CHAPTER 7

CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS

IN THE PHILIPPINES

I. Review Questions

1. There is a special need for ethical behavior by professionals to maintain public

confidence in the profession, and in the services provided by members of that
profession. The ethical requirements for CPAs are similar to the ethical
requirements of other professions. All professionals are expected to be
competent, perform services with due professional care, and recognize their
responsibility to clients. The major difference between other professional
groups and CPAs is independence. Because CPAs have a responsibility to
financial statement users, it is essential that auditors be independent in fact and
appearance. Most other professionals, such as attorneys, are expected to be an
advocate for their clients.

2. Independence in fact exists when the auditor is actually able to maintain an

unbiased attitude throughout the audit, whereas independence in appearance is
dependent on others’ interpretation of this independence and hence their faith in
the auditor.

Activities which may not affect independence in fact, but which are likely to
affect independence in appearance are: (Notice that the first two are violations
of the Code of Ethics.)

1. Ownership of a financial interest in the audited client.

2. Directorship or officer of an audit client.
3. Performance of management advisory or bookkeeping or accounting
services and audits for the same company.
4. Dependence upon a client for a large percentage of audit fees.
5. Engagement of the CPA and payment of audit fees by management.

3. In return for the faith placed in CPAs by the public, CPAs should continually
seek to demonstrate their dedication to professional excellence. The public
interest is defined as the community’s collective well-being. CPAs handle
ethical conflicts best by acting with integrity, objectivity, and due professional
care and by having a genuine interest in serving the public.
7-2 Solutions Manual - Principles of Auditing and Other Assurance Services
4. An ethical dilemma is a situation that a person faces in which a decision must be
made about the appropriate behavior. There are many possible ethical dilemmas
that one can face, such as finding a wallet containing money, or dealing with a
supervisor who asks you to work hours without recording them.

An ethical dilemma can be resolved using the six-step approach outlined below:
1. Obtain the relevant facts.
2. Identify the ethical issues from the facts.
3. Determine who is affected by the outcome of the dilemma and how
each person or group is affected.
4. Identify the alternatives available to the person who must resolve the
dilemma.
5. Identify the likely consequence of each alternative.
6. Decide the appropriate action.

5. Apparently, in ethical philosophy, the word “conscience” is used to describe the

“undefinable mental process that yields moral decisions.” A close kin in the
political science terms would be “anarchy.”

Conscience might not be a sufficient guide for personal ethics decisions because
the individual’s undefinable mental processes may be based on caprice,
immaturity, ignorance, stubbornness, or misunderstanding. Conscience may fail
to show the consistency, clarity, practicability, impartiality, and adequacy
preferred in ethical standards and behavior. Exactly the same can be said about
professional ethics decisions because a nonhypocritical individual can no more
split his behavior between personal life and professional life than he can
voluntarily split his own personality.

6. A professional accountant must be prepared to be an agent, spectator, advisor,

instructor, judge, and critic.

7. Ethical responsibility for acts of non-CPAs under a CPA’s supervision falls

under the latter’s jurisdiction. A CPA shall not permit others to carry out on his
behalf, either with or without compensation, acts which, if carried out by the
CPA, would place him in violation of the Code of Ethics.

8. The auditor’s gain from having an audit committee is a direct communication

pipeline to the board of directors.

9. Serving as a purchasing agent places Ben Santos’ father in an “audit sensitive

position.” Accordingly, Santos’ independence is impaired. Also, since Santos
is a managerial employee, he can no longer work in the Manila office of the
CPA firm. The CPA firm may retain its independence if Santos transfers to
another office (or resigns).
 Code of Ethics for Professional Accountants in the Philippines 7-3
10. The CPA firm’s independence would not be impaired as long as Gary Angeles
did not personally participate in the audit of this particular client. Once Gary
rises to the position in which he becomes a “managerial employee” of the CPA
firm, however, he must be transferred to an office which does not participate in
this audit if the firm is to remain independent.

11. Historically, compensation for CPAs serving as expert witnesses had to be based
on a standard per diem rate or a fixed sum. However, under certain situations,
such contingent fees are allowed only from clients for which the CPA does not
also provide to the client financial statement audits, reviews or certain
compilations, or prospective financial information examinations.

12. Sanchez may only refer certain clients to his wife or to another life insurance
agent who will share such a commission with his wife provided that he does not
perform assurance as well as nonassurance services.

II. Multiple Choice Questions

1. d 8. a* 15. c 22. b
2. b 9. a* 16. d 23. d
3. d 10. a 17. a 24. c
4. a 11. a 18. c 25. c
5. a 12. a 19. a 26. b
6. c 13. a 20. a 27. d
7. a* 14. c 21. a

*7. A fee for audit clients which is dependent upon the results achieved by the CPA’s efforts
is a contingent fee and is prohibited for audit clients.

*8. An auditor’s independence would not be considered to be impaired with respect to a

financial institution in which the auditor maintains a checking account which is fully
insured.

*9. The declaration requires the preparer to acknowledge that the return is “true, correct,
and complete...based on all information of which the preparer has any knowledge.”

III. Comprehensive Cases

Case 1. a. Interpretation – Honorary Directorships and Trusteeships

Ela will not be considered independent unless:
1. the position is in fact purely honorary, and
2. listings of directors show she is an honorary director, and
3. she restricts participation strictly to the use of her name, and
4. she does not vote or participate in management functions.
7-4 Solutions Manual - Principles of Auditing and Other Assurance Services
b. Interpretation – Retired Partners and Firm
Independence: Since Monte is still active with the firm as an ex-officio
member of the income tax advisory committee, meeting monthly, his
situation would impair the appearance of the firm’s independence. Monte
should either resign from the Palm board or cease his association with the
accounting firm.

c. Interpretation – Accounting Services

CPA Benitez must be careful to know whether outsiders would perceive
relationships that would indicate status as an employee, hence impairing the
appearance of independence. In particular, CPA Benitez must
1. Not have any business connection with Hernan Corporation or with
Mike Hernan that would in fact impair independence, objectivity and
integrity, and
2. Impress Mike Hernan (and the board of directors) that they must be
able and willing to accept primary responsibility for the financial
statements as their own, and
3. Not take managerial responsibility for conducting operations of the
Hernan Corporation (although Benitez’s supervision of the bookkeeper
seems to have this characteristics), and
4. Conduct the audit in conformity with GAAS and not fail to audit
records simply because they were processed under Benitez’s
supervision.

d. Interpretation – Effect of Family Relationships on Independence

Jack’s wife’s interest is attributed to him, and he would not be independent.
The financial interest is considered direct.

e. Interpretation
Jack is still not independent, so long as the daughter is a dependent child.
The financial interest is considered direct.

f. Interpretation
Still not enough. The grandfather (either Jack’s father or his father-in-law)
is considered a nondependent close relative, but the appearance of
independence is impaired. The grandfather’s investment is material (50
percent) in relation to his net financial resources.

Case 2. a. Pee and Co. / United Furniture, Inc.: This is a judgment call. In this
case, the services can be considered temporary, mechanical in nature and
performed on a one-time emergency basis. For these reasons, the SEC
would probably not consider independence impaired.

b. Renson & Co. / Spectrum Corporation Laser Division: The SEC would
consider independence impaired because of the extent of the bookkeeping
 Code of Ethics for Professional Accountants in the Philippines 7-5
services and the relative size of the Division. The only solution that might
work is to have another accounting firm audit the Laser Division financials
so that Renson & Co. can write a report “in reliance on the work of other
independent auditors.”

c. Reyes & Co. / Valley Bank: The SEC would consider independence
impaired because of the family relation of Annabelle, her connection with
Valley’s financial statements and the fact that Kris is a “member” (partner)
in the audit firm. (The PICPA would probably also consider independence
impaired because of the apparent closeness of the two sisters and the “audit
sensitivity” of Annabelle’s job).

d. Cruz & Reyes / Jonas Tomas / Starex Money Market Fund: Jonas is a
“member” since he is a manager and will provide audit services to SMMF.
Cruz & Reyes’ independence is impaired since Jonas holds a direct
financial interest.

Case 3. Violation of Code of Professional Ethics? Yes No

Since Bella had an employment relationship with the client during part of the period
covered by the financial statements, her independence is impaired.

Case 4. Violation of Code of Professional Ethics? Yes No

This is a violation. It is a contingent fee agreement.

Case 5. Although her decision will not be popular with the audit staff, Tracy Ong
should thank the client but decline the offer, both for her and for the staff. She
should explain that an outsider who had knowledge of all of the relevant facts
might view the free use of a condominium as a sizable “gift” to the auditors,
which might influence their independent mental attitude. Thus, we believe that
to maintain an appearance of independence, the auditors should not accept this
offer.

Case 6. No. CPAs may refuse client access to their working papers for any valid
business purpose. Therefore, a CPA may require that fees be paid before
working papers including such adjusting entries and supporting analysis are
provided to the client.