Question 1

The AWA case established that:
A)reasonable care and skill means following the auditing standards.
B)auditors have a duty to closely supervise and review the work of inexperienced audit staff.
C)auditors are only liable for the proportion of damages attributable to their actions.
D)auditors have a duty of care only to the shareholders as a group.

Accepted Answer

The answer of The AWA case established that:
A)reasonable care and...

Question 2

In the Caparo case, the court held that the auditor owes a duty of care to:
A)all users of the published financial report.
B)only those parties specified in the engagement letter.
C)the shareholders as a body, but not individual shareholders or third parties.
D)all shareholders, but not third parties.

Accepted Answer

In the Caparo Industries plc v Dickman [1990] UKHL 2 case, the court held that auditors owe a duty of care primarily to the company itself, represented by its shareholders as a whole, rather than to individual shareholders or third parties. This established a more limited scope of duty, focusing on the collective interests of shareholders as a body.

Question 3

An auditor can be sued for damages under which of the following Acts?
A)Crimes Act 1914.
B)ASIC Act 2001.
C)Corporations Act 2001.
D)None of the given answers are correct.

Accepted Answer

The answer of An auditor can be sued for damages...

Question 4

In pursuing the audit firm's quality control objectives, the firm may maintain records indicating which partners or employees of the firm were previously employed by the firm's clients.Which quality control objective would this be most likely to satisfy?
A)Professional relationship.
B)Supervision.
C)Independence.
D)Advancement.

Accepted Answer

This quality control objective would most likely satisfy the independence objective as it helps the audit firm to identify potential conflicts of interest or threats to independence that may arise if an individual who was previously employed by a client worked on an audit engagement for that same client. By maintaining records of previous client employers of partners or employees, the firm can ensure that individuals are not assigned to engagements where a threat to independence may exist.

Question 5

Contributory negligence:
A)has always been available as a defence to the auditor.
B)indicates the auditor has played no part in the plaintiff's loss.
C)will result in an apportionment of damages arising from the plaintiff's loss between the defendant and the plaintiff.
D)is used to describe the causal relationship between the actions of the auditor and any loss suffered by a plaintiff.

Accepted Answer

Contributory negligence refers to a situation where the plaintiff has played a role in their own loss, and in such cases, damages are typically apportioned between the defendant and plaintiff based on the degree of fault. It is not a defense that the auditor can use to escape liability, nor does it describe the causal relationship between the auditor's actions and any loss suffered by the plaintiff.

Question 6

An auditor's duty of care to a client would most likely be breached if the auditor failed to:
A)meet their reporting deadline.
B)detect all of a client's fraudulent activities.
C)conduct the audit for the most competitive price.
D)comply with all relevant auditing standards.

Accepted Answer

An auditor has a duty to comply with all relevant auditing standards, and failure to do so could result in a breach of their duty of care to their client. Meeting reporting deadlines and conducting the audit for a competitive price are important, but they do not necessarily impact the auditor's duty of care. Detecting all fraudulent activities is an important aspiration for an auditor, but it is not always feasible, and failure to detect every instance of fraud does not necessarily indicate a breach of duty.

Question 7

ABC Ltd (ABC) engaged the accounting firm of Ace & King to perform its annual audit.Ace amp; King performed the audit in a competent, non-negligent manner and billed ABC for $30 000, the agreed fee.Shortly after delivery of the audited financial report, Sam Lloyd, the assistant controller, disappeared, taking with him $40 000 of ABC's funds.It was then discovered that Sam had been engaged in a highly sophisticated, novel defalcation scheme during the past year.He had previously embezzled $50 000 of ABC's funds.ABC has refused to pay the auditor's fee and is seeking to recover the $90 000 that was stolen by Sam.Which of the following is correct?
A)The auditor cannot recover the audit fee and is liable for $90 000.
B)The auditor is entitled to collect the audit fee and is not liable for $90 000.
C)ABC is entitled to recover the $40 000 defalcation of the current year and is not liable for the $30 000 fee.
D)ABC is entitled to rescind the audit contract and thus is not liable for the $30 000 fee, but it cannot recover damages.

Accepted Answer

The auditor performed the audit in a competent, non-negligent manner, so they are entitled to their fee and are not liable for the embezzlement that they did not detect, especially if it involved a highly sophisticated scheme.

Question 8

Due professional care does not require:
A)critical review at every level of supervision of work done and judgment exercised.
B)good faith and integrity.
C)appointment of the auditor by the shareholders.
D)compliance with the auditing standards.

Accepted Answer

While appointment by shareholders may affect independence, it is not a requirement of due professional care. A, B, and D are all requirements of due professional care.

Question 9

The court found that Roberts & Associates had performed a negligent audit of Pinnacle Ltd, but the plaintiff did not receive damages because the court found insufficient proof of causation.Causation means that:
A)the auditor caused the misstatement of the financial report.
B)the auditor's failure to perform a proper audit caused the damages.
C)the auditor was negligent, but the plaintiff suffered no real damages.
D)the plaintiff was an unforeseen third-party user of the financial report.

Accepted Answer

Causation refers to the link between the auditor's negligence and the damages suffered by the plaintiff. In this case, the court found that Roberts & Associates had performed a negligent audit, but also found insufficient proof that this negligence had directly caused the damages suffered by the plaintiff. Therefore, choice B, which states that the auditor's failure to perform a proper audit caused the damages, is the best answer.

Question 10

An auditor who is approached by their accounting body to undergo a quality control audit must:
A)provide audit files to the investigators without delay.
B)obtain the client's permission to disclose information to the investigators prior to giving them any information.
C)cooperate in every way without delay.
D)disclose to the investigators any potential quality control problems that the member is aware of.

Accepted Answer

The answer of An auditor who is approached by their...

Question 11

The mandatory continuing professional education (CPE) requirement for members of Chartered Accountants Australia and New Zealand is:
A)120 CPE hours every year.
B)120 CPE hours every three years.
C)60 CPE hours every three years.
D)60 CPE hours every year.

Accepted Answer

Members of Chartered Accountants Australia and New Zealand are required to complete 120 CPE hours every three years to maintain their membership and ensure they remain up to date with professional standards and practices.

Question 12

Cases that have allowed the auditor to use the defence of contributory negligence include:
A)Kingston Cotton Mill.
B)Pacific Acceptance.
C)AWA.
D)None of the given answers are correct.

Accepted Answer

The AWA case is a notable example where the defense of contributory negligence was successfully used by auditors.

Question 13

The Pacific Acceptance case established that:
A)reasonable care and skill means following the auditing standards.
B)auditors have a duty to closely supervise and review the work of inexperienced audit staff.
C)auditors are only liable for the proportion of damages attributable to their actions.
D)auditors have a duty of care only to the shareholders as a group.

Accepted Answer

The Pacific Acceptance case is significant in the field of auditing because it established that auditors have a duty to closely supervise and review the work of inexperienced audit staff. This case highlighted the importance of oversight in the auditing process to ensure the accuracy and reliability of financial statements.

Question 14

When performing an audit, an auditor would most likely be considered negligent if they failed to:
A)detect all of the client's fraudulent activities.
B)include a negligence disclaimer in the client engagement letter.
C)warn the client of any known internal control weaknesses.
D)warn the client's customers of embezzlement by the client's employees.

Accepted Answer

As part of an auditor's responsibility, they are required to inform their clients of any known internal control weaknesses in a timely manner. If an auditor fails to do so, they can be found negligent as it could result in losses or damages to the client's business. Detecting all of the client's fraudulent activities is also an important responsibility, but auditors may not always be able to detect every instance. Including a negligence disclaimer in the client engagement letter is not sufficient to absolve an auditor of liability for negligence. It is not the responsibility of the auditor to inform the client's customers of embezzlement by the client's employees.

Question 15

Big Ltd wished to acquire the ordinary shares of Small Pty Ltd and engaged Albert & Associates to audit the financial report of Small Pty Ltd.Albert & Associates failed to discover a significant liability when performing the audit.In a common law action against Albert & Associates, Big Ltd, at a minimum, must prove:
A)negligence on the part of Albert & Associates.
B)fraud on the part of Albert & Associates.
C)that Albert & Associates knew that the liability existed.
D)All of the given answers are correct.

Accepted Answer

To succeed in a common law action against Albert & Associates, Big Ltd must prove that the audit firm was negligent in failing to discover the significant liability. They do not need to prove fraud or that Albert & Associates knew about the liability. Therefore, option A is the best choice.

Question 16

Within the context of quality control, the primary purpose of continuing professional development and training activities is to enable an audit firm to provide personnel with:
A)knowledge required to fulfil assigned responsibilities.
B)technical training that assures proficiency as an auditor'.
C)professional education to ensure that audit work is performed with due professional care.
D)knowledge required to perform a peer review.

Accepted Answer

Continuing professional development and training activities are primarily aimed at equipping personnel with the necessary knowledge to fulfill their assigned responsibilities effectively.

Question 17

To which of the following parties does the auditor owe a duty of care under contract?
A)The company itself.
B)The board of directors.
C)Shareholders as individuals.
D)Potential investors.

Accepted Answer

The auditor owes a duty of care under contract to the company itself as they are hired and paid by the company to audit its financial statements. The auditor's responsibility is to provide an independent opinion on the accuracy of the company's financial statements for the benefit of the company and its stakeholders. The board of directors, shareholders, and potential investors may benefit from the audit, but the primary responsibility of the auditor is to the company.

Question 18

The primary purpose of establishing quality control policies and procedures for deciding whether to accept a new client is to:
A)enable the audit firm to attest to the reliability of the client.
B)satisfy the audit firm's duty to the public concerning the acceptance of new clients.
C)minimise the likelihood of association with clients whose management lacks integrity.
D)anticipate before performing any fieldwork whether an unmodified opinion can be expressed.

Accepted Answer

Quality control policies and procedures for accepting new clients are primarily established to minimize the risk of association with clients whose management lacks integrity. This ensures that the auditor is not associated with clients who may compromise their independence, objectivity, and professional skepticism. While the other options may be relevant in quality control, they are not the primary purpose of establishing policies and procedures for accepting new clients.

Question 19

A basic objective of an audit firm is to provide professional services in conformance with professional standards.Reasonable assurance of achieving this basic objective is provided through:
A)continuing professional education.
B)a system of quality control.
C)compliance with Australian Securities Exchange listing requirements.
D)a system of peer review.

Accepted Answer

A system of quality control is the most relevant way to ensure that the audit firm is able to provide professional services in conformance with professional standards. This system includes policies and procedures that are designed to ensure that audits are conducted in accordance with professional standards and applicable legal and regulatory requirements. Continuing professional education, compliance with Australian Securities Exchange listing requirements, and a system of peer review are also important, but they are not as integral to providing reasonable assurance of achieving the basic objective of the audit firm.

Question 20

Common law requires that the auditor:
A)guarantees their work.
B)performs their work with due care.
C)discovers all fraud.
D)checks all transactions.

Accepted Answer

Common law requires auditors to perform their work with due care, which means that they must exercise a reasonable and prudent level of skill, care, and diligence in performing audit services. While auditors strive to detect fraud, they are not required to guarantee their work or uncover all instances of fraud. Additionally, auditing procedures are designed to provide reasonable assurance, but not absolute assurance, that financial statements are free from material misstatement. Auditors cannot check all transactions due to time constraints and the concept of materiality.

Quiz 2: Audit Regulation, Structure of the Profession and Auditors Liability

The AWA case established that:

In the Caparo case, the court held that the auditor owes a duty of care to:

An auditor can be sued for damages under which of the following Acts?

In pursuing the audit firm's quality control objectives, the firm may maintain records indicating which partners or employees of the firm were previously employed by the firm's clients.Which quality control objective would this be most likely to satisfy?

Contributory negligence:

An auditor's duty of care to a client would most likely be breached if the auditor failed to:

Due professional care does not require:

The court found that Roberts & Associates had performed a negligent audit of Pinnacle Ltd, but the plaintiff did not receive damages because the court found insufficient proof of causation.Causation means that:

An auditor who is approached by their accounting body to undergo a quality control audit must:

The mandatory continuing professional education (CPE) requirement for members of Chartered Accountants Australia and New Zealand is:

Cases that have allowed the auditor to use the defence of contributory negligence include:

The Pacific Acceptance case established that:

When performing an audit, an auditor would most likely be considered negligent if they failed to:

Within the context of quality control, the primary purpose of continuing professional development and training activities is to enable an audit firm to provide personnel with:

To which of the following parties does the auditor owe a duty of care under contract?

The primary purpose of establishing quality control policies and procedures for deciding whether to accept a new client is to:

A basic objective of an audit firm is to provide professional services in conformance with professional standards.Reasonable assurance of achieving this basic objective is provided through:

Common law requires that the auditor: