MODULE 3

PROFESSIONAL AND LEGAL RESPONSIBILITY

PROFESSIONAL RESPONSIBILITY

1. Engagement letters are widely used in practice for professional

engagements of all types. The primary purpose of the engagement
letter is to

a. remind management of its primary responsibility over the

financial statements.
b. satisfy the requirements of the Code of Professional Conduct
for CPAs.
c. provide a starting point for the auditor’s preparation of the
preliminary audit program.
d. provide a written record of the agreement with the client as to
the services to be provided.

2. There is generally an agreement within the auditing profession

and the courts that the auditor

a. is neither a guarantor nor an insurer of financial statements.

b. is a guarantor but not an insurer of the statements.
c. is an insurer but not a guarantor of the statements.
d. is both a guarantor and an insurer of the financial
statements.

3. The objective of an ordinary examination by the independent

auditor is the expression of an opinion on

a. the accuracy of the financial statements.

b. the balance sheet and income statement.
c. the fairness of the presentation of the financial statements.
d. the quality of the decision process of the management.

4. The auditor is not liable to his client for

a. negligence.
b. bad faith.
c. dishonesty.
d. errors of judgment.

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5. Which of the following is correct?

a. The evidence which the auditor accumulates remains the

same from audit to audit, but the general objectives vary,
depending on the circumstances.
b. The general audit objectives remain the same from audit to
audit, but the evidence varies, depending on the
circumstances.
c. The circumstances may vary form audit to audit, but the
evidence accumulated remains the same.
d. The general audit objectives may vary from audit to audit, but
the circumstances remain the same.

6. When a CPA expresses an opinion on the financial statements, his

responsibilities extend to

a. the underlying wisdom of the client’s management decision.

b. active participation in the implementation of the advice given
to the client.
c. an ongoing responsibility for the client’s solvency.
d. whether the results of the client’s operating decisions are
fairly presented in the financial statements.

7. Working papers prepared by a CPA in connection with an audit

engagement are owned by the CPA, subject to certain limitations.
The rationale for this rule is to

a. protect the working papers from being subpoenaed.

b. provide the basis for excluding admission of the working
papers as evidence because of the privileged communication
rule.
c. provide the CPA with evidence and documentation which may
be helpful in the event of a lawsuit.
d. establish a continuity of relationship with the client whereby
indiscriminate replacement of CPAs is discouraged.

8. The responsibility for adopting sound accounting policies,

maintaining adequate internal control, and making fair
representations in the financial statements rests

a. with management.
b. with the independent auditor.

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 c. equally with management and the auditor.
d. with the internal audit department.

9. When the auditor issues an erroneous opinion as a consequence

of an underlying failure to comply with the requirements of
generally accepted auditing standards, it results in

a. business failure.
b. audit failure.
c. audit risk.
d. all of them.

10. Fraudulent financial reporting is often called:

a. Management fraud
b. Defalcation
c. Theft of assets
d. Employee fraud

11. The accuracy of information included in the footnotes that

accompany the audited financial statements of a company whose
shares are traded on a stock exchange is the primary
responsibility of

a. the stock exchange officials.

b. the company’s management.
c. the independent auditor.
d. the Securities and Exchange Commission.

12. The ordinary examination of financial statements is not primarily

designed to disclose defalcations and other irregularities although
their discovery may result. Normal audit procedures are more
likely to detect a fraud arising from

a. collusion on the part of several employees.

b. failure to record cash receipts for services rendered.
c. forgeries on company checks.
d. theft of inventories.

13. The reason why the auditors accumulate evidence is to

a. defend themselves in the event of a lawsuit.

b. justify the conclusions they have otherwise reached.

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 c. satisfy the requirements of the Bureau of Internal Revenue.
d. enable them to reach conclusions about the fairness of the
financial statements and issue an appropriate audit report.

14. The auditor gives an audit opinion on the fair presentation of the
financial statements and associates his or her name with it when,
on the basis of adequate evidence, the auditor concludes that the
financial statements are unlikely to mislead

a. a prudent user.
b. management.
c. the reader.
d. investors.

15. The responsibility for the fairness of the financial assertions that
are embodied in the financial statements and in the notes to the
financial statements rests:

a. with management.
b. with Securities and Exchange Commission.
c. equally with management and the stockholders.
d. with the audit committee.

16. When preparing the financial statements, it is acceptable for the

auditor to prepare

a. the statement for client.

b. the footnotes for client.
c. a draft of the statements for client.
d. a draft of the statements and footnotes for client.

17. Which of the following statements best describes the auditor's

responsibility regarding the detection of material errors and
frauds?

a. The auditor is responsible for the failure to detect material

errors and frauds only when such failure results from the
misapplication of generally accepted accounting principles.
b. The audit should be designed to provide reasonable assurance
that material errors and frauds are detected.
c. The auditor is responsible for the failure to detect material
errors and frauds only when the auditor fails to confirm
receivables or observe inventories.

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 d. Extended auditing procedures are required to detect
unrecorded transactions even if there is no evidence that
material errors and frauds may exist.

18. The auditor has considerable responsibility for notifying users as

to whether or not the statements are properly stated. This
imposes upon the auditor a duty to

a. be an insurer of the fairness in the statements.

b. be a guarantor of the fairness in the statements.
c. be equally responsible with management for the preparation of
the financial statements.
d. provide reasonable assurance that material misstatements
will be detected.

19. The factor that distinguishes an error from an irregularity is

a. materiality.
b. intent.
c. whether it is peso amount or a process.
d. whether it is a caused by the auditor or the client.

20. Of the following statements, which best distinguishes ordinary

negligence from gross negligence?

a. Failure to detect material errors, whether internal control is

strong or weak, suggests gross negligence.
b. Failure to exercise reasonable care denotes ordinary
negligence, whereas failure to exercise minimal care indicates
gross negligence.
c. Gross negligence is most probable when the auditor fails to
detect errors that occurred under conditions of strong internal
control.
d. The more material the undetected error the greater the
likelihood of ordinary negligence.

21. The auditor’s responsibility for failure to detect fraud arises

a. when such failure clearly results from non-compliance to

generally accepted auditing standards.
b. whenever the amounts involved are material.

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 c. only when the examination was specifically designed to detect
fraud.
d. only when such failure clearly results from negligence so gross
as to sustain an inference of fraud on the part of the auditor.

22. Audit standards require an auditor to:

a. Perform procedures that are designed to detect all instances of

fraud.
b. Provide reasonable assurance that the financial statements
are not materially misstated.
c. Issue an unqualified opinion only when the auditor is satisfied
that no instances of fraud have occurred.
d. Design the audit program to meet financial statement users’
expectat ions concerning fraud.

23. Which of the following statements is correct concerning the

auditor’s responsibility with respect to illegal acts?

a. An auditor must design tests to obtain reasonable assurance

of detecting material direct-effect illegal acts.
b. An auditor must design tests to detect both immaterial and
material direct-effect illegal acts.
c. An auditor must design tests to detect both direct-effect and
indirect-effect illegal acts.
d. An auditor must design tests to detect both material direct-
effect and material indirect-effect illegal acts.

24. If specific information comes to an auditor’s attention that implies

the existence of possible illegal acts that could have a material,
but indirect effect on the financial statements, the auditor should
next

a. apply audit procedures specifically directed to ascertaining

whether an illegal act has occurred.
b. seek the advice of an informed expert qualified to practice law
as to possible contingent liabilities.
c. report the matter to an appropriate level of management at
least one level above those involved.
d. discuss the evidence with the client’s audit committee, or
others with equivalent authority.

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25. A principal purpose of a letter of representation from management
is to

a. serve as an introduction to company personnel and an

authorization to examine the records.
b. discharge the auditor from legal liability for his examination.
c. confirm in writing management’s approval of limitations on
the scope of the audit.
d. remind management of its primary responsibility for financial
statements.

26. The audit should not assume that management is dishonest, but
the possibility of dishonesty must be considered.” This is an
example of

a. unprofessional behavior.
b. an attitude of professional skepticism.
c. due diligence.
d. an ethical requirement.

27. Which of the following statements is true?

a. It is usually easier for the auditor to uncover irregularities

than errors.
b. It is usually easier for the auditor to uncover errors than
irregularities.
c. It is usually equally difficult for the auditor to uncover errors
or irregularities.
d. Usually, none of the above statements is true.

28. Should the auditor uncover circumstances during the audit that
may cause suspicions of management fraud, the auditor must

a. issue an adverse opinion.

b. issue a disclaimer.
c. evaluate their implications and consider the need to modify
audit evidence.
d. withdraw from engagement.

29. Most accounting and auditing professionals agree that when an

audit has failed to uncover material misstatements, and the
wrong type of audit opinion is issued, the audit firm

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 a. has failed to follow generally accepted auditing standards
(GAAS).
b. deserves to lose the lawsuit.
c. should be asked to defend the quality of the audit.
d. should not be held responsible for the financial loss suffered
loss suffered by others.

30. When planning the audit, if the auditor has no reason to believe
that illegal acts exist, the auditor should

a. make inquiries of management regarding their policies and

regarding their knowledge of violations, and then rely on
normal audit procedures to detect errors, irregularities, and
illegalities.
b. still include some audit procedures designed specifically to
uncover illegalities.
c. ignore the topic.
d. include audit procedures which have a strong probability of
detecting illegal acts.

31. The auditor is most likely to presume that a high risk of

irregularities exists if

a. the client is a multinational company that does business in

numerous foreign countries.
b. the client does business with several related parties.
c. inadequate segregation of duties places an employee in a
position to perpetrate and conceal thefts.
d. inadequate employee training results in lengthy EDP
exception reports each month.

32. Generally, the decision to notify parties outside the client’s

organization regarding an illegal act is the responsibility of the

a. independent auditor.
b. management.
c. outside legal counsel.
d. internal auditors.

33. An auditor’s examination performed in accordance with generally

accepted auditing standards generally should

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 a. be expected to provide assurance that illegal acts will be
detected where internal control is effective.
b. be relied upon to disclose violations of truth-in-lending act.
c. encompass a plan to search actively for illegalities which
relate to operating aspects.
d. not be relied upon to provide assurance that illegal acts will be
detected.

34. An auditor who believes that a material irregularity may exist

should initially

a. discuss the matter with those believed to be involved in the

perpetration of the material irregularity.
b. discuss the matter with a higher level of management.
c. withdraw from the engagement.
d. consult legal counsel.
35. When management refuses to disclose illegal activities which were
identified by the independent auditor, the independent auditor
may be charged with unethical conduct for

a. withdrawing form the engagement.

b. issuing a disclaimer of opinion.
c. failure to uncover the illegal activities during prior audits.
d. reporting these activities to the audit committee.

36. What is the independent auditor’s responsibility prior to

completion of fieldwork when he believes that a material fraud
may have occurred?

a. Notify the appropriate law enforcement authority.

b. Investigate the persons involved, the nature of the fraud, and
the amounts involved.
c. Reach an understanding with the appropriate client
representatives as to the desired nature and extent of
subsequent audit work.
d. Continue to perform normal audit procedures and write the
audit report in such a way to disclose adequately the
suspicions of material fraud.

37. In discovering material management fraud and an equally

material error, the audit plan

a. should be expected to provide the same degree of assurance.

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 b. cannot be expected to provide the same degree of assurance.
c. provide no assurance of detecting either.
d. should provide complete assurance of detection.

38. An auditor who finds that the client has committed an illegal act
would be most likely to withdraw from the engagement when the

a. illegal act affects the auditor's ability to rely on management

representations.
b. illegal act has material financial statement implications.
c. illegal act has received widespread publicity.
d. auditor cannot reasonably estimate the effect of the illegal act
on the financial statements.

39. In comparing management fraud with employee fraud, the

auditor’s risk of failing to discover the fraud is

a. greater for employee fraud because of the larger number of

employees in the organization.
b. greater for employee fraud because of the higher crime rate
among blue collar workers.
c. greater for management fraud because of management’s
ability to override existing internal controls.
d. greater for management fraud because managers are
inherently smarter than employees.

40. When the auditor knows that an illegal act has occurred, the
auditor must

a. issue an adverse opinion.

b. withdraw from the engagement.
c. consider the effects on the financial statements, including the
adequacy of disclosure.
d. report it to the proper government authorities.

41. The risk that the audit will fail to uncover a material
misstatement is eliminated

a. if client has good internal control.

b. if client follows generally accepted accounting principles.
c. when the auditor has complied with generally accepted
auditing standards.
d. under no circumstances.

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42. When an independent auditor’s examination of financial
statements discloses special circumstances that make the auditor
suspect that fraud may exist, the auditor’s initial course of action
should be to

a. recommend that the client pursue the suspected fraud to a

conclusion that is agreeable to the auditor.
b. extend normal audit procedures in an attempt to detect the
full extent of the suspected fraud.
c. reach an understanding with the proper client representative
as to whether the auditor or the client is to make the
investigation necessary to determine if a fraud has in fact
occurred.
d. decide whether the fraud, if in fact it should exist, might be of
such a magnitude as to affect the auditor’s report on the
financial statements.

43. The auditor’s evaluation of the likelihood of material employee

fraud is normally done initially as a part of

a. the assessment of whether to accept the audit engagement.

b. understanding the entity’s internal control structure.
c. the Tests of Controls.
d. the Tests of Transactions.

44. A basic objective of a CPA firm is to provide professional services

that conform to professional standards. Reasonable assurance of
achieving this basic objective is provided through

a. a system of peer review.

b. continuing professional education.
c. a system of quality control.
d. compliance with generally accepted reporting standards.

45. Which of the following statements regarding quality control

policies and procedures is incorrect?

a. Quality control policies and procedures should be

implemented at both the level of the audit firm and on an
individual audits.

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 b. The audit firm should implement quality control policies and
procedures designed to ensure that all audits are conducted
in accordance with PSAs or relevant national standards or
practices.
c. Quality control policies are objectives and goals while quality
control procedures are steps to be taken to accomplish the
policies adopted.
d. The policies and procedures adopted by individual audit firms
should not vary since there is an applicable PSA that
prescribes quality control policies and procedures that must
be adopted by all auditing firms.

46. A CPA firm studies its personnel advancement experience to

ascertain whether individuals meeting stated criteria are assigned
increased degrees of responsibility. This is evidence of the firm's
adherence to prescribed standards of

a. supervision and review.

b. continuing professional education.
c. professional development.
d. quality control.

47. The firm is to be staffed by personnel who have attained and

maintained the technical standards and professional competence
required to enable them to fulfill their responsibilities with due
care is the objective of what quality control policy?

a. Professional Requirements
b. Skills and Competence
c. Assignment
d. Delegation

48. Which of the following is not likely a quality control procedure on

consultation?

a. Identifies areas and specialized situations where consultation

is required and encourages personnel to consult with or in use
authoritative sources on other complex matters.
b. Designates individuals as specialists to serve as authoritative
sources and define their authority in consultative situations.
c. Assigns an appropriate person or persons to be responsible for
assigning personnel to audits.

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 d. Specifies the extent of documentation to be provided for the
result of consultation in those areas and specialized situations
where consultation is required.

49. The objective of quality control mandates that a public accounting

firm should establish policies and procedures for professional
development which provide reasonable assurance that all entry-
level personnel

a. prepare working papers which are standardized in form and

content.
b. have the knowledge required to enable them to fulfill
responsibilities assigned.
c. will advance within the organization.
d. develop specialties in specific areas of public accounting.

50. Which of the following is an element of “directing an audit

assistant” objective?

a. Identifying in advance the staffing requirements of a particular

audit engagement.
b. Informing assistants of their responsibilities and the
objectives of the procedures they are to perform.
c. Resolving any differences in professional judgment between
audit personnel.
d. Resolution of differences in audit findings.

51. In pursuing its quality control objectives with respect to assigning

personnel to engagements, a public accounting firm may use
policies and procedures such as

a. rotating employees from assignment to assignment on a

random basis to aid in the staff training effort.
b. requiring timely identification of the staffing requirements of
specific engagements so that enough qualified personnel can
be made available.
c. allowing staff to select the assignments of their choice to
promote better client relationships.
d. assigning a number of employees to each engagement in
excess of the number required so as not to overburden the
staff and interfere with the quality of the audit work
performed.

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52. In connection with the element of professional development, a
CPA firm's system of quality control should ordinarily provide that
all personnel

a. have the knowledge required to enable them to fulfill

responsibilities assigned.
b. possess judgment, motivation, and adequate experience.
c. seek assistance from persons having appropriate level of
knowledge, judgment, and authority.
d. demonstrate compliance with peer review directives.

53. A CPA establishes quality control policies and procedures for

deciding whether to accept a new client or continue to perform
services for a current client. The primary purpose for establishing
such policies and procedures is

a. to enable the auditor to attest to the integrity or reliability

of a client.
b. to comply with the quality control standards established by
regulatory bodies.
c. to lessen the exposure to litigation resulting from failure to
detect irregularities in client financial statements.
d. to minimize the likelihood of association with clients whose
management lacks integrity.

54. In which circumstance is a CPA firm's independence most likely to

be impaired?

a. An individual on the audit has a close relative who is a

receptionist for the client.
b. The father of the audit senior holds a material financial
interest in the client of which the senior is unaware.
c. The spouse of a staff member on the audit has an immaterial
common stock investment in the audit client.
d. The partner in charge of the office's compensation is affected
by office profitability, a portion of which arises from this audit.

55. Which of the following partners is least likely to be considered a

"covered member" for purposes of rendering assurance service to
of Company A, a nonaudit client, performed by the head office of a
national CPA firm?

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 a. The partner in charge of the entire CPA firm.
b. A partner in the Cebu office of the CPA firm who maintains a
small, immaterial investment in Company A.
c. A partner in the Davao office who worked on the Company A
for a different assurance engagement in previous years, but
currently has no responsibilities with respect to the
engagement.
d. The partner in charge of the Davao office.

56. While performing services for their clients, professionals have

always had a duty to provide a level of care which is

a. reasonable.
b. greater than average.
c. superior.
d. guaranteed to be free from error.

57. The existence of extreme or unusual negligence, even though

there was no intent to deceive or do harm, is

a. fraud.
b. gross fraud.
c. constructive fraud.
d. ordinary fraud.

58. The failure of the auditor to meet generally accepted auditing

standards is

a. an accepted practice.
b. a suggestion of negligence.
c. an evidence of negligence.
d. tantamount to criminal behavior.

59. Which of the following statement/s is true?

a. Gross negligence may constitute constructive fraud.

b. Constructive fraud is also termed recklessness.
c. Fraud requires the intent to deceive.
d. All three above are true.

60. Which of the following, if present, would support a finding of

constructive fraud on the part of a CPA?

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 a. Privity of contract
b. Intent to deceive
c. Reckless disregard
d. Ordinary negligence

61. In rare cases auditors have been held liable for criminal acts. A
criminal conviction against an auditor can result only when it is
demonstrated that the auditor

a. was negligent.
b. was grossly negligent.
c. intended to deceive or harm others.
d. caused financial loss to an innocent third party.

62. The principal issue to be resolved in cases involving alleged

negligence is usually

a. the amount of the damages suffered by the users of the

financial statements.
b. whether to impose punitive damages on defendant.
c. the level of care required to be exercised.
d. whether defendant was involved in fraud.

63. “Absence of reasonable care that can be expected of a person in a

set of circumstances” is the definition of

a. ordinary negligence.
b. constructive fraud.
c. gross negligence.
d. fraud.

64. A CPA firm is considered independent when it performs which of

the following services for a publicly-traded audit client?

a. Serving as a member of the client’s board of directors.

b. Determining which accounting policies will be adopted by the
client.
c. Accounting information system design and implementation.
d. Tax return preparation as approved by the board of directors.

65. The limitation of auditor liability under contract law is known as

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 a. privity of contract.
b. contributory liability.
c. statutory liability.
d. common law liability.

66. Privity of contract exists between the

a. auditor and client.

b. auditor and third parties.
c. auditor and the Securities and Exchange Commission.
d. All of the above

67. As a consequence of his failure to adhere to generally accepted

auditing standards in the course of his examination of the Leis
Corporation, Herman, CPA, did not detect the embezzlement of a
material amount of funds by the company’s controller. As a
matter of common law, to what extent would Herman be liable to
Leis Corporation for losses attributable to the theft?

a. He would have no liability, since the ordinary examination

cannot be relied upon to detect defalcations.
b. He would have no liability because privity of contract is
lacking.
c. He would be liable for losses attributable to his negligence.
d. He would be liable only if it could be proven that he was
grossly negligent.

68. In connection with the examination of financial statements, an

independent auditor could be responsible for failure to detect a
material fraud if

a. statistical sampling techniques were not used on the audit

engagement.
b. the auditor planned the work in a hasty and inefficient
manner.
c. accountants performing important parts of the work failed to
discover a close relationship between the treasurer and the
cashier.
d. the fraud was perpetrated by one client employee, who
circumvented the existing internal control.

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69. A CPA is criminally liable if he

a. refuses to turn over the schedules or working papers prepared

by the client staff to the client.
b. performs an audit in a negligent manner.
c. intentionally allows an omission of a material fact required to
be stated in a financial statement.
d. was not able to submit the audited financial statements on
time.

70. The auditor’s legal liability to third parties under common law
extends to?

a. All third parties for all acts of negligence.

b. All third parties for acts of fraud and gross negligence;
selected third parties for ordinary negligence.
c. All third parties for fraud; selected third parties for gross and
ordinary negligence.
d. All third parties for acts of willful misconduct.

71. The auditor's defense of contributory negligence is most likely to

prevail when

a. third party injury has been minimal.

b. the auditor fails to detect fraud resulting from management
override of the control structure.
c. the client is privately held as contrasted with a public
company.
d. undetected errors have resulted in materially misleading
financial statements.

72. Mix and Associates, CPAs, issued an unqualified opinion on the

financial statements of Glass Corp. for the year ended December
31, 2006. It was determined later that Glass' treasurer had
embezzled P300,000 from Glass during 2006. Glass sued Mix
because of Mix's failure to discover the embezzlement. Mix was
unaware of the embezzlement. Which of the following is Mix's
best defense?

a. The audit was performed in accordance with GAAS.

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 b. The treasurer was Glass' agent and, therefore, Glass was
responsible for preventing the embezzlement.
c. The financial statements were presented in conformity with
GAAP.
d. Mix had no actual knowledge of the embezzlement.

73. The factor that distinguishes constructive fraud from actual fraud
is

a. materiality.
b. quality of internal control.
c. type of error or irregularity.
d. intent.

74. If a CPA recklessly abandons standards of due care and diligence

while performing an audit, he or she may be held liable to
unknown third parties for:

a. Fraudulent misconduct.
b. Gross misconduct.
c. Gross negligence.
d. Contributory negligence.

75. Salve Corp. orally engaged Rex & Co., CPAs, to audit its financial
statements. The management of Salve informed Rex that it
suspected that the accounts receivable were materially overstated.
Although the financial statements audited by Rex did, in fact,
include a materially overstated accounts receivable balance, Rex
issued an unqualified opinion. Salve relied on the financial
statements in deciding to obtain a loan from City Bank to expand
its operations. City relied on the financial statements in making
the loan to Salve. As a result of the overstated accounts
receivable balance, Salve has defaulted on the loan and has
incurred a substantial loss. If Salve sues Rex for negligence in
failing to discover the overstatement, Rex's best defense would be
that

a. no engagement letter had been signed by Rex.

b. the audit was performed by Rex in accordance with generally
accepted auditing standards.
c. Rex was not in privity of contract with Salve.

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 d. Rex did not perform the audit recklessly or with an intent to
deceive.

76. In a common law action against an accountant, the lack of privity

is a viable defense if the plaintiff

a. bases his action upon fraud.

b. is the accountant's client.
c. is a creditor of the client who sues the accountant for
negligence.
d. can prove the presence of gross negligence which amounts to
a reckless disregard for the truth.

77. Which of the following conditions suggests auditor negligence?

a. Failure to detect material errors under conditions of weak

internal control.
b. Failure to detect collusive fraud perpetrated by members of
middle management.
c. Failure to detect collusive fraud perpetrated by members of
top management.
d. Failure to detect errors occurring outside the internal control
structure.

78. Marcia Corporation orally engaged Legaspi and Lopez, CPAs to

audit its year-end financial statements. The engagement was to be
completed within two months after the close of Marcia's fiscal year
for a fixed fee of P125,000. Under these circumstances, what
obligation is assumed by Legaspi and Lopez?

a. None. The contract is unenforceable since it is not in writing.

b. An implied promise to exercise reasonable standards of
competence and care.
c. An implied obligation to take extraordinary steps to discover
all defalcations.
d. The obligation of an insurer of its work, which is liable
without fault.

79. A third party sues a public accounting firm for negligence under
common law on the basis of materially false financial statements.
Which of the following is the firm's defense?

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 a. Lack of privity
b. Lack of reliance
c. Lack of intent
d. Contributory negligence

80. The factor that distinguishes constructive fraud from ordinary

negligence is

a. materiality.
b. intent.
c. type of error or irregularity.
d. Level of care.

81. What type(s) of liability do CPA's have in the Philippines?

Common Law Liability Statutory Law Liability

a. Yes Yes
b. Yes No
c. No Yes
d. No No

82. A CPA firm issues an unqualified opinion on financial statements

that were not prepared in accordance with GAAP. The CPA firm
will have acted with fraud or its equivalent in all the following
circumstances except where the firm

a. intentionally disregards the truth.

b. has actual knowledge of fraud.
c. negligently performs auditing procedures.
d. intends to gain monetarily by concealing the fraud.

83. Under common law rules, a claimant suing a CPA firm based on
an audit of financial statements must prove each of the following
except:

a. A loss was sustained.

b. Reliance upon the audited financial statements was a
proximate cause of the loss.
c. The loss sustained was material to the claimant.
d. The auditors were guilty of either ordinary or gross negligence,
depending upon the claimant's recovery rights.

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84. Conflict between financial statement users and auditors often
arises because of the

a. high cost of performing an audit.

b. technical vocabulary which the auditor uses in the report.
c. placement of the auditor's report in the back of the client's
annual report where it is hard to locate.
d. expectation gap.

85. Which of the following is best considered a fraud?

a. Intentional misrepresentation of financial information.

b. Declining to finish work on client in light of a valid contract.
c. Inability to provide due diligence.
d. Not acting professionally while performing services.

86. Anyone identified to the auditor by name prior to the audit who is
to be the principal recipient of the auditor’s report is a

a. third party.
b. foreseen beneficiary.
c. primary beneficiary.
d. secondary beneficiary.

87. A CPA will most likely be negligent when the CPA fails to:

a. Correct errors discovered in the CPA’s previously issued audit

reports.
b. Detect all of a client’s fraudulent activities.
c. Include a negligence disclaimer in the CPA’s engagement
letter.
d. Warn a client’s customers of embezzlement that may be
perpetuated by the client’s employees.

88. The concept of privity may be important in defending auditors

against potential claimants. Privity in general only allows:

a. Clients to sue their auditors.

b. Lenders of the client to sue the auditor.

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 c. Anyone that relied upon the audited financial statements to
make a decision to sue the auditor as long as the auditor
knew or should have known of such reliance.
d. Shareholders who relied upon the audited financial
statements to make an investment decision.

CODE OF PROFESSIONAL CONDUCT

89. Professionals are expected to conduct themselves at a higher level

than

a. most other members of their profession.

b. most other members of society.
c. anyone else.
d. their clients.

90. Individual CPAs, Firms or Partnerships of CPAs, including

partners and staff members thereof shall register with the BOA
and the PRC. If the application for registration of AB and Co.,
CPAs was approved on August 30, 2005, the registration will
expire on

a. Sept. 30, 2007

b. Dec. 31, 2007
c. Dec. 31, 2008
d. Aug. 30, 2007

91. The following are modifications made to the IFAC Code to consider
Philippine regulatory requirements and circumstances, except

a. the period for rotation of the lead engagement partner was

changed from five to seven years.
b. advertising and solicitation by individual professional
accountants in public practice were not permitted in the
Philippines.
c. additional examples relating to anniversaries and websites
wherein publicity is acceptable, as provided in BOA Resolution
19, Series of 2000, were included.
d. payment and receipt of commissions were not permitted in the
Philippines.

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92. Which statement is incorrect regarding the Code of Ethics for
Professional Accountants in the Philippines?

a. Professional accountants refer to persons who are Certified

Public Accountants (CPA) and who hold a valid certificate
issued by the Board of Accountancy.
b. Where a national statutory requirement is in conflict with a
provision of the IFAC Code, the IFAC Code requirement
prevails.
c. The Code of Ethics for Professional Accountants in the
Philippines is mandatory for all CPAs and is applicable to
professional services performed in the Philippines on or after
January 1, 2004.
d. Professional accountants should consider the ethical
requirements as the basic principles which they should follow
in performing their work.

93. The underlying reason for a code of professional conduct for any
profession is

a. the need for public confidence in the quality of service of the

profession.
b. that it provides a safeguard to keep unscrupulous people out.
c. that it is required by congress.
d. that it allows Professional Regulation Commission to have a
yardstick to measure deficient performance.

94. The following statements relate to RA 9298. Which statement is

true?

a. The Professional Regulation Commission has the authority to

remove any member of the Board of Accountancy for
negligence, incompetence, or any other just cause.
b. Insanity is not a ground for proceeding against a CPA.
c. A person shall be considered to be in the professional practice
of accounting if, as an officer in a private enterprise, he makes
decisions requiring professional accounting knowledge.
d. After three years, subject to certain conditions, the Board of
Accountancy may order the reinstatement of a CPA whose
certificate of registration has been revoked.

95. There are fundamental principles that the professional accountant

has to observe when performing assurance engagements. The

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 requirement of which principle is of particular importance in an
assurance engagement in ensuring that the conclusion of the
professional accountant has value to the intended user?

a. Integrity
b. Confidentiality
c. Professional competence
d. Objectivity

96. Existing accountant, as defined in the Code of Ethics, means

a. a professional accountant employed in industry, commerce,

the public sector or education.
b. a professional accountant in public practice currently holding
an audit appointment or carrying out accounting, taxation,
consulting or similar professional services for a client.
c. Those persons who hold a valid certificate issued by the Board
of Accountancy.
d. A sole proprietor, or each partner or person occupying a
position similar to that of a partner and each staff in a
practice providing professional services to a client irrespective
of their functional classification (e.g., audit, tax or consulting)
and professional accountants in a practice having managerial
responsibilities.

97. A profession is distinguished by certain characteristics including

I. Mastery of a particular intellectual

skill, acquired through training and education.
II. Adherence by its members to a
common code of values and conduct established by its
administrating body, including maintaining an outlook which
is essentially objective.
III. Acceptance of a duty to society as a
whole (usually in return for restrictions in use of a title or in
the granting of a qualification).

a. I, II and III
b. I and II only
c. III only
d. II and III only

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98. When a professional accountant performs services in a country
other than the home country and differences on specific matters
exist between ethical requirements of the two countries, the
following provisions should be applied:

a. When the ethical requirements of the country in which the

services are being performed are less strict than the Code of
Ethics of the Philippines, then the Code of Ethics of the
Philippines should be applied.
b. When the ethical requirements of the country in which
services are being performed are stricter than the Code of
Ethics of the Philippines, then the ethical requirements in the
country where services are being performed should be applied.
c. When the ethical requirements of the home country are
mandatory for services performed outside that country and
are stricter, then the ethical requirements of the home country
should be applied.
d. Any of the above

99. How did the Code of Ethics define public interest?

a. A distinguishing mark of a profession is the acceptance of its

responsibility to the public.
b. The accountancy profession's public consists of clients, credit
grantors, governments, employers, employees, investors, the
business and financial community, and others who rely on the
objectivity and integrity of professional accountants.
c. The collective well-being of the community of people and
institutions the professional accountant serves.
d. The standards of the accountancy profession are heavily
determined by the public interest.

100. Professional accountants may encounter problems in identifying

unethical behavior or in resolving an ethical conflict. When faced
with significant ethical issues, professional accountants should do
the following, except

a. follow the established policies 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.

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 c. if the problem is not resolved with the immediate superior and
the professional accountant determines to go to the next
higher managerial level, the immediate superior need not be
notified of the decision.
d. seek counseling and advice on a confidential basis with an
independent advisor or the applicable professional
accountancy body or regulatory body to obtain an
understanding of possible courses of action.

101. The work of each assistant needs to be reviewed by personnel of at

least equal competence. Which of the following is not one of the
objectives of this requirement?

a. The conclusions expressed are consistent with the result of

the work performed and support the opinion.
b. The work performed and the results obtained have been
adequately documented.
c. The objectives of the audit procedures have been achieved.
d. All available evidences have been obtained, evaluated and
documented.

102. Which of the following is incorrect regarding professional

competence?

a. Professional accountants may portray themselves as having

expertise or experience they do not possess.
b. Professional competence may be divided into two separate
phases.
c. The attainment of professional competence requires initially a
high standard of general education.
d. The maintenance of professional competence requires a
continuing awareness of development in the accountancy
profession.

103. Which of the following is the least required in attaining

professional competence?

a. High standard of general education.

b. Specific education, training and examination in professionally
relevant subjects.
c. Period of meaningful work experience.
d. Continuing awareness of development in the accountancy
profession.

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104. The following procedures relate to Skills and Competence, except

a. identify criteria which will be considered in evaluating

individual performance and expected proficiency.
b. provide procedures for maintaining the firm’s standards of
quality for the work performed.
c. establish qualifications and guidelines for evaluating potential
hirees at each professional level.
d. provide, to the extent necessary, programs to fill the firm’s
needs for personnel with expertise in specialized and
industries.

105. It is essential that users regard CPA firms as

a. competent.
b. unbiased.
c. technically proficient.
d. All of the above

106. Which of the following is prohibited by the Code of Professional

Ethics for CPAs?

a. Use of a firm name which includes the name of a retired

partner.
b. Announcement in a newspaper of the opening of a public
accounting office.
c. Engaging in civic activities during business hours.
d. Accepting an engagement or employment which one cannot
reasonably expect to complete or discharge with professional
competence.

107. The Code of Professional Ethics states, in part, that a CPA should
maintain integrity and objectivity. Objectivity refers to the CPA's
ability to

a. determine accounting practices that were consistently applied.

b. maintain an impartial attitude on all matters which come
under his review.
c. determine the materiality of items.
d. insist on all matters regarding audit procedures.

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108. Which of the following is a violation of the code of professional
ethics for certified public accountants?

a. A CPA permits his/her name to be used in a client's advertising

as having verified financial data and/or statistical facts with
respect to the client's products.
b. Based on information obtained in an audit, a CPA reports an
illegal act of his client to government authorities.
c. Three years after a partner has retired, the remaining partners
continue to practice under a firm name that includes the name
of the retired partner. The retired partner has severed all
connections with the CPA firm.
d. A CPA running for public office uses the professional
designation "CPA" after his name on posters employed in
connection with his election campaign.

109. Which of the following is incorrect regarding the professional

accountants’ tax practice?

a. A professional accountant rendering professional tax services

is entitled to put forward the best position in favor of a client,
or an employer.
b. Doubt may be resolved in favor of the client or the employer if
there is reasonable support for the position.
c. A professional accountant may hold out to a client or an
employer the assurance that the tax return prepared and the
tax advice offered are beyond challenge.
d. Professional accountants should ensure that the client or the
employer are aware of the limitations attaching to tax advice
and services so that they do not misinterpret an expression of
opinion as an assertion of fact.

110. A professional accountant may be associated with a tax return

that

a. contains a false or misleading statement.

b. contains statements or information furnished recklessly or
without any real knowledge of whether they are true or false.
c. omits or obscures information required to be submitted and
such omission or obscurity would mislead the revenue
authorities.
d. uses of estimates if such use is generally acceptable or if it is
impractical under the circumstances to obtain exact data.

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111. Which of the following is least likely an application of maintaining
an attitude of professional skepticism?

a. The auditor does not consider representations from

management as substitute for obtaining sufficient appropriate
audit evidence to be able to draw reasonable conclusions on
which to base the audit opinion.
b. In planning and performing an audit, the auditor assumes
that management is dishonest.
c. The auditor is alert to audit evidence that contradicts or
brings into question the reliability of documents or
management representations.
d. The auditor makes a critical assessment, with a questioning
mind, of the validity of audit evidence obtained.

112. Prior to beginning the 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 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 relates to the nature of the
entity’s business.

113. Which of the following statements is true when the CPA has been
engaged to do an attestation engagement?

a. The CPA firm is engaged and paid by the client; therefore, the
firm has primary responsibility to be an advocate for the
client.
b. The CPA firm is engaged and paid by the client, but the
primary beneficiaries of the audit are the statement users.
c. Should a situation arise where there is no convincing
authoritative standard available, and there is a choice of
actions which could impact client’s financial statements either
positively or negatively, the CPA is free to endorse the choice
which is best in the client’s interest.

66
 d. As long as CPA firms are competent, it is not required that
they remain unbiased.

114. The CPA should not undertake an engagement if his fee is to be

based upon

a. a percentage of audited net income.

b. per diem rates plus expenses.
c. the findings of a tax authority.
d. the complexity of the service rendered.

115. If the firm is involved in the preparation of accounting records or

financial statements and those financial statements are
subsequently the subject matter of an audit engagement of the
firm, this will most likely create

a. self-interest threat.
b. self-review threat.
c. intimidation threat.
d. familiarity threat.

116. 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
most likely create

a. self-interest threat.
b. self-review threat.
c. intimidation threat.
d. familiarity threat.

117. Jang, a CPA, has a law practice. Jang has recommended one of
his clients to Geum, a CPA. Geum has agreed to pay Jang 10% of
the fee for services rendered by Geum to Jang’s client. Who, if
anyone, is in violation of the Code of Ethics?

a. Both Jang and Geum

b. Jang only
c. Neither Jang and Geum
d. Geum only

118. Immediate family includes

67
 a. parent.
b. sibling.
c. non-dependent child.
d. spouse.

119. The network firms are required to be independent of the client

a. for assurance engagements provided to an audit client.

b. for assurance engagements provided to clients that are not
audit clients, when the report is not expressly restricted for
use by identified users.
c. for assurance engagements provided to clients that are not
audit clients, when the assurance report is expressly
restricted for use by identified users.
d. All of the above

120. One difference between auditors and other professionals is that

most professionals

a. need not be concerned about remaining independent.

b. do not have requirements for continuing education beyond
college.
c. do not have to pass a rigorous examination.
d. are not expected to act in public interest.

121. The Code of Professional Conduct would be violated if a member

accepted a fee for services and the fee was

a. fixed by a public authority.

b. based on a price quotation submitted in competitive bidding.
c. based on the result of judicial proceedings.
d. payable after a specified finding was attained.

122. For assurance engagements provided to an audit client, the

following should be independent of the client:

a b c d
 The members of the Yes Yes Yes Yes
assurance team
 The firm Yes Yes No No
 Network firms Yes No No Yes

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123. For assurance engagements provided to clients that are not audit
clients, when the report is not expressly restricted for use by
identified users, the following should be independent of the client:

a b c d
 The members of the Yes Yes Yes Yes
assurance team
 The firm Yes Yes No No
 Network firms Yes No No Yes

124. For assurance engagements provided to clients that are not audit
clients, when the assurance report is expressly restricted for use
by identified users, the following should be independent of the
client:

a b c d
 The members of the Yes Yes Yes Yes
assurance team
 The firm Yes Yes No No
 Network firms Yes No No Yes

125. The firm should be independent of the client in the following

engagements:

a b c d
 Assurance engagements Yes Yes Yes Yes
provided to an audit client
 Assurance engagements Yes Yes No No
provided to clients that are
not audit clients, when the
report is not expressly
restricted for use by
identified users
 Assurance engagements Yes No No Yes
provided to clients that are
not audit clients, when the
assurance report is expressly
restricted for use by
identified users

126. Direct financial interest is a financial interest:

69
 a b c d
 Owned directly by and under
the control of an individual or
entity (including those Yes Yes Yes No
managed on a discretionary
basis by other)
 Beneficially owned through a
collective investment vehicle,
estate, trust or other
Yes Yes No No
intermediary over which the
individual or entity has
control
 Beneficially owned through a
collective investment vehicle,
estate, trust or other
Yes No No Yes
intermediary over which the
individual or entity has no
control

127. Which of the following is incorrect regarding independence?

a. Independence consists of independence of mind and

independence in appearance.
b. Independence of mind is the state of mind that permits the
provision of an opinion without being affected by influences
that compromise professional judgment, allowing an
individual to act with integrity, and exercise objectivity and
professional skepticism.
c. Independence in appearance is the avoidance of facts and
circumstances that are so significant a reasonable and
informed third party, having knowledge of all relevant
information, including any safeguards applied, would
reasonably conclude a firm's or a member of the assurance
team’s integrity, objectivity or professional skepticism had
been compromised.
d. Independence is a combination of impartiality, intellectual
honesty and a freedom from conflicts of interest.

128. For which of the following services is a CPA professional required

to be independent?

a. Audits of historical financial statements

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 b. Review services
c. Examination of prospective financial statements
d. All of the above

129. For which of the following services is a CPA professional not

required to be independent?

a. Tax returns preparation

b. Audits of historical financial statements
c. Review engagement
d. Examination of a forecast

130. Occurs when a firm or a member of the assurance team could

benefit from a financial interest in, or other self-interest conflict
with, an assurance client.

a. Self-interest threat
b. Self-review threat
c. Advocacy threat
d. Familiarity threat
131. Examples of circumstances that may create self-interest threat
include:

a. Contingent fees relating to assurance engagements.

b. A direct financial interest or material indirect financial interest
in an assurance client.
c. A loan or guarantee to or from an assurance client or any of
its directors or officers.
d. All of the above

132. Which of the following least likely create “self-interest threat”?

a. Undue dependence on total fees from an assurance client.

b. Concern about the possibility of losing the engagement.
c. Having a close business relationship with an assurance client.
d. Pressure to reduce inappropriately the extent of work
performed in order to reduce fees.

133. Occurs when any product or judgment of a previous assurance

engagement or non-assurance engagement needs to be re-
evaluated in reaching conclusions on the assurance engagement
or when a member of the assurance team was previously a
director or officer of the assurance client, or was an employee in a

71
 position to exert direct and significant influence over the subject
matter of the assurance engagement.

a. Self-interest threat
b. Self-review threat
c. Advocacy threat
d. Familiarity threat

134. Examples of circumstances that may create self-review threat

least likely include

a. preparation of original data used to generate financial

statements or preparation of other records that are the subject
matter of the assurance engagement.
b. a member of the assurance team being, or having recently
been, an employee of the assurance client in a position to
exert direct and significant influence over the subject matter
of the assurance engagement.
c. performing services for an assurance client that directly affect
the subject matter of the assurance engagement.
d. potential employment with an assurance client.

135. Occurs when a firm, or a member of the assurance team,

promotes, or may be perceived to promote, an assurance client’s
position or opinion to the point that objectivity may, or may be
perceived to be, compromised. Such may be the case if a firm or a
member of the assurance team were to subordinate their judgment
to that of the client.

a. Self-interest threat
b. Self-review threat
c. Advocacy threat
d. Familiarity threat

136. A CPA-lawyer, acting as a legal counsel to one of his audit client,

is an example of

a. Self-interest threat
b. Self-review threat
c. Advocacy threat
d. Familiarity threat

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137. Occurs when, by virtue of a close relationship with an assurance
client, its directors, officers or employees, a firm or a member of
the assurance team becomes too sympathetic to the client’s
interests.

a. Self-interest threat
b. Self-review threat
c. Advocacy threat
d. Familiarity threat

138. Examples of circumstances that may create familiarity threat least

likely include

a. a member of the assurance team having an immediate family

member or close family member who is a director or officer of
the assurance client.
b. a member of the assurance team having an immediate family
member or close family member who, as an employee of the
assurance client, is in a position to exert direct and significant
influence over the subject matter of the assurance
engagement.
c. a former partner of the firm being a director, officer of the
assurance client or an employee in a position to exert direct
and significant influence over the subject matter of the
assurance engagement.
d. dealing in, or being a promoter of, share or other securities in
an assurance client.

139. Intimidation threat

a. is not a threat to independence.

b. occurs when a member of the assurance team may be
deterred from acting objectively and exercising professional
skepticism by threats, actual or perceived, from the directors,
officers or employees of an assurance client.
c. occurs when, by virtue of a close relationship with an
assurance client, its directors, officers or employees, a firm or
a member of the assurance team becomes too sympathetic to
the client’s interests.
d. occurs when a firm, or a member of the assurance team,
promotes, or may be perceived to promote, an assurance
client’s position or opinion to the point that objectivity may, or
may be perceived to be, compromised.

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140. Which of the following is not likely a threat to independence?

a. Acting as an advocate on behalf of an assurance client in

litigation or in resolving disputes with third parties.
b. Long association of a senior member of the assurance team
with the assurance client.
c. Threat of replacement over a disagreement with the
application of an accounting principle.
d. Owning immaterial indirect financial interest in an audit
client.

141. When threats to independence that are not clearly insignificant

are identified, the following are appropriate, except:

a. Professional judgment is used to determine the appropriate

safeguards to eliminate threats to independence or to reduce
them to an acceptable level.
b. In situations when no safeguards are available to reduce the
threat to an acceptable level, the only possible actions are to
eliminate the activities or interest creating the threat, or to
refuse to accept or continue the assurance engagement.
c. When the firm decides to accept or continue the assurance
engagement, the decision need not be documented provided
the threats identified were eliminated.
d. The evaluation of the significance of any threats to
independence and the safeguards necessary to reduce any
threats to an acceptable level, takes into account the public
interest.

142. If a member of the assurance team, or their immediate family

member, has a direct financial interest, or a material indirect
financial interest, in the assurance client, the self-interest threat
created would be so significant the only safeguards available to
eliminate the threat or reduce it to an acceptable level would be to
(choose the incorrect one)

a. dispose of the direct financial interest prior to the individual

becoming a member of the assurance team.
b. dispose of the indirect financial interest in total prior to the
individual becoming a member of the assurance team.

74
 c. dispose of a sufficient amount of the indirect financial interest
so that the remaining interest is no longer material prior to
the individual becoming a member of the assurance team.
d. limit the participation of the member of the assurance team.

143. If a member of the assurance team, or their immediate family

member receives, by way of, for example, an inheritance, gift or, as
a result of a merger, a direct financial interest or a material
indirect financial interest in the assurance client, a self-interest
threat would be created. The following safeguards should be
applied to eliminate the threat or reduce it to an acceptable level:

a. Disposing of the financial interest at the earliest practical

date.
b. Removing the member of the assurance team from the
assurance engagement.
c. Either a or b
d. Neither a nor b

144. If a firm, or a network firm, has a direct financial interest in an

audit client of the firm, the self-interest threat created would be so
significant no safeguard could reduce the threat to an acceptable
level. The action appropriate to permit the firm to perform the
engagement would be to

a. dispose of the financial interest.

b. dispose of a sufficient amount of it so that the remaining
interest is no longer material.
c. Either a or b
d. Neither a nor b

145. The following loans and guarantees would not create a threat to
independence, except:

a. A loan from, or a guarantee thereof by, an assurance client

that is a bank or a similar institution, to the firm, provided
the loan is made under normal lending procedures, terms and
requirements and the loan is immaterial to both the firm and
the assurance client.
b. A loan from, or a guarantee thereof by, an assurance client
that is a bank or a similar institution, to a member of the
assurance team or their immediate family, provided the loan

75
 is made under normal lending procedures, terms and
requirements.
c. Deposits made by, or brokerage accounts of, a firm or a
member of the assurance team with an assurance client that
is a bank, broker or similar institution, provided the deposit
or account is held under normal commercial terms.
d. 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.

146. Family and personal relationships between a member of the

assurance team and a director, an officer or certain employees,
depending on their role, of the assurance client, least likely create

a. self-interest threat.
b. self-review threat.
c. intimidation threat.
d. familiarity threat.

147. A director, an officer or an employee of the assurance client in a

position to exert direct and significant influence over the subject
matter of the assurance engagement has been a member of the
assurance team or partner of the firm. This situation least likely
create

a. self-interest threat.
b. advocacy threat.
c. intimidation threat.
d. familiarity threat.

148. A former officer, director or employee of the assurance client

serves as a member of the assurance team. This situation will
least likely create

a. self-interest threat.
b. self-review threat.
c. intimidation threat.
d. familiarity threat.

149. Which of the following will least likely impair independence?

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 a. 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 of the assurance engagement.
b. A member of the assurance team participates in the
assurance engagement while knowing, or having reason to
believe, that he or she is to, or may, join the assurance client
some time in the future.
c. A partner or employee of the firm serves as an officer or as a
director on the board of an assurance client.
d. A partner or employee of the firm or a network firm serves as
Company Secretary for an audit client, the duties and
functions undertaken are limited to those of a routine and
formal administrative nature as such as the preparation of
minutes and maintenance of statutory returns.

150. If firm, or network firm, personnel providing such assistance

make management decisions, the self-review threat created could
not be reduced to an acceptable level by any safeguards.
Examples of such managerial decisions include the following,
except:

a. Determining or changing journal entries, or the classifications

for accounts or transactions or other accounting records
without obtaining the approval of the audit clients
b. Authorizing or approving transactions.
c. Preparing source documents or originating data (including
decisions on evaluation assumptions), or making changes to
such documents or data.
d. Assisting an audit client in resolving account reconciliation
problems.

151. If the firm is involved in the preparation of accounting records or

financial statements and those financial statements are
subsequently the subject matter of an audit engagement of the
firm, this will most likely create

a. self-interest threat.
b. self-review threat.
c. intimidation threat .
d. familiarity threat.

77
152. 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
most likely create

a. self-interest threat.
b. self-review threat.
c. intimidation threat.
d. familiarity threat.

153. Which of the following is least likely considered to create a threat

to independence?

a. The provision of services by a firm or network firm to an audit

client which involve either the design or the implementation of
financial information technology systems that are used to
generate information forming part of a client’s financial
statements.
b. The provision of services in connection with the assessment,
design and implementation of internal accounting controls
and risk management controls.
c. The lending of staff by a firm, or network firm, to an audit
client when the individual is in a position to influence the
preparation of a client’s accounts or financial statements.
d. The provision of litigation support services to an audit client,
which include the estimation of the possible outcome and
thereby affects the amounts or disclosures to be reflected in
the financial statements.

154. Which of the following will impair the independence of a CPA in

public practice?

a. He has his name and address listed on a one-page section of

the telephone book.
b. He obtained a loan from a bank under the normal lending
procedures, terms and requirements of that bank.
c. He holds one share of the client’s capital stock.
d. He failed to disclose a client’s departure from GAAP.

155. When CPAs are able to maintain an independence attitude in

fulfilling their responsibility, it is referred to as independence in

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 a. fact.
b. appearance.
c. conduct.
d. total.

156. When the users of financial statements have confidence in the

independence of the CPA, it is referred to as in independence in

a. fact.
b. appearance.
c. conduct.
d. total.

157. Which of the following statements is incorrect?

a. CPAs lose their independence if they acquire any direct

financial interest in a client.
b. CPAs lose their independence if they have a material direct
financial interest in a client.
c. CPAs lose their independence if they acquire any indirect
financial interest in a client.
d. CPAs lose their independence if they acquire a material
indirect financial interest in a client.

158. When determining whether independence is impaired because of

an ownership interest in client company, materiality will affect
whether ownership is a violation of rule of independence

a. in all circumstances.
b. only for direct ownership.
c. only for indirect ownership.
d. under no circumstances.

159. A successor auditor is required to communicate with the previous

auditor. The primary concern in this communication is

a. information which will help the successor auditor determine

whether the client management has integrity.
b. to learn about client by examining predecessor’s working
papers.
c. to enable successor auditor to perform a more efficient audit.
d. to save successor auditor time and money in gathering data.

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160. When a CPA firm is requested to provide a written or oral opinion
on the application of accounting principles or the type of audit
opinion that would be issued for a specific or hypothetical
transaction relating to an audit client of another CPA firm,
primary among the requirements set forth is that

a. client is entitled to confidentiality, so the consulting CPA firm

is forbidden form communicating with the CPA firm which
does the audit.
b. the consulted CPA firm should communicate with the entity’s
existing auditors to ascertain all the available facts relevant to
forming a professional judgment on the matters the firm has
been requested to report on.
c. client is entitled to confidentiality, so the CPA firm which does
audit should refuse to share any information with the
consulting CPA firm under any circumstances.
d. client is not entitled to confidentiality under these
circumstances, so the existing auditors should share all
information with the consulting CPA firm.

161. A professional accountant has a professional duty or right to

disclose confidential information in each of the following, except:

a. To comply with technical standards and ethics requirements.

b. To disclose to BIR fraudulent scheme committed by the client
on payment of income tax.
c. To comply with the quality review of a member body or
professional body
d. To respond to an inquiry or investigation by a member body or
regulatory body.

162. Which of the following best describes the passing of confidential

information from a client to its auditor? The information:

a. Should in no circumstances be conveyed to third parties.

b. Is not legally protected and can be subpoenaed by a
competent court.
c. Can only be released for peer reviews after receiving
permission from the client.
d. Should be conveyed to the public if it affects the "correctness"
of the financial statements.

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163. If an auditor had a substantial stock investment in a client that
s(he) was auditing, which of the following would be true?

a. The auditor would lack independence.

b. The auditor would be violating the FASB standards.
c. The auditor would be violating the Institute of Management
Accounting standards.
d. The auditor would be violating the IIA standards.

164. The CPA must not subordinate his or her professional judgment
to that of others in every

a. engagement.
b. audit engagement.
c. engagement except tax services.
d. engagement except management advisory services.

165. Which of the following is an indication of lack of objectivity of an

auditor?

a. The auditor believes that accounts receivable may not be

collectible, but accepts management’s opinion without an
independent evaluation.
b. In preparing client’s tax return, the CPA encourages client to
take a deduction which the CPA believes is valid, but for
which there is some but not complete support.
c. Both a and b above would be a violation
d. Neither would be a violation

166. A CPA in public practice shall not disclose any confidential client
information without the specific consent of the client. The
confidentiality rule is violated if CPA disclosed information
without client’s consent as a result of a

a. subpoena or summons.
b. peer review.
c. complaint filed with the trial board of the Board of
Accountancy.
d. request by client’s largest stockholder.

167. The confidential relationship applies to

a. all services provided by CPAs.

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 b. only audit and attestation services.
c. audit and tax services, but no MAS services.
d. audit and MAS services, but not tax services.

168. The confidential relationship will be violated if, without client’s

permission, the CPA provides working papers about client to

a. a court of law which subpoenas them.

b. another CPA firm as part of a peer review.
c. another CPA firm which has just purchased the CPA’s entire
practice.
d. an investigative or disciplinary body which is conducting a
review of the CPA’s practice.

169. Several months after an unqualified audit report was issued, the
auditor discovers the financial statements were materially
misstated. The client’s chief executive officer agrees that the
statements are misstated, but refuses to issue a correction, and
claims that “confidentiality” prevents the CPA from informing
anyone.

a. CEO is correct. Auditor must maintain confidentiality.

b. CEO is wrong, but since auditor’s report is issued, it is too
late to retract.
c. CEO is wrong, and auditor has an obligation to issue a revised
correct audit report, even if CEO will not revise and correct
the financial statements.
d. CEO is correct, but to be ethically correct the auditor should
violate the confidentiality rule and disclose the error.

170. A member in public practice may perform for a contingent fee any
professional services for a client for whom the member or
member’s firm performs

a. an audit.
b. a review.
c. a compilation used only by management.
d. an audit of prospective financial information.

171. Which one of the following contingent fee is allowed?

a. All services performed by a CPA firm.

b. Non-attestation services.

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 c. Non-attestation services, unless the CPA firm was also
performing attestation services for the same client.
d. Attestation services.

172. Solicitation consists of the various means that CPA firms use to
engage new clients. Which one of the following would not be an
example of solicitation?

a. Accepting new clients that approach the firm.

b. Taking prospective clients to lunch.
c. Offering seminars on current tax law changes to potential
clients.
d. Advertisements in the yellow pages of a phone book.

173. Which of the following activities is not prohibited for the CPA
firm’s attestation service clients?

a. Competitive bidding on audit jobs.

b. Contingent fees on audit jobs.
c. Commissions for obtaining client services on audit jobs.
d. Referral fees on audit jobs.

174. If requested to perform a review engagement for a nonpublic entity

in which an accountant has an immaterial direct financial
interest, the accountant is

a. independent because the financial interest is immaterial and,

therefore, may issue a 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.

175. Which of the following most completely describes how

independence has been defined by the CPA profession?

a. Performing an audit from the viewpoint of the public.

b. Avoiding the appearance of significant interests in the affairs
of an audit client.
c. Possessing the ability to act with integrity and objectivity.
d. Possessing the ability to act professionally and accordance
with a professional code of ethics.

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176. To emphasize auditor independence from management, many
corporations follow the practice of

a. appointing a partner of the CPA firm conducting the

examination to the corporation’s audit committee.
b. establishing a policy of discouraging social contact between
employees of the corporation and the staff of the independent
auditor.
c. requesting that a representative of the independent auditor be
on hand at the annual stockholders’ meeting.
d. having the independent auditor report to an audit committee
of outside members of the board of directors.

177. In determining independence with respect to any audit

engagement, the ultimate decision as to whether or not the
auditor is independent must be made by the

a. auditor.
b. client.
c. audit committee.
d. public.

178. When a CPA who is not independent is associated with financial

statements, he would be precluded from expressing an opinion
because

a. the public would be aware of his lack of independence and

would place little or no faith in his opinion.
b. he would place himself in the position of suffering an adverse
decision in a possible liability suit.
c. he would be in the position of auditing his own work.
d. any auditing procedures he might perform would not be in
accordance with generally accepted auditing standards.

179. Which of the following statements best describes why the

profession of certified public accountants has deemed it essential
to promulgate a code of ethics and to establish a mechanism for
enforcing observance of the code?

a. A distinguishing mark of a profession is its acceptance of

responsibility to the public.

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 b. A prerequisite to success is the establishment of an ethical
code that stresses primarily the professional’s responsibility to
clients and colleagues.
c. The law requires an establishment of a code of ethics.
d. An essential means of self-protection for the profession is the
establishment of flexible ethical standards by the profession.

180. In which of the following circumstances would a CPA be bound by

ethics to refrain from disclosing any confidential information
obtained during the course of a professional engagement?

a. The CPA is issue a summons enforceable by a court order

which orders the CPA to present confidential information.
b. A major stockholder of a client company seeks accounting
information form the CPA after management declined to
disclose the requested information.
c. Confidential client information is made available as part of a
quality review of the CPA’s practice by a peer review team
authorized by the PICPA.
d. An inquiry by a disciplinary body of PICPA requests
confidential client information.

181. Which of the following best describes why publicly-traded

corporations follow the practice of having the outside auditor
appointed by the board of directors or elected by the
stockholders?

a. To comply with the regulations of the Accounting Standards

Council.
b. To emphasize auditor independence from the management of
the corporation.
c. To encourage a policy of rotation of the independent auditors.
d. To provide the corporate owners with an opportunity to voice
their opinion concerning the quality of the auditing firm
selected by the directors.

182. A violation of the ethical standards would most likely have

occurred when a CPA

a. made arrangement with a bank to collect notes issued by a

client in payment of fees due.
b. joined an accounting firm made up of three non-CPA
practitioners.

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 c. issued an unqualified opinion on the 2006 financial
statements when fees for the 2005 audit were unpaid.
d. purchased a bookkeeping firm’s practice of monthly write-ups
for a percentage of fees received over a three-year period.

183. The concept of materiality would be least important to an auditor

when considering the

a. decision whether to use positive or negative confirmations of

accounts receivable.
b. adequacy of disclosure of a client’s illegal act.
c. discovery of weaknesses in a client’s internal control
structure.
d. effects of a direct financial interest in the client upon the
CPA’s independence.

184. Which of the following is a violation Confidentiality rule of the

Code of Professional Conduct?

a. The CPA, in response to a court subpoena, submits auditor-

prepared workpapers as evidence of possible illegal acts
perpetrated by the client.
b. The CPA discloses to the board of directors a scheme
concocted by top management to intentionally inflate
earnings.
c. The CPA warns Client B as to the inadvisability of acquiring
Client A. The CPA bases this warning on knowledge of Client
A's financial condition and a belief that the management of
Client A lacks integrity. This knowledge was obtained by the
CPA as a result of auditing Client A during the past several
years.
d. The CPA, when questioned in court, admits to knowledge of
certain illegal acts perpetrated by the client.

185. An auditor who accepts an audit engagement and does not

possess the industry expertise of the business entity, should

a. engage financial experts familiar with the nature of the

business entity.
b. obtain a knowledge of matters that relates to the nature of the
entity's business.

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 c. refer a substantial portion of the audit to another CPA who
will act as the principal auditor.
d. first inform management that an unqualified opinion cannot
be issued.

186. In determining estimates of fees, an auditor may take into account

each of the following, except the:

a. Value of the service to the client.

b. Degree of responsibility assumed by undertaking the
engagement.
c. Skills required to perform the service.
d. Attainment of specific findings.

187. A CPA, while performing an audit, strives to achieve

independence in appearance in order to

a. reduce risk and liability.

b. comply with the generally accepted standards of fieldwork.
c. become independent in fact.
d. maintain public confidence in the profession.

188. A client company has not paid its 2006 audit fees. According to
the IFAC Code of Professional Conduct, for the auditor to be
considered independent with respect to the 2007 audit, the 2006
audit fees must be paid before the

a. 2006 report is issued.

b. 2008 fieldwork is started.
c. 2007 report is issued.
d. 2008 fieldwork is started.

189. The IFAC Code of Professional Conduct will ordinarily be

considered to have been violated when the member represents
that specific consulting services will be performed for a stated fee
and it is apparent at the time of the representation that the

a. actual fee would be substantially higher.

b. actual fee would be substantially lower than the fees charged
by other members for comparable services.
c. fee was a competitive bid.
d. member would not be independent.

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190. In which of the following instances would the independence of the
CPA not be considered to be impaired? The CPA has been retained
as the auditor of a brokerage firm

a. which owes the CPA audit fees for more than one year.
b. in which the CPA has a large active margin account.
c. in which the CPA's brother is the controller.
d. which owes the CPA audit fees for services in the current year
and has just filed a petition for bankruptcy.

191. In performing an audit, Jackson, CPA, discovers that the

professional competence necessary for the engagement is lacking.
Jackson informs management of the situation and recommends
another local firm, and management engages this other firm.
Under these circumstances,

a. Jackson may request compensation from the other firm for

any professional services rendered to it in connection with the
engagement.
b. Jackson may accept a referral fee from the other firm.
c. Jackson has violated the AICPA Code of Professional Conduct
because of nonfulfillment of the duty of performance.
d. Jackson's lack of competence should be construed to be a
violation of generally accepted auditing standards.

192. Which of the following fee arrangements is in violation of the Code

of Professional Conduct?

a. A fee based on whether the CPA's report on the client's

financial statements results in the approval of a bank loan.
b. A fee based on the outcome of a bankruptcy proceeding.
c. A fee based on the nature of the service rendered and the
CPA's particular expertise instead of the actual time spent on
the engagement.
d. A fee based on the fee charged by the prior auditor.

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193. Richard, CPA, performs accounting services for Norton
Corporation. Norton wishes to offer shares to the public and asks
Richard to audit the financial statements. Richard refers Norton
to Cruz, CPA, who is more competent in the area of registration
statements. Cruz performs the audit of Norton's financial
statements and subsequently thanks Richard for the referral by
giving Richard a portion of the audit fee. Richard accepts the fee.
Who, if anyone, has violated professional ethics?

a. Only Richard
b. Both Richard and Cruz
c. Only Cruz
d. Neither Richard nor Cruz

194. No person shall serve the Professional Regulatory Board of

Accountancy for more than

a. 3 years
b. 6 years
c. 9 years
d. 12 years

195. The following are represented both to the Financial Reporting

Standards Council (FRSC) and Auditing and Assurance Standards
Council (AASC), except:

a. Bangko Sentral ng Pilipinas

b. Securities and Exchange Commission
c. Bureau of Internal Revenue
d. Board of Accountancy

196. Which of the following is not a requisite in applying for the CPA
licensure examinations?

a. Natural-born citizen of the Philippines

b. Good moral character
c. Holder of the degree of Bachelor of Science in Accountancy
d. Has not been convicted of any criminal offense involving moral
turpitude

197. How many CPE credit units must be accumulated by a registered

accounting professional within the 3-year period?

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a. 15 credit units
b. 45 credit units
c. 60 credit units
d. 90 credit units

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