AUDITING THEORY

PROFESSIONAL AND LEGAL RESPONSIBILITY

QUIZ 2

1. The Code of Professional Ethics states, in part, that a CPA should maintain
integrity and
objectivity. Objectivity refers to the CPA‘s ability to
A. Determine accounting practices that were consistently applied
B. Maintain an impartial attitude on all matters which come under his
review
C. Determine the materiality of items
D. Insist on all matters regarding audit procedures

2. Which of the following values is not necessary for a professional accountant?

A. Honesty
B. Objectivity
C. Integrity
D. A primary commitment to self-interest

3. Which of the following is not a fundamental principle in codes of ethics for

professional
accountants?
A. Act in the client‘s best interest
B. Objectivity and independence
C. Maintain the good reputation of the profession
D. Maintain confidentiality

4. Which of the following statements about conceptual framework of the code of

ethics is
incorrect?
A. A conceptual framework that requires a professional accountant to
identify, evaluate and address threats to compliance with the fundamental
principles, rather than merely with a set of specific rules which may be
arbitrary is in the public interest.
B. As a concern to public interests, the professional accountant should
comply with a set of specific rules rather than arbitrarily identify, evaluate
and address threats to compliance with fundamental principles.
C. If identifies threats are other than clearly insignificant, a professional
accountant should appropriately apply safeguards to eliminate the threats
or reduce them to an acceptable level.
D. The Code provides a framework to assist a professional accountant to
identify, evaluate and respond to threats to compliance with the
fundamental principles.

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 5. Which of the following is true of the conceptual framework approach?
A. It is impossible to define every situation that creates specific threats and
specify the
appropriate mitigating action.
B. A professional accountant should take qualitative but not quantitative
factors into
account when considering the significance of a threat.
C. A professional accountant should take quantitative but not qualitative
factors into
account when considering the significance of a threat.
D. All inadvertent violations of the code of Ethics, irrespective of their
nature and
significance, always compromise compliance with the fundamental
principles

6. Which of the following appropriately describes an advocacy threat?

A. The professional accountant may be deterred from acting objectivity by
threats, actual or
perceived.
B. Because of a close relationship, a professional accountant becomes too
sympathetic to
the interest of others.
C. The professional accountant should provide a position or opinion to the
point that
subsequent objectivity may be compromised.
D. The professional accountant needs to be reevaluated his previous
judgment.

7. A threat that prevents the professional accountant from acting objectively by

threats, actual
or perceived.
A. Self-interest
B. Familiarity
C. Intimidation
D. Advocacy

8. A form of threat which may occur when a previous judgment needs to be

reevaluated by the
professional accountant who is responsible for that judgment.
A. Self-interest threat
B. Self-review threat
C. Familiarity threat
D. Advocacy threat

9. Advocacy threat may occur:

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 A. As a result of the financial or other interests of a professional accountant
or an
immediate or close family member.
B. When, because of a close relationship, a professional accountant
becomes too
sympathetic to the interests of others.
C. When a professional accountant promotes a position or opinion to the
point that
subsequent objectivity may be compromised.
D. When a professional accountant may be deterred from acting objectively
by threats,
actual or perceived.

10. It occurs when a firm or member of the assurance team could benefit from a
financial
interest in, or other self-interest conflict with, an assurance client.
A. Self-interest threat
B. Self-review threat
C. Advocacy threat
D. Familiarity threat

11. A financial interest beneficially owned through a collective investment vehicle,

estate, trust
or other intermediary over which the individual or entity has no control.
A. Indirect financial interest
B. Financial instrument
C. Direct financial interest
D. Clients‘ monies

12. Financial interest means:

A. Any bank account which is sued solely for the banking of clients‘ monies.
B. Any monies received by a professional accountant in public practice to be
held or paid
out on the instruction of the person from whom or on whose behalf they
are received.
C. A financial interest beneficially owned through a collective investment
vehicle, estate,
trust or other intermediary over which the individual or entity has no
control.
D. An equity interest or other security, debenture, loan or other debt
instrument of an entity, including rights and obligations to acquire
such an interest and derivatives directly related to such interest.

13. Direct financial interest is a financial interest:

A B C D
 Owned directly by and under

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 the control of an individual or
entity (including those Yes Yes Yes No
managed on a discretionary
basis by other)
 Beneficially owned through a
collective investment vehicle,
estate, trust or other
intermediary over which the Yes Yes No No
individual or entity has control
 Beneficially owned through a
collective investment vehicle,
estate, trust or other
intermediary over which the Yes No No Yes
individual or entity has no control

14. Occurs when any product or judgment of a previous assurance engagement or

non-assurance engagement needs to be re-evaluated in reaching conclusions on
the assurance
engagement or when a member of the assurance team was previously a director
or officer of
the assurance client, or was an employee in a position to exert direct and
significance influence
over the subject matter of the assurance engagement.
A. Self-interest threat
B. Self-review threat
C. Advocacy threat
D. Familiarity threat

15. Intimidation threat

A. is not a threat to independence.
B. occurs when a member of the assurance team may be deterred from
acting objectively
and exercising professional skepticism by threat, actual or perceived,
from the directors, officers or employees of an assurance client.
C. occurs when, by virtue of a close relationship with an assurance client,
its directors,
officers or employees, a firm or a member of the assurance team
becomes too
sympathetic to the client‘s interests.
D. occurs when a firm, or a member of the assurance team, promotes, or
may be perceived to promote, an assurance client‘s position or opinion to
the point that objectivity may, or may be perceived to be, compromised.

16. Safeguards created by the profession, legislation, or regulation, include the

following, except:

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 A. Educational, training and experience requirements for entry into the
profession.
B. Continuing education requirements.
C. Legislation governing the independence requirements of the firm.
D. Policies and procedures that emphasize the assurance client‘s
commitment to fair
financial reporting.

17. Which of the following is an example of engagement-specific safeguards?

A. Advising partners and professional staff of those assurance clients and
related entities
from which the must be independent.
B. Consulting an independent third party, such as committee of independent
directors, a
professional regulatory body or another professional accountant.
C. Policies and procedures that will enable the identification of interests or
relationships
between the firm or members of engagement teams and clients.
D. External review by a legally empowered third party of the reports,
returns,
communications or information produced by a professional accountant.

18. Which of the following is not a safeguard created by the profession,

legislation, or regulation?
A. Professional standards
B. Professional and procedures to implement and monitor quality control of
engagements.
C. Continuing professional development requirements
D. Educational, training and experience requirements for entry into the
profession.

19. Safeguards may eliminate or reduce threats to an acceptable level. The

following are
examples of these safeguards:
I. Professional or regulatory monitoring and discipline procedures.
II. Documented internal policies and procedures requiring compliance with
the
fundamental principles.
III. Policies and procedures to monitor and, if necessary, manage the
reliance on
revenue received from a single client.

Which of the foregoing examples of safeguards is/ are classified firm-wide

safeguards in the
work environment?
A. All of these

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 B. I and II
C. II and III
D. I and III

20. Which of the following fundamental principles is compromised when a

professional
accountant is associated with reports or returns that are significantly
misleading?
A. Integrity
B. Competence and due professional care
C. Objectivity
D. Professional behavior

21. Safeguards may eliminate or reduce threats to an acceptable level. The

following are
examples of these safeguards:
I. Professional or regulatory monitoring and disciplinary procedures.
II. Documented internal policies and procedures requiring compliance with
the
fundamental principles.
III. Policies and procedures to monitor and, if necessary, manage the
reliance on
revenue received from a single client.
IV. Corporate governance regulations

Which of the foregoing examples of safeguards that can be applied is(are) created
by the
profession, legislation, or regulation?
A. I and III
B. II and Iv
C. I and IV
D. II and III

22. Which of the following examples of safeguards that may effectively reduce
threats to
compliance with the fundamental of principles is created by the profession,
legislation or
regulation?
A. 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.
B. Effective, well-publicized complaints system operated by the employing
organization, the profession, or a regulator, which enable colleagues,
employers and members of the
public to draw attention to unethical behavior.

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 C. Designating a member of senior management to be responsible for
overseeing the
adequate functioning of the firm‘s quality control system.
D. Disclosing to those charged with governance of the client the nature of
services provided and the extent of fees charged.

23. Professional accountants may encounter problem in identifying unethical

behavior or in
resolving an ethical conflict. When faced with significant ethical issues,
professional accountants should do the following except
A. Follow the established policies of the employing organization to seek a
resolution of
such conflict.
B. Review the conflict problem with the immediate superior if the
organization‘s policies do
not resolve the ethical conflict.
C. If the problem is not resolved with the immediate superior and the
professional
accountant determines to go to the next higher managerial level, the
immediate superior
need not be notified of the decision.
D. Seek counseling and advice on a confidential basis with an independent
advisor or the
applicable professional accountancy body or regulatory body to obtain an
understanding
of possible courses of action.

24. As a resolution of the conflict in the application of fundamental principles, the

auditor, after considering the ethical issues and relevant facts may do any of the
following except:
A. Must immediately resign from the engagement or the employing entity.
B. Should weigh the consequences of each possible course of action.
C. Should consult with other appropriate persons within the firm or
employing organization
for help to finally resolve the matter.
D. The professional accountant may wish to obtain professional advice from
the relevant
professional body without breaching confidentiality if significant conflict
cannot be
resolved.

25. Which of the following is incorrect regarding integrity and objectivity?

A. Integrity implies not merely honesty but fair dealing and truthfulness.
B. The principle of objectivity imposes the obligation on all professional
accountants to be
fair, intellectually honest, and free of conflicts of interest.

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 C. Professional accountants serve in many different capacities and should
demonstrate
their objectivity in varying circumstances.
D. Professional accountants should neither accept nor offer any gifts or
entertainment.

26. If a professional accountant is billing an audit client a number of hours

greater than those
actually worked, which of the following fundamental principles is likely
violated?
A. Objectivity
B. Integrity
C. Professional due care
D. Confidentiality

27. Which of the following is incorrect regarding professional competence?

A. Professional accountants may portray themselves as having expertise or
experience
they do not possess.
B. Professional competence may be divided into two separate phases.
C. The attainment of professional competence requires initially a high
standard of general
education.
D. The maintenance of professional competence requires a continuing
awareness of
development in the accountancy profession.

28. In which of the following circumstances may disclosure of confidential

information be
appropriate?
A. Disclosure is necessary as required by legal proceedings.
B. The professional accountant volunteered to reveal information in order to
help a faster
resolution of legal proceedings.
C. Working papers are returned over to other professional accountant who
purchased the
accounting practice.
D. Detailed listing of inactive customers of one assurance client is passed on
to other non- assurance client.

29. The underlying reason for a code of professional conduct for any profession is
A. the need for public confidence in the quality of service of the profession.
B. that it provides a safeguard to keep unscrupulous people out.
C. that it is required by the congress.

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 D. that it allows Professional Regulation Commission to have a yardstick to
measure
deficient performance.

30. A professional accountant may be associated with a tax return that

A. contains a false or misleading statement.
B. contains statements r information furnished recklessly or without any
real knowledge of
whether they are true or false.
C. omits or obscures information required to be submitted and such
omission or obscurity
would mislead the revenue authorities.
D. uses of estimates if such use is generally acceptable or if it is impractical
under the
circumstances to obtain exact data.

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