No a. b. c. d. Human resources Yes No Yes No Engagement Performance Yes No Yes Yes 76. Which of the following quality control element of CPA firm’s quality control system that should considered in establishing its quality control policies and procedures? a. b. c. d. Considering audit risk and materiality Managing human resource Using statistical sampling techniques Complying with laws and regulations 77. Which of the following g quality control elements is most closely associated with the requirement to promote a culture a quality? a. b. c. d. Monitoring Leadership responsibilities for quality within the firm Engagement performance Human resources 78. The statement,”Quality control policies and procedures should be relevant, adequate, effective, and complied with” is more closely associated with that quality control element? a. b. c. d. Engagement performance Leadership responsibilities for quality within the firm Monitoring Relevant ethical requirements 79. This quality control element requires a firm to establish policies and procedures to provide it with reasonable assurance that engagements are performed in accordance 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. b. c. d. Ethical requirements Engagement performance Monitoring Human resources 80. 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 acceptable level by applying safeguards, or, if considered appropriate, to withdraw from the engagement . Which quality control element would this be most likely satisfy? a. b. c. d. Ethical requirements Monitoring Human resources Leadership responsibilities for quality within the firm 81. The primary purpose of establishing quality control 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. b. Enable the CPA firms to attest to the reliability of the client. c. 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. According to PSQC 1, a firm should establish policies and procedures for the acceptance and continuance of client relationships and specific engagement, 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. 82. 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 selection of completed engagements, designed to provide the reasonable assurance that its system of quality control is operating effectively. a. b. c. d. Monitoring Inspection Engagement quality control Supervision 83. The firm shall obtain written confirmation of compliance with its policies and procedures on independence from all firm personnel required to be independent by relevant ethical requirements a. b. c. d. At least annually At least monthly At least semi-annually At the completion of each engagement. 84. 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. b. c. d. Monitoring Leadership responsibilities for quality within the firm Human resources Engagement performance 85. The firm shall establish policies and procedures designed to provide 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 in which include the following, except a. b. c. Integrity Objectivity 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 86. The audit work performed by each assistant should be reviewed by a 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 adequately documented. c. Audit procedures performed are approved in the professional standards. d. Audit procedures performed are in accordance with Philippine 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) e) The objectives of the audit procedures have been achieved; and The conclusions expressed are consistent with the results of the work performed and support the audit opinion. 87. The nature timing and extent of an audit firm’s quality control policies and procedures depend on The CPA Firm’s size a. b. c. d. Yes Yes No Yes The nature of the CPA Firm’s Practice Yes Yes No No Appropriate Costbenefit considerations No Yes 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. 88. An audit firm should implement quality control policies and procedures designed to ensure that all audits are conducted accordance with PSA’s or relevant national standards or practices. These policies and procedures should be implemented a. b. c. d. At the audit level only On individual audits only Either at the audit firm level or an individual audits Both at the audit firm level and on individual audits 89. For audits of financial statements of listed entities, the engagement partner should not issue the auditor’s report until the completion of the a. b. c. d. Engagement quality control review Management Review Engagement Team Review 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 report, of the significant judgments the engagement team made and the conclusions it reached in formulating the report.” The Standard provides further that and engagement quality control review is for audits of financial statements of listed entities, and those other engagements, if any, for which the firm has determined an engagement quality control review is required. 90. The following statements relate to 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 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. 91. The engagement partner should be satisfied that appropriate procedures regarding the acceptance and continuance of client relationships and specific audit engagements have been followed and that conclusions reached in this regard are appropriate and have been documented. Acceptance and continuance of client relationships and specific audit engagements include considering: I. II. III. a. b. c. d. The integrity of the principal owners, key management, and those charged with governance of the entity. Whether the engagement team is competent to perform the audit engagement and has the necessary time and resources. Whether the firm and the engagement team can comply with ethical requirements. I only I and II only II and III only I, II, and III 92. 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. b. Tracking the progress of the audit engagement. 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 responsibilities. 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 information the members of the engagement team of their responsibilities the nature of the entity’s business; risk related issues; problems that may arise; and the detailed approach to the performance of the engagement. In addition to those activities described in answers A,B and D, supervision also includes considering the capabilities and competence of individual members of the engagement team, whether they have significant time to carry out their work, whether they understand their instructions, and whether the work is being carried out in accordance with planned approach to the audit engagement. 93. Who should take responsibility for the overall quality on each audit engagement? a. b. c. d. Engagement quality control reviewer Engagement partner Engagement team CPA Firm 94. The implementation of quality control procedures that are applicable to the individual audit engagement is the responsibility of the a. b. c. d. CPA firm Engagement quality control reviewer Engagement team Expert contracted by the firm in connection with the engagement THE AUDITOR’S RESPONSIBILITIES RELATING TO FRAUD IN AN AUDIT FINANCIAL STATEMENTS 95. Misstatements in the financial 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 statement is a. b. c. d. Simple or complex Intentional or unintentional Voluntary or involuntary Planned or unplanned 96. “Error” includes a. Engaging in complex transactions that are structures to misrepresent the financial position or financial performance of the entity. b. Concealing, or not disclosing, facts that could affect amounts recorded in the financial statements. c. An incorrect accounting estimate arising from oversight or misinterpretation of facts. d. Intentional misapplication of accounting policies relating to amounts, classification, manner of presentation, or disclosure. 97. Fraud involving one or more members of management or those charges with governance is referred to as a. b. c. d. Management fraud Employee fraud Fraudulent financial reporting Misappropriation of assets 98. The auditor is concerned with fraud that causes a material misstatement in the financial statements. There are two types of intentional misstatements that are relevant to the auditor: misstatements resulting from fraudulent financial reporting and misstatements resulting from a. b. Management fraud Employee fraud c. d. Misappropriation of assets Collusion with the entity or with third parties 99. Fraudulent financial reporting involves intentional misstatements to deceive financial statement users. It may be accomplished in a number of ways, including a. b. c. d. Embezzling receipts Stealing physical assets or intellectual property Using an entity’s assets for personal use Manipulation, falsification, or alteration of accounting records or supporting documentation from which the financial statements are prepared. 100. Which of the following conditions are generally present when misstatements due to fraud occur. I. II. III. Incentive or pressure Perceived opportunity Rationalization a. b. c. d. I and II only II and III only I and III only I, II, and III Fraud involves the incentive or pressure to commit fraud, a perceived opportunity to do so, and some rationalization of the act. 101. 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 risk of material misstatement is least likely to be increased if management. a. Is interested in inappropriate means of minimizing reported earnings for tax purposes. b. c. Commits to unduly aggressive forecasts. Operating and financing decisions are made by numerous individuals. d. Has an excessive interest in increasing the entity’s share price through the application of unduly aggressive accounting practices. 102. Three conditions are generally present when fraud occurs. Which of the following is not of them? a. b. c. d. Attitude or rationalization about the act of fraud. Opportunity to commit fraud Professional skepticism about the likelihood of fraud. Incentive or pressure to commit fraud. 103. which of the following is a required audit planning procedure concerning potential fraud? a. Consider whether estimates prepared and recorded b y 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. 104. 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 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 documents; 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. 105. What is the 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. c. By stealing cash from customer A and then using customer B’s balance to pay customer A’ account receivable. d. By the conversion of the stolen assets into cash. 106. 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. d. Most perpetrators invest their illegal income rather than spend it, thus concealing key evidence. 107. A classification of fraud where the perpetrator causes a company to pay 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 108. 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 109. Stealing a master list of customers and sealing it to a competitor is an example of what classification of fraud? a. Output theft b. Data theft c. Disbursement fraud d. Cash receipts fraud 110. 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. 111. The following are examples of misappropriation of assets, except a. The treasure 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 management changes inventory count tags and overstate 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. 112. Which of the following statements best describes an auditor’s responsibility regarding misstatements? a. An auditor should obtain reasonable assurance that financial 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 concealed 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 non compliance 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 material misstatement, whether caused by fraud or error”. 113. When obtaining an understanding of the entity and its environment, including its internal control, the auditor may identify events or conditions that indicate an incentive or pressure 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 114. The following are examples of fraud risk relating to misstatements arising from appropriation of assets, except a. Recurring negative cash flows from operating activities while reporting earnings and earnings growth. 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. 115. Opportunities to misappropriate assets increase when there are a. Known or anticipated future employee layoffs b. Promotion, 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/ rationalization. Opportunities to misappropriate assets increase when there are: l Inventory items that are small in size, of high value, or in high demand. l Large amounts of cash on hand or processed. l Easily convertible assets, such as bearer bonds computer chips, or diamonds. l Fixed assets which are small in size, marketable, or lacking observable identification of ownership. Answers A, B, and C are incorrect because they may create adverse relationships between the entity and employees that may motivate them to misappropriate the entity’s assets. 116. Which of the following conditions or events may create incentives/pressures to commit. a. Inadequate system or authorization and approval of transactions. b. Lack mandatory vacations for employees performing key control functions. c. Excessive pressure on management or operating personnel 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 opportunities to commit fraud. 117. Because of the risk of material misstatement, an audit of financial statements in accordance with PSAs should be planned an performed with an attitude of 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. 119. When planning the audit, the auditor should make inquiries of management. Such inquiries should address the following, except 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 risk 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 discussed by the auditor with other members of the audit team. 120. 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 entity’s financial yearend 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, obsolescence, or interest rates. Significant, unusual, or highly complex year-end transactions may provide opportunities to engage in fraudulent financial reporting. 121. 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 is increasing stock price or earnings trend through aggressive accounting practices. b. Effective accounting and internal control systems. c. Low turnover senior management, legal counsel, or those charged with governance d. Management is denominated by a single person or a small group with compensating controls such as effective oversight by those charged with governance. 122. 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 B C D Type of fraud or error indicated No Yes Yes No Likelihood of occurrence Yes No Yes No Likelihood that a particular type of fraud or error could have a material effect on the financial statements Yes No Yes No 123. 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. 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. 124. PSA 230 (Audit Documentation) requires the auditor to document matters which are important in providing evidence to support the audit opinion, and states that the working papers include the auditor’s reasoning on all significant matters which require the auditor’s judgment, together with the auditor’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 does not required documentation of the identified fraud risk factors and the auditor’s responses to them. PSA 240 states that because of the importance of fraud risk factors in the assessment of the inherent or control risk of material misstatement, the auditor documents fraud risk factors identified and the response considered appropriate by the auditor. 125. Because of the nature of fraud and the difficulties encountered by auditors in detecting material misstatements in the 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. 126. Which of the following statements concerning the auditor’s responsibility to detect conditions relating to financial stress of employees or adverse relationships between a company and its employee 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 to detect these conditions when the client is exposed to a risk of misappropriation of assets. d. The auditor is not required to plan the audit to discover these conditions, but should consider them if he/she becomes aware of them during the audit. 127. The following statements relate to communication of misstatements resulting from fraud to management and to those charged with governance. Which is false? a. The auditor need not bring to the attention of those charged with governance any material weaknesses internal control related to the prevention and detection of fraud. b. If the auditor has identified a fraud, whether or not it results in a material misstatement in the financial statements, 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 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 not 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 charged with governance. d. The auditor’s communication with those charged with governance may be made orally or in writing. CONSIDERATION OF LAWS AND REGULATIONS IN AN AUDIT OF FINANCIAL STATEMENTS 128. As used in PSA 250, this term refers to acts of omission 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. Deplorable acts d. Unforgivable acts 129. According to PSA 250, the term “non compliance” as used in the standard refers to acts of omission or commission by the entity being audited, either intentional or unintentional, which are contrary to the prevailing laws and 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 employees. 130. The responsibility for the prevention and detection of non compliance 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 entity’s operations are conducted in accordance with laws and regulations. 131. Which of the following statements best described why 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 accounting aspects rather than operating aspects. b. Non compliance may involve conduct designed to conceal it, such as collusion, forgery, deliberate failure to record transactions, senior management override of controls, or intentional misrepresentations being made to the auditor. c. Noncompliance may be perpetrated by the only person in the client’s organization with access to both assets and the accounting records. d. The client’s internal control may be so strong that the auditor performs only minimal substantive testing. 132. 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. 133. When the auditor becomes aware of information concerning a possible instance of noncompliance, the auditor should obtain an understanding of A B C D The nature of the act No Yes Yes No The circumstances in which it has occurred No Yes No Yes Sufficient other information to evaluate the possible effect on financial statements Yes Yes No No 134. 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 noncompliance that comes to the auditor’s attention. b. If the auditor suspects that members of senior management, including members of the board 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 supervisory board. c. The auditor should, as soon as practicable, communicate with those charged with governance, including matters that are clearly inconsequential or trivial. d. If in the auditor’s concludes that the noncompliance is believed to be intentional and material, the auditor should communication the finding without delay. 135. If the auditor concludes that the noncompliance has a material effect on the financial statements, and has not been properly reflected in the financial statements, the auditor should express a. A qualified opinion or an adverse opinion b. A qualified opinion or a disclaimer of opinion c. An disclaimer opinion d. An qualified opinion 136. If 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, the auditor should express a. A qualified opinion or an adverse opinion b. A qualified opinion or a disclaimer of opinion c. An adverse opinion d. An adverse opinion or a disclaimer of opinion. 137. 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 likely to have, occurred. c. The auditor is precluded by the entity from obtaining sufficient appropriate audit evidence to evaluate 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. COMMUNICATION WITH THOSE CHARGED WITH GOVERNANCE 138. 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 139. According to PSA 260, those matters that arise from 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 reporting and disclosure process are called a. Audit matters of governance interest b. Significant audit matters c. Auditors findings d. Material misstatements in the financial statements 140. 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 PSAs, 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 communication with those charged with governance may be made orally or in writing. PSA 260 states that audit matters of governance interest include those matters that have come to the attention of the auditor as a result of the performance of the audit. The auditor is not requires, in an audit in accordance with PSAs, to design audit procedures for the specific purpose of identifying matters of governance interest. 141. Audit matters of governance interest to be communicated to those charged with governance ordinarily include I. Audit adjustments, whether or not recorded by 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 to events and conditions that may cast significant doubt on the entity’s ability to continue as a going concern. a. I only b. I and II only c. I and III only d. I, II and III 142. PSA 260 requires the auditor to determine the relevant persons who are charged with governance and with whom audit matters of governance interest are communicated. For corporations covered by the SEC Code of Corporate Governance, which of the following is primarily responsible for corporate governance? a. President b. Controller c. Board of directors d. Management The Code of Corporate Governance promulgated by the Securities and Exchange Commission (SEC) states, “The Board of Directors is primarily responsible for the governance of the corporation.” 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 responsibilities. a. I only b. II only c. Neither I nor II d. Both I and II 144. Which of the following matters will an auditor most likely communicate to those with governance? a. The level of responsibility assumed by management for the preparation of the financial statements. 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 response rate from the entity’s customers in confirming accounts receivables. 145. Which of the following matters is an auditor most likely communicate to those charged with governance? I. Disagreements with management about matters significant 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 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 B B D B A A D B A A C A A D D B A B C C A C A C D D A D D 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 D C C C A A C C B C A C A D C C D A B A B A D C A C B A B 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 A C D B A C A B C D B A C C C B C B B C B A D A A C C B B 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103 104 105 106 107 108 109 110 111 112 113 114 115 116 D A B D C B C B C A C D D C C D C A A B B B C D A B A D C 117 118 119 120 121 122 123 124 125 126 127 128 129 130 131 132 133 134 135 136 137 138 139 140 141 142 143 144 145 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 D B C What is selfa. Self-interest threats—threats that arise from auditors acting in their own interest. Self-interests include auditors' emotional, financial, or other personal interests. Auditors may favor, consciously or subconsciously, those self-interests over their interest in performing a quality audit.
What are the threats to professionalism in accounting?Many threats fall into the following categories: (a) Self-interest; (b) Self-review; (c) Advocacy; (d) Familiarity; and (e) Intimidation. These threats are discussed further in Part A of this Code.
Which of the following may be considered by a professional accountant to eliminate or reduce identified threats to an acceptable level?100.13 Safeguards are actions or other measures that may eliminate threats or reduce them to an acceptable level. They fall into two broad categories: (a) Safeguards created by the profession, legislation or regulation; and (b) Safeguards in the work environment.
What are the threats faced by accountants in ensuring ethics in accounting?(C) During his professional career a professional accountant have to come across different threats like self- interest, self-review, advocacy, familiarity and intimidation which should be safeguarded by him by applying different techniques for different threats in order to maintain the dignity of accounting profession.
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Which of the following circumstances may create self interest threats for a professional accountant in public practice?
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