Scores:

1. 10
2. 15
3. 10
4. 35
5. 19
Total – 89/100

1. Why the does the CPA profession deemed it essential to promulgate

ethical standards and establish means for ensuring their
observance?
It is a distinguishing mark that every certified public
accountant must act in accordance with the interest of the
public. Thus, it is their professional responsibility to
satisfy the interest not of an individual or their employer
but of those users not in privy of the two parties. In
addition, It is important to establish means to ensure that
standards are not being violated when practicing their
profession. These means will identify threats to compliance
and evaluate if it the job is workable.
2. Cite a news article involving professional accountant’s
malpractice. Identify the affected Code of Ethics fundamental
Principles and propose possible course of action. (20 pts)
Waste Management Scandal (1998)
Waste Management Inc. fraudulently manipulated the
company's financial results to meet predetermined earnings
targets. The company's revenues were not growing fast
enough to meet these targets, so they instead resorted to
improperly eliminating and deferring current period
expenses to inflate earnings. They employed a multitude of
improper accounting practices to achieve this objective.
These improper accounting practices are:
  avoided depreciation expenses on their garbage trucks
by both assigning unsupported and inflated salvage
values and extending their useful lives,
 assigned arbitrary salvage values to other assets that
previously had no salvage value,
 failed to record expenses for decreases in the value
of landfills as they were filled with waste,
 refused to record expenses necessary to write off the
costs of unsuccessful and abandoned landfill
development projects,
 established inflated environmental reserves
(liabilities) in connection with acquisitions so that
the excess reserves could be used to avoid recording
unrelated operating expenses,
 improperly capitalized a variety of expenses, and
 failed to establish sufficient reserves (liabilities)
to pay for income taxes and other expenses.

Affected Code of Ethics Principles are:

A. Objectivity – The fraudulent act was due to the interest

of the CEO and other executives of the company to
increase earnings that would also increase their personal
profits which has been aided bby their long-time auditor,
Arthur Andersen LLP, which repeatedly issued unqualified
audit reports on the company's materially false and
misleading annual financial statements. At the outset of
the fraud, management capped Andersen's audit fees and
advised the Andersen engagement partner that the firm
could earn additional fees through "special work."
Andersen nevertheless identified the company's improper
accounting practices and quantified much of the impact of
those practices on the company's financial statements.
Andersen annually presented company management with what
it called Proposed Adjusting Journal Entries ("PAJEs") to
 correct errors that understated expenses and overstated
earnings in the company's financial statements.
B. Integrity - as stated above, Arthur Andersen LLP should
not be associated with reports, returns, and
communications which are misleading and misstated. Them,
aiding the fraudulent act of the company, is a direct
association to the crime.

NOTE:missing the possible course of action – what will an

ideal auditor do in this situation? Andersen can still
propose to the mngt “PAJE”, but those that would ethically
correct misstatement, not to misstate the FS. The auditing
firm of Andersen should have a quality control in place, to
review and police their auditors in their malpractices.

3. An engagement is to be classified as an Assurance Engagement if

and only if the following elements are present:
– (a) A three party relationship involving a practitioner, a
responsible party, and intended users;

– (b) An appropriate subject matter;

– (c) Suitable criteria;

– (d) Sufficient appropriate evidence; and

– (e) A written assurance report in the form appropriate to a

reasonable assurance engagement or a limited assurance
engagement.

Can the three parties of the engagement merge into one person, or
two people? Decide and support your answer/s. (10 pts)

o In some cases, responsible party can be one of the

intended users, but is not the only one. Practitioner
must not be the same as the responsible party nor the
intended user as it is a requisite that they should
prepare assurance reports which are primarily
 addressed to the intended users. Intended Users and
Responsible party may be from the same entity
depending on the context of the assurance engagements
as stated below:
 From different entities: intended users
(investors, creditors, government, other FS
users) may seek assurance about the fairness of
the presentation of FS that responsible parties
(company) provide for their consumption
(benefit).
 From the same entity: intended user (supervisory
board of a company) may seek assurance about
information provided by the responsible party
(management board of that same company) as they
are in the same scope of operation.

4. Define the following (5 pts each)

– Professional Skepticism

Recognizing that circumstances may exist that cause the

subject matter information to be materially misstated. It
may also means that the practitioner makes a critical
assessment, with a questioning mind, of the validity of
evidence obtained and is alert to evidence that contradicts
or brings into question the reliability of documents or
representations by the responsible entity.

– Assurance Engagement Risk

Risk that the practitioner expresses an inappropriate

conclusion when the subject matter information is
materially misstated. It is what is being considered when
determining the nature, timing, and extent of evidence-
gathering procedures.

– Suitable criteria
 Criteria are the benchmarks (standards) in evaluating or
measuring of the subject matter including relevant
benchmarks for presentation and disclosure. It could either
be formal or less formal. Suitable Criteria, on the other
hand, are context-sensitive (only within the context of
professional judgment) evaluation or measurement of the
subject matter.

– Audit Risk

Risk that the financial statements are materially

incorrect, even though the audit opinion states that the
financial reports are free of any material misstatements.
The two components of audit risk are the risk of material
misstatement and detection risk.

– Detection Risk

It is the chance that an auditor will not find material

misstatements relating to an assertion in an entity's
financial statements through substantive tests and
analysis. Detection risk is the risk that the auditor will
conclude that no material errors are present when in fact
there are.

– Business Risk

It is the risk that seizes the business to continue on a

going-concern. This comprises of the factors that will
cause the business to fail.

– Generally Accepted Auditing Standard

It is also called as GAAS which are the sets of standards

against which the quality of audits are performed and may
be judged.
5. Identify which Code of Ethics’ Fundamental Standards are
affected? Explain and support your answer. (5 pts each)

A. Juanita Garcia, CPA, refused to be associated with a

client’s financial statements after the client declined to
correct a material misstatement. Garcia later contacted
James Jordan, CPA, retained by the client to replace
Garcia, and informed Jordan of the misstatement. - 5
o Confidentiality – A professional accountant should
refrain from disclosing organizational 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. – HE COULD DISCLOSED, PROVIDED HE
ACQUIRED THE CONSENT OF HIS CLIENT

B. Brianna Lopez, CPA, agreed to review loan applications for

First Charter Bank, an audit client. The bank granted or
denied the loans on the basis of Lopez’ recommendations - 2
o Objectivity – Lopez’s recommendation (even if not
expressedly stated) is compromised by her interest
(conflict of interest). Every professional accountant
should come up with a professional judgment free from
dependence in which in this case First Charter Bank is
a client of Lopez, therefore there is a direct
relationship among these parties.
The independence rule prohibits a member from being
associated with an audit client in any capacity
equivalent to that of a member of management.
Making loan recommendations casts Lopez in that capacity.

C. In defense of a lawsuit alleging negligence, Melissa

Franklin, CPA, explained that she was not an expert in
commodities trading and therefore did not detect the
 accounting fraud perpetrated by her client, a commodities
broker. -5
o Professional Competence and Due Care – Every
professional accountant should have the required
skills when providing professional services. It is
also their duty to act with diligence to act in
accordance with the requirements of an assignment. In
this case, Franklin should not have performed the job
if she was certain that she is not capable of
performing it.

D. Rudy Boesch, CPA, accepted an audit engagement for a fixed

fee of $27,000 plus 1% of audited net assets. -5
o Objectivity – Section 120.2 of the Code of Ethics
states that A professional accountant may be exposed
to situations that may impair objectivity. It is
impracticable to define and prescribe all such
situations. Relationships that bias or unduly
influence the professional judgment of the
professional accountant should be avoided. In this
case, Boesh should not accept 1% of audited net assets
as it will lead to misstatement (inappropriate
appraisal of net assets) of the presentations.

E. Ben Williams, CPA, issued an unqualified opinion on a set

of financial statements, even though he felt uncomfortable
about an accounting practice applied by the client.
Although the practice in question was in accordance with
GAAP, it increased net income significantly above a level
that Williams considered reasonable. -2
o Integrity – Section 110.1 of the code state that all
professional accountants are obliged to be
straightforward and honest in professional and
business relationships. It also implies fair dealing
 and truthfulness. In this case, B. Williams should be
straightforward in his judgment as he sees fit

member shall not knowingly misrepresent facts or subordinate his or her

judgment to others. In this case, Williams, in agreeing to the questionable practice,
subordinated his judgment to that of management, thereby failing to adequately
represent the interests of the stockholders – Professional Behaviour and
Professional Competence and Due Care