Deck 3: Professional Ethics and Legal Liability

Question 1

"Independence" in auditing means

A)remaining aloof from the client.
B)not being financially dependent on the client.
C)impartiality in performing professional services.
D)being an advocate for the client.

Answer 1

C

Question 2

A code of professional conduct typically includes principles,rules of conduct,and interpretations or examples.What is the purpose of the principles?

A)to state what a practitioner must do for each audit engagement conducted
B)to provide discussions of the rules of conduct and how they relate to practical situations
C)to provide minimum standards of ethical conduct stated specifically
D)to provide ideal standards of ethical conduct aimed to serve the public interest

Answer 2

D

Question 3

When public accountants are able to maintain an independent attitude in fulfilling their responsibility,it is referred to as independence in

A)fact.
B)appearance.
C)conduct.
D)total.

Answer 3

A

Question 4

List the components of the auditor's ethical decision making framework.

Question 5

What is an ethical blind spot?

Question 6

Formal frameworks have been developed to help people resolve ethical dilemmas.After obtaining the relevant facts and identifying the ethical issues from the facts,what is the next step in the five-step ethical framework described in the chapter?

A)Decide on the appropriate action to be taken in resolving the ethical dilemma.
B)Identify the likely consequences of actions that will be taken.
C)Identify who is affected and how each is affected.
D)Identify the alternatives available to the person who must resolve the dilemma.

Question 7

Society has attached a special meaning to the term professional.A professional is

A)someone who has passed a qualifying exam to enter the job market.
B)any person who receives pay for the services performed.
C)a person who is expected to conduct himself or herself at a higher level than the requirements of society's laws or regulations.
D)someone who has both an education in the trade and on-the-job experience received under an experienced supervisor.

Question 8

As a member of a professional accounting association,when considering the applicability of the rules of professional conduct,a PA would be responsible for compliance by

A)themselves only.
B)their partners in the practice and themselves.
C)their employees.
D)themselves,their employees,and partners.

Question 9

You are the senior in charge of the accounts receivable section of the audit of a large clothing manufacturer downtown in the clothing district.The client sells to local clothing stores as well as to other retailers in the province.
Accounts receivables seem to be deteriorating,with many more accounts in the over 90 days column than in the past.You sent out twenty accounts receivable confirmations,but only six were returned.Of these six,only three confirmed the balance as in agreement with the client,while the others indicated that they kept their records on an open item basis (rather than a balance forward basis)and were unable to respond to the confirmation request.When you looked at the prior year's file,it seemed that the same thing had happened last year.
When you phoned the supervisor in charge of the audit engagement,she told you to not bother with follow up,as the engagement was already over budget and costs need to be kept down.You were concerned that you would be unable to state a conclusion with respect to the fairness of the accounts receivable balance and she was really angry with you,saying that she would have to sign off for you then.
Required:
Discuss the ethical and quality issues raised by this audit engagement.

Question 10

The underlying reason for a high level of professional conduct,such as exemplified in a code of conduct,for any profession is

A)the need for public confidence in the quality of service of the profession.
B)that it provides a safeguard to keep unscrupulous people out.
C)that it is required by federal legislation.
D)that it allows licensing agencies to have a standard to measure deficient performance.

Question 11

Financial statement users cannot be expected to evaluate audit performance because they will not have the time or the competence to do so.In such a situation,public confidence in the quality of professional services is enhanced when there are

A)only business majors hired to work as auditing students with public accounting firms.
B)adequate controls at the public accounting firm to limit the amount of overtime worked.
C)high standards of performance and conduct on the part of all practitioners.
D)strict rules about the type of work that employees should complete on a daily basis.

Question 12

When the users of financial statements have confidence in the independence of the public accountant,it is referred to as independence in

A)fact.
B)appearance.
C)conduct.
D)total.

Question 13

In which of the following circumstances would a public accountant be bound by ethics to refrain from disclosing any confidential information obtained during the course of a professional engagement?

A)The public accountant is issued a subpoena that orders the public accountant to present confidential information.
B)A major shareholder of a client company seeks accounting information from the public accountant after management declined to disclose the requested information.
C)Confidential client information is made available as part of a practice inspection of the public accountant's practice.
D)An inquiry by a disciplinary body of a provincial institute requests confidential client information.

Question 14

Ethical dilemmas occur when

A)you know what you want to do but the rules say otherwise.
B)businesses disregard the laws and engage in illegal behaviour.
C)a person chooses to act in his/her own interest.
D)a choice must be taken about appropriate behaviour.

Question 15

Describe an ethical dilemma that an auditor or an accountant might face in his or her business career.Then illustrate how the auditor or accountant might use the five-step approach presented in Chapter 3 to resolve the dilemma.Be specific.

Question 16

According to the CPA Code of Professional Conduct,ethical principles are aimed at

A)the emphasis on serving the public interest and at achieving orderly and courteous conduct within the profession.
B)the ability to enforce the ideals.
C)the enforceability of minimum behaviour and performance standards.
D)the tendency to define the rules as maximum rather than minimum standards.

Question 17

Ethical behavior is considered to be a cornerstone for trust in everyday life as well as in business practices.Ethics are

A)beliefs that we have about our own behaviour.
B)a set of moral principles or values.
C)rules in society that help us to do the right thing.
D)laws that govern how businesses should behave.

Question 18

Which portions of the code of professional conduct are enforceable?

A)principles and rules
B)the rules of conduct
C)interpretations
D)rules and interpretations

Question 19

A public accountant would be facing an ethical dilemma when deciding whether or not to

A)overlook a material overstatement of revenues to maintain a good client relationship.
B)overlook a non-material error in the financial statements.
C)accept an invitation from the client to go golfing in order to maintain a good client relationship.
D)participate in a charitable activity organized by the client.

Question 20

Generally,all of the rules of professional conduct for CPAs apply to

A)students in public practice.
B)students and members in firms.
C)members in public practice.
D)all members and firms.

Question 21

The confidential relationship will be violated if,without the client's permission,the public accountant provides working papers about a client to

A)a court of law that subpoenas them.
B)the relevant provincial institute as part of a practice inspection.
C)another public accounting firm that has just purchased the public accountant's entire practice.
D)an investigative or disciplinary body of the relevant provincial institute that is conducting a review of the public accountant's practice.

Question 22

What is the difference between auditors and lawyers with respect to privileged information?

Question 23

Independence is assessed in the eyes of external users and regulators.Which of the following is a tool that helps the auditor identify whether the auditor is independent for a particular audit engagement?

A)completion of independence forms at time of employment
B)an independence threat analysis
C)an audit risk model assessment for each engagement
D)professional skepticism when assessing control risks

Question 24

Which one of the following forms of advertisement would violate solicitation rules? PA

A)placed an advertisement in a newspaper indicating the opening of a new office.
B)conducted a cold-calling campaign where companies were asked if they would like to change PA firms.
C)placed a media advertisement listing the different types of expertise available at the firm's major office locations.
D)conducted a survey asking companies about the types of services that are provided by their accounting firms.

Question 25

The provincial institutes' Rules of Professional Conduct state,in part,that a public accountant should maintain integrity and due care.Integrity in the Rules refers to a public accountant's

A)ability to maintain an impartial attitude on all matters that come under the public accountant's review.
B)ability to distinguish independently between accounting practices that are acceptable and those that are not.
C)ability to be unyielding in all matters dealing with auditing procedures.
D)reputation for honesty and fair dealing.

Question 26

Which of the following situations best describes an advocacy threat? PA has been hired to

A)consult with the corporate controller and the bank manager about the conditions for financing a loan.
B)manage the accounting department for three weeks while the corporate controller is on vacation.
C)complete the personal tax returns of all executive management.
D)prepare the year end journal entries for a subsidiary company.

Question 27

The Rules of Professional Conduct require a successor auditor to communicate with the previous auditor.The primary concern in this communication is

A)to acquire information that will help the successor auditor determine whether the client management has integrity.
B)to learn about the client by examining the predecessor's working papers.
C)to enable the successor to perform a more efficient audit.
D)to save the successor auditor time and money in gathering data.

Question 28

PA has been asked to accept the audit engagement of BarneyBlues Corporation.PA sent a letter to the predecessor auditor asking whether there was any reason why he should not accept the engagement.Assuming that the prior year audit went smoothly,what would be an appropriate response by the predecessor auditor?

A)Provide a brief statement that there is no reason of which he or she is aware that would prevent accepting the engagement.
B)Send a copy of the entire working paper file to PA.
C)Telephone PA and say that PA should not take the engagement because the fee charged was too large.
D)Send a copy of the tax returns and tax assessments to PA.

Question 29

Each of the following situations involves a possible violation of the provincial institutes' Rules of Professional Conduct.For each situation,(1)decide whether or not the Rules have been violated,and (2)briefly explain how the situation violates (or does not violate)the Rules.A)Johnny Line has a successful dentistry practice in Calgary.Johnny has recommended one of his patients to Leslie King,public accountant.To show gratitude for the referral,Leslie has agreed to pay Johnny 5% of the fee for audit services rendered by Leslie to Johnny's patient.Leslie discloses the payment agreement to her new client.
Violation? Yes No
B)The accounting firm of Bayer & Peng,public accountants,is negotiating a fee with a new audit client.They agree the client will pay $75 000 if Bayer & Peng issues a clean,unqualified opinion,$50 000 if a qualified opinion is issued,$40 000 if an adverse opinion is issued,and $10 000 if a denial of opinion is issued.
Violation? Yes No
C)Don Smith,public accountant,takes part in the audit of Shaw Corporation.Don is not a partner or a manager in the public accounting firm,and does not own any stock in Shaw Corporation.Don's five year-old daughter,Betty Lou,received one share of Shaw Corporation's common stock for her fifth birthday.The stock was a gift from Betty Lou's grandmother.Betty Lou treasures that share of stock and is absolutely unwilling to part with it.
Violation? Yes No
D)On August 5,2017,Page Dane,public accountant,issued the audit report on Borhut Corporation's June 30,2017 financial statements.On August 30,2017,Borhut paid Page's audit fee with stock rather than cash.Page sold the stock on September 15,2017,two months prior to the beginning of the planning phase for the audit of the June 30,2018,financial statements.
Violation? Yes No

Question 30

How do quality control processes for the financial statement audit process incorporate consideration of legislation that affects the client?

A)they require second partner review of all working papers that relate to legislative matters
B)they provide auditors with copies of legislation that affects their client
C)they require the training of all auditors in legislation details that could affect all clients
D)they include in audit checklists questions that address relevant new legislation

Question 31

Kimora is a senior manager at a public accounting firm.Kimora was assigned to the audit of Toble Corp.Upon arriving at the client,Kimora met with the controller,Brad,who was a classmate in college,20 years ago.She had not been in contact with Brad since college,but they realized that they still had many friends in common.Brad invited Kimora to go to the company box to watch a hockey game and catch up.
Discuss the issue of independence between Kimora and Toble Corp.

Question 32

How is use of an applicable accounting framework enforced via legislation?

A)The Canada Business Corporations Act and many provincial incorporating acts require that financial statements be prepared in accordance with CAS as set out in the CPA Canada Handbook.
B)PAs who do not prepare financial statements in accordance with such frameworks are expelled from their professional association.
C)tax authorities may sue corporations who do not prepare their financial statements in accordance with such frameworks.
D)financial executives may be sued if the financial statements prepared by their company are not in conformance with such frameworks.

Question 33

Which of the following situations would be an example of a self-interest threat that would prevent a PA from auditing the client?

A)The PA's uncle owns the business that the PA is auditing.
B)For the last two years,the client could not pay their fees,so the PA created a loan agreement covering the fees,with the client paying 10% interest on the fees.
C)The PA has a small bank loan at normal business interest rates with the bank that his firm is auditing.
D)The PA has purchased a used car from one of the employees of the client.

Question 34

You are having lunch with a former employee of your firm,a friend of yours.Gino had been laid off last year when he had failed to pass his professional examinations for the third year in a row.Gino told you that he managed to obtain a CPA designation in the past year,and has started his public practice.
He has been circulating flyers and electronic email announcements with fixed rates: $400 for a compilation engagement,$1000 for a review,and $5000 for an audit where revenues are less than $1 million,$15 000 for an audit for a client with revenues up to $5 million.He already has clients to keep him busy for the next three months.He even has some feelers for clients that he personally handled while he was working for your firm - there were a lot of contacts developed during the five years that he was working there! To help attract some of the larger clients,he is considering not charging any fee for the first ten hours spent on tax-related services.
Gino ended the conversation by asking you if you would like to join him in his new firm,because at this rate he'll need a second person really soon!
Required:
Identify the violations in the professional rules of conduct and explain why they are violations.

Question 35

The rules of accounting bodies in Canada require their members to behave in the best interest of the profession and the public.Identify the situation where the accountant is acting in the best interest of the profession.An accountant

A)reports a fellow accountant after noticing that the accountant helped a client with tax evasion.
B)openly criticizes a fellow accountant's competencies after having lost a bid for a new client.
C)brags about his competence and professional title,and encourages clients to invest in a new venture he is starting.
D)refuses to cooperate with the new auditor after having lost a client.

Question 36

What should a PA do if approached by a client where he and his firm lack or do not have access to the technical knowledge required to complete the audit?

A)subcontract the audit to another firm
B)indicate that they can do a review engagement,not an audit
C)decline the new audit engagement
D)conduct the engagement,but prepare a qualified audit report

Question 37

Sandra is a new partner at a PA firm.Sandra recently signed a new contract with Gretchen Fabrics to become its auditor.In the process of accepting the client and planning the first year's audit,Sandra did the following:
- Sandra contacted the previous auditor to enquire if there were any reasons not to accept the audit of this client.Unfortunately,the previous auditor was on vacation and did not respond to Sandra before she accepted the client.
- Upon his return,the previous auditor did communicate with Sandra and indicated that the client had aggressive expense deferral policies that they disagreed on.Sandra asked to review the working papers of the previous auditor with regards to these expenses and found them to be right below the materiality threshold.
- Gretchen Fabrics imports most of its fabrics and has two production facilities in Asia.The company therefore has a complex tax structure and many import duties.Since this is not the area of expertise of Sandra,she asked another auditing firm to provide the required audit procedures for the international taxes and duties expense.When selecting the other audit firm,Sandra researched the firm online.She also ensured that they had their professional designation and enquired with the CPA and provincial association if the firm had any complaints or litigation outstanding for malpractice.
- Since the bidding process took time,Sandra had to start the audit almost right after learning she had the winning bid.She did not prepare an engagement letter before starting the work.She does not see this as being a problem since waiting until the audit has begun will provide her with a better idea of what work has to be done and what the engagement letter should include.
Required:
Identify the good and bad steps that Sandra has undertaken in reducing her exposure to legal liability.

Question 38

For which of the following engagements is a contingent fee permitted?

A)an audit engagement of a large listed corporation
B)a tax consulting assignment assessing the excise tax payment processes
C)a review engagement of a small manufacturing corporation
D)an assurance engagement of leasehold payments for a rental agreement

Question 39

Which one of the following situations is a violation of the professional rules of conduct? PA

A)looked the other way when he noticed that one of his firm's accounting staff accepted money from client management.
B)resigned so that he could accept a position on the Board of Directors at a major client.
C)prepared personal and corporate tax returns for a client and all of its executive officers.
D)placed an advertisement in the local paper indicating that she conducted audit engagements for five major insurance companies.

Question 40

When should a PA assess the five threats to independence with respect to an audit engagement?

A)when deciding to accept a client or whether to continue an existing engagement
B)after signing the engagement letter and before commencing field work
C)after the completion of this year's audit,before starting the next engagement
D)after a discussion with the Board of Directors

Question 41

Which of the following situations would be an example of a self-review threat? Prior to commencing the audit engagement,PA has completed

A)personal and corporate tax returns.
B)the audit of a company where the client owns a minority interest.
C)a purchase price allocation calculation for a company that the client purchased during the year.
D)an audit of the not-for-profit organization of the client.

Question 42

Xiao,PA,is the auditor of Minkle Credit Union,a medium-sized credit union.Xiao has prepared a management letter with several serious control weaknesses.Management agrees with the facts,but does not want to present the letter with the weaknesses to the audit committee or the board of directors.Management has implied that they will request a change of auditors if your firm presents the management letter to the board.
Required: Discuss the actions that Xiao should take.Justify your response.

Question 43

For listed clients,the audit committee should approve both the appointment of the auditor and

A)all services that the PA firm provides to the client.
B)an engagement that might affect the appearance of independence,such as design of control systems.
C)any services that are provided for senior management.
D)the material that is included in the management letter by the PA firm.

Question 44

To ensure that employees remain independent,an audit firm should

A)ask employees to sign a form confirming that they do not have an investment in a company that they are auditing.
B)prohibit an employee from the Toronto office to have an investment in a company audited by the Hong Kong branch of the PA firm.
C)include a section in the code of conduct indicating that the employees should not invite their client to dinner.
D)refuse an audit where the cousin of a staff member works in the marketing department.

Question 45

At a small practice where the bulk of the work is accounting,bookkeeping,and review engagements,what is an important procedure that should be followed by the PA to help ensure independence?

A)Management should be trained in accounting principles so that they can adequately assess the PAs work.
B)All transactions should be prepared and processed by client personnel.
C)Transactions and journal entries should be discussed with and approved by the client.
D)The accountant should avoid doing bookkeeping for review engagements,and restrict this to compilation engagements only.

Question 46

Why does a self-review threat pose a problem when conducting an audit engagement?

A)The audit can be conducted more efficiently.
B)You are auditing your own work,and may not detect inadequacies.
C)The audit is more expensive,as you have to provide clear documentation.
D)The auditor may not have the expertise to complete the special work.

Question 47

Raul,PA,received a call from his friend Cristobal Franco.He needed an audit urgently,because the bank might call his loan for his computer store CF Ltd.Since Cristobal had been his high school friend and they still played soccer together every two weeks,Raul agreed.Raul and Cristobal had a quick meeting,where Raul fixed the audit fee at $10 000.Cristobal stressed the importance of an unqualified opinion for the bank.
Raul sent two available junior staff to CF's offices.The junior staff were experienced in review engagements,and had been working for Raul for about six months.The two staff had a quick look around the store,noting the documents strewn everywhere.The accounting staff came in and chatted briefly after their smoke break.They were about a month behind on recording transactions,because Cristobal had laid off one salesperson.The accounting staff also helped out with providing sales quotes and Cristobal did all of the technical work.
At the end of the day,the junior staff were each given a $250 gift certificate to be used in the computer store.This was great,because CF also sold MP3 players and supplies such as CDs and DVDs.
At dinner that night,the junior staff told their family that it would probably be a great idea to hold off on any computer supplies or equipment purchases that they needed,since CF would likely hold a sale in the next month or two to improve cash flow.
Required:
Identify and discuss the violations in the rules of conduct with respect to CF.

Question 48

Discuss the ways the accounting profession and society encourage public accountants to conduct themselves in a professional manner (i.e. ,the factors that influence the ethical conduct of audit practitioners).

Question 49

If the public accountant negligently failed to properly prepare and file a client's tax return,the public accountant can be held liable for

A)the penalties the client owes Canada Revenue Agency.
B)the penalties and interest the client owes.
C)the penalties and interest,plus the tax preparation fee that the public accountant charged.
D)the penalties and interest,the tax preparation fee,and the amount of tax that was underpaid.

Question 50

Each of the following situations involves a possible violation of the provincial institutes' Rules of Professional Conduct.For each situation (1)decide whether or not the rules have been violated,and (2)briefly explain how the situation violates (or does not violate)the rules.A)Carla is the CFO of Xenon Company.Carla was very happy after her husband Dwayne,a partner at a large PA firm,was assigned as the new auditor of the company.Carla is confident that this will be helpful to Xenon since Dwayne already knows so much about the business.
Violation? Yes No
Explanation:
B)Jeremy accepted a summer internship at a PA firm.Jeremy's parents own 0.1% of Raven Inc,a large public company in Austria.Raven Inc.is a client of the Austrian branch of the PA firm.Jeremy reported this to the partner of his office.
Violation? Yes No
Explanation:
C)Ken Burns is a partner at Burns and Fields LLP,a PA firm.Ken was approached by a friend who asked him to invest in Safran Group Inc. ,a growing high tech company.The proposal would be for Ken to invest $650 000 to obtain 1% of the company.Ken decided to go ahead with the investment because Safran is a client from their Seattle office and he has never provided any services to Safran Inc.Ken indicates that he will ensure that he does not work on the audit of Safran.
Violation? Yes No
Explanation:
D)Sintron Inc.is a payroll processing company.Over the past 5 years,Clarkson Coppers LLP,a PA firm,has outsourced its payroll processing and other human resources tasks to Sintron.Clarkson Coopers LLP is happy to outsource more functions to Sintron as Sintron has asked Clarkson for additional consulting services with regards to system implementation and application of new accounting policies.
Violation? Yes No

Question 51

Each of the following situations involves a possible violation of the independence requirements of the provincial institutes' Rules of Professional Conduct.For each situation,(1)decide whether the Rules have been violated,and (2)briefly explain how the situation violates (or does not violate)the Rules.A)Mike Lednicky,public accountant,is a partner in the Oshawa office of Arthur & Thompson,public accountants.Mike's brother is employed as an inventory warehouse supervisor (an audit-sensitive position)by Sweeny Appliances,a publicly held company in Manitoba.Sweeny Appliances is one of Arthur & Thompson's audit clients.Neither Mike nor the Oshawa office of Arthur & Thompson is involved in the audit of Sweeny Appliances.
Violation? Yes No
Explanation:
B)The accounting firm of Finke & Hersley,public accountants,provides bookkeeping and tax services for Hendershot Corporation.Finke & Hersley also performs the annual audit of Hendershot Corporation.
Violation? Yes No
Explanation:
C)Brent Shaw,public accountant,is the auditor of Cafe Eccel.A couple of weeks ago,Cafe Eccel's management expressed an intention to commence litigation against Brent,alleging he was negligent in last year's audit.Brent believes there is a strong possibility that management will proceed with the litigation.However,Cafe Eccel has not fired Brent as its auditor,and he is now working on the current year's audit of Cafe Eccel.
Violation? Yes No
Explanation:
D)Melissa Barry,public accountant,is the auditor of Audio Video Inc.Audio Video has not paid Melissa's audit fee for the past two years.Melissa is working on the current year's audit of Audio Video.
Violation? Yes No

Question 52

Where an independence threat occurs,it may be that only the person affected needs to be removed from the engagement.In this case,other members of the firm can complete the engagement.An example of a situation where only the student or member would be excluded from the engagement is where PA

A)has a significant financial interest in the client,such that influence could be exerted.
B)used to be a controller at the client,but now works for the PA firm.
C)owns ten percent of the shares of the client.
D)is a board member of the client with signing authority for cheques.

Question 53

An intimidation threat occurs when

A)it is difficult to believe the actions of management because there is a suspicion of irregular activity in the recording of transaction activity.
B)the auditor suspects that fraud has occurred at the middle management level of the organization.
C)the auditor has been working on a client engagement for many years and has trouble believing that management would deceive the auditors.
D)a client threatens the firm or its staff with respect to the content of the financial statements or with respect to the conduct of the audit.

Question 54

Which of the following is the best example of an intimidation threat? Management

A)has decided to sue you because the audit fee was twice as high as they expected.
B)has changed auditors of all of its subsidiary companies as they can get the audit done for a lower cost.
C)threatens to change auditors if you do not let them overstate accounts receivable by $100 000 (the bad debt allowance is too low).
D)threatens to resign from the company if the board of directors does not give them a 15% raise.

Question 55

If a PA firm provided corporate finance services to a company during the year,which of the following engagements could the PA firm accept to provide to the same company?

A)non-assurance services
B)audit of listed entity
C)audit of non-listed entity
D)an assurance engagement other than an audit

Question 56

According to the profession's ethical standards,an auditor would be considered independent in which of the following instances? The

A)auditor's chequing account,which is fully insured by CDIC,is held at a client financial institution.
B)client comprises 75% of the auditor's fees.
C)auditor does not have enough employees to meet the client's reporting deadline.
D)client owes the auditor fees for two consecutive annual audits.

Question 57

Pierre,a CPA,was convicted of stealing money from his clients and deliberately preparing personal tax returns that were false.In addition,Pierre will likely

A)need to take additional training courses to upgrade his tax skills.
B)need to defend himself to prove non-negligent performance.
C)have a suspension of designation or expulsion from the professional accounting body.
D)have lack of privity with the federal and provincial tax authorities.

Question 58

A familiarity threat at an audit engagement occurs when

A)the member has a financial interest in the client.
B)it is difficult to behave with professional skepticism.
C)PA promotes the client's position to third parties.
D)the member discloses financial information about the client.

Question 59

Some independence rules apply to all assurance engagements,while others apply only to a listed entity.For the purposes of assessing the independence rules,a listed entity is defined as

A)an organization with share capital exceeding $10 million that has public accountability.
B)an entity whose debt or shares are listed on a stock exchange,with market capitalization and total assets greater than $10 million.
C)any organization that has shares or debt listed on a stock exchange.
D)an organization that has shares or debt listed on a stock exchange,and that has redeemed shares.

Question 60

Which of the following situations best describes a familiarity threat?

A)design and implementation of a new payroll system
B)preparation and entry of bookkeeping transactions
C)completion of corporate transactions for subsidiary companies
D)PA has been working with this client for ten years,first as a manager,now as a partner

Question 61

Most of the major lawsuits against public accounting firms have dealt with

A)audited or unaudited financial statements.
B)disputes over income-tax preparation services.
C)disputes arising in the performance of management consulting services contracts.
D)unaudited financial statements.

Question 62

An example of a breach of contract would be

A)a bank's claim that an auditor had a duty to uncover material errors in financial statements that had been relied on in making a loan.
B)an auditor's refusal to return a client's records until the client paid last year's audit fees.
C)a public accounting firm's failure to deliver a tax return on the agreed-upon date because the firm had a backlog of other work that was more lucrative.
D)an auditor's failure to complete the audit by the agreed-upon date because the client's financial records had been destroyed.

Question 63

When an auditor issues an erroneous opinion as the result of an underlying failure to comply with the requirements of generally accepted auditing standards,it results in

A)business failure.
B)audit failure.
C)audit risk.
D)business risk.

Question 64

PAs are members of a professional association that can impose sanctions for violations of the professional code of conduct.What is an example of a severe penalty that can be imposed by a professional association?

A)publication of information about the offence in a newsletter
B)requirement of the completion of training courses
C)requirement to have another peer review conducted within one year
D)expulsion from the professional association

Question 65

A legal duty that arises when there is a contractual agreement with the client is known as

A)objectivity.
B)standard of care.
C)privity.
D)independence.

Question 66

According to the CPA Canada Handbook,the auditor's responsibility for failure to detect fraud arises

A)when such failure clearly results from failure to comply with generally accepted auditing standards.
B)whenever the amounts involved are material.
C)only when the examination was specifically designed to detect fraud.
D)only when such failure clearly results from negligence so gross as to sustain an inference of fraud on the part of the auditor.

Question 67

In connection with the examination of financial statements,an auditor could be responsible for failure to detect a material fraud if

A)statistical sampling techniques were not used on the audit engagement.
B)the auditor planned the work in a hasty and ineffective manner.
C)accountants performing important parts of the work failed to discover a close relationship between the treasurer and the cashier.
D)the fraud was perpetrated by one client employee who circumvented the existing internal controls.

Question 68

An example of an audit failure is when the

A)auditor issues an erroneous audit opinion as the result of a failure to comply with the requirements of CAS.
B)audit opinion is qualified.
C)company files for bankruptcy less than 12 months after receiving an unqualified opinion.
D)auditor issues an erroneous audit opinion as the result of an undiscovered fraud that took place in the period being audited.

Question 69

One reason for lawsuits against public accountants is

A)lack of awareness of the responsibilities of public accountants by users of financial statements.
B)the increasing complexity of auditing and accounting functions.
C)reduced consciousness on the part of provincial securities commissions of their responsibility for protecting investors' interests.
D)many public accounting firms are not willing to settle legal problems.

Question 70

Amin is distraught.Six months ago,a big-box stereo store opened just down the street from his independent stereo and music business and now he is unable to continue operating his business.Only eight months ago,you issued an unqualified audit opinion on his financial statements that showed the financial results of a well-run,profitable store.Amin's business is experiencing

A)customer expectation gap.
B)audit failure.
C)fiduciary duty.
D)business failure.

Question 71

Conflict between financial statement users and auditors often arises because of the

A)high cost of performing an audit.
B)extremely technical vocabulary auditors use in their reports.
C)placement of the auditor's report in the back of the client's annual report,where it is hard to locate.
D)expectation gap.

Question 72

The failure to perform a duty with the requisite standard of care is known as

A)lack of objectivity.
B)lack of independence.
C)negligence.
D)lack of CPA education.

Question 73

While performing services for their clients,professionals have always had a duty to provide a level of care that is

A)reasonable.
B)greater than average.
C)superior.
D)guaranteed to be free from error.

Question 74

To succeed in an action against the auditor,the client must be able to show that

A)the auditor was grossly negligent.
B)the auditor was fraudulent.
C)there is a close causal connection between the auditor's breach of the standard of due care and the damages suffered by the client.
D)there was a written contract.

Question 75

In the auditing environment,failure to meet generally accepted auditing standards is often

A)an accepted practice.
B)a suggestion of negligence.
C)strong evidence of negligence.
D)tantamount to criminal behaviour.

Question 76

In rare cases,auditors have been held liable for criminal acts.A criminal conviction against an auditor can result only when it is demonstrated that the auditor

A)was negligent.
B)was grossly negligent.
C)knowingly issued an incorrect auditor's report.
D)caused a financial loss to an innocent third party.

Question 77

The principal issue to be resolved in cases involving alleged negligence is usually

A)the amount of the damages suffered by the plaintiff.
B)whether to impose punitive damages on the defendant.
C)the level of care required.
D)whether the defendant was involved in fraud.

Question 78

The King Surety Company wrote a general fidelity bond covering defalcations by the employees of Wilson,Inc.Thereafter,Cooney,an employee of Wilson,embezzled $17 200 of company funds.When the activities were discovered,King paid Wilson the full amount in accordance with the terms of the fidelity bond,and then sought recovery against Wilson's auditors,Lynch & Merritt,public accountants.Which of the following would be Lynch & Merritt's best defence?

A)King is not in privity of contract.
B)The shortages were the result of clever forgeries and collusive fraud which would not be detected by an examination made in accordance with generally accepted auditing standards.
C)Lynch & Merritt were not guilty of either negligence or fraud.
D)Lynch & Merritt were not aware of the King-Wilson surety relationship.

Question 79

It is not practical for users to evaluate the quality of the performance of most professional services because of their

A)complexity.
B)legal standing.
C)veracity.
D)salaries and working conditions.

Question 80

PA was engaged by Microcomputer Distributor Limited (MDL)to conduct a review engagement.The financial statements are used primarily by the shareholders,management,and by the bank.Recently,an employee was fired for stealing computer parts,primarily chips and boards that could easily be placed in a pocket.MDL is suing PA because they believed that audit procedures,such as counting inventory,would have detected this fraud.What is PA's best defence?

A)absence of causal connection
B)lack of negligence
C)contributory negligence
D)duty of care not required