Deck 2: Ethics, Legal Liability and Client Acceptance

Question 1

Shayna Kirschfield audits a company that has market capitalization of $20,000,000. There is also a requirement that the partners in her firm be rotated every seven years and the audit committee must pre-approve all services provided to the client by Shayna's firm. What kind of client is this?

A) small business
B) diversified
C) reporting issuer
D) partnership

Answer 1

D

Question 2

Ensuring compliance with auditing regulations will not assist auditors in avoiding litigation.

Answer 2

False

Question 3

Cliff Marsden has been an audit manager at Copeland & Cahoon, CA's the past ten years. Two years ago he performed human resources and internal audit functions for 9 months while his client underwent a major restructuring. His firm has a policy of changing audit partners and managers every five to seven years. He is reluctant to take on the audit because he believes there is an independence threat. Which threat is in play?

A) integrity threat
B) familiarity threat
C) self-review threat
D) advocacy threat

Answer 3

D

Question 4

An engagement letter does not include an overview of the client's responsibility for the preparation of the financial statements.

Question 5

Luanne Phong just joined the firm of Moses, Denson, and Etchevery (MDE). She found out that she owns shares in a client company of MDE. She is going to divest herself of these shares. Which threat to her independence will she be eliminating?

A) self-interest threat
B) self-review threat
C) familiarity threat
D) advocacy threat

Question 6

When Joe Girardi, CA tried to collect last year's audit fees, he was told that he would receive the fees for the previous year and the current year upon finishing this year's work and issuing a "clean" audit opinion. This was non-negotiable and he was told that if he did not want to go along with it, the client would get another auditor. When he decided to leave his client, what threat to his independence did he mitigate?

A) self-interest threat
B) self-review threat
C) advocacy threat
D) none of these

Question 7

Auditors can avoid litigation by implementing policies and procedures that ensure all work is fully documented.

Question 8

The key difficulty for third parties in successfully claiming against the auditor is establishing that the client's management contributed to the third party's loss.

Question 9

Jae Williams, CA lives in the same neighbourhood as one of her major clients. She and her children are involved in the Lord Reading Yacht Club, as are many of her client's management employees. How would her independence threat best be described?

A) self-interest threat
B) self-review threat
C) advocacy threat
D) none of these

Question 10

Objectivity refers to the obligation that all members of the professional bodies be straightforward and honest.

Question 11

Being negligent means not exercising due care.

Question 12

An example of an advocacy threat is encouraging others to buy shares or bonds being sold by the client.

Question 13

When assessing client integrity, the auditor will consider the appropriateness of the client's interpretation of accounting rules.

Question 14

Compliance with the fundamental ethical principles is mandatory for all members of the accounting profession.

Question 15

Pete Marsh wrote up an advertisement for his firm. In his draft to the local newspaper he indicated that the firm was able to provide services that he knew it could not deliver. Which part of the profession's standards or codes of conduct was Pete breaking?

A) objectivity
B) professional behaviour
C) confidentiality
D) communication

Question 16

Third parties are anyone other than the client and its shareholders that use the financial statements to make a decision.

Question 17

Independence in appearance is the ability to act with integrity, objectivity and professional scepticism.

Question 18

When auditors divest themselves of shares owned in a client company, they are eliminating their self-review threat to independence.

Question 19

An engagement letter sets out the terms of the engagement.

Question 20

An effective audit committee will enhance the independence of the external audit function.

Question 21

Brenda Beauchamp withdrew from a client engagement. The client sued her for not fulfilling the understanding in the engagement letter and can establish that Brenda owed him a duty of due care. How can this be done using legal means?

A) the client can sue the auditor for breach of contract
B) the client can claim that the auditor failed to take reasonable care in the performance of the audit
C) both a and b
D) none of the above

Question 22

What type of threat to independence arises when an accounting firm acts on behalf of its assurance client?

A) advocacy threat
B) self-interest threat
C) intimidation threat
D) self-review threat

Question 23

Auditor independence is:

A) defined as acting with integrity, objectivity and professional scepticism.
B)
B) essential when complying with the ethical principles to act with integrity and objectivity.
C) both a and
D) not fundamental to every audit.

Question 24

Having policies and procedures to ensure the quality of an accounting firm's service is an example of a safeguard to independence created by:

A) the client's audit committee.
B) the Canada Business Corporations Act.
C) the client's board of directors.
D) None of the above.

Question 25

Which of the following is a fundamental principle of professional ethics?

A) confidentiality
B) objectivity
C) integrity
D) all of the above

Question 26

The firm of McMaster and Martin, CA's is concerned that its client's current corporate culture may have an impact on the firm's independence. What kinds of safeguards can the client introduce or create to reduce the threat to independence?

A) introduce appropriate corporate governance mechanisms such as the establishment of an audit committee
B) ensure that the responsibility for the appointment and removal of an auditor rests with independent directors on the audit committee or the board
C) both a and b
D) none of the above

Question 27

Intimidation threats to independence include:

A) the threat that that the client will use a different assurance firm next year.
B) a close business relationship with the client.
C) representing the client in a legal dispute.
D) preparing information for the client that is then assured.

Question 28

The main recipients of the financial statements and the attached audit report are acknowledged as:

A) the board of directors.
B) the shareholders or members.
C) the audit committee.
D) the provincial stock exchanges.

Question 29

An example of a safeguard to independence created by accounting firms is:

A) the establishment of a code of ethics.
B) legislation that requires that an auditor be independent.
C) the existence of client acceptance and continuation procedures.
D) the establishment of an audit committee.

Question 30

Independence in appearance is:

A) the ability to act with integrity, objectivity and professional scepticism.
B) the belief that independence of mind has been achieved.
C) the ability to make a decision that is free from bias, personal beliefs and client pressures.
D) also referred to as actual independence.

Question 31

Examples of board committees include the:

A) risk committee.
B) nomination committee.
C) compensation committee.
D) all of the above.

Question 32

Threats to the independence of auditors include:

A) familiarity threats.
B) self-interest threats.
C) advocacy threats.
D) all of the above.

Question 33

Safeguards to independence are created by:

A) accounting firms.
B) the profession, legislation or regulation.
C) clients.
D) all of the above.

Question 34

Objectivity refers to the obligation that all members of the professional bodies:

A) be straightforward and honest.
B) refrain from disclosing information to people outside of their workplace that is learned as a result of their employment.
C) not allow their personal feelings or prejudices to influence their professional judgment.
D) ensure that they do not harm the reputation of the accounting profession.

Question 35

Which of the following is an example of a familiarity threat to independence?

A) a bank account held with the client
B) performing services for the client that are then assured
C) both a and b
D) a former partner of the assurance firm holding a senior position with the client

Question 36

It is the responsibility of the board of directors to:

A) ensure that the financial statements are fairly presented.
B) provide an opinion on the fair presentation of the financial statements.
C) direct the auditors to audit specific financial statement accounts.
D) none of the above.

Question 37

A self-interest threat refers to the threat that can occur when an accounting firm or its staff:

A) is threatened by the client's staff or directors.
B) has a financial interest in an audit client.
C) needs to form an opinion on their own work or work performed by others in the firm.
D) acts on behalf of its assurance client.

Question 38

When the external auditors perform work they are responsible for auditing the financial statements. Which users are the auditors least likely to deal with in fulfilling their duties?

A) executive directors of the board
B) audit committee of the board
C) shareholders
D) internal auditors

Question 39

Professional behaviour refers to the obligation that all members of the professional bodies:

A) ensure that they do not harm the reputation of the accounting profession.
B) not allow their personal feelings or prejudices to influence their professional judgment.
C) refrain from disclosing information to people outside of their workplace that is learned as a result of their employment.
D) be straightforward and honest.

Question 40

Rob Wood has reviewed the engagement letter his firm has prepared for a client. Which of these elements would he be surprised to find?

A) unrestricted access to persons within the entity in order to obtain audit evidence
B) references to Canadian generally accepted auditing standards
C) management's responsibilities
D) previous year's internal control issues

Question 41

Describe the three categories of safeguards to an auditor's independence.

Question 42

The final stage in the client acceptance and continuance decision process involves:

A) the auditor obtaining a management representation letter from the client.
B) the auditor preparing an independence declaration statement.
C) the client's audit committee meeting with the auditor.
D) the preparation of an engagement letter.

Question 43

An auditor's assessment of their client's integrity would not include:

A) whether the auditor has sufficiently competent staff to complete the audit.
B) the client's attitude to audit fees and its willingness to pay a fair amount.
C) the client's attitude to risk exposure and management.
D) the reputation of the client and its management.

Question 44

The WRI Audit Committee has a policy of changing audit firms every five years to ensure that they receive fresh approaches from different audit firms. Accordingly, the WRI Board has asked Morgan Faustini, & Feaster to replace its previous audit firm.
WRI is a manufacturer and distributor of wire ropes, industrial cables, and rigging cables and has a reputation for its ability to fill special orders and to ship across Canada from its Thunder Bay facility on time and at competitive prices. They have a reputation among their customers for going the extra mile and have kept a loyal customer base for over a century.
Jack Bonami, a new partner at Morgan, Faustini & Feaster, a growing CA firm in northern Ontario, is excited about WRI becoming a potential new client. The previous week he met with the Canadian President of WRI, Bob Rooper.
Jack Bonami quickly decided that Bob Rooper was a man of integrity and his frank and open opinions would make it a pleasure to deal with him. He also appeared to have a competent management team in place.
Jack also wanted to make an impression on his new firm by bringing in several new clients in the next year or two, as a good portion of his future compensation will be derived from new business.
He is also aware that any negligence on his part during the client acceptance phase would reflect on his professional judgment and open the firm to possible litigation.
The senior partner, Bob Morgan, has invited Jack Bonami to join him in his office to discuss WRI.
Required:
a) You are Bob Morgan, the Senior Partner at Morgan, Faustini & Feaster. What would be on your "checklist" of client acceptance questions? Prepare an exhaustive inventory of all the questions you would ask Jack before deciding to accept or reject WRI.
b) The firm recently lost a lawsuit and has parted ways with the partner-in-charge of the aggrieved client. What can Bob Morgan do to avoid litigation?

Question 45

Auditors can avoid litigation by:

A) ensuring compliance with ethical regulations.
B) meeting with the client's nomination committee to discuss any significant audit issues.
C)
C) training their staff and regularly updating their knowledge.
D) a and

Question 46

Under tort law, to prove that an auditor has been negligent the plaintiff must establish:

A) there was a breach of the duty of care.
B) a loss was suffered as a result of the breach of duty of care.
C) a duty of care was owed by the auditor.
D) all of the above.

Question 47

Distinguish between independence of mind and independence in appearance.

Question 48

Management failed to put in a system of adequate internal controls. The public accounting firm uncovered the weakness, but did not report it to the Board members of the company. What kind of liability, if any, would the auditors be exposed to?

A) breach of contract
B) contributory negligence
C) a and b
D) no liability

Question 49

Explain the purpose and major contents of an engagement letter between the auditor and their client.

Question 50

The principles established by Justice Moffitt in the Pacific Acceptance case do not include:

A) auditors are watchdogs but not bloodhounds.
B) auditors must properly document procedures used.
C) auditors have a duty to use reasonable skills and care.
D) auditors must audit the whole year.

Question 51

Executive directors are:

A) part of the company's management team.
B)
B) full-time employees of the company.
C) not members of the company's board of directors.
D) a and

Question 52

Explain the five fundamental principles of professional ethics.

Question 53

Indicate whether you agree or disagree with the following statements and explain your reasoning.
a) To ensure that it is independent of prospective and continuing clients, an audit firm must review the threats to independence, and make certain that safeguards are put in place to limit or remove those threats.
b) The final stage in the client acceptance and continuance decision process involves assessing independence threats.
c) By signing the engagement letter, management is not necessarily considered to be responsible for the financial statements.
d) To successfully sue an auditor, a plaintiff must only prove that a duty of care was owed by the auditor.