CPA REVIEW SCHOOL OF THE PHILIPPINES AT-7714 Manila AUDITING THEORY CPA Review CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS IN THE PHILIPPINES Part A - establishes the fundamentat principles of professional ethics for professional ‘accountants and provides a CONCEPTUAL FRAMEWORK for applying those principles. Part B - applies to professional accountants in public practice. Part C - applies to professional accountants in business. FUNDAMENTAL PRINCIPLES: A. INTEGRITY - to be straightforward and honest in all professional and business relationships, B. OBJECTIVITY — to not allow bias, conflict of interest or undue influence of others to override professional or business judgments. C. PROFESSIONAL COMPETENCE AND DUE CARE ~ to maintain professional knowledge and skill at the level required to ensure that a dient or employer receives. competent professional services based on current developments in practice, iegislation and techniques and act diligently and in accordance with applicable technical and professional standards. D. CONFIDENTIALITY - to respect the confidentiality of information acquired as a result of professional and business relationships and, therefore, not disclose any such information to ‘third parties without proper and specific authority, unless there is a legal or professional right or duty to disclose, nor use the information for the personal advantage of the professional accountant or third parties. E, PROFESSIONAL BEHAVIOR — to comply with relevant laws and regulations and avoid any action that discredits the profession. CONCEPTUAL FRAMEWORK APPROACH ‘The Code provides a framework to assist a professional accountant to identify, evaluate and respond to threats to compliance with the fundamental principles. If identified threats not at en acceptable level, a professional accountant should, where appropriate, apply safeguards to eliminate the threats or reduce them to an acceptable level, such that compliance with the fundamental principles is not compromised. THREATS TO COMPLIANCE WITH THE FUNDAMENTAL PRINCIPLES: A, SELF-INTEREST THREAT - the threat that a financial or other interest will appropriately influence the professional accountant’s judgment or behavior. B. SELF-REVIEW THREAT — the threat that a professional accountant will not appropriately evaluate the results of a previous judgment made or service performed by the professional accountant, or by another individual within the professional accountant’s firm or employing ‘organization, on which the accountant will rely when forming a judgment as part of providing a current service. C. ADVOCACY THREAT - the threat that a professional accountant will promote a client's or ‘employer's position to the point that the professional accountant’s objectivity is compromised. Page 1 of 10 PagesGPAR - MANILA ALTIMA D. FAMILIARITY THREAT - the threat that due to a long or close relationship with a client or ‘employer, a professional accountant will be too sympathetic to their interests or too accepting of their work. ~ INTIMIDATION THREAT - the threat that @ professional accountant will be deterred from acting objectively because of actual or perceived pressures, including attempts to exercise undue influence aver the professional accountant. ‘SAFEGUARDS THAT MAY ELIMINATE OR REDUCE THREATS TO AN ACCEPTABLE LEVEL 1. Safeguards created by the profession, legislation or regulation. Educational, training and experience requirements for entry into the profession. Continuing professional development requirements. Corporate govemance regulations, Professional standards. Professional or regulatory monitoring and disciplinary procedures. External review by @ legally empowered third party of the reports, returns, communications or information produced by a professionat accountant. —— Safeguards in the work environment. + Firm-wide safeguards ‘© Engagement specific safeguards. INDEPENDENCE Independence of mind ‘The state of mind that permits the expression of a conclusion without being affected by influences: that compromise professional judgment, thereby allowing an individual to act with integrity, and ‘exercise objectivity and professional skepticism. Independence in appearance ‘The avoidance of facts and circumstances that are so significant that a reasonable and informed third party would be likely to conclude, weighing all the specific facts and circumstances, that a firm's, or a member of the audit or assurance team's integrity, objectivity or professional ‘skepticism has been compromised. CONCEPTUAL APPROACH TO INDEPENDENCE 1, Identify threats to independence; 2. Evaluate the significance of the threats identified; and 3. Apply safeguards, when necessary, to eliminate the threats or reduce them to an acceptable level. MULTIPLE CHOICE QUESTIONS 1. Which of the following statements best explains why the CPA profession has found it essential to establish ethical standards and means for ensuring their observance? A. Vigorous enforcement of an established code of ethics is the best way to prevent unscrupulous acts. B, Ethical standards that emphasize excellence in performance over material rewards establish a reputation for competence and character. C. Adistinguishing mark of a profession is its acceptance of responsibility to the public.PAR - MANILA ATT ©. A requirement for a profession is to establish ethical standards that stress primarily a responsibility to clients and colleagues, 2. Which of the following fundamental ethical principles requires a professional accountant to act diligently and in accordance with applicable technical and professional standards? A. Objectivity B. Professional behavior C. Professional competence and due care D. Integrity 3. Which part of the Code establishes the fundamental principles of professional ethics for professional accountants and provides a conceptual framework that professional accountants shall apply to identify threats to compliance with the fundamental principles, * evaluate the significance of the threats identified, and apply safeguards, when necessary, to eliminate the threats or reduce them to an acceptable level? A. Pata. B. Part B, C. Part C, D. Part D. ‘4. Which part of the Code applies to professional accountants in public practice? A. Part a. B. Part B. C. Part C. D. Part D. 5, The threat that a professional accountant will be deterred from acting objectively because of actual or perceived pressures from the client is known as. A. Intimidation threat 8. Familiarity threat. C Self-interest threat. D. Advocacy threat. 6. Which of the following will not create self-interest threat for a professional accountant in Public practice? A. The possibility of losing a significant client. 8, Direct financial interest in the assurance client. C. Undue dependence on total fees from a client. ©. Preparing the original data used to generate records that are the subject matter of the assurance engagement. 7. Familiarity threat could be created under the following circumstances except ‘A. A professional accountant accepting gifts from a client whose value is inconsequential or trivia, . Senior personne! having a long association with the assurance client, C. 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, D. A member of the engagement team having a clase or immediate family member who is aa director or officer of the client, 8. This threat to independence occurs when 2 member of the assurance team has recently performed services for an assurance client that directly affect the subject matter information of the assurance engagement (€.g., valuation services), A. Self-review threat, B. Advocacy threat. C. Self-interest threat, D. Familiarity threat.CRAR = MANILA, ALTIMA 9. 10. iL. 12, 13. 14. 15. on => Which of the following circumstances may create advocacy threat for a professional ‘accountant in public practice? A. The firm promoting shares in an audit client. B. A firm issuing an assurance report on the effectiveness of the operation of financial systems after designing or implementing the systems. C. Afirm being threatened with dismissal from a client engagement. D. Affirm being concemed about the possibilty of losing a significant client. The following circumstances may create intimidation threats, except Being threatened with dismissal or replacement in related to a client engagement. Being pressured to reduce inappropriately the extent of work performed In order to reduce fees. Being threatened with litigation. ‘A member of the assurance team being, or having recently been, a director or officer of the client. 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. Disclosing to those charged with governance of the client the nature of service provided and extent of fees charged. . Adisciplinary mechanism to promote compliance with the firm's policies and procedures. D, Published policies and procedures to encourage and empower staff to communicate to senior levels within the firm any issue relating to compliance with the fundamental principles that concerns them. ‘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. In the case of audit engagements, it is in the public interest end, therefore, required by the Code that members of audit teams, firms and network firms shail be independent of audit dlients. 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 ‘When the professional accountant determines that appropriate safeguards are not available ‘or cannot be appiied to eliminate the threats to Independence or reduce them to an acceptable level, the professional accountant shall I. Eliminate the croumstance or relationship creating the threats. Tl, Decline or terminate the audit engagement, Tonly Tonly Neither I nor 11 Either I or IL ooRP Independence from the audit client is required During the engagement period. During the pera covered by the nantl statements Tonly Both I and Il. Tony. Neither I nor 11, poerasGPAR - MANILA ALITA 16. 17. 19. 20, 2a. 22. Financial interests may be held through an intermediary (for example, a collective investment vehicle, estate or trust). When control over the investment vehicle or the ability to influence investment decisions exists, the code defines that financial interest to be a/an A. Direct financial interest. B. Material direct financial interest. C. Indirect financial interest. D. Materiat indirect financial interest. Holding a financial interest in an audit client may create a self-interest threat. The existence and significance of any threat created depends on I. The role of the person holding the financial interest. I, Whether the financial interest is direct or indirect. IIL The materiality of the financial interest. A. Land Il only. B. Land UI only. C Iand Il only. D. 1, 0, and m1. ‘The concept of materiality is least important to an auditor when considering the A. Effects of a direct financial interest in the client upon the auditor's independence. B. Decision whether to use positive or negative confirmations of accounts receivable. C. Adequacy of disclosure of a client's illegal act. D. Discovery of weaknesses in a client's internal control. AA direct financial interest or a material indirect financial interest in the audit client of a member of the audit team or his immediate family member may create a significant self- interest threat, Which of the following safeguards would be least likely considered to eliminate the threat or reduce it to an acceptable level? ‘A. Discuss the matter with those charged with governance of the audit client B. Dispose of the direct financial interest prior to the individual becoming a member of the audit team. C. Dispose of the indirect financial interest in total or dispose of a sufficient amount of it 0 that the remaining interest is no longer material prior to the individual becoming ‘member of the audit team. D. Remove the member of the audit team from the audit engagement. Jayson, CPA, was offered the engagement to audit W Corporation for the year ended December 31, 2015. He had served as a director of W Corporation until December 31, 2013, and his spouse currently owns 6,000 of the 100,000 outstanding share capital of W Corporation. Jayson disassociated from W Corporation prior to being offered the engagement. Moreover, the engagement does not Cover any period that includes Jayson’s: association or employment with W Corporation. Under the code of ethics, Jayson should A. Accept the engagement. B. Let a partner fram the same office accept and conduct the engagement. C. Refuse the engagement because he had served as a director. D. Refuse the engagement because of his spouse's stock ownership. A loan, or guarantee of a Joan, to the firm from an audit client that is a bank or a similar institution, would not create a threat to independence provided 1. The loan, or guarantee, is made under normal lending procedures, terms and requirements. IL. The loan is immaterial to both the firm receiving the loan and the audit client. A. Lonly 3. only © Netther I nor 11 ©. Both I and IT A close business relationship between a firm or a member of the audit team, or a member of that individual's immediate family, and the audit client or its management may create A. Self-interest and intimidation threatsPAR - MANILA, ATT 24, (25. 26. 27. 28. 8. Self-review and familiarity threats C. Advocacy and self-review threats D. SelF-interest and self-review threats 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. 8. 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. 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 8. Self-interest threat €. Self-review threat D. Familiarity threat Which of the following would not generally create a threat to independence? A. The purchase of goods and services from an assurance client by the firm (or from a financial statement audit client by a network firm) or a member of the assurance team provided that the transaction is in the normal course of business and on an arm’s length basis. B. A partner or employee of the firm or @ network firm serves as Company Secretary for a financial statement audit client. C. Determining which recommendations of the firm should be implemented. D. Reporting, in a management role, to those charged with governance. The following forms of assistance to a financial statement audit dient do not generally threaten the firm's independence, except A. Anaiyzing and accumulating information for regulatory reporting. B. Assisting in resolving account recondiliation problems. C. Authorizing or approving transactions. D. Assisting in the preparation of consolidated financial statements. ‘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 liabiity 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 ‘The following statements relate to the provision of taxation, intemal audit or IT Systems services to audit clients. Which is false? A. Preparing calculations of current and deferred tax liabilities (or assets) for an audit client for the purpose of preparing accounting entries that will be subsequently audited by the firm creates a self-interest threat. B. Aself-review threat may be created when a firm, or network firm, provides internat audit services to an audit client,PAR - MANILA ArT 23. 30. 31. 32. 33. 34, 35. 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 clent’s financial statements may create a self- Feview threat. D. The provision of services in connection with the assessment, design, and implementation of internal accounting controls and risk management controls does not create a threat to independence provided that firm or network firm personnel do not perform management functions. What threat to independence is created when the litigation support services provided to an audit client include the estimation of the possible outcome and thereby affects the amounts or disclosures to be reflected in the financial statements? A. Self-review threat * B. Advocacy threat C._ Intimidation threat D. Familiarity threat ‘The recruitment of senior management for an assurance client, such as those in a position to affect the subject matter of the assurance engagement, may create the following current or future threats to independence, except A. Self-interest threat B. Familiarity threat Intimidation threat D. Self-review threat When the total fees generated by an assurance client represent a large proportion of @ firm's total fees, the dependence on that client’or client group and concam about the possibility of losing the client may create a/an A. Self-interest threat B. Self-review threat. . Intimidation threat D. Advocacy thréat What threat to independence may be created if fees due from an assurance client for professional services remain unpaid for a long time, especially if a significant part is not paid before the Issue of the assurance report for the following year? ‘A. Advocacy threat B. Self-interest threat . Intimidation threat D. Self-review threat “These are fees calculated on a predetermined basis relating to the outcome or resuit of a transaction or the result of the work performed. A. Contingent fees 8. Fixed fees C. Predetermined fees D. Commissions. Which of the following threats to Independence may be created when litigation takes place, or appears likely, between the firm or a member of the assurance team the assurance client? A, Self-interest or advocacy threat B. Advocacy or intimidation threat C. Self-interest or intimidation threat D. Familiarity or self-review threat ‘As defined in the Code of Ethics, is the communication to the public of information as to the services or skills provided by professional accountants in public practice with a view to procuring professional business. A. Advertising B. PublicityCPAR MANILA anys 1 36. 137. 138. 39. 41 C. Solicitation D, Marketing professional services As defined in the Code of Ethics, is the communication to the public of facts about a professional accountant which are not designed for the deliberate promotion ofthat professional accountant. A. Advertising B. Publicity . Solicitation D. Marketing professional services The following statements relate to the provisions of the Code of Ethics that deal with the + professional accountant’s marketing of professional services. Which Is false? ‘A. When a professional accountant in pubiic practice solicits new work through advertising ‘or other forms of marketing, a selFinterest threat to compliance with the principle of professional behavior may be created. 8, ‘The professional accountant should be honest and truthful when marketing professional services. Advertising and publicity are generally unacceptable. D. When marketing professional services, the professional accountant should not make exaggerated ciaims for services offered, qualifications possessed or experience gained. Which of the following statements conceming publicity is incorrect? A, Booklets and other documents bearing the name of a professional accountant and giving ‘technical information for the assistance of staff or clients may be issued to such persons, other professional accountants or other interested parties. B. Professional accountants who author books or articles on professional subjects may state their name and professional qualifications; give the name of their organization, and give any information as to the services that the firm provides. €. Appropriate newspapers or magazines may be used to inform the public of the establishment of 2 new practice, of changes in the composition of a partnership of professional accountants in public practice, or of any alteration in the address of a practice. . 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. The holding of media-covered events undertaken only to commemorate a professional accountan’s 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. AS B. 10 c 20 D, 25 Which of the following statements conceming 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. ©. 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. A professional accountant in public practice is allowed to A. Refer to, use or cite actual or purported testimonials by third parties.(SPAR -MANILA arr 42. 43. 47. B. Publish services in billboard (e.g., tarpaulin, streamers, etc.) advertisements. . Publish and compare fees with other CPAs or CPA firms or compare those services with those provided by another firm or CPA practitioner. D. Inform interested parties through any medium that a partnership or salaried employment of an accountancy nature is beng sought. After evaluating the significance of the threat created by an actual or threatened litigation, the following safeguards should be applied to reduce the threat to an acceptable level, except ‘A. Disclosing to the audit committee, or others charged with governance, the extent and "nature of the litigation. B, If the litigation involves a member of the assurance team, removing that individual from the assurance team. . 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 acvept, the assurance engagement. Litigation support services include the following activities, except A. Acting as an expert witness. B. Providing assistance to an audit client's internal legal department. C. Calculating estimated damages or amounts that might become receivable or payable as the result of litigation or other legal dispute. D. Assistance with document management and retrieval in relation to a dispute or litigation. . What threats to independence are created when a contingent fee is charged by a firm in respect of an assurance engagement? ‘A. Self-review and intimidation threats B. Self-interest and advocacy threats C. Familiarity and intimidation threats D. Selfinterest and setf-review threats . When a firm obtains an assurance engagement at a significantiy lower fee level than that charged by the predecessor firm, or quoted by other firms, the self-interest threat ‘will not be reduced to an acceptable level unless 1. The firm is able to demonstrate that appropriate time and qualified staff are assigned to the task. TL. All applicable assurance standards, guidelines, and quality control procedures are being ‘complied with, A. Tonly B. Ionly Both I and It D. Nelther I nor II What threat to independence may be created when the fees generated by the assurance Glient represent a large proportion of the revenue of an Individual of the firm? threat ‘The following statements relate to the provision of legal services to an audit dient, Which is incorrect? ‘A. The provision of legal services to an audit dient Involving matters that would not be expected to have a material effect on the financial statements may create a self-review threat. B. Legal services to support an audit client In the execution of a transaction (€.9., contract Support) may create a self-review threat. . Acting for an audit dient 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CRAR MANILA ALTA 48, 49, audit client would create advocacy and self-review threats so significant no safeguards could reduce the threats to an acceptable level. D. The appointment of a partner or an employee of the firm or network firm as General Counsel for legal affeirs to an audit client would create self-review and advocacy threats that are so significant no safeguards could reduce the threats to an acceptable level. When a close family member of a member of the assurance team is a director, an officer, cor an employee of the assurance client in a position to exert direct and significant influence Over the subject matter information of the assurance engagement, threats to independence may be created. If the threats are other than dearly insignificant, which of the following safeguards can be applied to reduce the threats to an acceptable level? 1. Removing the individual from the assurance team. Il, 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. TI, Policies and procedures to empower staff to communicate to senior levels within the firm any issue of independence and objectivity that concerns them, A. Land Ionly 8. [and If only . Land Hl onty D. 1, IE, and Which of the following threats to independence may be created by family and personal relationships between a member of the assurance team and a director, an officer, or an employee of the assurance client in a position to exert direct and significant influence over ‘the subject matter information of the assurance engagement? A. Self-interest, familiarity or intimidation threats B. Self-review, familiarity, or advocacy threats C. Advocacy, familiarity or seif-review threats D. Self-interest, advocacy or self-review threats ‘The following circumstances create advocacy threats for a professional accountant in public practice except ‘A. Promoting shares in an audit client. B. Acting as an advocate on behalf of an audit client in litigation or disputes with third parties. . Acting as campaign manager for the president of a client who is running for a public office. D. A member of the assurance team having a significant close business relationship with an assurance client. ~ END —