CHAPTER 4

REGULATION OF THE PRACTICE

OF PUBLIC ACCOUNTANCY

Questions

1. Refer to pages 110 (Section 28 of the Philippine Accountancy Act of 2004) of

the textbook.

2. Refer to pages 112 (Sections 34 & 35 of the Philippine Accountancy Act of

2004) of the textbook.

3. Competencies include both what individual auditors know and what individual
auditors and audit teams do. Competencies are evidenced by auditors applying
their skills in the delivery of services to clients or supporting the delivery of
those services. These competencies categorized as “High Opportunity
Competencies” and “Low Opportunity Competencies” are as follows:

High Opportunity Competencies have a high likelihood of being building

blocks for selling or delivering new assurance services.
 Analytical Skills
 Business Advisory Skills
 Business Knowledge
 Capacity for Work
 Comprehension of Client’s Business Processes
 Communication Skills
 Efficiency
 Intellectual Capability
 Learning and Rejuvenation
 Marketing and Selling
 Model Building
 People Development
 Relationship Management
 Responsiveness and Timeliness
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 Technology
 Verification

Low Opportunity Competencies, while important to the delivery of current

assurance services, are less likely to be exploited in the development of future
services.
 Accounting and Auditing Standards
 Administrative Capability
 Managing Audit Risk

4. Examples of typical lawsuits against CPAs are

a) Alleged misstatements that the auditor did not detect in the financial
statements involving
1) improper or inadequate disclosure
2) inappropriate valuations
b) Alleged failure to detect defalcation as a result of negligence in the
conduct of the audit
c) Alleged failure to complete the audit on the agreed-on date
d) Alleged inappropriate withdrawal from an audit

5. Indications That Noncompliance May Have Occurred

Examples of the type of information that may come to the auditor’s attention
that may indicate that noncompliance with laws or regulations has occurred are
listed below:
• Investigation by government departments or payment of fines or
penalties.
• Payments for unspecified services or loans to consultants, related
parties, employees or government employees.
• Sales commissions or agent’s fees that appear excessive in relation to
those ordinarily paid by the entity or in its industry or to the services
actually received.
• Purchasing at prices significantly above or below market price.
• Unusual payments in cash, purchases in the form of cashiers’ checks
payable to bearer or transfers to numbered bank accounts.
• Unusual transactions with companies registered in tax havens.
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• Payments for goods or services made other than to the country from
which the goods or services originated.
• Payments without proper exchange control documentation.
• Existence of an accounting system which fails, whether by design or by
accident, to provide an adequate audit trail or sufficient evidence.
• Unauthorized transactions or improperly recorded transactions.
• Adverse media comment.

6. Refer to page 119 of the textbook.

7. PSA 260 (Clarified), “Communication with Those Charged with Governance”

deals with the auditor’s responsibility to communicate with those charged with
governance in relation to an audit of financial statements. Although this PSA
applies irrespective of an entity’s governance structure or size, particular
considerations apply where all of those charged with governance are involved in
managing an entity, and for listed entities. This PSA does not establish
requirements regarding the auditor’s communication with an entity’s
management or owners unless they are also charged with a governance role.

8. The increase in litigation against auditors seems to be happening for two

reasons: a general increase in litigation in society, and the fact that investors and
creditors who suffer losses will look for “deep pockets” to pay for those losses.
Most accounting firms appear to have “deep pockets.”

9. Due (professional) care is the standard by which the courts and the profession
expect a CPA to practice. A CPA who is found to have exercised due
professional care in an engagement should not have any liability to others.

10. The four gradations are none, negligence, gross negligence (sometimes referred
to as constructive fraud), and fraud. At one extreme is the auditor who performs
an appropriate audit and issues an appropriate report. This auditor’s degree of
wrongdoing is “none.” An auditor who commits fraud is at the other extreme,
since he or she knows that the financial statements are misstated and yet issues
an unqualified opinion. An auditor is negligent if he or she does not do what a
reasonably prudent auditor should do in the circumstances. An auditor is grossly
negligent if he or she consistently fails to follow the standards of the profession
on an engagement.

11. Auditors are responsible to clients for negligence, gross negligence, or fraud.

12. Refer to page 126 of the textbook.

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13. Most courts have held that an auditor has a higher responsibility to communicate
information beyond that required by PFRSs and PSAs. Courts have held that
compliance with PFRSs is persuasive but not conclusive evidence.

14. An auditor should (a) follow the Philippine Standards on Auditing, the Code of
Ethics for Professional Accountants in the Philippines, and where appropriate,
PFRSs; (b) establish and follow appropriate quality control procedures; (c)
evaluate whether a client has the necessary integrity and appropriate reputation
in the community; (d) evaluate carefully why a client wants an audit; (e) conduct
the audit with appropriate professional skepticism; (f) provide for appropriate
levels of consultation for issues; and (g) provide for appropriate review of the
audit.

15. The prudent man concept states that a man is responsible for conducting a job in
good faith and with integrity, but is not infallible. Therefore, the auditor is
expected to conduct an audit using due care, but does not claim to be a guarantor
or insurer of financial statements.

Multiple Choice Questions

1. B 11. A 21. B 31. B

2. C 12. D 22. C
3. A 13. C 23. A
4. B 14. D 24. A
5. A 15. C 25. A
6. C 16. A 26. C
7. A 17. A 27. C
8. C 18. D 28. A
9. A 19. B 29. A
10. B 20. D 30. C