Week 2 Flashcards
(4 cards)
📋 Q: What are the six specific rule violations under the CPA Code of Professional Conduct?
A:
1. Advertising (Rule 217): Must not claim superior skills unless they can be substantiated.
2. Solicitation (Rule 217.2): Prohibited from soliciting another accountant’s client; advertising must align with the profession’s high standards.
3. False or misleading information (Rule 205): Must not associate with or sign off on anything materially false or misleading, even with a disclaimer.
4. Commission/referral fees (Rule 216): Not allowed to pay or receive commissions or compensation for client referrals.
5. Contingent fees (Rule 215): Not permitted for services where payment depends on achieving a specific result.
6. Predecessor communication (Rule 302): Must contact the predecessor CPA before accepting an engagement to assess any relevant concerns.
📋 Q: What is the role and composition of the audit committee in corporate governance?
A:
The audit committee is a subcommittee of the board of directors that strengthens accountability between management, the board, and the external auditors. It enhances audit quality and independence by providing a direct line of communication between the auditor and the board, excluding management.
Key responsibilities:
-Oversee the financial reporting process to ensure accuracy and integrity.
-Review the external audit plan and results.
-Monitor internal controls and risk management.
-Assess auditor independence and effectiveness.
-Meet privately with the auditors.
-Select external auditors and recommend their appointment for shareholder approval.
Composition and requirements:
🔴 Mandatory for publicly accountable enterprises.
🔴 Must include at least three independent directors who are financially literate.
Q: 🔹 What are the key concepts related to auditor’s legal liability (before considering legal defenses)?
A:
🔸 Auditors must exercise due care: follow standards, document work, and be diligent
🔸 Liability can arise from:
* Contract law (to clients) — breach of engagement terms
* Tort law (to clients or third parties) — negligence = duty of care, breach, loss
🔸 For third-party liability, auditor must have known or should have known that the third party would rely on the statements
🔸 Third-party lawsuits are often riskier due to higher damages (e.g., investor losses, market cap drops)
🔸 Key factors affecting liability:
* Was reliance foreseeable?
* What was the intended purpose of the audit report?
Q: 🔹 What are the key steps and considerations in the client acceptance and continuance process for auditors?
A:
🔸 Three key steps:
* Assess client integrity
* Assess auditor’s ability to meet ethical/competence requirements
* Auditor prepares and obtains signed engagement letter
🔸 Engagement letter (per CAS 210) outlines:
* Audit scope and responsibilities
* Financial reporting framework
* Expected form of audit report
🔸 In assessing client integrity, auditors consider:
* Reputation of management and directors
* Reason for auditor change
* Risk attitudes and control environment
* Accounting rule interpretations
🔸 Ethical considerations:
* Identify threats to independence or competence
* Consider safeguards
* Decline if threats can’t be mitigated
