B-AUDT312 MIDTERMS SUMMATIVE # 1

1. The nature and significance of threats may differ depending on whether they arise in relation to the
provision of services to a client. In which of the ff types of clients would the Code provide the strictest
set of requirements regarding independence?
A financial statement audit client
A non-client
A non-assurance client
A non-financial statement audit assurance client

2. A CPA firm’s quality control procedures pertaining to the acceptance of a prospective audit client would
most likely include
Inquiry of 3rd parties, such as the prospective client’s bankers and attorneys, about information
regarding the prospective client and its management
Consideration of whether sufficient competent evidential matter may be obtained to afford a reasonable
basis for an opinion
Inquiry of management as to whether disagreements between the predecessor auditor and the
prospective client were resolved satisfactorily
Consideration of whether the internal control structure is sufficiently effective to permit a reduction in
the required substantive tests

3. Certain safeguards may increase the likelihood of identifying or deterring unethical behavior. Such
safeguards which may be created by the accounting profession, legislation, regulation or an employing
organization, include, but are not restricted to:
I. Effective, well publicized complaints systems operated by the employing organization, the
profession or a regulator, which enable colleagues, employers and members of the public to draw
attention to unprofessional or unethical behavior
II. An explicitly stated duty to report breaches of ethical requirements
II only
I and II
I only
Neither I nor II

4. Which of the ff safeguards to eliminate or reduce threats to independence is provided by the profession,
legislation or regulation?
Internal policies and procedures to implement compliance with firm policies and procedures as they
relate to independence
Policies and procedures that emphasize the assurance client’s commitment to fair financial reporting
Rotation of senior personnel
Continuing education requirements

5. In pursuing the firm’s quality control objectives with respect to assigning personnel to engagements, the
auditors may use policies and procedures such as
Requiring auditing personnel to have current accounting and auditing literature available for research
and reference purposes throughout the engagement
 Requiring timely identification of the staffing requirements of specific engagements so that enough
qualified personnel can be made available
Establishing at entry levels a policy for recruiting that includes minimum standards of academic
preparation and accomplishments
Designating senior qualified personnel to provide advice on accounting or auditing questions throughout
the engagement

6. A CPA in business should maintain information for which he/she is responsible in a manner that:
Classifies and records information in a timely and proper manner
Represents the facts accurately and completely in all material respects
All of these
Describes clearly the true nature of business transactions, assets or liabilities

7. Which respect to the quality control element of skills and competence, what criterion would not be
considered in evaluating individual performance and expected proficiency?
Client relations
Communicative skills
Analytical judgment abilities
Relationship of personnel with relatives of clients

8. S1: It is practical to establish ethical requirements which apply to all situations and circumstances that
CPAs may encounter.
S2: CPAs should consider the ethical requirements as the ideal principles which they should follow in
performing their work.
False, False
False, True
True, True
True, False
9. Which of the ff quality control objective would be least important to the auditor?
Review and supervision
Hiring personnel
Professional advancement
Determination of audit fee

10. A CPA in public practice should not:

Engage in any business, occupation or activity that impairs or might impair integrity, objectivity or the
good reputation of the profession
Engage in non-accounting related activities which also involve members of the companies that
compromise his/her audit clients
Engage in teaching or provision of accounting instruction while still in public practice, since this would
cause a division of time and effort, resulting to impairment of the quality of service provided to clients
Engage in any business, occupation or activity aside from his/her public accounting practice

11. In which of the ff situations would a CPA be in violation of the rules of professional ethics in
determining professional fees?
 A fee which is lower compared to the fee charged in the prior year for similar services
A fee that is based on 10% of the client’s adjusted net income for the current year
A fee based on appropriate rates per hour or per day for the time of each person engaged in performing
professional services
A fee based on appropriate rates per hour, where the appropriate rate is based on the fundamental
premise that the organization and conduct of the CPA and the services provided to clients are well
planned, controlled and managed.

12. The objective of the quality control policies to be adopted by an audit firm will ordinarily incorporate all
of the following except:
Risk assessment
Skills and competence
Professional requirements
Assignment

13. When initiating either a formal or informal conflict resolution process, a CPA should consider the ff,
either individually or together with others, as part of the resolution process:
I. Relevant facts
II. Ethical issues involved
III. Fundamental principles related to the matter in question
IV. Established internal procedures
V. Alternative courses of action
I, II, III & IV
I, III, IV & V
I, II, III, IV & V
I, II, V

14. A CPA in public practice should not pay or receive a referral fee or commission unless the CPA has
established
Another company as recipient, whose name does not include the name of the CPA in public practice
Safeguards to eliminate or reduce threats to fundamental principles to an acceptable level
Internal controls designed to scientifically compute the referral fee or commission
That explicit approval to pay or receive commissions has been obtained from the SEC

15. S1: A CPA in public practice should agree to provide only those services that the CPA in public practice
is competent to perform
S2: Acceptance decisions need not be periodically reviewed for recurring client engagements
True, True
True, False
False, False
False, True

16. Which of the ff quality control procedures do not relate to skills and competence?
Advancement
Professional development
 Hiring
Direction

17. The original Code is applicable to professional services performed in the Phils. on or after
December 31, 2008
January 1, 2004
December 31, 2009
June 30, 2008

18. Circumstances that threaten the ability of a professional accountant in business to perform duties with
the appropriate degree of professional competence and due care include the following except:
Incomplete, restricted or otherwise inadequate information for performing the duties properly
Inadequate resources for the proper performance of the duties
Sufficient experience, training and/or education
Insufficient time for properly performing or completing the relevant duties

19. In connection with the element of assignment, a CPA firm’s system of quality control should ordinarily
establish procedures that
Encourage personnel to use authoritative sources on complex or unusual matter
Establish qualifications deemed necessary for various levels of responsibility within the firm
Provide adequate supervision at all levels, considering the training, ability and experience of the
personnel assigned
Require preparation of time budgets for audits to determine manpower requirements and to schedule the
audit work

20. S1: Professional accountants refer to persons who are registered in the PRC as CPAs and who hold a
valid certificate issued by the BOA, whether they be in any sector of practice of accountancy.
S2: The Code of Ethics for Professional Accountants in the Phils is mandatory for all CPAs.
True, True
True, False
False, True
False, False

21. A client seeking a second opinion does not permit the CPA to communicate with the existing
accountant. In such cases, the CPA should:
Issue a disclaimer of opinion due to a significant client-imposed scope limitation
Communicate the client’s refusal directly to the existing accountant
Consider whether to issue a qualified opinion or disclaimer of opinion due to a significant client-
imposed scope limitation
Consider whether, taking all the circumstances into account, it is appropriate to provide the opinion
sought

22. Appropriate safeguards during client acceptance may include:

Securing the client’s commitment to improve corporate governance practices or internal controls
Obtaining knowledge and understanding of the client
 All of these
Obtaining knowledge and understanding about the client’s owners, managers and those responsible for
its governance and business activities

23. Within the context of quality control, the primary purpose of continuing professional education and
training activities is to provide CPA firm with reasonable assurance that personnel within the firm have
Technical training that assures proficiency as an auditor
Professional education that is required to perform with due professional care
The ability to fulfill assigned responsibilities and the qualifications for advancement
The degree of independence as required by the Code of Professional Ethics

24. The Code of Ethics for Professional Accountants in the Phils is approved by ____, recommended for
adoption by the ___ and approved of the ___.
BOA, PRC, Pres of the Phils.
SEC, BOA, PRC
BOA, PICPA, PRC
PICPA, BOA, PRC

25. Assuring consistent compliance with the elements of quality control policies and procedures involves
Assignment
Professional requirements
Monitoring
Delegation

26. Contingent fees are widely used for certain types of non-assurance engagements. They may, however,
give rise to threats to compliance with the fundamental principles, especially the principle of
Professional behavior
Confidentiality
Objectivity
Professional competence and due care

27. Intimidation threat could be created under the ff circumstances except

A firm entering into a contingent fee arrangement relating to an assurance engagement
A firm being threatened with litigation by the client
A professional accountant being informed by a partner of the firm that he would not be promoted unless
he agrees with an audit client’s inappropriate accounting treatment
A firm being pressured to reduce inappropriately the extent of work performed in order to reduce fees

28. When a CPA in business is pressured to become associated with misleading information or to become
associated with misleading information through the action of others, what kinds of threats might arise?
Familiarity and self-review
Self-review and advocacy
Self-interest and intimidation
Self-interest and self-review
29. What is the objective of monitoring as an element of quality control policies of a firm?
To ensure that personnel are sufficiently directed, supervised and their work being reviewed adequately
To provide reasonable assurance that the firm’s other quality control policies and procedures are
effectively operating
To have reasonable assurance that right personnel is assigned to an audit engagement
To evaluate prospective clients and for their approval as clients

30. The ff principles are considered fundamental except:

Integrity
Objectivity
Independence
Confidentiality

31. To comply with the quality control element of professional requirements, the auditor would most likely
Monitor the effectiveness of recruiting programs
Emphasize independence of mental attitude in training programs and in supervision and review of the
audits
Identify criteria which will be considered in evaluating individual performance and expected proficiency
Identify on a timely basis the staffing requirements of specific audits

32. A quality control policy that requires personnel in the firm to adhere to independence, integrity,
objectivity, confidentiality and professional behavior, relates to
Professional requirements
Skills and competence
Delegation
Monitoring

33. If a CPA cannot implement appropriate safeguards, the professional accountant should do the ff, except:
Issue an adverse opinion the subject matter of the engagement
Decline the specific professional service involved
Resign from the client or the employing organization, as necessary
Discontinue the specific professional service involved

34. In connection with the element of consultation, a CPA firm’s system of quality control should ordinarily
provide that all personnel
Possess judgement, motivation and adequate experience
Seek assistance from persons having appropriate levels of knowledge, judgement and authority
Demonstrate compliance with all quality control standards
Have the knowledge required to enable them to fulfill responsibilities assigned

35. If a firm had a material financial interest, whether direct or indirect, in the assurance client, the self-
interest threat created:
Can be reduced by the application of appropriate safeguards as mentioned in Section 290.32 of the
revised code
Would be significant no safeguard could reduce the threat to an acceptable level
 Would be insignificant if the financial interests are disposed of within the most practicable time (i.e.,
within 3 months from the date of acceptance of the engagement)
Must be eliminated by written disclosure to the BOA, SEC and the AASC of such material financial
interest, provided such disclosure is made within 60 days from the date of acceptance of the engagement

36. Work environment safeguards to eliminate or reduce threats for a professional accountant in public
practice to an acceptable level include the ff except
Policies and procedures to monitor and if necessary, manage the reliance on revenue received from a
single client
Using different partners and engagement teams with separate reporting lines for the provision of non-
assurance services to an assurance client
Absence of disciplinary mechanism to promote compliance with policies and procedures
Documented internal policies and procedures requiring compliance with the fundamental principles of
quality controls
37. Which of the following quality control procedures relate to skills and competence?
Evaluating performance of personnel and advising personnel of their progress
Provide for approval of the scheduling and staffing of the audit by the auditor
Designating individuals as specialists to serve as authoritative sources
Provide procedures for planning audits

38. Which of the ff. Statements best describe why the CPA professions has deemed it essential to
promulgate a code of professional ethics and to establish a mechanism for enforcing observation of the
Code?
A prerequisite to success is the establishment of an ethical code that primarily defines the professional’s
responsibility to clients and colleagues
A requirement of most state laws calls for the profession to establish a code of ethics
A requirement of most state laws calls for the profession to establish a code of ethics
A distinguishing mark of a profession is its acceptance of responsibility to the public

39. A firm of independent auditors must establish and follow quality control policies and procedures
because these standards
Are required by the SEC for auditors of all firms
Include formal filing of records of such policies and procedures
Are necessary to meet increasing requirements of auditor’s liability insurers
Give reasonable assurance that the firm as a whole will conform with professional standards

40. The code of ethics would be violated if a CPA accepted a fee for services and the fee was
Based on a price quotation submitted in competitive bidding
Fixed by public authority
Based on the results of judicial proceedings in a tax matter
Payable after a specified finding was attained in a review of financial statements

41. Independence of an auditor in relation to the enterprise may be impaired in the following cases, except:
Direct or material indirect financial interest in the enterprise
Engaged to render management advisory services to the enterprise
 Having a loan to or from the enterprise or any officer, director or principal stockholder thereof, with
certain exceptions
Connection with the enterprise as a promoter, underwriter, voting trustee, director, officer or employee

42. The nature and extent of a CPA firm’s quality control policies and procedures depend on:
A. CPA firm size
B. Nature of CPA firm’s practice
C. Cost-Benefit Consideration
AC
AB
ABC
BC

43. In case of differences of opinion among members of a team:

The engagement partner shall issue a disclaimer of opinion due to a scope limitation
The report shall not be issued until the matter is resolved
Documentation will be made regarding the unresolved matter, and the auditor will withdraw from the
engagement altogether
An increase in the audit fee will be requested due to the extension of the time required to complete the
engagement

44. The ff steps are part of the conceptual framework approach. Set the steps in proper order
I - Address threats which are other than clearly insignificant through the application of safeguards
II - Evaluate the significance of threats to compliance with fundamental principles
III - Identify threats to compliance with the fundamental principles

I, II, III
III, I, II
III, II, I
II, III, I

45. Which of the ff is least likely considered a quality control procedure used to satisfy control policy on
consultation?
Assigns an appropriate person or persons to be responsible for assigning personnel to audits
Specifies the extent of documentation to be provided for the result of consultation in those areas and
specialized situations where consultation is required
Designated individuals as specialists to serve as authoritative sources and define their authority in
consultative situations
Identifies areas and specialized situations where consultation is required and encourage personnel to
consult with or in use authoritative sources on other complex matters

46. A CPA in business or an immediate or close family member may be offered an inducement or pressured
to offer inducements. Inducements may take various forms, including:
Any of these
Inappropriate appeals to friendship or loyalty
 Gifts and hospitality
Preferential treatment

47. Ethical conflict resolution:

Requires arbitration by an independent 3rd party
Results to withdrawal from the specified engagement
May either be formal or informal
Always involves a professional accountant as violating party

48. The primary purpose of establishing quality control policies and procedures for deciding whether to
accept a new client is to
Anticipate before performing any field work whether an unqualified opinion can be expressed
Enable the CPA firm to attest to the reliability of the client
Minimize the likelihood of association with clients whose management lacks integrity
Satisfy the CPA firm’s duty to the public concerning the acceptance of new clients

49. Sufficient direction, supervision and review of work at all levels to provide reasonable assurance that
work performed meets appropriate standards of quality relates to
Assignment
Professional requirements
Skills and competence
Delegation

50. Which of the ff are elements of a CPA firm’s quality control that should be considered in establishing its
quality control policies and procedures?
A. Skills & Competence
B. Monitoring
C. Professional Requirements
AC
BC
ABC
AB