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Exam 3: Professional Ethics and Legal Liability

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Question 21

Multiple Choice

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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

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

E) A) and B)
F) None of the above

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Question 22

Multiple Choice

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

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

E) A) and D)
F) None of the above

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Question 23

Multiple Choice

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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

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

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

Ethical dilemmas occur when

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.

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

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

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?

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.

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

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?

To ensure that employees remain independent,an audit firm should

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

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

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

What is an ethical blind spot?

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

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