Exam 3: Professional Ethics and Legal Liability

Fabio recently sold his restaurant for $650 000,the value of the net assets as reported on the balance sheet.After the sale,Fabio realized that he could have sold the restaurant for as much as $950 000 as the fair value of the assets was $300 000 higher than what was reported on the balance sheet.Fabio is suing the auditors for his loss.The auditor's best defence is

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?

Musical Productions Limited has had declining sales as more and more media are being presented online rather than on CD or DVD.It diversified its business by moving into backup systems,but is still having trouble boosting income. The audit team was led by Theresa Sanford,who obtained her CPA last year.Theresa had two assistants,Marv and Uhta,who did the work in the accounts receivable and inventory areas.Theresa felt that they did not require supervision,as they had been with the firm for two years and were expected to do well on their professional exams this year.Marv found that the accounts receivable had many old accounts and customers were difficult to contact.Accordingly,he decided to accept management's representations with respect to the balances.Similarly,Uhta noted that there were still many CDs in inventory that had been there for over three years.Management insisted on recording these at cost.Uhta accepted managements' valuation. Two months after the audit report was issued,Musical Productions Limited went bankrupt.It was found that many accounts receivable were for fictitious customers and the receiver was only able to obtain five cents on the dollar for the inventory,which was sold as scrap. The bank is suing the auditors to recover its bank loan,which had been renegotiated based upon the results of the financial statements. Required: Will the bank be successful in its suit? Why or why not? B)Do you believe that the auditor will lose the suit? Why or why not?

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

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

"Independence" in auditing means

Winston Chang,a PA,conducted the audit of Manra Manufacturing Ltd. ,a small company that produces a variety of machined parts for the automotive and computer industries.The audit showed that the company produced a small profit after paying the owners of the company a high salary.Manra was purchased by a competitor,Cheblay.Cheblay had hoped to produce efficiencies by combining the two companies but was unable to do so.Cheblay sued Chang because it relied upon the financial statements when purchasing the company's shares,claiming that the machines,which were about fifteen years old,had been overvalued.The machines were recorded at cost,which was below net realizable value.What is the auditor's best defence?

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

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

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

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 familiarity threat at an audit engagement occurs when

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

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

Which portions of the code of professional conduct are enforceable?

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

The leading precedent-setting case in third-party liability was a 1931 U.S.case,Ultramares v.Touche.What is the key aspect of this case?

Most accounting and auditing professionals agree that when an audit has failed to uncover material misstatements,and the wrong type of audit opinion is issued,the audit firm

The requirement for an attitude of professional skepticism means that the auditor should

Bigland and Betton,PAs,is being sued by a bank for potential negligence during an audit engagement that was completed over five years ago.Which of the following actions during that audit engagement will help ensure that the suit is fairly assessed?