SW - Ethics

Auditing Theory
Case1
The following is a list of circumstances that might be faced by a public accounting firm. Select the
rule violated of the Code of Professional Conduct in the second column. If no rule is violated select
10-no violation (this may be used once, more than once, or not at all). Rules 1 through 9 may be
used either once, or not at all.

 
Circumstance Rule Violated
The dependent-son of a partner in a CPA firm owns ten shares of
A. 1. Accounting principles.
stock in an audit client.
In preparing a tax return, a CPA takes a deduction at the client’s
B. 2. Acts discreditable.
request that the CPA believes is not justified.
Advertising and other
C. A CPA robs a bank. 3.
forms of solicitation.
A CPA owns 100 shares in a consulting client for which the firm Commissions and
D. 4.
provides no attest services. referral fees.
A CPA charges an audit fee that depends on the amount of credit Compliance with
E. 5.
the client obtains. standards.
Confidential client
F. A CPA advertises in a local newspaper. 6.
information.
G A client knowingly issues financial statements that inappropriately
7. Contingent fees.
. and materially depart from standard.
A CPA and the president of an audit client both have an immaterial
H. joint investment in another company.  The CPA firm provides no 8. Independence.
services for the other company.
A CPA discloses information about a client because the information
I. 9. Integrity and objectivity.
was subpoenaed.
A CPA does not follow generally accepted auditing standards in the 10
J. No violation.
audit of a nonpublic company. .
 
 Arrange your answers as:
A. 1

 
Case 2

The firm of Bulaklak and Bubuyog, CPAs, has two offices, one in Quezon City and one in Solano, Nueva
Vizcaya. The firm has audited the Hardin Corporation out of its QC office for the past 5 years. For each of
the following independent cases, which occurred during the year under audit, indicate whether the
independence of either (1) the CPA involved or (2) the firm would be impaired.
a. Bango Bulaklak, a partner in the Solano Branch, fell wildly in love with Jerry Bee, the treasurer
for Hardin Corporation. They were married in Las Vegas. During the week, Bulaklak still lives in
Solano and works in that branch, while Jerry Bee lives in QC, working for Hardin. On weekends
they commute to their home in Santiago City. Bulaklak does not participate in the engagement.
b. Big Bubuyog is the father of Small Bubuyog, a QC partner. Big B has a material investment in
Hardin. Small B is unaware of his father’s investment, but does participate in the engagement.
c. Sally, a senior in the Solano office, has a material investment in the capital stock of Hardin. She
does not participate in the engagement.
d. Shelly, a staff assistant in the QC office, works on the Hardin audit. Her uncle works as the chief
accounting officer of Hardin.
e. Bill, a senior in the QC office, does not work on the Hardin audit, but owns 9% of Hardin’s
outstanding equity.

Case 3
Thomas and Susan formed a professional practice called “Financial Services” each taking 50%.
Thomas is a CPA while Susan is an insurance underwriter. The company performs auditing and tax
services under Thomas’ direction and insurance services under Susan’s supervision.
One of the company’s first audit clients was Grand Company. Grand had total assets of
P6,000,000 and total liabilities of P2,700,000. In the course of his examination, Thomas found that
Grand’s building with a carrying value of P2,400,000 was used as collateral for a 10-year term note in the
amount of P2,000,000. The client’s financial statements did not mention that the building was pledged
as collateral for the 10-year term note. However, as the failure to disclose the lien did not affect either
the value of the assets or the amount of the liabilities, and his examination was satisfactory in all other
respects, Thomas rendered an unqualified opinion on Grand’s financial statements. About two months
after the date of his opinion, Thomas learned that an insurance company was planning to loan Grand
P1,500,000 in the form of a 1st mortgage note on the building. Realizing that the insurance company was
unaware of the existing lien on the building, Thomas had Susan notify the insurance company of the fact
that Grand’s building was pledged as collateral for a term note.
Shortly after the event described above, Thomas was charged with several violations of
professional ethics.

Required: Identify and discuss at least three (3) ethical implications of those acts by Thomas that were in
violation of the Code of Professional Conduct.