POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

Sta. Mesa Manila

Comprehensive Cases

I. Each of the following five situations involves a possible violation of Independence of the Code of
Professional Ethics. For each situation, (1) decide whether the Code has been violated, and (2) briefly explain
how the situation violates (or does not violate) the Code.
 
a. Samantha Lopez, CPA, is a partner in the Philippines office of Bill & Gates, CPAs. Samantha's brother is
employed as the controller of Scotch Appliances, a large, publicly held company in Manila, Philippines. Scotch
Appliances is one of Bill & Gates' audit clients. Neither Samantha nor the Philippines office of Bill & Gates is
involved in the audit of Scotch Appliances.

  Violation? Yes No
Explanation:
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 b. Enron Phelps, CPA, is a partner in the Las Pinas office of Magadia & Franks, CPAs. Enron's brother,
Glenn, owns an immaterial amount of bonds issued by Lucky You Industries, a company based in Manila.
Lucky You Industries is one of Magadia & Franks’ audit clients. Neither Enron nor the Las Pinas office of
Magadia & Franks is involved in the audit of Lucky You.
 

Violation? Yes No
Explanation:
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c. Divine Sweaty, CPA, owns a material amount of stock in La PAZ Corp. The La PAZ is not an audit client of
Divine's. However, Divine audits The Manila Funeral Corp., which owns a material amount of stock in La PAZ.

  Violation? Yes No
Explanation:
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d. Christopher Hagada, CPA, is a partner assigned to a review engagement. Chris has a dependent daughter
who is employed by the review client as a machine operator - a non-audit-sensitive position.
 
Violation? Yes No
Explanation:
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e. On April 08, 2012, Pagie Dapne, CPA, issued the audit report on Bornut Chocnut Corporation's January 30,
2012 financial statements. On April 30, 2012, Bornut paid Pagie's audit fee with stock rather than cash. Pagie
sold the stock on May 15, 2012, two months prior to the beginning of the planning phase for the audit of the
January 30, 2013 financial statements.
 

Violation? Yes No
Explanation:
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f. In XXX2, Unfreeman, CPA, Jerik, CPA, Lettermen, CPA, and Scramburger, CPA, decided to engage in the
CPA practice and created an entity and they call it "Unfreeman, Jerik, Lettermen, & Scramburger, CPAs." In
XXX3, Jerik died, but Unfreeman, Lettermen, and Scramburger continued to call the firm "Unfreeman, Jerik,
Lettermen, & Scramburger, CPAs." In XXX6, both Unfreeman and Scramburger retired. Since that time,
Lettermen has operated as a sole practitioner, and has continued to use the name "Unfreeman, Jerik, Lettermen,
& Scramburger, CPAs."
 
On XXX8 and onwards is there any violation? Yes No
Explanation:
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g. Johnny Walker has a successful dentistry practice in Manila. Johnny has recommended one of his patients to
Kayla King, CPA. To show gratitude for the referral, Kayla has agreed to pay Johnny 5% of the fee for audit
services rendered by Kayla to Johnny's patient.
 
Violation? Yes No
Explanation:
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h. The accounting firm of Buyer & Selling, CPAs, is negotiating a fee with a new audit client. They agree the
client will pay CU75,000 if Buyer & Selling issues a clean, unqualified opinion, CU50,000 if a qualified
opinion is issued, CU40,000 if an adverse opinion is issued, and CU10,000 if a disclaimer of opinion is issued.
 
Violation? Yes No
Explanation:
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i. Don Magadia, CPA, takes part in the audit of Shaw Blvd. Corporation. Don is not a partner or a manager in
the CPA firm, and does not own any stock in Shaw Blvd. Corporation. Don's five-year-old daughter, Betty Lou,
received one share of Shaw Blvd. Corporation's common stock for her fifth birthday. The stock was a gift from
Betty Lou's grandmother and it is treated as direct financial interest. Betty Lou treasures that share of stock and
is absolutely unwilling to part with it.
 
Violation? Yes No
Explanation:
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j. Jhennyfer Dabwois, CPA, is a partner in the CPA firm that audits Pulvoronson, Inc., a closely held
corporation. Jennyfer's husband's sister in law is the chief financial officer in Pulvoronson, Inc.
 
Violation? Yes No
Explanation:
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“I can no longer remember your full name but my mind is so clear, that I can easily
remember your manners.” GAM