AUDITING THEORY

 CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS IN THE PHILIPPINES

Part A – establishes the fundamental principles of professional ethics for professional

accountants and provides a CONCEPTUAL FRAMEWORK for applying those
principles.
Part B – applies to professional accountants in public practice.
Part C – applies to professional accountants in business.

FUNDAMENTAL PRINCIPLES
A. INTEGRITY
A professional accountant should be straightforward and honest in all professional and
business relationships.

B. OBJECTIVITY
A professional accountant should not allow bias, conflict of interest or undue influence
of others to override professional or business judgments.

C. PROFESSIONAL COMPETENCE AND DUE CARE

 A professional accountant has a continuing duty to maintain professional knowledge
and skill at the level required to ensure that a client or employer receives competent
professional service based on current developments in practice, legislation and
techniques.
 A professional accountant should act diligently and in accordance with applicable
technical and professional standards when providing professional services.

D. CONFIDENTIALITY
A professional accountant should respect the confidentiality of information acquired as
a result of professional and business relationships and should not disclose any such
information to third parties without proper and specific authority unless there is a legal
or professional right or duty to disclose.

E. PROFESSIONAL BEHAVIOR
A professional accountant should comply with relevant laws and regulations and should
avoid any action that discredits the profession.

CONCEPTUAL FRAMEWORK APPROACH

The Code provides a framework to assist a professional accountant to identify, evaluate and
respond to threats to compliance with the fundamental principles. If identified threats are
other than clearly insignificant, a professional accountant should, where appropriate, apply
safeguards to eliminate the threats or reduce them to an acceptable level, such that
compliance with the fundamental principles is not compromised.

THREATS TO COMPLIANCE WITH THE FUNDAMENTAL PRINCIPLES

A. SELF-INTEREST THREAT - may occur as a result of the financial or other interests of a
professional accountant or of an immediate or close family member.

B. SELF-REVIEW THREAT - may occur when a previous judgment needs to be re-

evaluated by the professional accountant responsible for that judgment.

C. ADVOCACY THREAT - may occur when a professional accountant promotes a position

or opinion to the point that subsequent objectivity may be compromised.

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D. FAMILIARITY THREAT - may occur when, because of a close relationship, a
professional accountant becomes too sympathetic to the interests of others.

E. INTIMIDATION THREAT - may occur when a professional accountant may be deterred

from acting objectively by threats, actual or perceived.

SAFEGUARDS THAT MAY ELIMINATE OR REDUCE THREATS TO AN ACCEPTABLE

LEVEL
1. Safeguards created by the profession, legislation or regulation.
 Educational, training and experience requirements for entry into the profession.
 Continuing professional development requirements.
 Corporate governance regulations.
 Professional standards.
 Professional or regulatory monitoring and disciplinary procedures.
 External review by a legally empowered third party of the reports, returns,
communications or information produced by a professional accountant.

2. Safeguards in the work environment.

 Firm-wide safeguards.
 Engagement specific safeguards.

INDEPENDENCE
Independence of mind
The state of mind that permits the expression of a conclusion without being affected by
influences that compromise professional judgment, allowing an individual to act with
integrity, and exercise objectivity and professional skepticism.

Independence in appearance
The avoidance of facts and circumstances that are so significant that a reasonable and
informed third party, having knowledge of all relevant information, including safeguards
applied, would reasonably conclude a firm's, or a member of the assurance team's,
integrity, objectivity or professional skepticism had been compromised.

CONCEPTUAL APPROACH TO INDEPENDENCE

1. Identify threats to independence.
2. Evaluate whether these threats are clearly insignificant.
3. In cases when the threats are not clearly insignificant, identify and apply appropriate
safeguards to eliminate or reduce the threats to an acceptable level.

MULTIPLE CHOICE QUESTIONS

1. The Code of Ethics for Professional Accountants in the Philippines is applicable to

professional services performed in the Philippines on or after
A. December 31, 2009
B. December 31, 2008
C. June 30, 2008
D. June 30, 2009

2. Which of the following fundamental ethical principles requires a professional

accountant to be straightforward and honest in all professional and business
relationships?
A. Objectivity C. Professional competence and due care
B. Professional behavior D. Integrity

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3. 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. Initially, a high standard of 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 developments.

4. 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

5. 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 C. I and IV only
B. III and IV only D. II and III only

6. Which of the following circumstances may create self-interest threats for a professional
accountant in public practice?
A. A financial interest in a client or jointly holding a financial interest with a client.
B. Performing a service for a client that directly affects the subject matter of the
assurance engagement.
C. Being threatened with litigation.
D. Acting as an advocate on behalf of an assurance client in litigation or disputes with
third parties.

7. The following are examples of circumstances that may create familiarity threats,
EXCEPT
A. Promoting shares in a listed entity when that entity is a financial statement 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 relationship
with a director or officer of the client.
D. A former partner of the firm being a director or officer of the client or an employee
in a position to exert direct and significant influence over the subject matter of the
engagement.

8. The following circumstances may create intimidation threats, EXCEPT

A. Being threatened with dismissal or replacement in related to a client engagement.
B. Being pressured to reduce inappropriately the extent of work performed in order to
reduce fees.
C. Being threatened with litigation.
D. A member of the assurance team being, or having recently been, a director or officer
of the client.

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9. 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 service
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.

10. 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.

11. 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

12. In cases when the threat to independence is other than clearly insignificant 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

13. The Code of Ethics requires the members of the assurance team and the firm to be
independent of the assurance client during the period of the assurance engagement.
Which of the following statements relating to the period of engagement is CORRECT?
A. The engagement period starts when the assurance team begins to perform
assurance services and ends when the assurance reports is issued, regardless of
whether the engagement is expected to recur.
B. If the assurance engagement is expected to recur, the engagement period starts
when the assurance team begins to perform assurance services and ends with the
notification by either party that the professional relationship has terminated or the
issuance of the final assurance report, whichever is earlier.
C. In the case of a financial statement audit engagement, the engagement period
includes the period covered by the financial statements reported on by the firm.
D. If the assurance engagement is expected to recur, the engagement period ends with
the notification by either party that the professional relationship has terminated.

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14. A direct financial interest or a material indirect financial interest in the assurance client
of a member of the assurance team or his immediate family member may create a
significant self-interest threat. Which of the following safeguards would be LEAST likely
considered to eliminate the threat or reduce it to an acceptable level?
A. Discuss the matter with those charged with governance of the assurance client.
B. Dispose of the direct financial interest prior to the individual becoming a member of
the assurance team.
C. Dispose of the indirect financial interest in total or dispose of a sufficient amount of
it so that the remaining interest is no longer material prior to the individual
becoming a member of the assurance team.
D. Remove the member of the assurance team from the assurance engagement.

15. 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 C. Neither I nor II
B. II only D. Both I and II

16. A loan, or a guarantee of a loan, from an assurance client that is a bank or a similar
institution, to a member of the assurance team or his immediate family, would NOT
create a threat to independence provided the loan, or a guarantee, is
A. Immaterial to the member of the assurance team or his immediate family.
B. Immaterial to the assurance client.
C. Immaterial to both the member of the assurance team or his immediate family and
the assurance client.
D. Made under normal lending procedures, terms and requirements.

17. A close business relationship between a firm or a member of the assurance team and the
assurance client or its management, or between the firm, a network firm and financial
statement audit client may create
A. Self-interest and intimidation threats
B. Self-review and familiarity threats
C. Advocacy and self-review threats
D. Self-interest and self-review threats

18. When an immediate family member of a member of the assurance team is a director, an
officer, or an employee of the assurance client in a position to exert direct and significant
influence over the subject matter information of the assurance engagement, or was in
such a position during the period covered by the engagement, the threats to
independence can only be reduced to an acceptable level by
A. Where possible, structuring the responsibilities of the assurance team so that the
professional does not deal with matters that are within the responsibility of the
immediate family member.
B. Withdrawing from the assurance engagement.
C. Removing the individual from the assurance team.
D. Discussing the issue with those charged with governance, such as the audit
committee.

19. 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 C. Self-review threat
B. Self-interest threat D. Familiarity threat
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20. In the financial statement audit of listed entities, the engagement partner and the
individual responsible for the engagement quality control review should be rotated after
serving in either capacity, or a combination thereof, for a pre-defined period, normally
no more than
A. 5 years C. 10 years
B. 7 years D. 6 years

21. Which of the following would NOT generally create a threat to independence?
A. The purchase of goods and services from an assurance client by the firm (or from a
financial statement audit client by a network firm) or a member of the assurance
team provided that the transaction is in the normal course of business and on an
arm's length basis.
B. A partner or employee of the firm or a network firm serves as Company Secretary for
a financial statement audit client.
C. Determining which recommendations of the firm should be implemented.
D. Reporting, in a management role, to those charged with governance.

22. 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.

23. As defined in the Code, "a valuation comprises the making of assumptions with regard to
future developments, the application of certain methodologies and techniques, and the
combination of both in order to compute a certain value, or range of values, for an asset,
a liability or for a business as a whole.” Which of the following threats may be created
when a firm or a network firm performs valuation for an audit client that is to be
incorporated in the client's financial statements?
A. Advocacy threat C. Self-review threat
B. Familiarity threat D. Intimidation threat

24. The following statements relate to the provision of taxation, internal audit or IT Systems
services to audit clients. Which is FALSE?
A. Taxation services, including compliance, planning, provision of formal taxation
opinions, and assistance in the resolution of tax disputes may create a self-review
threat.
B. A self-review threat may be created when a firm, or network firm, provides internal
audit services to an audit client.
C. The provision of services by a firm or network firm to an audit client that involve the
design and implementation of financial information technology systems that are used
to generate information forming part of a client's financial statements may create a
self-review threat.
D. The provision of services in connection with the assessment, design, and
implementation of internal accounting controls and risk management controls does
not create a threat to independence provided that firm or network firm personnel do
not perform management functions.

25. 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 C. Intimidation threat
B. Advocacy threat D. Familiarity threat

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26. The recruitment of senior management for an assurance client, such as those in a
position to affect the subject matter of the assurance engagement, may create the
following current or future threats to independence, EXCEPT
A. Self-interest threat C. Intimidation threat
B. Familiarity threat D. Self-review threat

27. 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 C. Intimidation threat
B. Self-review threat D. Advocacy threat

28. What threat to independence may be created if fees due from an assurance client for
professional services remain unpaid for a long time, especially if a significant part is not
paid before the issue of the assurance report for the following year?
A. Advocacy threat C. Intimidation threat
B. Self-interest threat D. Self-review threat

29. 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 C. Predetermined fees
B. Fixed fees D. Commissions

30. Which of the following threats to independence may be created when litigation takes
place, or appears likely, between the firm and a member of the assurance team the
assurance client?
A. Self-interest or advocacy threat C. Self-interest or intimidation threat
B. Advocacy or intimidation threat D. Familiarity or self-review threat

31. 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 C. Solicitation
B. Publicity D. Marketing professional services

32. 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 C. Solicitation
B. Publicity D. Marketing professional services

33. The following statements relate to the provisions of the Code of Ethics that deal with the
professional accountant's marketing of professional services. Which is FALSE?
A. When a professional accountant in public practice solicits new work through
advertising or other forms of marketing, a self-interest threat to compliance with the
principle of professional behavior may be created.
B. The professional accountant should be honest and truthful when marketing
professional services.
C. Advertising and publicity are generally unacceptable.
D. When marketing professional services, the professional accountant should not make
exaggerated claims for services offered, qualifications possessed or experience
gained.

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34. Which of the following statements concerning publicity is INCORRECT?
A. Booklets and other documents bearing the name of a professional accountant and
giving technical information for the assistance of staff or clients may be issued to
such persons, other professional accountants or other interested parties.
B. Professional accountants who author books or articles on professional subjects may
state their name and professional qualifications; give the name of their organization;
and give any information as to the services that the firm provides.
C. Appropriate newspapers or magazines may be used to inform the public of the
establishment of a new practice, of changes in the composition of a partnership of
professional accountants in public practice, or of any alteration in the address of a
practice.
D. A professional accountant may develop and maintain a website in the Internet in
such suitable length and style which may also include announcements, press
releases, publications and such other necessary and factual information.

35. 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 C. 20
B. 10 D. 25

36. Which of the following statements concerning publicity is INCORRECT?

A. A professional accountant may write a letter or make a direct approach to another
professional accountant when seeking employment or professional business.
B. Genuine vacancies for staff may be communicated to the public through any medium
in which comparable staff vacancies normally appear.
C. Professional accountants are prevented from providing training services to other
professional bodies, associations or educational institutions which run courses for
their members or the public.
D. In publications such as those specifically directed to schools and other places of
education to inform students and graduates of career opportunities in the profession,
services offered to the public may be described in a business-like way.

37. A professional accountant in public practice is allowed to

A. Refer to, use or cite actual or purported testimonials by third parties.
B. Publish services in billboard (e.g., tarpaulin, streamers, etc.) advertisements.
C. Publish and compare fees with other CPAs or CPA firms or compare those services
with those provided by another firm or CPA practitioner.
D. Inform interested parties through any medium that a partnership or salaried
employment of an accountancy nature is being sought.

38. After evaluating the significance of the threat created by an actual or threatened
litigation, the following safeguards should be applied to reduce the threat to an
acceptable level, EXCEPT
A. Disclosing to the audit committee or others charged with governance, the extent and
nature of the litigation.
B. If the litigation involves a member of the assurance team, removing that individual
from the assurance team.
C. Involving an additional professional accountant in the firm who was not a member of
the assurance team to review the work or otherwise advice as necessary.
D. Withdraw from, or refuse to accept, the assurance engagement.

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39. Which of the following threats to independence may be created when litigation takes
place, or appears likely, between the firm or a member of the assurance team the
assurance client?
A. Self-interest or advocacy threat C. Self-interest or intimidation threat
B. Advocacy or intimidation threat D. Familiarity or self-review threat

40. 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 C. Familiarity and intimidation threats
B. Self-interest and advocacy threats D. Self-interest and self-review threats

41. When a firm obtains an assurance engagement at a significantly lower fee level than that
charged by the predecessor firm, or quoted by other firms, the self-interest threat
created will not be reduced to an acceptable level unless
I. The firm is able to demonstrate that appropriate time and qualified staff are
assigned to the task.
II. All applicable assurance standards, guidelines, and quality control procedures
are being complied with.
A. I only C. Both I and II
B. II only D. Neither I nor II

42. 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 C. Self-interest threat
B. Familiarity threat D. Advocacy threat

43. The following statements relate to the provision of legal services to an audit client.
Which is INCORRECT?
A. The provision of legal services to an audit client involving matters that would not be
expected to have a material effect on the financial statements may create a self-
review threat.
B. Legal services to support an audit client in the execution of a transaction (e.g.,
contract support) may create a self-review threat.
C. Acting for an audit client in the resolution of a dispute or litigation in such
circumstances when the amounts involved are material in relation to the financial
statements of the audit client would create advocacy and self-review threats so
significant no safeguards could reduce the threats to an acceptable level.
D. The appointment of a partner or an employee of the firm or network firm as General
Counsel for legal affairs to an audit client would create self-review and advocacy
threats that are so significant no safeguards could reduce the threats to an acceptable
level.

44. When a close family member of a member of the assurance team is a director, an officer,
or an employee of the assurance client in a position to exert direct and significant,
influence over the subject matter information of the assurance engagement, threats to
independence may be created. If the threats are other than clearly insignificant, which of
the following safeguards can be applied to reduce the threats to an acceptable level?
I. Removing the individual from the assurance team. x
II. Where possible, structuring the responsibility of the assurance team so that—
the professional does not deal with matters that are within the responsibility of
the close family member. '
III. Policies and procedures to empower staff to communicate to senior levels within
the firm any issue of independence and objectivity that concerns them. ,
A. I and II only C. I and III only
B. II and III only D. I, II, and III
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45. 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 self-review threats
D. Self-interest, advocacy or self-review threats

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