CPA REVIEW SCHOOL OF THE PHILIPPINES AT-8714 Manila AUDITING THEORY CPA Review CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS IN THE PHILIPPINES 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, legislation 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 disdiose, 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 are not at an 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 inappropriately 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 dlient’s or employer's position to the point that the professional accountant's objectivity is compromised. 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. Page 1 of 10 Pages(CPAR - MANILA arena E, INTIMIDATION THREAT — the threat that a professional accountant will be deterred from acting objectively because of actual or perceived pressures, including attempts to exercise undue influence over the professional accountant. ‘SAFEGUARDS THAT MAY ELIMINATE OR REDUCE THREATS: TO AN ACCEPTABLE LEVEL 1. Safeguartis created by the profession, legislation or regulation. ‘© Educational, training and experience requirements for entry into the profession. * Continuing professional development requirements. © Corporate governance regulations. * Professional standards. '* Professionai or regulatory monitoring and disciplinary procedures. + External review by a legally empowered third party of the reports, returns, ‘communications or information produced by a professional accountant. 2. 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 acts. unscrupulous B. Ethical standards that emphasize excellence in performance over material rewards establish a reputation for competence and character. Page 2 of 10 Pages(CPAR - MANILA arsm4 7 C. Adistinguishing mark of a profession is Its acceptance of responsibility to the public. D. A requirement for a profession is to establish ethical standards that stress primarily a responsibility to clients and colleagues. h Which of the following fundamental ethical prindples 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 “The professional accountant should be constantly conscious of and be alert to factors that give rise to conficts of interest. When faced with significant ethical issues such as identifying unethical behavior or resolving an ethical conflict, the professional accountant should do the following, except ‘A. follow the established polices of the employing organization to seek a resolution of such conflict. B. review the conflict problem with the immediate superior if the organization’s policies do not resolve the ethical conflict. . seek advice on a confidential basis with an independent advisor or the applicable professional accountancy body or reguiatory body to obtain an understanding of possible courses of action. D. report the matter to the Securities and Exchange Commission. a ‘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 B, Familiarity threat. C. Self-interest threat. D. Advocacy threat. . 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. B. Direct financial interest in the assurance client. C. Undue dependence on total fees from a client. D. Preparing the original data used to generate records that are the subject matter of the assurance engagement. . Familiarity threat could be created under the following circumstances ‘except ‘A. A professional accountant accepting gifts from a client whose value is inconsequential or trivial. B. Senior personnel 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. Amember of the engagement team having a close or immediate family member who is a director or officer of the client. ‘This threat to independence occurs when a member of the assurance team has recently performed services for an assurance cient that directly affect the subject matter information of the assurance engagement (e.g., valuation services). A. Self-review threat. B. Advocacy threat. C. Self-interest threat. D. Familiarity threat. Page 3 of 10 PagesCPAR - MANILA AT-ST14 8, If requested to perform a review engagement for an entity in which a practitioner has an immaterial direct financial interest, the accountant is ‘A. independent because the financial interest is Immaterial and, therefore, may issue review report. B. not independent and, therefore, may not be associated with the financial statements. C. not independent and, therefore, may not issue a review report. D. not independent and, therefore, may issue a review report, but may not issue an auditor's opinion. 9. The following circumstances may create intimidation threats, except A. Being threatened with dismissal or replacement in related to a dient engagement. B. Being pressured to reduce inappropriately the extent of work performed in order to reduce fees. C. Being threatened with litigation. D. Amember of the assurance team being, or having recently been, a director or officer of the client. 10. Which of the following safeguards to eliminate or reduce threats to independence is peer by the profession, legislation or regulation? A. Policies and procedures that emphasize the assurance client's commitment to fair financial reporting. B. Intemal policies and procedures to implement compliance with firm policies and procedures as they relate to independence. . Continuing professional development requirements. D. Rotation of senior personnel. 11. 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._Disclasing 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. 12. 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 TSE trl brew reas SW bye of York yeti D. The level of trainingland experience of the persons necessarily engaged on the work. 13. In the case of audit engagements, itis in the public interest and, therefore, required by the Code that members of audit teams, firms and network firms shall be independent of audit lents. Independence requires A Independence of mind onty. B. Independence in appearance only. CC. Both independence of mind and independence in appearance D. Either independence of mind or independence in appearance 14, When the professional accountant determines that appropriate safeguards are not available or cannct be applied to eliminate the threats to independence or reduce them to an acceptable level, the professional accountant shall 1. Gliminiate the circumstance or relationship creating the threats. TL, Decline or terminate the audit engagement. A. Tonhy B. only Page 4 of 10 Pages15. Independence from the audit client is required 1. During the engagement period. TI. During the period covered by the financial statements. A. Tonly 8. Both I and Il. ©. Monly, ‘D. Neither I nor II. 16. 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. 8. Material direct financial interest. C. Indirect financial interest. D. Material indirect financial interest. 17. Holding a financial interest in an audit dient may create a self-interest threat. The existence and significance of any threat created depends on 1, The role of the person holding the financial interest. Il. Whether the financial interest is direct or indirect. 1 The materia ofthe financial interes. A. Tand I only. B. Land III only. © Mand I only. D. 1, 1, and II. 18. The concept of materiality is least important to an auditor when considering the A. Effects of a direct financial interest in the dient upon the auditor's i 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. 19. A direct financial interest or 2 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 tliminate the threstor reduce to an acceptable level? A. Discuss the matter with these 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 dispase of a sufficient amount of it ‘so that the remaining interest is no longer material prior to the individual becoming a ‘member of the audit team. D. Remove the member of the audit team from the audit engagement. 20. Jayson, CPA, was offered the engagement to audit W Corporation for the year ended December 31, 2019. He had served as a director of W Corporation until December 31, 2017, 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 assodation or employment with W Corporation. Under the code of ethics, Jayson should ‘A. Accept the engagement. B. Leta partner from 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. 21. A loan, or guarantee of a loan, to the firm from an audit client that is a bank or a similar institution, would not create a threat to independence provided Page 5 of 10 PagesCPAR - MANILA ars7i4 22. 23. 24, 25. 26. 27. I. The loan, or guarantee, is made under normal lending procedures, terms and requirements. II. The loan is immaterial to both the firm receiving the loan and the audit client. A. Tonly B. Tonly C. Neither I nor I D. Both I and II 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 B. 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 @ 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. 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 \Which of the following would not generaliy create @ threat to independence? A. The purchase of gdods and services from an assurance client by the firm (or from a financial statement audit client by a network firm) or a member of the assurance team Provided that the transaction is in the normal course of business and on an arm’s length basis. B. A partner or employee of the firm or a network firm serves as Company Secretary for a financial statement audit client. . 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 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, 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 oF 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 8. Familiarity threat Page 6 of 10 PagesCPAR-MANILA ATT 28. 29. 30. a1, 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 intemal 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 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 rnanagement 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 C. Intimidation threat D. Selfereview threat 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 croup and concem about the possibility of losing the dient may create a/an A. Self-interest threat B. Self-review threat. C. Intimidation threat D. Advocacy threat . What threat to independence may be creuted if fees due from an assurance client for professional services remain unpaid for a long time, especially if significant part is not paid before the issue of the assurance report for the following year? A. Advocacy threat B. Self-interest threat C. Intimidation threat D. Self-review threat . These are fees calculated on a predetermined basis relating to the outcome or result of a transaction or the result of the work performed. ‘A. Contingent fees B. Fixed fees C. Predetermined fees D. Commissions. Page 7 of 10 FagesCPAR - MANILA, AT-e714 34. 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 dient? A. Self-interest or advocacy threat B. Advocacy or intimidation threat €. Self-interest or intimidation threat D. Familiarity or self-review threat 35. 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 C. Solicitation D. Marketing professional services 36. 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 of that prorated ‘accountant. ‘A. Advertising B. Publicity C. Solicitation D. Marketing professional services 37. The following statements relate to the provisions of the Code of Ethics that deal with the professional accountant’s marketing of professional services. Which is false? ‘A. When a professional accountant in public practice solicits new work through advertising or other forms of marketing, a self-interest threat to compliance with the principle of professional behavior may be created. B. The professional accountant should be honest and truthful when marketing professional services. ‘Aavertsing end publicty are generaly unacoptabe When marketing professional services, the professional accountant should not make "exaggerated claims for services offered, qualifications possessed or experience gained. 38. Which of the following statements concerning publicity is incorrect? ‘A. Booklets and other documents bearing the name of a professional accountant and giving ‘technical information for the assistance of staff or lients 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 a 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 f 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. Page 8 of 10 Pages41. 42. 43. 45. arena |. 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. 8. Genuine vacancies for staff may be communicated to the public through any medium in which comparable staff vacancies normally appear. . 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. A professional accountant in public practice is allowed to A. Refer to, use or cite actual or purported testimonials by third parties. B. Publish services in billboard (e.g., tarpaulin, streamers, etc.) advertisements. C. Publish and 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 being 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. CC. 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. D. Withdraw from, or refuse to accept, 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 toa 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. Self-interest and self-review threats When a firm obtains an assurance engagement at a significantly lower fee level than that charged by the predecessor firm, or quoted by other firms, the self-interest threat created will not be reduced to an acceptable level unless I. The firm is able to demonstrate that appropriate time and qualified staff are assigned to the task. 11. All applicable assurance standards, guidelines, and quality control procedures are being complied with. only Tonly ‘Both I and IT Neither I nor It pomP What threat to independence may be created when the fees generated by the assurance liant represent a large proportion of the revenue of an individual of the firm? A. Self-review threat Page 9 of 10 Pages—————_—_—_—_—_—_——————EEEEE SPAR - MANILA Ars74 47. 8, Familiarity threat C. Self-interest threat D. Advocacy 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 client 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 (e.g., 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. D. The appointment of a partner or an employee of the firm or network firm as General Counsel for legal affairs to an audit client would create self-review and advocacy threats that are so significant no safeguards could reduce the threats to an acceptable level, 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 exert direct and significant influence ‘ver the subject matter information of the assurance engagement, threats to independence may be created. If the threats are other than clearty 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. 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. III. Policies and procedures to empower staff to communicate to senior levels within the firm any issue of independence and objectivity that concems them. A. Tand Ionly 8. Iand III only C. Tand Il only D. 1,0, and It . ‘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. Cc ‘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 — Page 10 of 10 Pages