Deck 2: Ethics,legal Liability and Client Acceptance

Question 1

The fundamental ethical principles that apply to all members of the professional bodies are to act with integrity,objectivity,professional competence and due care,confidentiality and professional behaviour.

Answer 1

True

Question 2

For auditors to be liable to third parties for negligence,a duty of care must exist.

Answer 2

True

Question 3

A famous statement by Lord Justice Lopes in the Pacific Acceptance case was that an auditor "…is a watchdog,but not a bloodhound."

Answer 3

False

Question 4

Being negligent means not exercising due care.

Question 5

Professional competence refers to the to the members of a professional body;

A)Maintain the knowledge to adequately operate in their clients industry.
B)Maintain a level of understanding of their clients business operations.
C)Maintain a level of commitment to their industry associations.
D)Maintain their level of knowledge and skill required by the professional body.

Question 6

Ensuring compliance with auditing regulations will not assist auditors to avoid litigation.

Question 7

For an auditor to be truly independent they must possess independence of mind and independence of appearance.

Question 8

An engagement letter sets out the terms of the engagement.

Question 9

The role of the Internal Auditors will enhance the work of the external auditors by further developing the findings of the external auditors between engagements.

Question 10

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 11

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

Question 12

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

Question 13

An engagement letter is prepared by the auditors and signed by the client at the conclusion of the audit process.

Question 14

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

Question 15

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

Question 16

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

Question 17

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

Question 18

The judgement in the Esanda case has made it far easier for third parties to establish that a duty of care is owed by the auditor.

Question 19

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

Question 20

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

Question 21

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

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

Question 22

Which of the following was an observation or recommendation by Justice Owen in the HIH Royal Commission Report?

A)audit reports should be addressed to shareholders.
B)auditor independence is not a critical element in establishing the credibility of an auditor's report.
C)boards of directors should establish an audit committee.
D)an independent and objective audit,conducted with an appropriate degree of professional scepticism,is required.

Question 23

Independence in appearance is:

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

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

Question 25

Safeguards to independence are created by:

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

Question 26

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

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

Question 27

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

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

Question 28

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

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

Question 29

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

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

Question 30

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

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

Question 31

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

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

Question 32

It is the responsibility of the board of directors to:

A)provide an opinion on the truth and fairness of the financial statements.
B)direct the auditors to audit specific financial statement accounts.
C)ensure that the financial report is prepared so as to provide a true and fair view.
D)none of the above.

Question 33

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

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

Question 34

Examples of board committees include the:

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

Question 35

Objectivity 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)refrain from disclosing information to people outside of their workplace that is learned as a result of their employment.
C)be straightforward and honest.
D)not allow their personal feelings or prejudices to influence their professional judgement.

Question 36

Intimidation threats to independence include:

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

Question 37

Which of these cases established the legal principle that auditors owe a duty of care to shareholders as a group and not to individual shareholders?

A)Caparo.
B)Esanda.
C)Pacific Acceptance.
D)Scott Group.

Question 38

According to the ASX Corporate Governance Council,an audit committee should:

A)be chaired by the chairman of the board of directors.
B)consist of a majority of independent directors.
C)not have a formal charter.
D)have at least four members.

Question 39

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

A)the audit committee.
B)the shareholders or members.
C)the board of directors.
D)the Australian Securities and Investments Commission.

Question 40

Threats to the independence of auditors include:

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

Question 41

Explain the five fundamental principles of professional ethics.

Question 42

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

Question 43

Distinguish between independence of mind and independence in appearance.

Question 44

Independence is considered one of the key characteristics of auditors.Explain why auditor independence is so important to the effectiveness of an audit and explain the various threats to an auditor's independence.

Question 45

Discuss the findings in the Esanda case as they relate to an auditor's liability to a third party.

Question 46

The key difficulty for third parties in legal action against auditors has been establishing that a duty of care was owed to them by their auditor.Explain the development of the relevant legal principles relating to an auditor's duty of care to third parties with reference to specific case law.

Question 47

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

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

Question 48

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

Question 49

Audit committees have been widely recommended as being an important mechanism for enhancing the external auditor's independence.What are the important characteristics of audit committees and discuss why these characteristics are considered so important to a committee's effective and efficient operation.