Question 1

Simean & Co, a firm of CPA's, issued an unqualified audit report for its client, Xiing Manufacturing Corporation, a footwear manufacturer in Asia. Xiing Manufacturing, listed its head office in Toronto, Ontario, and its sharwere traded on a Canadian Stock Exchange. Besidthe shareholders, Simean & Co. knew the company was in the process of refinancing a significant bank loan coming due, and the bank was anxious to see the year end results. After an unqualified audit report was issued, the regulator of the stock exchange halted the trading of the sharafter allegations of management fraud came to light. As a result, the share price plummeted and the company went out of business. 
Required: 
(a) To whom did Simean & Co. owe a duty of care? 
(b) What must the bank demonstrate to establish negligence? 
(c) What are the defencavailable to Simean & Co?

Accepted Answer

The answer of Simean & Co, a firm of CPA's,...

Question 2

Auditors can avoid litigation by:

Accepted Answer

Ensuring compliance with ethical regulations and training their staff and regularly updating their knowledge can help auditors avoid litigation by increasing the accuracy and effectiveness of their audits. Additionally, meeting with the client's nomination committee to discuss any significant audit issues can help prevent misunderstandings or disputes that could lead to legal action.

Question 3

Describe the three categoriof safeguards to an auditor's independence.

Accepted Answer

The answer of Describe the three categoriof safeguards to an...

Question 4

An auditor's assessment of their client's integrity would not include:

Accepted Answer

The assessment of the client's integrity would not include whether the auditor has sufficiently competent staff to complete the audit. This would fall under the assessment of the auditor's own resources and capabilities, rather than the client's integrity. The other options, including the client's attitude towards audit fees, risk exposure, and management, as well as the reputation of the client and its management, would all be factors considered in assessing the client's integrity.

Question 5

Explain the five fundamental principlof professional ethics.

Accepted Answer

The answer of Explain the five fundamental principlof professional ethics....

Question 6

The principlestablished by Justice Moffitt in the Pacific Acceptance case do not include:

Accepted Answer

The answer of The principlestablished by Justice Moffitt in the...

Question 7

Audit committehave been widely recommended as being an important mechanism for enhancing the external auditor's independence. What are the important characteristics of audit committeand discuss why these characteristics are considered so important to a committee's effective and efficient operation.

Accepted Answer

The answer of Audit committehave been widely recommended as being...

Question 8

For each of the following, indicate if there is a threat to independence. If so, state the threat and a possible safeguard. 
(a) John Schmidt, CPA, CA, is unaware that his audit client, Franks Spa and Pool Co. makup 20% of John Schmidt firms revenues. 
(b) JamPara goto his assurance client, Bob's Autosalto buy a used car for his daughter. Due to their business relationship, Bob offers Jama vehicle below cost.
 (c) Jack Jacobs has been auditing Bob's Pool and Spa Limited for many years. Bob's Pool and Spa Limited has been experiencing financial difficultiand has not been able to pay its audit fefor the last three years. Bob's now owJack Jacobs $50,000 in assurance fees. 
(d) Frank Fargo has three review engagements. One of the review engagements is done for Sangha Meatshop Ltd., which is 80% owned by his father-in-law, Sanchez Sangha. The remaining 20% of the Meatshop is owned by Sanchez's four children.

Accepted Answer

The answer of For each of the following, indicate if...

Question 9

Under tort law, to prove that an auditor has been negligent the plaintiff must establish:

Accepted Answer

To prove that an auditor has been negligent, all three elements must be established. The plaintiff must prove that the auditor owed a duty of care to the plaintiff, that the auditor breached that duty of care, and that this breach caused the plaintiff to suffer a loss. Therefore, all options A, B, and C are necessary to prove negligence under tort law.

Question 10

The key difficulty for third partiin legal action against auditors has been establishing that a duty of care was owed to them by their auditor. Explain the development of the relevant legal principlrelating to an auditor's duty of care to third partiwith reference to specific case law.

Accepted Answer

The answer of The key difficulty for third partiin legal...

Question 11

For the following scenarios, state the violation(s) to the Rulof Professional Conduct: 
(a) Bill Williams, CPA, began a telephone campaign to grow his client base. He began calling companilisted in the telephone directly within a twenty mile radius advising them of his accounting services. After making several phone calls, Bill finally landed a new audit client, Big Bob's Autosaland Leasing Ltd. In order to secure this new business, Bill entered into an agreement with Big Bob whereby Bill would receive a flat fee every time he referred one of his clients to Big Bob's. He would also earn a 1% percent commission on any vehicle sale or lease that resulted from the referral. As their business relationship grew overtime, Bill asked Big Bob for a loan claiming he wanted to expand his accounting practice. He in fact took the funds for his own personal use without advising his client. 
(b) Paul Lee, CPA, was the CFO of ABC Incorporated. In his role as CFO, he became aware of a material error in the company's inventory for the annual financial statements in the amount of approximately $1.5 million. Paul brought the matters to the attention of senior management, who casually indicated that year end was already completed and thus they did not want to harm investor confidence by reissuing the financial statements, but Paul did not seek assistance or guidance from either the professional body or the securiticommission. 
(c) David Collier, CPA, obtained his designation in 2000. Since that time, he has built up a significant tax practice. In late 2015, a new client approached David and asked him to perform an audit engagement. Believing this could lead to a substantial amount of tax work in the future, David agreed, even though he had not taken any accounting or assurance coursfor many years. In performing the audit engagement, David obtained an engagement letter, put the financial statements together based on the clients trial balance, and attached a review engagement report. The financial statements contained a material error.

Accepted Answer

The answer of For the following scenarios, state the violation(s)...

Question 12

Indicate whether you agree or disagree with the following statements and explain your reasoning.
a) To ensure that it is independent of prospective and continuing clients, an audit firm must review the threats to independence, and make certain that safeguards are put in place to limit or remove those threats.
b) The final stage in the client acceptance and continuance decision process involves assessing independence threats.
c) By signing the engagement letter, management is not necessarily considered to be responsible for the financial statements.
d) To successfully sue an auditor, a plaintiff must only prove that a duty of care was owed by the auditor.

Accepted Answer

The answer of Indicate whether you agree or disagree with...

Question 13

Explain the purpose and major contents of an engagement letter between the auditor and their client.

Accepted Answer

The answer of Explain the purpose and major contents of...

Question 14

The final stage in the client acceptance and continuance decision process involves:

Accepted Answer

The final stage in the client acceptance and continuance decision process involves preparing an engagement letter, which outlines the scope of the audit, the responsibilities of both the auditor and the client, and other terms and conditions of the engagement. The other options listed may be steps in the decision process, but they are not specifically related to the final stage.

Question 15

Independence is considered one of the key characteristics of auditors. Explain why auditor independence is so important to the effectiveness of an audit and explain the various threats to an auditor's independence. CASE

Accepted Answer

The answer of Independence is considered one of the key...

Question 16

Distinguish between independence of mind and independence in appearance.

Accepted Answer

The answer of Distinguish between independence of mind and independence...

Quiz 2: Ethics, Legal Liability and Client Acceptance