Question 1

There are four major sources of auditors' legal liability.Briefly summarize the four sources.

Accepted Answer

The answer of There are four major sources of auditors'...

Question 2

An investor suing an auditor for not discovering that the financial statements of a company were materially misstated is an example of

Accepted Answer

A) criminal liability. 
B) fiduciary duty. 
C) third party liability. 
D) liability to client under common law.

Question 3

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.

Accepted Answer

The answer of Describe an ethical dilemma that an auditor...

Question 4

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

Accepted Answer

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 5

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

Accepted Answer

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

Question 6

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

Accepted Answer

The answer of Each of the following situations involves a...

Question 7

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

Accepted Answer

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 8

Ethical dilemmas occur when

Accepted Answer

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 9

A bank sues an auditor after having lost a significant amount of money from a loan granted to a client based on the financial statements that contained a material error.The source of the legal liability is

Accepted Answer

A) known third party liability. 
B) client liability. 
C) liability under provincial securities law. 
D) criminal liability.

Question 10

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.

Accepted Answer

The answer of Kimora is a senior manager at a...

Question 11

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

Accepted Answer

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

Question 12

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

Accepted Answer

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

Question 13

To ensure that employees remain independent,an audit firm should

Accepted Answer

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 14

Small Town Lumberyard Limited (STLL)needed an additional bank loan to finance its operations.To make its financial statements look better,the company overstated its inventory and overstated its accounts payable.The auditors did not detect this deliberate misstatement because they conducted limited tests of inventory and did not confirm accounts payable.Other auditors agreed that the procedures conducted during this audit were inadequate.The auditors of STLL would likely be considered to be

Accepted Answer

A) guilty of fraud. 
B) negligent. 
C) contributorily negligent with STLL. 
D) guilty of constructive fraud.

Question 15

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

Accepted Answer

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 16

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

Accepted Answer

The answer of Each of the following situations involves a...

Question 17

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?

Accepted Answer

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 18

What is an ethical blind spot?

Accepted Answer

The answer of What is an ethical blind spot?...

Question 19

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?

Accepted Answer

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 20

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

Accepted Answer

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.

Exam 3: Professional Ethics and Legal Liability