Chapter 5

I. Multiple choice

1. When a professional accountant learns of a material error or omission in a tax return of

a prior year, he/she has the responsibility to do the following, except
A. Promptly advise the client or employer of the error or omission and recommend
that disclosure be made to the revenue authorities.
B. Promptly inform the revenue authorities even without the permission of the
client.
C. Advise the employer to correct the error and recommend that disclosure be
made to the revenue authorities.
D. Consider discontinuing association with the client if the client does not correct
the error.

2. This threat to independence occurs when a member of the assurance team has an
immediate family member who is a director or officer of the assurance client.
A. Familiarity threat
B. Advocacy threat.
C. Self-review threat.
D. Intimidation threat.

3. Which of the following statements is not true?

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.

4. An example of an ‘’indirect ownership interest in a client’’ would be ownership of a

client’s stock by a member’s
A. Grandfather.
B. Spouse.
C. Dependent child.
D. None of the above are indirect interest.

5. 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.

6. Which of the following would be a violation of the code of ethics requiring integrity by
the CPA?
A. 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.
B. In preparing client’s tax return, te CPA encourages client to take a deduction for
which there is no support, but which has little chance of discovery by the BIR.
C. Both a and b above would be violations.
D. Neither would be violations.

7. 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 PICPA peer review program.
C. Another CPA firm which has just purchased the CPA’s entire practice.
D. An investigative or disciplinary body of the PICPA which is conducting a review of
the CPA’s practice.

II. True or false

8. Independence in auditing means being an advocate for the client?

A. True.
B. False. Taking an unbiased viewpoint.

9. The two primary reasons why people act unethically:

I. the person’s ethical standards are different from those of society as a whole.
II. the person chooses to act selfishly.
A. First statement is true and second is false
B. Second statement is true and first is false.
C. Both statements are true.
D. Neither is true.

10. One difference between auditors and other professionals is that most professionals
I. need to be concerned about remaining independent.
II. Don’t have to pass a rigorous examination.
A. First statement is true and second is false
B. Second statement is true and first is false.
C. Both statements are true.
D. Neither is true.