Unit 2

Question 1

What are the code of conduct fundamental ethic principles?

Answer 1

o Integrity - Strightforward & honest
o Objectivity - no preference or bias
o Professional Competence & Due care -
• Must maintain knowledge and skill at level required by professional body and keep up with changes in regulations and standards.
• Must act diligently taking care to complete each task thoroughly, document all work and finish on a timely basis.

o Confidentiality - Refrain from disclosing information
o Professional Behavior - Comply with rules

Question 2

What are rules and principles of professional ethics?

Answer 2

• Fess & Pricing - Fee is provided only when requested by potential client.
• Advertising - must be in good taste
• Contact with predecessor audtior -
  o Prior to accepting new engagement, auditor is required to contact predecessor auditor.
  o Must ask predecessor if there is any reason why the engagement cannot be accepted.
  o Answer will be a yes or no unless they are given permission to disclose information.
• Firm Names - cannot be misleading

-professional conduct -
o If auditor is aware of accountant that has breached rules of professional conduct the auditor must inform institute of breach.

-Independence

Question 3

What is Independence?

Answer 3

Acting with integrity, objectivity, and professional skepticism.

Question 4

What are the two forms of independence?

Answer 4

 Independence in fact (of mind):
• Known as actual independence
• Ability to act with integrity, objectivity, and professional skepticism
• Ability to make decision free from bias, personal beliefs, and client pressures
 Independence in appearance
• Belief that independence has been achieved
• Must be independent in appearance and in mind

Question 5

What are the threats to independence?

Answer 5

• Self interest
• self review
• advocacy
• familiarity
• intimidation

Question 6

What is the self interest threat?

Answer 6

o Occurs when firm or staff have financial interest in an assurance client

Question 7

What is the self review threat?

Answer 7

o Can occur when assurance team forms opinion of own work or work performed by others in their firm

Question 8

What is the advocacy threat?

Answer 8

o Can occur when an accounting firm or assurance staff acts, or is believed to act on behalf of assurance client

Question 9

What is the familiarity threat?

Answer 9

o Occurs when a close relationship exists between assurance firm and client.
o Assurance team becomes to sensitive to needs of client and loses objectivity.

Question 10

What is the intimidation threat?

Answer 10

o Can occur when member of assurance team feels threatened by client. Unable to act objectively as they believe there will be negative consequences.

Question 11

What are reporting issuers?

Answer 11

• Are Public companies with a market capitalization and book value of total assets more than $10 million
• Audit partners must be rotated every 7 years with a 5-year break from engagement

Question 12

What is a safeguard and who develops them?

Answer 12

o Safeguards are mechanisms developed by accounting profession, legislators, regulators, clients, and accounting firms
o Used to minimize risk that a threat will surface and deal with existing threats

Question 13

When can an auditor be found negligent? What must be established to prove negligence?

Answer 13

• Did not exercise due care
• • To be found negligent, it must be established that:
  o A duty of care was owed by the auditor
  o There was a breach of duty of care
  o Loss was suffered because of that breach

Question 14

What is an engagement letter?

Answer 14

o Is a form of contract between auditor and client and outlines the obligations of both parties.
• Letter aims to prevent misunderstandings between auditor and the client.

Question 15

What is in an engagement letter?

Answer 15

o Explanation of scope of audit.
o Summary of responsibilities of management and auditor.
o Identifies applicable financial reporting framework.
o References the expected for and content of the audit report.

Question 16

What are factors for client acceptance?

Answer 16

o Purpose for FS and who will be relying on them:
 Helps us assess the risk and whether we want to go through with it
o Industry Regulations:
 Need to determine if auditors have expertise to follow regulations and identify if the client is following them.
o Auditors ability to perform the work regarding resources:
 Must have necessary resources and ability to perform in timely matter.
o Reputation of client and management:
 Help auditor assess client’s integrity. Lack of integrity then will not accept.
o Accounting framework applied:
 Need expertise in the framework to perform work
o Independence:
 Need to be independent in mind and appearance
o Limitations that may result in not enough evidence:
 Help determine if a modified opinion is likely and whether to take it on.
o Financial stability:
 How stable are they and is it a good idea to accept if pay isn’t likely.
o Relationships with predecessor auditors:
 Important to ask predecessor whether they can accept or not.