CHAPTER 3: THE CPA’S PROFESSIONAL RESPONSIBILITIES

1. The Code of Ethics for Professional Accountants in the Philippines consists of three parts. Part A

A. Applies to professional accountants in public practice.

B. Establishes the fundamental principles for professional accountants.

C. Applies to professional accountants in business.

D. Provides a conceptual framework for the application of fundamental principles and illustrates
how the framework is to be applied in specific situations.

2. Which part of the Code of Ethics applies to professional accountants in public practice?

A. Part A

B. Part B

C. Part C

D. Part D

3. Which of the following fundamental ethical principles requires a professional accountant to be

straightforward and honest in all professional and business relationships?

A. Objectivity

B. Professional behavior

C. Professional competence and due care

D. Integrity

4. The following statements relate to the fundamental principles of professional ethics:

A B C D

Integrity implies fair dealing and truthfulness True True False False

The principle of objectivity imposes an True False True False

obligation on all professional accountants to
 maintain professional knowledge and skill at the
level required

The principle of professional behavior requires False False True True

all professional accountants to act diligently
and in accordance with applicable technical and
professional standards when rendering
professional services.

5. Competence as a certified public accountant includes all of the following except

A. Having the technical qualifications to perform an engagement.

B. Possessing the ability to supervise and to evaluate the quality of staff work.

C. Warranting the infallibility of the work performed.

D. Consulting others if additional technical information is needed.

6. Which of the following fundamental ethical principles prohibits association of professional

accountants with reports, returns, communications or other information that is believed to contain a
materially false or misleading statement?

A. Integrity

B. Objectivity

C. Professional competence and due care

D. Confidentiality

7. According to the Code of Ethics, professional competence may be divided into two phases: attainment
of professional competence and maintenance of professional competence. The attainment of
professional competence requires the following, except

A. A high standard of general education.

B. Specific education, training, and examination in professionally relevant subjects.

 C. Whether prescribed or not, a period of work experience.

D. A continuing awareness and an understanding of relevant technical professional and business

development.

8. The Code of Ethics provides a Conceptual Framework for applying the fundamental ethical principles.
This framework requires a professional accountant to

I. Identify threats to compliance with the fundamental principles.

II. Evaluate the significance of the identified threats.

III. Apply safeguards to eliminate the threats or reduce them to an acceptable level.

A. I and II only

B. I and III only

C. II and III only

D. I, II, and II

9. Which of the following threats to compliance with the fundamental principles may occur as a result of
the financial or other interests of a professional accountant or of an immediate or close family member?

A. Self-interest

B. Self-review

C. Advocacy

D. Familiarity

10. Which of the following may be considered by a professional accountant to eliminate or reduce
identified threats to an acceptable level?

I. Safeguards created by the profession, legislation or regulation.

II. Safeguards in the work environment.

 III. Resign from the client or the employer.

IV. Decline or discontinue the professional engagement.

A. I and II only

B. III and IV only

C. I and IV only

D. II and III only

11. The Code of Ethics allows an auditor to perform which of the following services for an audit client
that is not a public Interest entity?

A. Performance of bookkeeping services for the client.

B. Authorization of transactions for the client.

C. Preparation of client source documents.

D. Preparation and posting of journal entries without the client‘s approval

12. A CPA provides audit services to a large company. Almost eighty-five percent of the CPA’s revenues
come from this client. Which statement is most likely to be true?

A. Appearance of independence may be lacking.

B. The CPA firm does not have the competence to perform the audit.

C. The situation is satisfactory if the auditor exercises due skeptical negative assurance care in the
audit.

D. The auditor should provide an "other matter paragraph" to his/her audit report adequately
disclosing this information and then it may issue an unmodified opinion.

13. Safeguards created by the profession, legislation or regulation include the following, except

A. Continuing professional development requirements.

 B. Professional standards.

C. Firm-wide and engagement specific safeguards.

D. Educational, training and experience requirements for entry into the profession.

14. Which of the following circumstances may create self-interest threat for a professional accountant in
public practice?

A. A member of the assurance team having a direct financial interest in the assurance client.

B. Performing a service for an assurance client that directly affects the subject matter information
of the assurance engagement.

C. Being threatened with litigation by the client.

D. Acting as an advocate on behalf of an audit client in litigation or disputes with third parties.

15. The following are examples of circumstances that may create familiarity threat, except

A. The firm promoting shares in an audit client.

B. Long association of senior personnel with the assurance client.

C. A member of the engagement team having a close or immediate family member who is a
director or officer of the client.

D. A director or officer of the client or an employee in a position to exert significant influence over
the subject matter of the engagement having recently served as the engagement partner.

16. The following circumstances may create intimidation threat, except

A. A firm being threatened with dismissal from a client engagement.

B. A firm being pressured to reduce inappropriately the extent of work performed in order to
reduce fees.

C. A firm being threatened with litigation by the client.

 D. A member of the assurance team being, or having recently been, a director or officer of the
client.

17. On which of the following safeguards a professional accountant in public practice cannot rely solely
to reduce threats to an acceptable level?

A. Safeguards created by the profession, legislation or regulation.

B. Firm-wide safeguards.

C. Engagement specific safeguards.

D. Safeguards within the client's systems and procedures.

18. Which of the following is an example of engagement-specific safeguards in the work environment?

A. Advising partners and professional staff of those assurance clients and related entities from
which they must be independent.

B. Disclosing to those charged with governance of the client the nature of services provided and
extent of fees charged.

C. A disciplinary mechanism to promote compliance with the firm/s policies and procedures.

D. Published policies and procedures to encourage and empower staff to communicate to senior
levels within the firm any issue relating to compliance with the fundamental principles that
concerns them.

19. If the fee quoted for a professional service is so low, it may be difficult for the CPA to perform the
engagement in accordance with applicable technical and professional standards for that price. This
situation may create a self-interest threat to

A. Professional competence and due care

B. Objectivity

C. Integrity

D. Professional behavior
 A

20. According to Section 240 of the Code of Ethics, fees charged for assurance engagements should be a
fair reflection of the value of the work involved. In determining professional fees, the following should be
taken into account, except

A. The time necessarily occupied by each person engaged on the work.

B. The outcome or result of a transaction or the result of the work performed.

C. The skill and knowledge required for the type of work Involved.

D. The level of training and experience of the persons necessarily engaged on the work.

21. Which of the following is not a contingent fee?

A. A fee that is dependent upon the approval of the assurance client’s loan application.

B. An audit fee that is based on 5% of the client's adjusted net income for the current year.

C. A fee that is fixed by a court or other public authority.

D. An arrangement whereby no fee will be charged unless a specified finding or result is attained

22. The Code of Ethics requires that members of assurance teams, firms and, when applicable, network
firms be independent of assurance clients. Independence requires

A. Independence of mind only

B. Independence in appearance only

C. Both independence of mind and independence in appearance

D. Either Independence of mind or Independence in appearance

23. Which of the following most completely describes how independence has been defined by the
accountancy profession?

A. Possessing the ability to act with integrity, and exercise objectivity and professional skepticism.
 B. Accepting responsibility to act professionally and in accordance with laws and regulations.

C. Avoiding the appearance of significant interests in the affairs of an assurance client.

D. Performing an assurance service from the viewpoint of the public.

24. Which of the following is a misunderstanding created by the use of the word “independence?"

A. Possessing the ability to act with integrity and objectivity.

B. Independence precludes relationships that may appear to impair objectivity in rendering

assurance services.

C. A person exercising professional judgment should be free from all economic, financial and other
relationships.

D. Possessing the ability to express a conclusion without being affected by influences that
compromise professional judgment.

25. The Code of Ethics provides that where the larger structure is aimed at cooperation and the entities
within the structure share a significant part of professional resources, it is considered to be a network.
Professional resources include the following, except

A. Audit methodology or audit manuals

B. Training courses and facilities

C. Brand name

D. Partners and staff

26. In cases when the threat to independence is significant and no safeguards are available to reduce it
to an acceptable level, which of the following actions should be taken?

I. Eliminating the activities or interests creating the threat.

II. Refusing to accept or continue the assurance engagement.

A. I only
 B. II only

C. Neither I nor II

D. Either I or II

27. When identified threats to independence are significant and the firm decides to accept or continue
the assurance engagement, the decision should be documented. The firm's documentation should
include

I. A description of the threats identified.

II. The safeguards applied to eliminate or reduce the threats to an acceptable level.

A. I only

B. II only

C. Neither I nor II

D. Both I and II

28. Which of the following threats to independence would most likely be created by a financial interest
in an assurance client?

A. Self-interest threat

B. Self-review threat

C. Familiarity threat

D. Intimidation threat

29. A loan, or guarantee of a loan, to the firm from an assurance client that is a bank or a similar
institution, would not create a threat to independence provided

I. The loan, or guarantee, is made under normal lending procedures, terms and requirements.

II. The loan is immaterial to both the firm and the assurance client.
 A. I only

B. II only

C. Neither l nor II

D. Both I and II

30. Which of the following threats to independence may be created by family and personal relationships
between a member of the assurance team and a director, an officer, or an employee of the assurance
client in a position to exert direct and significant influence over the subject matter information of the
assurance engagement?

A. Self-interest, familiarity or intimidation threats

B. Self-review, familiarity, or advocacy threats

C. Advocacy, familiarity or intimidation threats

D. Self-interest, advocacy or self-review threats

31. Which of the following threats to independence is created when a member of the assurance team
participates in the assurance engagement while knowing, or having reason to believe, that he is to, or
may, join the assurance client sometime in the future?

A. Intimidation threat

B. Self-interest threat

C. Self-review threat

D. Familiarity threat

32. Using the same engagement partner or the same individual for the engagement quality control
review on a financial statement audit over a prolonged period may create a

A. Self-review threat

B. Intimidation threat
 C. Familiarity threat

D. Self-interest threat

33. CPAs may provide bookkeeping services to their non-pubic interest audit clients, but there are a
number of conditions that must be satisfied if the auditor is to maintain independence. Which of the
following conditions is not necessary?

A. The CPA must not assume a management role or function.

B. The client must hire an external CPA to approve all of the journal entries prepared by the auditor.

C. The auditor must comply with GAAS when auditing work prepared by his/her firm.

D. The client must accept responsibility for the financial statements.

34. The following activities may create self-interest or self-review threats, except

A. Preparing source documents or originating data evidencing the occurrence of a transaction.

B. Supervising assurance client employees in the performance of their normal recurring activities.

C. Having custody of an assurance client’s assets.

D. Using the same senior personnel on an assurance engagement over a long period of time.

35. The following forms of assistance to a financial statement audit client do not generally threaten the
firm's independence, except

A. Analyzing and accumulating information for regulatory reporting.

B. Assisting in resolving account reconciliation problems.

C. Authorizing or approving transactions.

D. Assisting in the preparation of consolidated financial statements.

C
36. Litigation support services include the following activities except.

A. Acting as an expert witness.

B. Providing assistance to an audit client’s internal legal department.

C. Calculating estimated damages or amounts that might become receivable or payable as the
result of litigation or other legal dispute.

D. Assistance with document management and retrieval in relation to a dispute or litigation

37. What threat to independence is created when the litigation support services provided to an audit
client include the estimation of the possible outcome and thereby affects the amounts or disclosures to
be reflected in the financial statements?

A. Self-review threat

B. Advocacy threat

C. Intimidation threat

D. Familiarity threat

38. The recruitment of senior management for an audit client may create the following current or future
threats to independence, except

A. Self-interest threat

B. Familiarity threat

C. Intimidation threat

D. Self-review threat

39. The provision of corporate finance services, advice or assistance to an audit client may create

A. Self-interest threat

B. Self-interest and intimidation threats

 C. Advocacy and self-review threats

D. Advocacy and intimidation threats

40. When the total fees generated by an assurance client represent a large proportion of a firm's total
fees, the dependence on that client or client group and concern about the possibility of losing the client
may create a/an

A. Self-interest threat

B. Self-review threat

C. Intimidation threat

D. Advocacy threat

41. What threat to independence may be created when the fees generated by the assurance client
represent a large proportion of the revenue of an individual of the firm?

A. Self-review threat

B. Familiarity threat

C. Self-interest threat

D. Advocacy threat

42. What threat to independence maybe created if fees due from an assurance client for professional
services remain unpaid for a long time, especially if a significant part is not paid before the issue of the
assurance report for the following year?

A. Advocacy threat

B. Self-interest threat

C. Intimidation threat

D. Self-review threat

B
43. These are fees calculated on a predetermined basis relating to the outcome or result of a transaction
or the result of the work performed.

A. Contingent fees

B. Fixed fees

C. Predetermined fees

D. Commissions.

44. What threats to independence are created when a contingent fee is charged by a firm in respect of
an assurance engagement?

A. Self-review and intimidation threats

B. Self-interest and advocacy threats

C. Familiarity and intimidation threats

D. Self-interest and self-review threats

45. Accepting gifts or hospitality (unless inconsequential or trivial) may create

A. Self-interest and familiarity threats

B. Advocacy and intimidation threats

C. Familiarity and self-review threats

D. Self-interest and self-review threats

46. Which of the following threats to independence may be created when litigation takes place, or
appears likely, between the firm member of the assurance team and the assurance client?

A. Self-interest or advocacy threat

B. Advocacy or intimidation threat

 C. Self-interest or intimidation threat

D. Familiarity or self-review threat

47. Which of the following is not a factor to consider in determining the professional fee of a
professional accountant in public practice?

A. The skill and knowledge required for the type of professional services involved.

B. The result of the assurance work.

C. The level of training and experience of the persons necessarily engaged in performing the
professional services.

D. The time necessarily occupied by each person engaged in performing the professional services.

48. A client company has not paid its 20X5 audit fees. According to the Code of Professional Ethics, in
order for the auditor to be considered independent with respect to the 20X6 audit, the 20X5 audit fees
must be paid before the:

A. 20X5 report is issued.

B. 20X6 fieldwork is started.

C. 20X6 report is issued.

D. 20x7 fieldwork is started.

49. As defined in the Code of Ethics, ___________ is the communication to the public of information as
to the services or skills provided by professional accountants in public practice with a view to procuring
professional business.

A. Advertising

B. Publicity

C. Solicitation

D. Marketing professional services

 A

50. As defined in the Code of Ethics, ________ is the communication to the public of facts about a
professional accountant which are not designed for the deliberate promotion of that professional
accountant.

A. Advertising

B. Publicity

C. Solicitation

D. Marketing professional services

51. The holding of media-covered events undertaken only to commemorate a professional accountant's
anniversaries in public practice does not violate the rules on advertising and solicitation provided that
such undertaking should be done only every years of celebration.

A. 5

B. 10

C. 20

D. 25

52. A professional accountant in public practice may issue to clients or, in response to an unsolicited
request, to a non-client

I. A factual and objectively worded brochure of the services provided.

II. A directory setting out names of partners, office addresses and names and addresses of
associated firms and correspondents.

A. I only

B. II only

C. Both I and II

D. Neither I nor II
 C

53. A firm should establish and maintain a system of quality control to provide it with reasonable
assurance that:

I. The firm and its personnel comply with professional standards and applicable legal and
regulatory requirements.

II. Reports issued by the firm or engagement partners are appropriate in the circumstances.

A. I only

B. II only

C. Both I and II

D. Neither I nor II

54. The firm's system of quality control should include policies and procedures that address each of the
following elements, except

A. Monitoring

B. Control environment

C. Relevant ethical requirements

D. Human resources

55. Which of the following is an element of a CPA firm's quality control system that should be considered
in establishing its quality control policies and procedures?

A. Considering audit risk and materiality.

B. Managing human resources.

C. Using statistical sampling techniques.

D. Complying with laws and regulations.

B
56. Which of the following quality control elements is most closely associated with the requirement to
promote a culture of quality?

A. Monitoring

B. Leadership responsibilities for quality within the firm

C. Engagement performance

D. Human resources

57. The statement, “Quality control policies and procedures should be relevant, adequate, effective, and
complied with." is most closely associated with what quality control element?

A. Engagement performance

B. Leadership responsibilities for quality within the firm

C. Monitoring

D. Relevant ethical requirements

58. This quality control element requires a firm to establish policies and procedures to provide it with
reasonable assurance that engagements are performed in accordance with professional standards and
regulatory and legal requirements, and that the firm or the engagement partner issue reports that are
appropriate in the circumstances.

A. Ethical requirements

B. Engagement performance

C. Monitoring

D. Human resources

59. In pursuing a firm’s quality of control objectives, a firm should adopt policies and procedures to
enable it to identify and evaluate circumstances and relationships that create threats to independence,
and to take appropriate action to eliminate those threats or reduce them to an acceptable level by
applying safeguards, or, if considered appropriate, to withdraw from the engagement. Which quality
control element would this be most likely to satisfy?

A. Ethical requirements

B. Monitoring

C. Human resources

D. Leadership responsibilities for quality within the firm

60. The primary purpose of establishing quality control policies and procedures for deciding whether to
accept a new client .Is to

A. Anticipate before performing any fieldwork whether an unmodified opinion can be expressed.

B. Enable the CPA firm to attest to the reliability of the client.

C. Satisfy the CPA firm's duty to the public concerning the acceptance of new clients.

D. Minimize the likelihood of association with clients whose management lacks integrity.

61. As defined in PSQC 1, _______ is a process comprising an ongoing consideration and evaluation of
the firm's system of quality control, including a periodic inspection of a selection of completed
engagements, designed to provide the firm with reasonable assurance that its system of quality control
is operating effectively.

A. Monitoring

B. Inspection

C. Engagement quality control review

D. Supervision

62. The firm shall obtain written confirmation of compliance with its policies and procedures on
independence from all firm personnel required to be independent by relevant ethical requirements

A. At least annually
 B. At least monthly

C. At least semi-annually

D. At the completion of each engagement

63. Which element of a system of duality control is addressed by the establishment of policies and
procedures designed to provide the firm with reasonable assurance that it has sufficient personnel with
the competence, capabilities, and commitment to ethical principles?

A. Monitoring

B. Leadership responsibilities for quality within the firm

C. Human resources

D. Engagement performance

64. The firm shall establish policies and procedures designed to provide it with reasonable assurance
that the firm and its personnel comply with relevant ethical requirements. The Code of Ethics for
Professional Accountants in the Philippines establishes the fundamental principles of professional ethics
which include the following, except

A. Integrity

B. Objectivity

C. Relevance

D. Professional behavior

65. An 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. These policies
and procedures should be implemented

A. At the audit firm level only.

B. On individual audits only.

C. Either at the audit firm level or on individual audits.

 D. Both at the audit firm level and on individual audits.

66. For audits of financial statements of listed entities, the engagement partner should not issue the
auditor’s report until the completion of the

A. Engagement Quality Control Review

B. Management Review

C. Engagement Team Review

D. Engagement Partner Review

67. Who should take responsibility for the overall quality on each audit engagement?

A. Engagement quality control reviewer

B. Engagement partner

C. Engagement team

D. CPA firm

68. The implementation of quality control procedures that are applicable to the individual audit
engagement is the responsibility of the

A. CPA Firm

B. Engagement quality control reviewer

C. Engagement team

D. Expert contracted by the firm in connection with the audit engagement

69. Misstatements in the financial statements can arise from fraud or error. The distinguishing factor
between fraud and error is whether the underlying action that results in the misstatement of the
financial statements is
 A. Simple or complex

B. Intentional or unintentional

C. Voluntary or involuntary

D. Planned or unplanned

70. “Error” includes

A. Engaging in complex transactions that are structured to misrepresent the financial position or
financial performance of the entity.

B. Concealing, or not disclosing, facts that could affect the amounts recorded in the financial
statements.

C. An incorrect accounting estimate arising from oversight or misinterpretation of facts.

D. Intentional misapplication of accounting policies relating to amounts, classification, manner of

presentation, or disclosure

71. Fraud involving one or more members of management or those charged with governance is referred
to as

A. Management fraud

B. Employee fraud

C. Fraudulent financial reporting

D. Misappropriation of assets

72. The auditor is concerned with fraud that causes a material misstatement in the financial statements.
There are two types of intentional misstatements that are relevant to the auditor: misstatements
resulting from fraudulent financial reporting and misstatements resulting from

A. Management fraud

B. Employee fraud
 C. Misappropriation of assets

D. Collusion within the entity or with third parties

73. Fraudulent financial reporting involves intentional misstatements including omissions of amounts or
disclosures in financial statements to deceive financial statement users. It may be accomplished in a
number of ways, including

A. Embezzling receipts.

B. Stealing physical assets or intellectual property.

C. Using an entity’s assets for personal use.

D. Manipulation, falsification, or alteration of accounting records or supporting documentation

from which the financial statements are prepared

74. Which of the following conditions are generally present when misstatements due to fraud occur?

I. Incentive or pressure

II. Perceived opportunity

III. Rationalization

A. I and II only

B. II and III only

C. I and III only

D. I, II, and III

75. Three conditions are generally present when fraud occurs. Which of the following is not one of
them?

A. Attitude or rationalization about the act of fraud.

B. Opportunity to commit fraud.

 C. Professional skepticism about the likelihood of fraud.

D. Incentive or pressure to commit fraud.

76. Which of the following is a required audit planning procedure concerning potential fraud?

A. Consider whether estimates prepared and recorded by management could indicate a biased
reporting.

B. Consider the nature of journal entries, particularly those made near the end of the reporting
period.

C. Document the results of procedures used to address the risk of fraud.

D. Conduct discussions among the members of the audit team regarding the risks of material
misstatement due to fraud or error.

77. What is one common way to conceal a theft?

A. By changing the stolen item to an expense account

B. By creating cash through inter-bank cash transfers.

C. By stealing cash from customer A and then using customer B's balance to pay customer A's
accounts receivable.

D. By the conversion of stolen assets into cash.

78. Why is computer fraud often much more difficult to detect than other types of fraud?

A. Perpetrators can commit a fraud and leave little or no evidence.

B. Perpetrators usually only steal very small amounts of money at a time, thus requiring a long
period of time to have elapsed before they are discovered.

C. Most computer criminals are older and are considered to be more cunning when committing
such a friend.

D. Most perpetrators invest their illegal income rather than spend it, thus concealing key evidence.
 A

79. A classification of fraud where the perpetrator causes a company to pay too much for ordered goods,
or to pay for goods never ordered' us called

A. Payroll fraud

B. Disbursement fraud

C. Cash receipts fraud

D. Inventory fraud

80. In payroll fraud, funds can be stolen by

I. Paying a fictitious or ghost employee.

II. Increasing pay rates without permission.

III. Keeping a real but terminated employee on the payroll.

A. I and II only

B. I and III only

C. II and III only

D. I, II and III

81. Stealing a master list of customers and selling it to a competitor is an example of what classification
of fraud?

A. Output theft

B. Data theft

C. Disbursement theft

D. Cash receipt theft

82. The primary mum fat the prevention and detection of fraud rests with
 A. Those charged with governance of the entity.

B. Management of the entity

C. Both A and B

D. The auditor.

83. When obtaining an understanding of the entity and its environment, including its internal control,
the auditor may identify events or conditions that indicate an incentive or pressure to commit fraud or
provide an opportunity to commit fraud. Such events or conditions are referred to as

A. Fraud conditions

B. Fraud risk factors

C. Fraudulent activities

D. Fraud environment

84. Opportunities to misappropriate assets increase when there are

A. Known or anticipated future employee Iayoffs.

B. Promotions, compensation, or other rewards inconsistent with expectations.

C. Recent or anticipated changes to employee compensation or benefit plans.

D. Inventory items that are small in size, of high value, or in high demand.

85. Which of the following conditions or events may create incentives/pressures to commit fraud?

A. Inadequate system of authorization and approval of transactions.

B. Lack of mandatory vacations for employees performing key control functions.

C. Excessive pressure on management or operating personnel to meet financial targets established

by those charged with governance, including sales or profitability incentive goals.

D. Inadequate access controls over automated records.

 C

86. Because of the risk of material misstatement, an audit of financial statements in accordance with
PSAs should be planned and performed with an attitude of

A. Impartial conservatism

B. Objective judgment

C. Independent integrity

D. Professional skepticism

87. Which of the following characteristics most likely would heighten an auditor's concern about the risk
of material misstatement arising from fraudulent financial reporting?

A. Excessive interest by management in increasing stock price or earnings trend through aggressive
accounting practices.

B. Effective accounting and internal control systems.

C. Low turnover of senior management, legal counsel, or those charged with governance.

D. Management is dominated by a single person or a small group with compensating controls such
as effective oversight by those charged with governance.

88. When the auditor identifies a misstatement in the financial statements, the auditor should consider
whether such a misstatement may be indicative of fraud and if there is such an indication, the auditor
should

A. Consider the implications of the misstatement in relation to other aspects of the audit.

B. Withdraw from the engagement.

C. Communicate the information to regulatory and enforcement authorities.

D. Report the matter to the person or persons who made the audit appointment.

A
89. As used in PSA 250, this term refers to acts of omission or commission by the entity being audited,
either intentional or unintentional, which are contrary to prevailing laws or regulations.

A. Noncompliance

B. Illegal acts

C. Deplorable acts

D. Unforgivable acts

90. According to PSA 250, the term “noncompliance” as used in the standard refers to acts of omission
or commission by the entity being audited, either intentional or unintentional, which are contrary to the
prevailing laws or regulations. Such acts do not include

A. Transactions entered into by the entity.

B. Transactions entered into in the name of the entity.

C. Transactions entered into on the entity’s behalf by its management or employees.

D. Personal misconduct (unrelated to the entity’s business activities) by the entity’s management or
employees.

91. The responsibility for the prevention and detection of noncompliance rests with

A. The auditor

B. Management

C. The auditor’s lawyer

D. The client’s lawyer

92. If the auditor concludes that the noncompliance has a material effect on the financial statements,
and has not been property reflected in the financial statements the auditor should express

A. A qualified or an adverse opinion

B. A qualified opinion or a disclaimer of opinion

 C. A disclaimer of opinion

D. An unmodified opinion

93. If the auditor is precluded by the entity from obtaining sufficient appropriate audit evidence to
evaluate whether noncompliance that may be material to the financial statements, has, or is likely to
have, occurred, the auditor should express

A. A qualified opinion or an adverse opinion

B. A qualified opinion or a disclaimer of opinion

C. An unmodified Opinion

D. An adverse opinion or a disclaimer of opinion

94. Under PSA 260, this term is used to describe the role of persons entrusted with the supervision,
control and direction of an entity.

A. Oversight

B. Governance

C. Direction

D. Control

95. According to PSA 260, those matters that arise from the audit of financial statements and, in the
opinion of the auditor, are both important and relevant to those charged with governance in overseeing
the financial reporting and disclosure process are called

A. Audit matters of governance interest

B. Significant audit matters

C. Auditor’s findings

D. Material misstatements in the financial statements

A
96. Audit matters of governance interest to be communicated to those charged with governance
ordinarily include

I. Audit adjustments, whether or not recorded by the entity that have, or could have, a
material effect on its financial statements.

II. Expected modifications to the auditor’s report.

III. Material uncertainties related to events and conditions that may cast significant doubt on
the entity/s ability to continue as a going concern.

A. I only

B. II and III only

C. I and III only

D. I, II, and III

97. PSA 260 requires the auditor to determine the relevant persons who are charged with governance
and with whom audit matters of governance interest are communicated. For corporations covered by
the SEC Code of Corporate Governance, which of the following is primarily responsible for corporate
governance?

A. President

B. Controller

C. Board of Directors

D. Management

98. The auditor shall communicate with those charged with governance his/her responsibilities in
relation to the audit of the entity’s financial statements, including that

I. The auditor is responsible for forming and expressing an opinion on the financial statements.

II. The audit of the financial statements does not relieve management or those charged with
governance of their responsibilities.

A. I only
 B. II only

C. Neither I nor II

D. Both I and II

99. Which of the following matters will an auditor most likely communicate to those charged with
governance?

A. The level of responsibility assumed by management for the preparation of financial statements.

B. The effects of significant accounting policies adopted by management in emerging areas for
which there is no authoritative guidance.

C. A list of negative trends that may lead to working capital deficiencies and adverse financial
ratios.

D. Difficulties encountered in achieving a satisfactory response rate from the entity’s customers in
confirming account receivables.

100. Which of the following matters is an auditor required to communicate to those charged with
governance?

I. Disagreements with management about matters significant to the entity’s financial

statements that have been satisfactorily resolved.

III. Material weaknesses in internal control.

A. I only

B. II only

C. Both I and II

D. Neither I nor II

TRUE OR FALSE
1. Familiarity threat is the threat that a CPA will promote a client’s or employer's position to the point
that his/her objectivity is compromised.

2. Safeguards fall into two broad categories: safeguards in the work environment and firm-wide
safeguards.

3. The principle of professional behavior imposes an obligation on all CPAs to comply with relevant laws
and regulations and avoid any action that may discredit the profession.

4. When identified threats are not at an acceptable level, a CPA may rely solely on safeguards that
his/her client has implemented.

5. A primary purpose for establishing a code of professional ethics is to demonstrate acceptance of

responsibility to the interests of those served by the profession.

6. Safeguards implemented by the firm, including policies and procedures to implement professional
and regulatory requirements, may be applied to mitigate or eliminate threats to independence and
other ethical principles.

7. The auditor must be independent of the audit client unless the lack of independence does not
influence his or her professional judgment.

8. With regard to detecting fraud, auditing standards require auditors to issue an unmodified opinion
only when the auditor is satisfied that no instances of fraud have occurred.

9. Due professional care requires auditors to plan and perform their duties with the skill and care that
is commonly expected of accounting professionals.

10. Fraud is either an intentional or unintentional misstatement of the financial statements, depending
on materiality, and consistency.
 F

11. A factor that relates to opportunities to commit fraudulent financial reporting is lack of controls
relating to the calculation and approval of accounting estimates.

12. When determining whether independence is impaired because of an ownership interest in a client
company, materiality will affect ownership only for direct ownership.

13. A direct financial interest violates independence when close relatives such as a brother, sister, or in-
laws are employed by the client.

14. If an entity asks a CPA to perform a review engagement, and the CPA has an immaterial direct
financial interest in the entity, the CPA is not independent and, therefore, may not issue a review
report.

15. A CPA would be ethically bound to refrain from disclosing any confidential client information when a
major shareholder of a client company seeks accounting information from the CPA after
management declined to disclose the requested information.

16. According to the Fundamental Principles section of the Code of Ethics, all CPAs should maintain
independence of mind and in appearance at all times.

17. Misappropriation of assets is normally perpetrated by employees at lower levels of the organization.

18. The Code of Ethics requires independence for all assurance engagements.

19. A factor that relates to incentives or pressures to commit fraudulent financial reporting is excessive
pressure for management to meet debt repayment requirements.

20. The term “ethics" relates to an individual's propensity to abide by the laws of the land.
 F

21. The profession of Certified Public Accountants has deemed it essential to promulgate a code of
conduct and to establish a mechanism for enforcing observance of the code because a prerequisite
to success is the establishment of an ethical code that stresses primarily the CPA's responsibility to
clients and colleagues.

22. The CPA's independence would not be considered to be impaired when the CPA has been retained as
the auditor of a restaurant where the CPA dines frequently.

23. In determining estimates of fees, an auditor may take into account the attainment of specific
findings.

24. The CPA’s independence would not be considered to be impaired when the CPA has been retained as
the auditor of a brokerage firm in which the CPA’s brother is the controller.

25. Except in emergency situations, a CPA firm is prohibited from providing accounting and bookkeeping
services to public-interest audit clients.