23

Code of Ethics
for Professional Accountants

An ethical practice is the bedrock of an accountant's success. 

This chapter presents the relevant ethical requirements professional accountants should comply
in performing their professional services.

LEARNING OBJECTIVES
After studying this chapter, you should be able to: 

1. Explain the importance of code of ethics. 

2. Enumerate the three parts of the Code of Ethics. 

3. Describe the general application of the Code of Ethics relating to (1) 

fundamental principles, (2) threats and safeguards, and (3) ethical conflict resolution 

4. Discuss the threats, as well as safeguards, to compliance with fundamental principles and

independence professional accountants in public practice. 

5. Discuss the threats, as well as safeguards, to compliance with fundamental principles

professional accountants in business.  

INTRODUCTION-_IMPORTANCE OF THE CODE OF ETHICS (Learning Objectives). 

Ethics is a set of principles that guides professional accountants in appropriately conducting and
portraying themselves to help fulfill the responsibility of the profession: to act not only for the
client's or employing entity's interest, but primarily for the public interest. 

In the introductory paragraph of Code of Ethics for Professional Accountants (the “Code"), as
issued by the International Ethics Standards Board for Accountants (IESBA) of the International
Federation of Accountants (IFAC), and on which the Philippine Code is based, as adopted by PRC
through BOA, it states: 

“A distinguishing mark of the accountancy profession is its acceptance of the responsibility to act
in the public interest. Therefore, a professional accountant's responsibility is not exclusively to
satisfy the needs of an individual client or employer. In acting in the public interest, a professional
accountant shall observe and comply with this Code.” 

Therefore, one may say that in the accountancy profession: "the public is the main beneficiary of
the accountant's service." And the Code serves as the backbone or foundation of the profession
in discharging this obligation by providing ethical principles and obliging professional accountants
to adhere to these principles. Needless to say, without profession being perceived to be acting in
behalf of public, the profession cannot grow and ultimately survive. 

OVERVIEW OF THE CODE (Learning Objective 2) 

The Code consists of three parts, which are:

1. Part A—General Application of the Code

2. Part B—Professional Accountants in Public Practice

3. Part C—Professional Accountants in Business 

Professional accountants in public practice may also find Part C relevant to their particular
circumstances. Professional accountants shall not apply less stringent standards than those
stated in this Code. However, if a professional accountant is prohibited from complying with
certain parts of this Code by law or regulation, they shall comply with all other parts of this
Code. 

The following exhibit outlines the main contents of the three parts of the Code.
Exhibit 23.1—Contents of the Code
Part A-General Application of the Code 
• Conceptual Framework Approach to Compliance 

• Fundamental Principles 

• Threats and Safeguards 

• Ethical Conflict Resolution 

Part B- Professional Accountants in Public Practice

• Professional Appointment 

• Conflicts of Interest 

• Second Opinions

• Fees and Other Types of Remuneration

• Marketing Professional Services

• Gifts and Hospitality

• Custody of Client Assets

• Objectivity-All Services 

• Independence-Audit and Review Engagements 

• Independence-Other Assurance Engagements 

Part C--Professional Accountants in Business 

• Conflicts of Interest 
• Preparation and Reporting of Information 
• Acting with Sufficient Expertise
• Financial Interests
• Inducements

PART A-GENERAL APPLICATION OF THE CODE (Learning Objective 3) 

The next exhibit summarizes the general application of the Code. Study well this exhibit and the
next; in a nutshell, they are what the Code is all about.

Exhibit 23.2—General Application of the Code 

Fundamental Principles

1. Integrity-Honesty, fairness
2. Objectivity-Uncompromising judgment
3. Professional competence and due care-Required level of
Comply knowledge, skill, and diligence
with 4. Confidentiality-Not discredit the reputation of the profession 
5. Professional Behavior--Not discredit the reputation of the
profession 

Professional
Accountants Threats to compliance with Fundamental Principles
Identify,
evaluate 1. Self-interest-- Financial interest that compromises judgment
2. Self-review--Inappropriate evaluation of previous judgment T
, and 3. Advocacy--Promotion of client's or employer's interest rather
address than the public interest.
4. Familiarity--Being too sympathetic because of dose
relationship with a client or employer
5. Intimidation--Pressures and undue influence that deter
objectivity.

The Code establishes a conceptual framework to compliance with the fundamental principles
(and independence, for assurance engagements)
Exhibit 23.3—Conceptual Framework Approach to Compliance 

Identified
threats that are not
at acceptable level?

Two safeguards;
No further actions
Apply safeguards
necessary; No Yes 1.Profession,
to eliminate or
compliance to legislation; and
reduce threats to
fundamental regulation; and
an acceptable
principles not 2.Work
level
compromised. environment

Yes

Decline, Are threats eliminated

withdraw, or or reduced to an
resign from a acceptable level?
client or an No
employer

Fundamental Principles

Integrity 

All professional accountants shall be straightforward and honest in all professional and business
relationships. Integrity also implies fair dealing and truthfulness. 

Therefore, the accountant should not be associated with reports or information that (1) contains
a materially false or misleading statement, (2) contains information furnished recklessly, or (3)
omits or obscures information that would be misleading. 

Objectivity 
All professional accountants shall not compromise their professional or business judgment
because of bias, conflict of interest, or the undue influence of others. 

An accountant shall not perform a professional activity or service if a circumstance or

relationship biases or unduly influences the accountant's judgment. 

Professional Competence and Due Care

All professional accountants shall:

a. Maintain professional knowledge and skill at the level required to ensure that clients or
employers receive competent professional service; and
b. Act diligently in accordance with applicable professional standards

Professional competence may be divided into two separate phases:

a. Attainment of professional competence. This typically follows the process of (1) high
standard of general education; (2) specific education, training and examination in
professionally relevant subjects; and (3) a period of work experience; and 
b. Maintenance of professional competence. This requires a continuing awareness and an
understanding of relevant technical, professional, and business developments. 

Diligence encompasses the responsibility to act in accordance with the requirements of an

assignment, carefully, thoroughly, and on a timely basis. Where appropriate, an accountant shall
make users of the accountant's professional services aware of the limitations inherent in the
services. 

Confidentiality 

All professional accountants shall refrain from:

a. Disclosing outside the firm or employer confidential information acquired as a 

result of professional and business relationships without (1) proper and specific authority, (2)
legal (e.g., a court subpoena or disclosure to public authorities of infringements of law [in this
case, it is advisable to seek legal advice before making the disclosure]) or (3) professional right or
duty to disclose (e.g., compliance with quality control review by BOA, investigation by a
regulatory body, compliance with technical standards and ethics requirements, or protection of
accountant's interest in a legal proceeding); and

b. Using confidential information acquired as a result of professional and business

relationships to their personal advantage or the advantage of third parties. 

The need to comply with the principle of confidentiality continues even after the end of
relationships between a professional accountant and a client or employer. 
Professional Behavior 

All professional accountants to comply with relevant laws and regulations and avoid any action
that may discredit the profession. This includes actions that a reasonable and informed third
party, weighing all the specific facts and circumstances, would be likely to conclude adversely
affects the good reputation of the profession. 

In marketing and promoting themselves and their work, accountants shall not bring the
profession into disrepute. Accountants shall be honest and truthful and not: 

a. Make exaggerated claims for their services, qualifications, or experience; or

b. Make disparaging references or unsubstantiated comparisons to work of others. 

Threats to Compliance with Fundamental Principles 

Threats refer to relationships or circumstances that could compromise, an accountant's

compliance with the fundamental principles. Threats fall into one or more of the following
categories:

1. Self-interest threat-the threat that a financial or other interest will inappropriately

influence the accountant's judgment or behavior;
2. Self-review threat—the threat that an accountant will not appropriately evaluate the
results of a previous judgment made, or activity or service performed by the accountant,
or by another individual within the accountant's firm or employing organization, on
which the accountant will rely when forming a judgment as part of performing a current
activity or providing a current service;
3. Advocacy threat—the threat that an accountant will promote a client's or employer's
position to the point that the accountant's objectivity is compromised;
4. Familiarity threat—the threat that due to a long or close relationship with a client or
employer, an accountant will be too sympathetic to their interests or too accepting of
their work; and
5. Intimidation threat-the threat that an accountant will be deterred from acting
objectively because of actual or perceived pressures, including attempts to exercise
undue influence over the accountant. 

The next exhibit provides examples of circumstances that may create such threats.

Exhibit 23.4–Examples of Circumstances that Create Threats

1. Self-interest 
• Having a direct financial interest in the assurance client.
• Having undue dependence on total fees from a client.

• Having a significant close business relationship with an assurance client.

• Being concerned about the possibility of losing a significant client. 

• Entering into employment negotiations with the audit client. 

• Contingent fee arrangement relating to an assurance engagement. 

• Holding a financial interest in, or a loan or guarantee from the employer 

• Participating in incentive compensation arrangements offered by the employer.

•• Inappropriate personal use of corporate assets. 

• Concern over employment security. 

• Commercial pressure from outside the employing organization. 

2. Self-review 
• Issuing an assurance report on the effectiveness of the operation of financial systems after
designing or implementing the systems.

• Having prepared the original data used to generate records that are the subject matter of the
assurance engagement.

• A member of the assurance team being, or having recently been, (1) a director, (2) an officer,
or (3) an employee in a position to exert significant influence over the subject matter of the
engagement of the client.

• Performing a service for an assurance client that directly affects the subject matter
information of the assurance engagement.

• Determining the appropriate accounting treatment for a business combination after

performing the feasibility study that supported the acquisition decision.
3. Advocacy 
• Promoting shares in an audit client. 
• Acting as an advocate on behalf of an audit client in litigation or disputes with third parties.
4. Familiarity 
• A member of the engagement having a close or immediate family mem family member who is
(1) a director, (2) an officer, or (3) an employee in a position to exert significant influence over
the subject matter of the engagement of the client.
• (1) A director, (2) an officer, or an employee in a position to exert significant influence over
the subject matter of the engagement of the client having recently served as the engagement
partner.
• Accepting gifts or preferential treatment from a client, unless the value is trivial or
inconsequential.
• Senior personnel having a long association with the assurance client.
• Being responsible for the employer's financial reporting when an immediate or close family
member employed by the entity makes decisions that affect the entity's financial reporting. 
• Long association with business contacts influencing business decisions.
5. Intimidation 
• Being threatened with dismissal from a client engagement. 
• An audit client indicating that it will not award a planned non-assurance contract to the firm if
the firm continues to disagree with the client.
• Being threatened with litigation by the client.
• Being pressured to reduce inappropriately the extent of work to .reduce fees.
• An accountant feeling pressured to agree with the judgment of a client employee because the
employee has more expertise on the matter in question. 
•An accountant being informed that a promotion will not occur unless the accountant agrees
with an audit client's inappropriate accounting treatment.
• Threat of dismissal or replacement of the accountant or a close or immediate family member
over a disagreement about an accounting principle.
• A dominant personality attempting to influence the decision making process, for example with
regard to or the application of an accounting principle. 

Safeguards to Address Threats 

Safeguards are actions or other measures that may eliminate threats or reduce them to an
acceptable level. They fall into two broad categories:

1. Safeguards created by the profession, legislation or regulation; and

2. Safeguards in the work environment. 

In certain cases, a client may also have safeguards that accountants in public practice may rely.
However, it is not possible to rely solely on such safeguards. Examples of such safeguards are
provided in the next exhibit.

Exhibit 23.5—Examples of Safeguards against Threats

1. 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 an accountant. 

2. Work environment
• Leadership of the firm that stresses importance of compliance with the Code. 
• Leadership of the firm that establishes the expectation that members of an  assurance team
will act in the public interest.
• Policies and procedures to implement and monitor quality control.
• Advising partners and professional staff of assurance clients and related entities from which
independence is required.
• A disciplinary mechanism to promote compliance with policies and procedures.
• Having an accountant who was not a member of the assurance team review the assurance
work performed or otherwise advise as necessary.
• Consulting an independent third party, such as a regulatory body. 
• Discussing ethical issues with TCWG of the client.
• Disclosing to TCWG of client the nature of services and extent of fees charged.
• Rotating senior assurance team personnel.
• Recruitment procedures of employing high caliber competent staff.
• Policies and procedures to encourage employees to communicate to senior levels within the
employer ethical issues without fear of retribution. 
3. Clients System and Procedures
• The client requires persons other than management to ratify the appointment.
• The client has competent employees with experience and seniority.
• The client has implemented internal procedures that ensure objective choices in
commissioning non-assurance engagements.
• The client has a corporate governance structure that provides appropriate oversight and
communications regarding the firm's services. 

Ethical Conflict Resolution 

Exhibit 23.6—Ethical Conflict Resolution Process

Step 1 Gather relevant facts.
Step 2 Identify ethical issues involved.
Step 3 Determine fundamental principles related to the matter in question.
Step 4 Consider and follow established internal procedures within the organization, such as
consulting with ethics or personnel department.
Step 5 If not resolved, formulate alternative courses of action, such as 
a. Consulting with TCWG, if conflict involves the organization;
b. Obtaining outside professional and legal advice, but observe 
 confidentiality; and
c. Disassociating from the conflict, such as withdrawing from the 
engagement team or specific assignment, or resigning altogether from the
engagement, the firm or the employer 

 
PART B-PROFESSIONAL ACCOUNTANTS IN PUBLIC PRACTICE
(Learning Objective 4) 

A professional accountant shall not knowingly engage in any business, occupation, or activity that
impairs or might impair integrity, objectivity or the good reputation of the profession
incompatible with the fundamental principles. This part of the Code deals with the matters
outlined in the exhibit below.

Exhibit 23.7--Summary of Matters Dealt with in Part B of the Code 

Professional Appointment
Accept only a client or engagement that does not compromise compliance.

Conflicts of Interest
Avoid conflicting interests that could compromise compliance. 

Second Opinions
Provide second opinions when compliance with the Code will not be compromised. 

Fees and Other Types of Remuneration

Commissions, inadequate fees, and contingent fees may compromise compliance. 

Marketing Professional Services

Assertions in marketing should be honest and truthful. 

Gifts and Hospitality 

The accountant shall decline such offers from inconsequential. 

Custody of Client Assets

Accountants generally shall not hold client assets. 
Objectivity-All Services
Relationships that compromise the accountant's objectivity should be avoided. 

Independence-Audit and Review Engagements

An accountant who provides an assurance service shall be independent of the client. 

Independence--Other Assurance Engagements

Requirements are similar to those for audit and review engagements. 
Professional Appointment

Exhibit 23.8 Threats and Safeguards 

Client Threats to integrity or professional behavior may be created from
Acceptance Acceptance questionable issues associated with the client. For example,
client involvement in illegal activities (e.g., money laundering),
dishonesty or questionable financial reporting. Safeguards may include:
• Obtaining knowledge and understanding of the client; or 
• Securing the client's commitment to improve corporate governance
practices or internal controls. 

Engagement A self-interest threat to professional competence and due care is)

Acceptance created if the engagement team does not possess, or cannot acquire,
the necessary competencies. The following are examples of safeguards:
• Acquiring knowledge of relevant industries or subject matters; 
• Obtaining experience with relevant regulatory requirements; 
Assigning sufficient staff with necessary competencies; and 
• Using experts where necessary. 

Changes in a An accountant who is asked to replace another accountant shall

Professional determine if there are any reasons for not accepting the engagement.
Appointment  For example, there may be a threat to professional competence and due
care if an accountant accepts the engagement before knowing all
pertinent facts. This may require direct communication with the existing
accountant or obtaining necessary information from other sources. 

Conflicts of Interest 

Conflicts of interest can arise, for example, when an accountant represents two clients, one a
buyer and the other a seller to the same transaction, or is assisting a client in hiring an employee
but one of the applicants is related to the accountant.

 An accountant should take reasonable steps to identify circumstances that could pose a conflict
of interest. Ordinarily, two questions need to be answered:

1. If one party gains, is the other party certain or likely to lose?

2. Will the accountant gain from the use of confidential information? 

Additionally, the professional accountant may consider public perception. 

A conflict of interest creates a threat to objectivity and other fundamental principles. Examples
of safeguards include (1) implementing mechanisms to prevent unauthorized disclosure of
confidential information; (2) having an accountant not involved in the conflict review the work to
assess appropriateness; and (3) consulting with third parties, e.g., a professional body, legal
counsel or another accountant. 

Second Opinions 

When asked to provide a second opinion on accounting, auditing, or other standards to specific
circumstances or transactions, an accountant should evaluate the significance of threats and
apply necessary safeguards. 

For example, there may be a threat to professional competence and due care in circumstances
where the second opinion is not based on adequate evidence. Examples of safeguards include (1)
seeking client permission to contact the existing accountant, (2) describing the limitations
surrounding any opinion, and (3) providing the existing accountant with a copy of the opinion. 

Fees and Other Types of Remuneration

Exhibit 23.9—Threats and Safeguards: Fees and Commissions
Too low This creates a self-interest threat to professional competence and engagement
engagemen due care if it may be difficult to perform the engagement in fees accordance
t fees with professional standards. Examples of safeguards include: 
• Making the client aware of engagement terms and basis of fees; or 

• Assigning appropriate time and qualified staff to the task. 

Contingent Contingent fee is a fee calculated on a predetermined basis relating to the

fees  outcome of a transaction or the result of the services. A fee that is established
by a court or other public authority is not a contingent fee. Contingent fees are
widely used for certain types of non-assurance engagements. They may create
a self-interest threat to objectivity and other fundamental principles. Examples
of safeguards to this threat include: 
• An advance written agreement as to the basis of remuneration; 
• Disclosure to intended users and the basis of remuneration; 
• Quality control policies and procedures; or 
• Review by an independent third party of the work. 

Receiving or Receiving or | Receiving a commission from a third party (e.g., a software

paying vendor) paying in connection with the sale of goods or services to a client or
referral fee paying referral fee a referral fee to obtain a clienhbt creates a self-interest
or threat to objectivity and professional competence and due care. Examples of
commission commission safeguards include: 
• Disclosing to the client any arrangements about referral fee; or 
 Agreeing with the client commission arrangements in connection with the sale
by a third party of goods or services to 

Marketing Professional Services

When a professional accountant solicits new work through advertising or other forms of marketing,
there may be a threat to compliance with the fundamental principles. For example, a self-interest
threat to professional behavior is created if services, achievements, or products are inappropriately
marketed.

Gifts and Hospitality

Unless trivial and inconsequential, a self-interest or familiarity threat to objectivity may be created if
a gift or hospitality from a client is accepted; an intimidation threat to objectivity may result from the
possibility of such offers being made public. When the threats cannot be addressed by safeguards,
such an offer shall not be accepted.

Custody of Client Assets 

The holding of client assets creates threats to compliance with the fundamental principles; for
example, there is a self-interest threat to professional behavior and may be a self-interest threat to
objectivity. Hence, an accountant shall not assume custody of client monies or other assets unless
permitted by law. When entrusted with money (or other assets) belonging to others, the accountant
shall:

a. Keep such assets separately from personal or firm assets;

b. Use such assets only for the purpose for which they are intended;
c. At all times be ready to account for those assets and any income thereon; and
d. Comply with all relevant laws and regulation

As part of engagement acceptance services that may involve the holding of client assets, an
accountant shall make inquiries about the source of such asset and consider legal and regulatory
obligations. For example, if the assets were derived from illegal activities, such as money
laundering, a threat would be created. In such situations, the accountant may consider
seeking legal advice.
Objectivity- All Services

A accountant shall determine whether there are threats to objectivity resulting from having interests
in, or relationships with, a client or its employees. For example, a familiarity threat to objectivity may
be created from a family or close personal or business relationship. If safeguards cannot address the
threat, the accountant shall terminate the engagement. Examples of safeguards include: 

 Withdrawing from the engagement team;

 Supervisory procedures;
 Terminating the financial or business relationship giving rise to the threat;
 Discussing the issue with higher levels of management within the firm; or
 Discussing the issue with TCWG of the client.

Independence-Audit and Review Engagements 

Independence comprises (1) independence of mind and (2) independence in appearance, as defined in t
next exhibit.

Exhibit 23.10—Two Aspects of Independence

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

Independence The avoidance of facts and circumstances that are so significant that a
reasonable and informed third party would be likely to conclude, weighing all
In the specific facts and circumstances, that a firm's, or member of the audit
team's, integrity, objectivity or professional skepticism has been
Appearance compromised. 

The next exhibit summarizes the independence requirements.

 Exhi
23.11—
Audit Non-audit, report Non-audit, report is for

Is for general use Restricted use

Audit client The team, the The team, the The team, the firm, and the

firm, and the firm, and the network firm

network firm network firm

Non-audit n/a The team and the The team and the firm must

Assurance firm Have no material financial

Client Interest in the client.

Independence Requirements Application 

The next exhibit provides summary of the rules on idependence.

Exhibit 23.12—Specific Independence Rules Summary

Engagement Independence from audit client is required both period (1) during the
engagement period (which starts when the auditor begins audit and ends
Period when the audit report is issued) and (2) the p covered by F/S. When the
engagement is recurring, it ends later of the notification by either party that
the profess relationship has terminated or the issuance of final audit report.
Financial Financial interest in audit client may be direct or indirect. When an
individual or entity has control over the investment or the domy to
Interest influence investment decisions, the financial interest is considered direct;
otherwise, it is indirect. Under the Code:
(primarily
a. If (1) a member of audit team, (2) a member of that
creates self- individual's immediate family (i.e., a spouse (or equivalent] or dependent),
or (3) a firm has (a) a direct financial interest or (b) a material indirect
financial interest in audit client, the self-interest threat created would be so
Interest
significant that no safeguards could address the threat.
Threat)
b. When (1) a member of audit team has a close family member (i.e., a
parent, child or sibling who is not an immediate family member) or (2) the
firm's retirement benefit plan has (a) a direct financial interest or (b) a
material indirect financial interest in audit client, the significance of self-
interest threat shall be evaluated and safeguards applied

This depends on whether loans and guarantees are:

a. From a client financial institution but not made under normal lending

procedures—the self-interest threat created would be so significant that no
safeguards could address the threat.

b. From a client financial institution and made under normal lending

procedures but is material to audit client or the firm independence is not
necessarily compromised if safeguards are applied.

c. From a client financial institution to a member of audit team (including

that individual's immediate family) and made under normal lending
procedures—this does not create a threat to  independence.

d. From and to a non-financial institution audit client the self-interest threat

created would be so significant that safeguards could address the threat,
unless is immaterial both (a) the firm or team member and immaterial
to immediate family members and (b) the client

Business An example of business relationships includes having a financial interest in

a joint venture with either the client or a controlling owner, director, officer
Relationship or other individual who performs senior managerial activities for that client.
Under the Code:
(primarily
a. Between the firm and the client-unless immaterial and insignificant, the
Create self- threat created would be so significant that no safeguards could address the
threat.
Interest or
b. Between a member of the audit team and the client—unless immaterial
Intimidation and insignificant to member, the individual shall be removed from audit
team; otherwise, independence is compromised.
Threats)
c. Between an immediate family member of a member of audit team and
audit client or its management—the significance of any threat shall be
evaluated and safeguards applied. 

Family and These involve relationships between a member of the audit team (including
personal that member's immediate family) and a (1) director or (2) officer of the
relationships client or (3) an employee in a position to exert significant influence over the
(primarily preparation of the client's accounting records or the F/S. In this case, the
create self- threats to independence can only be addressed by removing the individual
interest, from the audit team. 
familiarity, or
intimidation For other relationships, the significance of the threat shall be evaluated and
threats) safeguards applied, such as: 

• Removing the individual from the audit team; or 

 Structuring the team responsibilities so that the member does not

deal with matters of close family member responsibility. 

Employment This may be the case when (1) a director or (2) officer of the audit with an
with an Audit Audit client, or (3) an employee in a position to exert significant influence
Client over the preparation of the client's accounting records (primarily or the
(primarily F/S, has been a member of the audit team or partner of the created firm.
creates If a significant connection remains between the firm and the
familiarity, familiarity, individual, the threat cannot be addressed by safeguards;
intimidation, otherwise, safeguards may be applied.
or self-interest
threats) A self-interest threat is created when a member of audit team will,
threats) or may, join the client some time in the future. The significance
of any threat shall be evaluated and safeguards applied. 

Temporary This occurs when a firm lends staff to an audit client. In all circumstances, the
Staff client shall be responsible for directing and supervising the activities of the
Assignment loaned staff. The significance of any threat shall be evaluated and safeguards
s (Primarily applied.
creates self-
review
threat)

Recent This is the case when a member of audit team has recently served as (1) a
Services director, (2) officer, or (3) employee in a position to exert significant
with an influence over the preparation of the client's accounting records or the F/S.
audit client Under the Code:
(primarily
creates a. If employed during the period covered by audit report-no safeguards could
self- address the threat.
interest,
self-review b. If before the period covered by audit report-safeguards applied may
or address the threat (e.g., conducting a review of work). 
familiarity
threats)
Serving as a In this case, the threats would be so significant that no safeguards could
Director or address the threats, except when permitted under local law, professional
Officer of an rules, or practice. 
Audit Client
(primarily Performing routine administrative services to support a secretarial
creates self- administration does not generally create threats, as long as client
review and management makes all decisions.
self-interest
threats) 

Long
Association The significance of the threats shall be evaluated and safeguards.
of Senior Association of applied when necessary. Examples of such safeguards
Personnel include:
(including
partner
rotation)  Rotating the senior personnel off the audit team; Personnel
with an audit  Having a professional accountant who was not a member of the
client audit team review the work of the senior personnel; or Partner 
(primarily
creates
• Regular independent quality reviews of the engagement.
familiarity
and self-
interest
threats)
Partner Rotation-Public Interest Entities

In respect of an audit of a public interest entity, an individual shall not be a

key audit partner for more than seven years based on the
creates international version of the Code (however, under SEC SRC Rule  68,
rotation is required every after five years). After such time, the individual
shall not be a member of the engagement team or be a key audit partner for
the client for two years (also known as "cooling off” period). 

If the individual has served the audit client as a key audit partner when the
client becomes a public interest entity, the partner may continue to serve
for a maximum of two additional years before rotating off.
Provision of The firm shall not assume a “management responsibility” for an audit client. 
Non-
assurance Preparing Accounting Records and F/S
services to
an audit This creates a self-review threat. These services do not include technical
client assistance to the client on matters such as resolving account reconciliation
(primarily problems or analyzing and accumulating information for regulatory reporting.
create self- Under the Code:
review, self-
interest and
a. Not public interest entities audit clients--the firm may provide these
advocacy
services where the services are a routine or mechanical nature, so long as any
threats)
self-review threat created is addressed.

b. Public interest entities audit clients-except in emergency situations, a firm

shall not provide accounting and bookkeeping services, including payroll
services.

Valuation Services

This may create a self-review threat. Under the Code:

a. Not public interest entities audit clients—if the valuation service has a

material effect on F/S and the valuation involves a significant degree of
subjectivity, no safeguards could address the threat.

b. Public interest entities audit clients—no valuation services shall be

provided if the valuations would have a material effect on F/S. 

Taxation Services

These create self-review and advocacy threats;

a. Tax return preparation-being subject to review by the tax authority, such

service does not generally create a threat if management takes responsibility
for the returns.

b. Tax calculations for the purpose of preparing the accounting entries—in

case of not public interest entities audit clients, calculations of current and
deferred taxes create a self-review 
threat, but safeguards should address the threat; however, if public interest
entities audit clients, except in emergency situations, a firm shall not prepare
such calculations where they are material to F/S.

c. Tax planning and other tax advisory services--this service may be provided, as
long as with safeguards, except where the effectiveness of tax advice depends on
a particular accounting treatment in F/S and (a) the audit team has reasonable
doubt as to the appropriateness of accounting treatment; and (b) the outcome of
tax advice will have a material effect on F/S.

d. Assistance in the resolution of tax disputes-an advocacy or self-review threat

may be created. Where the services involve acting as an advocate before a public
tribunal or court and the amounts are material to F/S, the advocacy threat
created cannot be addressed by any safeguards. 

Internal Audit Services

This creates a self-review threat if the firm uses the internal audit work in
external audit. The significance of the threat shall be evaluated and safeguards
applied when necessary. For example, using professionals who are not members
of the audit team. 

In the case of an audit client that is a public interest entity, a firm shall not
provide internal audit services that relate to:
a. A significant part of internal controls over financial reporting;
b. Amounts or disclosures that are material to F/S. 

IT Systems Services

These may create a self-review threat. Under the Code:

a. Not a public interest entity audit client—the significance of any threat shall be
evaluated and safeguards applied. For example, having an accountant review
the audit or non-assurance work.
b. A public interest entity audit client-a firm shall not provide 
 involving the design or implementation of IT systems that (a) form a significant
part of the internal control over financial reporting or (b) generate information
that is significant to the client's accounting records or F/S

Litigation Support Services 

These services may include acting as an expert witness

calculating estimated damages, and assistance with document management and retrieval.
These services may create a self-review or advocacy threat. The significance of any threat
shall be evaluated and safeguards applied. 

Legal Services

This may create self-review and advocacy threats. The significance of threat shall be
evaluated and safeguards applied, except in appointment of a partner or an employee of the
firm as General Counsel for legal affairs that no safeguards could address the threats. 

Recruiting Services

These services may create self-interest, familiarity, or intimidation threats. The significance of
any threat created shall be evaluated and safeguards applied. In all cases, the firm shall not
assume management responsibilities, including acting as a negotiator on the client's behalf,
and the hiring decision shall be left to the client. 

A firm shall not provide recruiting services to a public interest entity audit client with respect
to (1) a director or (2) officer of the entity or (3) senior management in a position to exert
significant influence over the preparation of the client's accounting records or F/S. 

Corporate Finance Services

These services may create advocacy and self-review threats. The significance of threat shall
be evaluated and safeguards applied. 
However, the self-review threat cannot be addressed by safeguards where the effectiveness
of corporate finance advice depends on a particular accounting treatment in F/S and:

a. The audit team has reasonable doubt as to the appropriateness of the accounting

treatment; and

b. The outcome or consequences of the corporate finance advice will have a material effect
on F/S. 

Promoting, dealing, or underwriting an audit client's shares create an advocacy or self-review

threat that no safeguards could address. 

Fees (primarily
Create self- Fees-Relative Size
Interest or
intimidation When the total fees from an audit client represent a large proportion of the
total fees of the firm, the dependence on that client and concern about losing
the client creates a self-interest or intimidation threat. The significance of the
threat shall be evaluated and safeguards applied when necessary. 

For public interest entities audit clients, the Code states that where total fees
from the client represent more than 15% of the firm's total fees for two
consecutive years, the firm shall: 
 Disclose this to TCWG, and 

• Arrange for a review to be conducted, either by an external accountant

 or by a regulatory body; this review can be either before the audit opinion
on the second year's F/S is issued (a 'pre-issuance review') or after it is
issued (a 'post- issuance review') 

If total fees significantly exceed 15%, then a pre-issuance review will be

required. If fees continue to exceed 15% each year the discussion with TCWG
shall occur and a pre-issuance or post issuance review must be carried out
each year. 

Fees-Overdue 

A self-interest threat may be created if audit fees due remain unpaid for a long
time, especially if a significant part is not paid before the issue of audit report
for the following year. The significance of threat shall be evaluated and
safeguards applied. The firm shall determine if the overdue fees might be
regarded a loan to client. 

Contingent Fees 

This fee arrangement with an audit client creates a self-interest threat that is
so significant that no safeguards could address. 

Compensation
And EvaluationA self-interest threat is created when a member of the audit team is evaluated
Policies on or compensated for selling non-assurance services to audit client. If the
(primarily threat is not at an acceptable level, the firm shall either revise the
create self- compensation plan or evaluation process for that individual or apply
Interest threat)safeguards to address the threat. A key audit partner shall not be evaluated on
or compensated based on spelling non-assurance services to partner’s audit
client.
 Gifts and If a firm or a member of audit team accepts gifts or hospitality, unless trivial
hospitality and inconsequential, the threats would be so significant that no safeguards
(primarily could address the threats.
create self-
interest and
familiarity
threats)

Actual or The significance of threats shall be evaluated and safeguards applied when
Threatened necessary.
Litigation
(primarily
creates self-
interest and
intimidation
threats)

Reports Public Interest Entities

that include
a It is not necessary to apply the additional requirements that apply to audit
Restriction engagements for public interest entities.
on use and
distribution Financial interest, Loans and Guarantees, Close Business Relationship and
family and Personal Relationship

Requirements relating to these relationships apply only to the members of

team and their immediate and close family members.

PART C-PROFESSIONAL ACCOUNTANTS IN BUSINESS

(Learning Objective 5)

An accountant shall further the legitimate aims of the employer. Nonetheless, the accountant shall
not knowingly engage in any business, occupation, or activity that impairs or might impair integrity,
objectivity or the good reputation of the profession and as a result would be incompatible with the
fundamental principles.

This part of the Code deals with the matters outlined in the exhibit below.
Exhibit 23.13--Summary of Matters Dealt with in Part C of the Code

Conflicts of Interest
An accountant shall not allow a conflict of interest to compromise judgment.

Preparation and Reporting of Information

An accountant shall prepare and report information in an appropriate manner. 

Acting with Sufficient Expertise

An accountant only undertakes significant tasks for which the accountants has, or can obtain,
sufficient specific training or experience.

Financial Interests, Compensation and Incentives Linked to Financial Reporting and Decision
Making

An accountant shall not allow financial interest, including those arising from compensation or
incentive arrangements, to undermine compliance.

Inducements
An accountant shall not receive or offer an inducement that compromises compliance.\

Conflicts of interest

A conflict of interest creates a threat to objectivity and other fundamental principles. If safeguards
cannot address the threat, the accountant shall decline or discontinue the professional activity or
terminate or dispose the relevant relationships or interests. 

Preparation and Reporting of Information 

An accountant shall prepare or present such information fairly, honestly, and in accordance with
professional standards. 

Threats to compliance with the fundamental principles, for example, self-interest or intimidation
threats to integrity, objectivity, or professional competence and due care, are created where an
accountant is pressured to prepare information in a misleading way or to become associated with
misleading information through the actions of others. 

Acting with Sufficient Expertise 

An accountant shall not intentionally mislead an employer as to the ler expertise or experience
possessed, nor fail to seek appropriate expert au assistance when required. When threats cannot be
addressed, accountants shall determine whether to refuse to perform the duties in question. 

Financial Interests, Compensation and Incentives Linked to Financial Reporting and Decision
Making 

Accountants may have financial interests, such as compensation or incentive arrangements, or may
know of financial interests of immediate or close family members that may create threats. For
example, self-interest threats to objectivity or confidentiality may be created through the existence
of the motive and opportunity to manipulate price-sensitive information in order to gain financially. 

An accountant shall not manipulate information or use confidential information for personai gain or
for the financial gain of others.

Inducements

Inducements may take various forms, including gifts, hospitality, preferential treatment, and
inappropriate appeals to friendship or loyalty. The principles set out in the Code are presented
below. Exhibit 23.14-Threats and Safeguards: Inducements

Receiving Self-interest threat to objectivity or confidentiality are created when

offers inducement made in an attempt to unduly influence acts or decisions,
encourage illegal or dishonest behavior or obtain confidential information.
Intimidation threats to objectivity or confidentiality are created if such an
inducement is accepted and it is followed by threats to make that offer public
and damage the reputation of either the accountant or an immediate or close
family member. When the threats cannot be addressed, an accountant shall
not accept the inducement,

Making An accountant shall not offer an inducement to improperly influence

offers professional judgment of a third party.
 CHAPTER PRACTICE QUESTIONS

PART ---TRUE OR FALSE 

1. Ethical practice is not the foundation of practice of professional accountants. 

2. To merit public trust and confidence, the professional accountant must convince the public
that he will place public service ahead of personal reward. 

3. A CPA certificate is evidence of basic competence in the discipline of  accounting at the time
the certificate is granted. 

4. A code of professional conduct is one of the most important distinguishing characteristics of a

profession. 

5. A professional accountant may perform a professional service if a circumstance or relationship

biases or unduly influences the accountant's professional judgment with respect to that service

6. An accountant in public practice should consider when providing any service whether there
are threats to compliance with the fundamental principle. 

7. Even furthering the legitimate goals and objectives of their employers, accountants in business
may promote the organization's position, provided any statements made are neither false nor
misleading. 

8. Safeguards are actions or other measures that may eliminate threats or reduce them to an
acceptable level, and they fall into two broad categories: (a) Safeguards created by the profession,
legislation or regulation; and (b) Safeguards in the work environment. 

9. A professional accountant in business should prepare or present business information fairly,

honestly and in accordance with relevant professional standards so that the information will be
understood in its context. 

10. A professional accountant in business should neither manipulate information nor use

confidential information for personal gain. 

PART II-MULTIPLE CHOICE 

Introduction-Importance of the Code of Ethics

1. A primary purpose for establishing a code of conduct within a professional organization is to:

a. Reduce the likelihood that members of the profession will be sued for substandard work.

b. Ensure that all members of the profession perform at approximately the same level of
competence.

c. Demonstrate acceptance of responsibility to the interests of those served by the profession.

d. Require members of the profession to exhibit loyalty in all matters pertaining to the affairs of
their organization. 

Overview of the Code

2. Which statement is incorrect regarding the Revised Code of Ethics for Professional Accountants
in the Philippines?

a. Professional accountants refer to persons who are Certified Public Accountants (CPA) and who
hold a valid certificate issued by the Board of Accountancy.

b. Where a local law is in conflict with a provision of the Code, the Code requirement prevails.

c. The Revised Code of Ethics for Professional Accountants in the Philippines is mandatory for all
CPA's and is applicable to professional services performed in the Philippines.

d. A professional accountant or firm shall not apply less stringent standards than those stated in
this Code. However, if a member body or firm is prohibited from complying with certain parts of
this Code by law or regulation, they shall comply with all other parts of this Code. 

Part A-General Application of the Code

3. Part A of the code of professional ethics establishes the fundamental principles of professional
ethics for professional accountants and provides a conceptual framework that professional
accountants shall apply with the fundamental principles. A professional accountant shall use
professional judgment in applying this conceptual framework. Which of the following statements
relating to the conceptual framework is incorrect?
 a. Identify threats to compliance with the fundamental principles and evaluate the significance
of the threats identified.
b. Apply safeguards, when necessary, to eliminate the threats or red, them to an acceptable
level.
c. Safeguards are necessary when the professional accountant determines that the threats are
not at a level at which a reasonable and informed third party would be likely to conclude,
weighing all the specific facts and circumstances available to the professional accountant at that
time, that compliance with the fundamental principles is not compromised.
d.No safeguards are necessary as long as the professional accountants adhere to applicable
technical standards.

Fundamental principles
4. Which of the following statements is incorrect about and integrity?
a. The principle of integrity imposes the obligation on all professional accountants to be
straightforward and honest in professional and business relationships.
b. Integrity implies fair dealing and truthfulness.
c .A professional accountant should not be associated with reports, returns, communications or
other information that (even an appropriate modified report is provided) contains a false or
misleading statement.
d. None of the above 

5. The code of professional ethics states that a CPA should maintain integrity and objectivity. The
term "objectivity” in the Code refers to a CPA's ability to:
a. choose independently between alternate accounting principles and auditing standards.
b. distinguish between accounting practices that are acceptable and those that are not
c. be unyielding in all matters dealing with auditing procedures.
d. maintain an impartial attitude on matters that come under the CPA's she review. 

6. The principle of professional competence and due care imposes the following obligations on all
professional accountants, except
a. To maintain professional knowledge and skill at the level required to ensure that clients or
employers receive competent professional service; and
b. To act diligently in accordance with applicable technical and professional standards when
providing professional services.
c. To exercise of unsound judgment in applying professional knowledge and skill in the
performance of professional service.
d. To take reasonable steps to ensure that those working under the professional accountant's
authority in a professional capacity have appropriate training and supervision and where
appropriate, make clients, employers or other users of the accountant's professional services
aware of the limitations inherent in the services. 

7. Which of the following is incorrect regarding professional competence and due care?

a. Professional competence may be divided into three separate phases.
b. The attainment of professional competence requires initially a high standard of general
education.
c. The maintenance of professional competence requires a continuing awareness of development
in the accountancy profession.
d. Diligence encompasses the responsibility to act in accordance with the requirements of an
assignment, carefully, thoroughly and on any basis. 

8. Which of the following is incorrect regarding confidentiality? 

a. The principle of confidentiality imposes an obligation on all professional accountants to refrain
from disclosing outside the firm or employing organization confidential information acquired as a
result of professional and business relationships without proper and specific authority or unless
there is a legal or professional right or duty to disclose and using confidential information
acquired as a result of professional and business relationships to their personal advantage or the
advantage of third parties.
b. The duty of confidentiality ceases after the end of the relationship between the professional
accountant and the client or employer.
c. Confidentiality should always be observed by a professional accountant unless specific
authority has been given to disclose information or there is a legal or professional duty to
disclose.
d. Confidentiality requires that a professional accountant acquiring information in the course of
performing professional services neither uses nor appear to use that information for personal
advantage or for the advantage of a third party. 

9. A professional accountant has a professional duty or right to disclose  confidential information

in each of the following, except
a. To comply with technical standards and ethics requirements
b. To disclose to BIR fraudulent scheme committed by the client on payment of income tax.
c. To comply with the quality review of a member body or professional body
d. To respond to an inquiry or investigation by a member body or regulatory body.
 
10. Normally the auditor is not permitted to divulge confidential information obtained from a
client. Which of the following situations would be a violation of this requirement? 
a. to respond to the information request of a shareholder.
b. to respond to a quality review request of the BOA.
c. to initiate a complaint with the board of accountancy.
d. to ensure adequate disclosure in accordance with PERSS. 

11. Which of the following actions by a CPA who is selling an accounting practice is most likely to
violate the CPA Code of Ethical Principles?
a. Advertising that the practice is available for purchase
b. Disclosing the amount of fees earned from the practice to a purchaser
C. Transferring working papers to a purchaser prior to informing clients
d. Receiving from the purchaser part of the fees earned from clients in years subsequent to the
purchase 
12. Which of the following statements is(are) correct regarding a CPA employee of a CPA firm
taking copies of information contained in client files when the CPA leaves the firm?
I. A CPA leaving a firm may take copies of information contained in client files to assist another
firm in serving that client.
II. A CPA leaving a firm may take copies of information contained in client files as a method of
gaining technical expertise.
a. I only.
b. II only.
c. Both I and II.
d. Neither I nor II. 

13. The principle of professional behaviour imposes an obligation on professional accountants to

a. Comply with relevant laws and regulations
b. Avoid any action that may bring discredit to the profession
c. Both a and b
d. Neither a nor b 

14. In marketing and promoting themselves and their work, professional accountants shall be
honest and truthful. Professional accountants shall not:
a. Bring the profession into disrepute.
b. Make exaggerated claims for the services they are able to offer, t he qualifications they
possess, or experience they have gained; or
c. Make disparaging references or unsubstantiated comparisons to the work of others.
d. All of the above. 

Threats
15. This refers to the threat that a financial or other interest will inappropriately  influence the
professional accountant's judgment or behaviour
a. Self-interest threat
b. Advocacy threat
c. Self-review threat
d. Familiarity threat 

16. It refers to the threat that due to a long or close relationship with a client or  employer, a
professional accountant will be too sympathetic to their interests or too accepting of their work;
and
a. Self-interest threat
b. Advocacy threat 
c. Self-review threat
d. Familiarity threat 

17. Intimidation threat 

a. is not a threat to independence, but only to fundamental principles.
b. is the threat that a professional accountant will be deterred from acting objectively because of
actual or perceived pressures, including attempts to exercise undue influence over the
professional accountant.
c. is the threat that a financial or other interest will inappropriately influence the professional
accountant's judgment or behavior.
d. all of the above. 

18. Examples of circumstances that create self-interest threats for a professional  accountant in
public practice include the following, except:
a. A member of the assurance team having a direct financial interest in the assurance client.
b. A firm having undue dependence on total fees from a client.
c. A member of the assurance team having a significant close business relationship with an
assurance client.
d. A firm issuing an assurance report on the effectiveness of the operation of financial systems
after designing or implementing the systems. 

19. Examples of circumstances that create familiarity threats for a professional accountant in

public practice include:
a. A director or officer of the client or an employee in a position to exert significant influence
over the subject matter of the engagement having recently served as the engagement partner. 
b. A professional accountant accepting gifts or preferential treatment from a client, unless the
value is trivial or inconsequential. 
c. Senior personnel having a long association with the assurance client.
d. All of the above 

20. Examples of circumstances that create intimidation threats for a professions accountant in

public practice include the following, except:
a. A firm being threatened with dismissal from a client engagement.
b. An audit client indicating that it will not award a planned non-assurance  contract to the firm if
the firm continues to disagree with the client's accounting treatment for a particular transaction.
c. A firm being threatened with litigation by the client.
d. The firm promoting shares in an audit client. 

21. Under the code of professional ethics, circumstances that may create self interest threats for
those professional accountants in business include:
I. Financial interests, loans or guarantees.
II. Incentive compensation arrangements. 
II. Inappropriate personal use of corporate assets.
IV. Concern over employment security. 
V. Commercial pressure from outside the employing organization. 

a. I, II, III
b. 1, 11, III and V
c. 1, 11, III and IV
d. All of the above 

22. Circumstances that may create intimidation threats to professional accountants in business

include:
a. Threat of dismissal or replacement of the professional accountant in business or a close or
immediate family member over disagreement about the application of an accounting principle or
the way in which financial information is to be reported.
b. A dominant personality attempting to influence the decision-making process, for example with
regard to the awarding of contracts or the application of an accounting principle.
c. Both (a) and (b)
d. Neither (a) nor (b) 

Safeguards
23. Safeguards created by the profession, legislation or regulation, include following, except
a. Educational, training and experience requirements for entry into 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 

24. Safeguards in the work environment, include the following, except 

a. Professional standards and monitoring and disciplinary processes.
b. The assurance client has competent employees to make managerial decision. c. Internal
procedures that ensure objective choices in commissioning non assurance engagements.
d. A corporate governance structure, such as an audit committee, that provides oversight and
communications regarding a firm's services. 

Ethical Conflict Resolution

25. A professional accountant may be required to resolve a conflict in complying with the
fundamental principles. When initiating either a formal or informal conflict resolution process,
the following factors, either individually or together with other factors, may be relevant to 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
a. I, II, III
b. I, II, III and V
c. I, II, III and IV
d. All of the above 

26. When faced with significant ethical issues, and having considered the relevant  factors, a
professional accountant shall determine the appropriate course of action, weighing the
consequences of each possible course of action. Professional accountants should do the
following, except
a. Follow the established policies of the employing organization to seek a resolution of such
conflict.
b. Should not consult with those charged with governance of the organization, such as the board
of directors or the audit committee.
c. If a significant conflict cannot be resolved, a professional accountant may wish to obtain
professional advice from the relevant professional body or legal advisors, and thereby obtain
guidance on ethical issues without breaching confidentiality
d. If, after exhausting all relevant possibilities, the ethical conflict remains unresolved, a
professional accountant should, where possible, refuse to remain associated with the matter
creating the conflict. 

Part B- Professional Accountants in Public Practice

Professional Appointment
27. A professional accountant in public practice should agree to provide only those services that
the professional accountant in public practice competent to perform. Before accepting a specific
client engagement professional accountant in public practice should consider the following
except:
a. Whether acceptance would create any threats to compliance with the fundamental principles.
For example, a self-interest threat to professional competence and due care is created if the
engagement team does not possess, or cannot acquire, the competencies necessary to properly
carry out the engagement.
b. The significance of any threats and the necessary safeguards necessary to eliminate them or
reduce them to an acceptable level.
c. When a professional accountant in public practice intends to rely on the advice or work of an
expert, the professional accountant in public practice should evaluate whether such reliance is
warranted. The professional ant in public practice should consider factors such as reputation,
expertise, resources available and applicable professional and ethical standards. Such
information may be gained from prior association with the expert or from consulting others. d.
All of the above 

28. The following statements relate to a professional accountant in public practice who is asked
to replace another professional accountant in public practice, which is incorrect?
a. A professional accountant in public practice shall determine whether there are any reasons for
not accepting the engagement, such as circumstances that threaten compliance with the
fundamental principles.
b. It may require direct communication with the existing accountant to establish the facts and
circumstances behind the proposed change.
c. An existing accountant is not bound by confidentiality. Hence, the existing accountant should
ordinarily volunteer information about client's affairs. d. A professional accountant in public
practice will ordinarily need to obtain the client's permission, preferably in writing, to initiate
discussion with an existing accountant. 
Conflicts of Interest
29. A professional accountant in public practice should take reasonable steps identify
circumstances that could pose a conflict of interest. Such circumstances may give rise to the
following threats to compliance with fundamental principles, except 
a. A threat to objectivity such as when a professional accountant in public practice competes
directly with a client or has a joint venture or similar arrangement with a major competitor of a
client.
b. A threat to objectivity or confidentiality such as when a professional accountant in public
practice performs services for clients whose interests are in conflict or the clients are in dispute
with each other in relation to the matter or transaction in question.
c. Neither a nor b
d. Both a and b 

Second Opinions
30. Situations where a professional accountant in public practice is asked provide a second
opinion on the application of accounting, auditing, reporting or other standards or principles to
specific circumstances or transactions by or on behalf of a company or an entity that is not an
existing client may give rise to threats to compliance with the fundamental principles. For
example, there may be a threat to in circumstances where the second opinion is not
based on the same set of facts that were made available to the existing accountant, or is based
on inadequate evidence?
a. Professional competence and due care
b. Integrity
C. Professional behavior
d. Objectivity 

Fees and Other Types of Remuneration

31. If the fee quoted for a professional service is so low, it may be difficult for the CPA to
perform the engagement in accordance with applicable technical and professional standards for
that price. This situation may create a self-interest threat to
a. Objectivity
b. Professional competence and due care
c. Professional behavior
d. Integrity 

32. Which of the following is not a contingent fee? 

a. A fee that is fixed by a court or other public authority.
b. An arrangement whereby no fee will be charged unless a specified finding or result is attained.
c. An audit fee that is based on 5% of the client's adjusted net income for the current year.
d. A fee that is dependent upon the approval of the assurance client's loan application. 

33. With respect to the acceptance of contingent fees for professional ethics, the
Code of ethics indicates the firm
a. should not accept contingent fees
b. should establish appropriate safeguards around acceptance of 
A contingent fee
c. should accept contingent fee only for assurance services other than FSaudit
d. should accept contingent fees if it is customary in the country 

34. A client company has not paid its 2018 audit fees. According to the Code of 
Professional Conduct, for the auditor to be considered independent with respect to the 2019
audit, the 2018 audit fees must be paid before the
a. 2018 report is issued
b. 2019 field work is started
c. 2019 report is issued
d. 2020 field work is started 

35. According to the ethical standards of the profession, which of the following acts is generally
prohibited?
a. Purchasing a product from a third party and reselling it to a client.
b. Writing a financial management newsletter promoted and sold by a publishing company.
c. Accepting a commission for recommending a product to an audit client.
d. Accepting engagements obtained through the efforts of third parties. 

36. Which of the following would be an appropriate business practice for a CPA? 
a. Paying a referral fee to another accountant (not a CPA) as a commission for recommending the
CPA to a new client
b. Receiving a referral fee from a CPA as a commission for recommending her to a new client
c. Accepting a commission for the sale of an accounting practice
d. Refusing to discuss a file with a successor auditor who has obtained the client's consent 

Marketing Professional Services

37. The communication to the public of facts about a professional accountant which are not
designed for the deliberate promotion of that professional accountant.
a. Publicity
b. Indirect promotion
c. Advertising
d. Solicitation 

38. Advertising as defined in the Code of Ethics, means 

a. The communication to the public of facts about a professional accountant which are not
designed for the deliberate promotion that professional accountant.
b. The approach to a potential client for the purpose of offering professional services.
c. 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.
d. Any of the above. 
39. When a professional accountant in public practice solicits new work through advertising or
other forms of marketing, there may be potential threats to compliance with the fundamental
principles. For example, a to compliance with the principle of professional behavior is created if
services, achievements or products are marketed in a way that is consistent with that principle.
a. self-interest threat
b. familiarity threat
c. self-review threat
d. advocacy threat 

40. A CPA wrote an article for publication in PICPA Accountants Journal or News Magazine. The
Code of Professional Ethics would be violated if the CPA allowed the article to state that the CPA
was a
a. Member of PICPA
b. Professor at a school of professional accountancy
c. Partner in a national CPA firm
d. Practitioner specializing in providing tax services. 

Gifts and Hospitality

41. A professional accountant in public practice, or an immediate or close family member, may
be offered gifts and hospitality from a client. Such an offer ordinarily gives rise to threats to
compliance with the fundamental principles. Which of the following statements is incorrect?
a. Self-interest threats to objectivity may be created if a gift from a client is accepted.
b. Intimidation threats to objectivity may result from the possibility of such offers being made
public.
c. The significance of such threats will depend on the nature, value and intent behind the offer. 
d. When the threats cannot be eliminated or reduced to an acceptable level  through the
application of safeguards, a professional accountant in public practice may accept such an offer.

Custody of Client Assets

42. Which of the following statements is incorrect when a professional accountant considering
to have custody of client assets?
a. A professional accountant in public practice should not assume custody of client monies or
other assets unless permitted to do so by law.
b. The holding of client assets creates threats to compliance with the fundamental principles; for
example, there is a self-interest threat to professional behavior and may be a self-interest threat
to objectivity arising from holding client assets.
c. Professional accountants in public practice should be aware of threats to compliance with the
fundamental principles through association with such assets, for example, if the assets were
found to derive from illegal activities, such as money laundering.
d. All of the above statements are correct. 

43. To safeguard against threats, a professional accountant in public practice  entrusted with
money (or other assets) belonging to others should: (Choose the incorrect statement)
a. Keep such assets together with personal or firm assets.
b. Use such assets only for the purpose for which they are intended.
c. At all times, be ready to account for those assets, and any income,  dividends or gain
generated, to any persons entitled to such accounting.
d. Comply with all holding of and accounting for such assets. 

Objectivity-All Services
44. A  threat to objectivity may be created from a family or close personal or business
relationship.
a. Familiarity
b. Self-review
c. Self-interest
d. Advocacy 

45. Safeguards against threats to compliance with objectivity may include the following, except
a. Withdrawing from the engagement team or supervisory procedures.
b. Terminating the financial or business relationship giving rise to the threat.
c. Discussing the issue with higher levels of management within the firm or with those charged
with governance of the client.
d. All of the above 

Independence-Audit and Review Engagements

46. Which of the following most completely describes how independence has been defined by
the accountancy profession?
a. Possessing the ability to act with integrity and exercise objectivity and professional skepticism.
b. Accepting responsibility to act professionally and in accordance with laws and regulations.
c. Avoiding the appearance of significant interest in the affairs of an assurance client.
d. Performing an assurance service from the viewpoint of the public. 

47. For assurance engagements provided to an audit client, the following should be independent
of the client 

a. b. c. d.
Members of the engagement team Yes Yes Yes Yes
Immediate or close family of engagement team Yes Yes Yes Yes
The firm Yes Yes No No
Network firms Yes No No Yes

48. An auditor strives to achieve independence in appearance to 

a. Appear to an independent third party not to have compromised their integrity.
b. Become independent in fact.
c. Comply with the international auditing standards of fieldwork.
d. Evaluation of all matters of continuing accounting significance. 

49. A CPA, while performing an audit, strives to achieve independence in appearance in order to
a. Reduce risk and liability
b. Maintain public confidence in the profession
c. Become independent in fact
d. Comply with PSAs 

50. In cases when the threat to independence is significant and no safeguards are  available to
reduce it to an available to reduce it to an acceptable level, which of the following actions should
be taken?
a. Eliminating the activities of interests creating the threat.
b. Refusing to accept or continue the assurance engagement.
c. Either a orb
d. Neither a nor b 

51. According to the standards of the profession, which of the following  circumstances will
prevent a CPA performing audit engagements from being independent?
a. Obtaining a collateralized automobile loan from a financial institution client.
b. Litigation with a client relating to billing for consulting services for which the amount is
immaterial.
c. Employment of the CPA's spouse as a client's director of internal audit.
d. Acting as an honorary trustee for a not-for-profit organization client.
 
52. 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. Advocacy and self-review threats
b. Self-interest and self-review threats
c. Self-interest and intimation threats
d. Self-review and familiarity threats 

53. Which of the following statements is true? The CPA firm will lose its independence if:
a. a staff auditor providing audit services to the client acquires stock in that client.
b. a staff tax preparer who provides 15 hours of non-audit services to the client acquires stock in
that client.
c. an audit manager in an office different than the office providing audit services has a direct,
immaterial financial interest in the audit client.
d. a covered member has an indirect, immaterial financial interest in an audit client. 

54. According to the profession's ethical standards, an auditor would be considered independent
in which of the following instances?
a. The auditor's checking account is held at a client financial institution.
b. The auditor is also an attorney who advises the client as its general counsel.
c. An employee of the auditor serves as treasurer of a charitable organization that is a client.
d. The client owes the auditor fees for two consecutive annual audits. 
55. The following loans and guarantees would not create a threat to independence, except
a. A loan from, or a guarantee thereof by, an assurance client that is a bank or a similar
institution, to the firm, provided the loan is made under normal lending procedures, terms and
requirements and the loan is immaterial to both the firm and the assurance client.
b. A loan from, or a guarantee thereof by, an assurance client that is a bank or a similar
institution, to a member of the assurance team or their immediate family, provided the loan is
made under normal lending procedures, terms and requirements.
c. Deposits made by, or brokerage accounts of, a firm or a member of the  assurance team with
an assurance client that is a bank, broker or similar institution, provided the deposit or account is
held under normal commercial terms.
d. If the firm, or a member of the assurance team, makes a loan to an  assurance client, that is not
a bank or similar institution, or guarantees such an assurance client's borrowing. 

56. Family and personal relationships between a member of the assurance team and a director,
an officer or certain employees, depending on their role, of the assurance client, least likely
create
a. Self-interest threat
b. Intimidation threat
c. Self-review threat
d. Familiarity threat 

57. A director, an officer or an employee of the assurance client in a position to  exert direct and
significant influence over the subject matter of the assurance engagement has been a member of
the assurance team or partner of the firm. The situation least likely create
a. Self-interest threat
b. Intimidation threat
c. Self-review threat
d. Familiarity threat 

58. If a member of the assurance team, partner or former partner of the firm has joined the
assurance client, the significance of the self-interest, familiarity or joined the assurance client,
the significance of the self-inter intimidation threats created is least likely affected b
a. The position the individual has taken at the assurance client 
b. the amount of any involvement the individual will have with the assurance team. 
c. The length of time that the individual was a member of the assurance team or firm.
d. The former position of the individual within the assurance team or firm. 

59. A former officer, director or employee of the assurance client serves as a member of the
assurance team. This situation will least likely create 
a. Self-interest threat
b. Intimidation threat
c. Self-review threat
d. Familiarity threat 
60. Using the same engagement partner or the same individual for the engagement quality
control review on a financial statement audit over a prolonged period may create a
a. Self-review threat
b. Familiarity threat
c. Intimidation threat
d. Self-interest threat 

61. 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
b. 7 years
c. 6 years
d. 10 years 

62. The partner may continue serve, as the lead engagement partner before  rotating off the
engagement for how many years after audit client becomes a listed entity?
a. One year
b. Three years
c. Two years
d. Four years 

63. If firm, or network firm, personnel providing such assistance make management decisions,
the self-review threat created could not be reduces to an acceptable level by any safeguards.
Examples of such manager decisions include the following, except that the begins
a. Determining or changing journal entries, or the classifications for accounts or transactions or
other accounting records without obtaining the approval of the audit clients 
b. Authorizing or approving transactions
c. Preparing source documents or originating data (including decisions on evaluation
assumptions), or making changes to such documents or data.
d. Assisting on audit client in resolving account reconciliation problems. 

64. These following services are considered to be a normal part of the audit process and do not,
under circumstances, threaten independence, except a. Analyzing and accumulating information
for regulatory reporting.
b. Assisting in the preparation of consolidated financial statements.
c. Drafting disclosure items
d. Having custody of an assurance client's assets. 

65. If the firm is involved in the preparation of accounting records or financial statements and
those financial statements are subsequently the subject matter of an audit engagement of the
firm, this will most likely create 
a. Self-interest threat
b. Intimidation threat
c. Self-review threat
d. Familiarity threat 

66. The firm, or a network firm, may provide an audit client that is not a listed  entity with
accounting and bookkeeping services, including payroll services, of a routine or mechanical
nature, provided any self-review threat created is reduced to an acceptable level. Examples of
such services least likely include:
a. Recording transactions for which the audit client has determined or approved the appropriate
account classification.
b. Posting coded transactions to the audit client's general ledger.
c. Preparing financial statements based on information in the trial balance.
d. Determining and posting journal entries without obtaining the approval of the audit client. 

67. When the question arises whether a CPA firm may do both bookkeeping and auditing services
for the same public company client, the Interpretations of the code of professional ethics:
a. encourage it.
b. prohibit it.
c. allow it.
d. allow each firm to determine the answer on a case-by-case basis. 

68. 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 most likely create
a. Self-interest threat
b. Intimidation threat
c. Self-review threat 
d. Familiarity threat 

69. The recruitment of senior management for an assurance client, such as those in a position to
affect the subject of the assurance engagement may least likely create
a. Self-interest threat
b. Intimidating threat
c. Advocacy threat
d. Familiarity threat 

70. A small CPA firm provides audit services to a large local company. Almost eighty percent of
the CPA firm's revenues come from this client. Which statement is most likely to be true?
a. Appearance of independence may be lacking.
b. The small CPA firm does not have the proficiency to perform a larger audit.
c. The situation is satisfactory if the auditor exercises due skeptical negative assurance care in the
audit.
d. The auditor should provide an "emphasis of a matter paragraph" to his/her audit report
adequately disclosing this information and then it may issue an unqualified opinion. 
Part (-Professional Accountants in Business
Potential Conflicts
71. Examples of safeguards against threats created by potential conflict between the employing
organization and the professional obligations to comply with the fundamental principles include
the following, except
a. Obtaining advice where appropriate from within the employs organization, an independent
professional advisor or a relevant professional body.
b. The existence of a formal dispute resolution process within the employing organization.
c. Seeking legal advice.
d. All of the above are safeguards. 

Preparation and Reporting of Information

72. When a professional accountant in business faces threats to compliance with the
fundamental principles, he or she shall do the following, except
a. Evaluate the threats and, if they are other than clearly insignificant, safeguards should be
considered and applied as necessary to eliminate them or reduce them to an acceptable level.
b. Safeguards may include consultation with superiors within the employing organization, for
example, the audit committee or other body responsible for governance, or with a relevant
professional body.
c. Where it is not possible to reduce the threat to an acceptable level, a  professional accountant
in business should refuse to remain associated with information they consider is or may be
misleading.
d. The professional accountant in business may not wish to seek legal advice or resign.

Acting with Sufficient Expertise

73. The fundamental principle of professional competence and due care requires that a
professional accountant in business should only undertake significant tasks for which the
professional accountant in business has, or can obtain, sufficient specific training or experience.
(Choose the incorrect statement.)
a. A professional accountant in business should not intentionally mislead an employer as to the
level of expertise or experience possessed, nor should a professional accountant in business fail
to seek appropriate expert advice and assistance when required.
b. Identify and evaluate threats, such as: insufficient time for properly performing or completing
the relevant duties; incomplete, restricted or otherwise inadequate information for performing
the duties properly; insufficient experience, training and/or education; and inadequate resources
for the proper performance of the duties.
c. The significance of the threats should be evaluated and, if they are other than clearly
insignificant, safeguards should be considered and applied as necessary to eliminate them or
reduce them to an acceptable level.
d. Where threats cannot be eliminated or reduced to an acceptable level, professional
accountants in business should consider whether to refuse to perform the duties in question and
may not be clearly communicated. 
Financial interests, Compensation and Incentives Linked to Financial Reporting and Decision
Making
74. Professional accountants in business may have financial interests or may know of financial
interests of immediate or close family members, that could, in certain circumstances, give rise to
threats to compliance with the fundamental principles. For example, self-interest threats to
objectivity or confidentiality may be created through the existence of the motive and opportunity
to manipulate price sensitive information in order to gain financially.
a. Self-interest
b. Self-review
c. Advocacy
d. Intimidation 

Inducements
75. A professional accountant in business or an immediate or close family member may be
offered an inducement or may make an offered of inducement, such as, gifts, hospitality,
preferential treatment and inappropriate appeals to friendship or loyalty. Offers of inducements
may create threats to compliance with the fundamental principles. (Choose the incorrect
statement
a. Self-interest threats to objectivity or confidentiality are created where an inducement is made
in an attempt to unduly influence actions or decisions, encourage illegal or dishonest behavior or
obtain confidential information.
b. Intimidation threats to objectivity or confidentiality are created if such an inducement is
accepted and it is followed by threats to make that offer public and damage the reputation of
either the professional accountant in business or an immediate or close family member.
c. A professional accountant in business should not offer an inducement to improperly influence
professional judgment of a third party.
d. If evaluated threats are other than clearly insignificant, safeguards should not be considered
and applied as necessary to eliminate them or reduce them to an acceptable level.