Lec 3

Question 1

which is more profitable, audit or consulting, and why

Answer 1

consulting is more profitable because it is a product which can be sold to multiple clients, while auditing is client specific

Question 2

why are accountants expected to be more ethical than other professions?

Answer 2

because of the three-party accountability model, auditors are paid by the clients but are accountable to the users of the statements

Question 3

how is an auditor different to a lawyer

Answer 3

an auditor is responsible to the final users of the statements not the client, while the lawyer is accountable to the clients

Question 4

do all provinces use the same code of ethics?

Answer 4

yes

Question 5

what are the general ethics described as professional responsibilities?

Answer 5

they are rules and principles for the proper conduct of an auditor

Question 6

list the general ethics rules of an auditor
- auditors must conduct work:

Answer 6

• for the respect and confidence of the public
• which distinguishes professional from general public
• where rules of professional conduct are maintained
• where rules of conduct provide a means of self-policing the profession

Question 7

basic principles of governing conduct

Answer 7

1 - act to maintain the profession’s reputation
2 - use due care and maintain their professional competence
3 - maintain independence in the appearance, as well as the fact
4 - preserve client confidentiality
5 - develop practice based upon professional excellence (reputation)
6 - professional courtesy to other members should be maintained

Question 8

Meaning of acting to maintain the profession’s reputation

Answer 8

should act in a way that maintains the good reputation of the profession and its ability to serve the public interest
- should not be associated with any misleading information or misrepresentation

Question 9

what is the most important principle that accountants must adhere to

Answer 9

serve the public interest

Question 10

does the profession have to maintain a good reputation at all time and what are some examples of what happens when they dont

Answer 10

yes,
e.g. minor offences such as frequent NSF cheques - CPA revoked
e.g. cannot go bankrupt - CPA revoked

Question 11

what does it mean to have professional competence and due care

Answer 11

maintain integrity, use due care and maintain professional competence

Question 12

integrity is the duty to what?

Answer 12

be honest and conscientious in performing professional work

Question 13

what are the three things you need to be free of to be objective?

Answer 13

free of influence, interest, and relationships that worsen your professional judgement

Question 14

what are the two considerations of being independent

Answer 14

be independent in fact and in appearance

Question 15

why is independence in fact difficult to prove and how is it overcome

Answer 15

it is difficult because it is a state of mind, it is solved by being independent in appearance

Question 16

what does it mean to be independent in appearance

Answer 16

to follow the rules and legislation of the profession

Question 17

what are the 5 threats to independence

Answer 17

• self review threat
• self interest threat
• advocacy threat
• familiarity threat
• intimidation threat

Question 18

what must an auditor do if they recognize that a threat might exist

Answer 18

document actions taken or decline the engagement

Question 19

define self review threat and give example

Answer 19

auditor placed in a position where they have to audit their own work
e.g. when you do the record keeping or you help implement an accounting system

Question 20

define self-interest threat

Answer 20

when an accountant has a financial interest in the client or its financial results

Question 21

what are three examples of self-interest threats

Answer 21

• auditor has borrowed from client
• owns shares of the client
• client fees are significant is relation to total income collected by office

Question 22

define advocacy threat

Answer 22

when the firm is promoting the client’s position

Question 23

when is it okay to advocate for a client

Answer 23

when the auditor is testifying in court in behalf of the client

Question 24

define familiarity threat

Answer 24

when it is difficult to behave with professional skepticism

Question 25

what are two ways that aim to avoid familiarity threat

Answer 25

• the one year cooling off period where an auditor cannot work for the client until a year after so that audit practices are not revealed
• partner rotation every 5 years

Question 26

define intimidation threat

Answer 26

client intimidates the firm in respect to contents of the F/S or the conduct of the audit

Question 27

what are examples of intimidation threats

Answer 27

• client threatens to replace audit firm
• client places a maximum fee it will pay which is unrealistic based on the hours

Question 28

how are family interests in the client treated

Answer 28

interests of spouses, dependants, and close relatives are treated as if they were the auditors

Question 29

a member shall NOT be associated with what

Answer 29

shall not be associated with false or misleading financial information

Question 30

define confidentiality

Answer 30

shall not disclose financial information of a client without consent

Question 31

what are the three exceptions when it comes to the confidentiality principle

Answer 31

• CPAB inspects your audit
• courts require information
• when there is disciplinary action against the auditor by the provincial CPA body

Question 32

what can be done if you are in canada and find F/S fraud in regards to stock market regulators (OSC)

Answer 32

you do not need to to report F/S fraud to OSC - just issue a qualified or adverse opinion

Question 33

what can be done if you are in usa and find F/S fraud in regards to stock market regulators (SEC)

Answer 33

MUST report F/S fraud to SEC and issue a qualified or adverse opinion

Question 34

what are contingency fees and are they allowed

Answer 34

fees that are dependent on the result of an audit - these fees are prohibited

Question 35

can auditors receive commission fees

Answer 35

commission fees are prohibited

Question 36

what two professional qualities are used to deal with potential biases

Answer 36

professional skepticism and judgement

Question 37

what are the steps in auditing critical thinking process

Answer 37

• define role in engagement
• identify contentious issues
• understand reasons and motivations for competing positions
• evaluate the arguments
• form a conlcusion based on validity, how strongly the reasons support the conclusion, relevance of the conclusion

Question 38

expectation gap

Answer 38

gap between what the final users expect of the auditors and what the auditors actually perform

Question 39

what are the two types of ethics in the professional environment

Answer 39

general ethics (principles) ad professional ethics (rules)

Question 40

consequentialism:

Answer 40

moral theory that the choice of action is made based solely on the con-sequences, that is, that it maximizes utility; note that economics and busi-ness are based on this theory

Question 41

steps in professional judgement

Answer 41

1. Identifying the crucial issues
2. Gathering information on all the significant assertions
3. Identifying possible alternative courses of action
4. Evaluating the alternative courses of actions
5. Deciding on the best course of action