AUDITING THEORY

Quizzer 4:
1. The Code of Ethics for Professional Accountants in the Philippines is
a. Mandatory for all CPAs
b. Mandatory for CPAs in public practice
c. Mandatory for CPAs in Government
d. Not mandatory

2. Which of the following statements best describes why the profession of

CPAs has deemed it essential to promulgate a code of professional ethics
to establish a mechanism for enforcing observation of the Code?
a. A distinguishing mark of a profession is its acceptance of
responsibility to the public.
b. A pre-requisite to success is the establishment of an ethical code
that primarily defines the professional’s responsibility to clients
and colleagues.
c. A requirement of most state laws calls for the profession to establish
a code of ethics.
d. An essential means of self-protection for the profession is the
establishment of flexible ethical standards by the profession.

3. The following steps are part of the conceptual framework approach. Set
the steps in proper order.
I. Address threats which are other than clearly insignificant through
the application of safeguards.
II. Evaluate the significance of threats to compliance with
fundamental principles.
III. Identify threats to compliance with the fundamental principles.

a. I, II, III c. III, I, III

b. II, III, I d. III, II, I

4. If a CPA cannot implement appropriate safeguards, the professional

accountant should do the following, except:
a. Decline the specific professional service involved.
b. Discontinue the specific professional service involved.
c. Resign from the client or the employing organization, as necessary.
d. Issue an adverse opinion on the subject matter of the engagement.

5. An inadvertent violation of the Code of Ethics, depending on the nature

and significance of the matter, may not compromise compliance with the
fundamental principles involved, once the violation is discovered,
a. The CPA withdraws from the specific professional service involved.
b. A disclaimer of opinion is issued to the client as a result of the
violation.
c. The violation is corrected promptly and any necessary safeguards are
applied.
d. The engagement is promptly transferred to another professional
accountant who has not committed the violation.

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6. A CPA should maintain objectivity and free of conflicts of interest
when performing:
a. Audits, but not any other professional services
b. All attestation services, but not other professional services.
c. All attestation and tax services, but not other professional
services.
d. All professional services.

7. Which of the following fundamental ethical principles requires a

professional accountant to be straightforward and honest in all
professional and business relationships?
a. Objectivity c. Professional competence and due care
b. Professional behavior d. Integrity

8. Prior to beginning of field work on a new audit engagement in which

a CPA does not possess expertise in the industry in which the client
operates, the CPA should:
a. Reduce the audit risk by lowering the preliminary levels of
materiality.
b. Design special substantive tests to compensate for the lack of
industry expertise.
c. Engage financial experts familiar with the nature of the industry.
d. Obtain a knowledge of matters that relate to the nature of the
entity’s business.

9. A CPA shall not disclose confidential information obtained during an

audit engagement in which one of the following situations?
a. When the security of the state so requires.
b. With the consent of the client.
c. In defense of himself when sued by the client.
d. Under the rule against disclosing confidential information.

10. In which of the situations given below would disclosure by a CPA be

in violation of the Code?
a. Disclosing confidential information in order to properly discharge
the CPA’s responsibilities in accordance with his profession’s
standard.
b. Disclosing confidential information in compliance with a subpoena
issued by a court.
c. Disclosing confidential information to another accountant interested
in purchasing the CPA’s practice.
d. Disclosing confidential information in a review of the CPA’s
professional practice by the Quality Review Committee.

11. According to the Code of Ethics, professional competence may be

divided into two phases: attainment of professional competence and
maintenance and maintenance of professional competence. The
attainment of professional 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.
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 d. A continuing awareness and an understanding of relevant technical
professional and business developments.

12. Which of the following threats to compliance with the fundamental

principles may occur as a result of the financial or other interests
of a professional accountant or of an immediate or close family
member?
a. Self-interest
b. Self-review
c. Advocacy
d. Familiarity

13. 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.

14. 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 client.
b. Performing a service for an 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.

15. 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 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.

16. The following circumstances may create intimidation threat, except

a. A firm being pressured 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.

17. If the fee quoted for a professional service is so 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
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 a. Professional competence and due care.
b. Objectivity.
c. Integrity
d. Professional behavior.

18. The state of mind that permits the provision of an opinion without
being affected by influences that compromise professional judgment.
a. Professional skepticism
b. Integrity
c. Objectivity
d. Independence in mind

19. The avoidance of facts and circumstances that are so significant a

reasonable and informed party, having knowledge of all relevant
information, would reasonably conclude a CPA’s integrity, objectivity
or professional skepticism had been compromised.
a. Principle of segregation
b. Independence in Appearance
c. Functional integrity
d. Preemptive estoppel

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 interests 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 without being
affected by influences that compromise professional judgment.

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23. For assurance engagement provided to an audit client, the following
should be independent from the client:
a. The members of the assurance team
b. The firm
c. Network firms
d. All of these

24. Which of the following situations would a CPA be in violation of the

rules of professional ethics in determining the professional fees?
a. A fee based on appropriate rates per hour or per day for the time of
each person engaged in performing professional services.
b. A fee is lowered compared to the fee charged in the prior year for
similar services.
c. A fee based on appropriate rates per hour, where the appropriate rate
is based on the fundamental premise that the organization and conduct
of the CPA and the services provided to clients are well planned,
controlled and managed.
d. A fee that is based on 10% of the client’s net income for the current
year.

25. The rendering of two or more types of professional services

concurrently:
a. Is a violation of the code of ethics.
b. Would impair integrity, objectivity or independence, or the good
reputation of the profession.
c. Does not by itself impair integrity, objectivity, or independence.
d. Is inconsistent with the practice of public accountancy.

26. Which statement is incorrect regarding custody of client’s asset?

a. Client’s asset should not be held by a CPA if there is reason to
believe that the assets were obtained from, or are to be used for,
illegal services.
b. A CPA in public practice should maintain one or more bank accounts
for client’s monies.
c. Monies may only be drawn from the client’s account on the instructions
of the client.
d. Fees due from a client may be drawn from client’s monies without the
need of notifying the client.

27. Which statement is incorrect regarding CPAs in business?

a. CPAs in business owe a duty of loyalty to their employer as well as
to the profession, therefore there may be no time that the two will
be in conflict.
b. A CPA, particularly one having authority over others, should give
weight for the need for them to develop and hold their own judgment
in accounting matters and should deal with difference of opinion in
a professional way.
c. When undertaking significant tasks for which a CPA has not had
sufficient specific training or experience, he or she should not
mislead the employer as to the degree of expertise or experience he
or she possesses, and where appropriate, expert advice and assistance
should be sought.
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 d. A CPA is expected to present financial information fully, honestly
and professionally and so that it will be understood in its context.

28. One difference between auditors and other professionals is that most
professionals:
a. Need not be concerned about remaining independent.
b. Don’t have requirements for continuing education beyond college.
c. Don’t have to pass a rigorous examination.
d. Aren’t expected to act in public interest.

29. Statement 1: A CPA can relax the confidentiality rule when in a social
environment.
Statement 2: A CPA should also maintain confidentiality of information
disclosed by a prospective client or employer.
a. True, false c. true, true
b. False, true d. false, false

30. The nature and significance of threats may differ depending on whether
they arise in relation to the provision of services to a client. In
which of the following types of clients would the Revised Code provide
the strictest set of requirements regarding independence?
a. A financial statement audit client.
b. A non-financial statement audit assurance client.
c. A non-assurance client
d. A non-client

31. Appropriate safeguards during client acceptance may include:

a. Obtaining knowledge and understanding of the client.
b. Obtaining knowledge and understanding about the client’s owners,
managers and those responsible for its governance and business
activities.
c. Securing the client’s commitment to improve corporate governance
practices or internal controls.
d. All of these.

32. Regarding conflicts of interest, the following safeguards are

applicable (select the exception):
a. Notifying the client of the firm’s business interest or activities
that may represent a conflict of interest, and obtaining their
consent to act in such circumstances.
b. Notifying all known relevant parties that the CPA in public practice
is acting for two or more parties in respect of a matter where their
respective interests are in conflict, and obtaining their consent to
so act.
c. Notifying the client that the CPA in public practice does not act
exclusively for any one client in the provision of proposed services
and obtaining their consent to so act.
d. Clear guidelines for members of the client personnel on issues of
security and confidentiality.

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33. A client seeking a second opinion does not permit the CPA to
communicate with the existing accountant. In such cases, the CPA
should:
a. Issue a disclaimer of opinion due to a significant client-imposed
scope limitation.
b. Consider whether, taking all the circumstances into account, it is
appropriate to provide the opinion sought.
c. Consider whether to issue a qualified opinion or disclaimer of
opinion due to a significant client-imposed scope limitation.
d. Communicate client’s refusal directly to the existing accountant.

34. The payment or receipt of referral fees or commissions may create

threats to which fundamental principles?
I. Integrity
II. Objectivity
III. Professional competence and due care
IV. Professional behavior

a. I and III c. II, III and IV

b. I and IV d. II and III

35. A CPA in business may be:

a. A salaried employee.
b. A partner, director, (whether executive or non-executive) or an owner
manager.
c. A volunteer or another working for one or more employing
organization.
d. Any of these.

36. A CPA in business or an immediate or close family member may be

offered an inducement or pressured to offer inducements. Inducements
may take various forms, including
a. Gifts and hospitality
b. Preferential treatment
c. Inappropriate appeals to friendship or loyalty
d. Any of these.

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