Q&A Hero

Q: The assessment against a defendant of the full loss suffered by a plaintiff regardless of the extent to which other parties shared in the wrongdoing is called A) separate and proportionate liability. B) joint and several liability. C) shared liability. D) unitary liability.

Q: Laws that have been passed through federal or provincial governments are A) statutory law. B) judicial law. C) criminal law. D) common law.

Q: An example of a breach of contract would be A) a bank's claim that an auditor had a duty to uncover material errors in financial statements that had been relied on in making a loan. B) an auditor's refusal to return a client's records until the client paid last year's audit fees. C) a public accounting firm's failure to deliver a tax return on the agreed-upon date because the firm had a backlog of other work which was more lucrative. D) an auditor's failure to complete the audit by the agreed-upon date because the client's financial records had been destroyed.

Q: A bank sues the auditor after making a loan to Klaxxon, a company that went bankrupt. The bank indicates that they relied on the year-end financial statements of Klaxxon to make the lending decision. The bank analyst indicates that the audit opinion was unqualified so he assumed that Klaxxon was a going concern. The auditor defends himself by referring to a note disclosure in the financial statements about the company's economic dependence on one buyer, Dexters Corp. Dexters Corp had experienced some significant financial trouble for the past year and went bankrupt 3 months after the financial statements of Klaxxon were released. The PA's liability is likely A) contributory negligence. B) fraud. C) breach of contract. D) gross negligence.

Q: An auditor would be found negligent if he/she A) relied on a report from management without considering management integrity. B) relied on a report that contained errors that had been concealed by management. C) did not consider the expenses from a division due to management intentionally withholding that information. D) failed to discover a payroll fraud by testing a statistical sample of transactions in the salary expense account.

Q: The PA is having a discussion with his client about the outcome of several lawsuits that are presently in progress. The client has requested that the comments during the discussion be removed from the audit file. The client would like the only documentation in the audit file to be the legal letter from the client, and brief comments with respect to the auditor's judgments with respect to the quality of disclosure in the financial statements. The client is concerned that A) only high quality audit working papers be included in the working paper files. B) auditors may breach confidentiality and disclose information about the client. C) the auditor's working paper files may be subpoenaed by the courts. D) the audit firm does not have adequate quality control procedures.

Q: During the audit engagement, the primary auditor may rely on other individuals, such as specialists, other auditors and internal auditors (secondary auditors). The primary way to defend the auditor against negligence should such other individuals conduct poor quality work is whether the A) other individuals were professionals with recognized credentials. B) primary auditor conducted sufficient quality control work with respect to the secondary auditor. C) secondary auditor had ever been sued before. D) the appropriate level of materiality had been used during the conduct of the engagement.

Q: An individual PA sets up his or her own business as a sole practitioner. With additional practitioners, a common structure is a partnership. Why would a large firm set up its organizational structure as a limited liability partnership (LLP)? If the audit was conducted in accordance with GAAS A) partners not on the engagement would not be liable on their personal assets. B) improved quality control practices can be initiated using technical personnel. C) more formal reporting requirements are in place to federal tax authorities. D) partners are liable for only a limited portion of their personal assets when sued.

Q: The standard of due care to which the auditor is expected to be held is referred to as the A) prudent person concept. B) common law doctrine. C) due care concept. D) reckless regard doctrine.

Q: There is agreement within the auditing profession and the courts that the auditor is A) not a guarantor or insurer of financial statements. B) a guarantor but not an insurer of the statements. C) an insurer but not a guarantor of the statements. D) both a guarantor and an insurer of the financial statements.

Q: Most of the major lawsuits against public accounting firms have dealt with A) audited or unaudited financial statements. B) disputes over income tax preparation services. C) disputes arising in the performance of management consulting services contracts. D) unaudited financial statements.

Q: If the public accountant negligently failed to properly prepare and file a client's tax return, the public accountant can be held liable for A) the penalties which the client owes Canada Customs and Revenue Agency. B) the penalties and interest which the client owes. C) the penalties and interest, plus the tax preparation fee which the public accountant charged. D) the penalties and interest, the tax preparation fee, and the amount of tax which was underpaid.

Q: PA has been recently appointed auditor of Foible Ltd., a company that sells high cost knickknacks to third world countries. To facilitate the rapid preparation of the financial statements, management had the physical inventory counted in October, rather than at the December year end. During the inventory count, PA noticed that several of the boxes were labelled with receiving documents from a competitor. PA was told that the new warehouse supervisor worked part time at the competitor, and must have picked up the wrong boxes. Several employees have sued Foible Ltd. for wrongful dismissal, claiming that they were promised a job that would last at least one year, with low cost accommodations as well. They are suing for the balance of the year's wages and claiming that they were brought into the country under false pretenses. These employees are all from an eastern European country. The law firm has responded in the legal letter that this suit is without merit. During the year Foible obtained legal services from a firm in which the Chairman of the Board of the company is a partner. Fees and disbursements for these services for the year was $125,000, a material amount. During the audit, employees often spoke in a foreign language among themselves before responding to PA, then one employee would respond after some often heated discussion. Subsequent to the year end, the warehouse supervisor was arrested on criminal charges of theft, and Foible charged with selling stolen goods. PA was charged as an accomplice to money laundering, as all of the management for Foible were members of a criminal group laundering money from eastern Europe. Required: Discuss the actions that PA could have taken during the engagement to prevent these charges.

Q: There are four major sources of auditor's legal liability. Briefly summarize the four sources.

Q: For each of the following independent situations, state whether the PA would be considered to have a fiduciary duty. Justify your response. A) Juan is conducting a review engagement for the fifth year for Mini Market Greenwood Limited. B) Lisa is working as a temporary controller at Middle Manufacturing Co. while the controller recovers from surgery. C) Mark is managing the assets of a ten year old buy whose parents were killed in a car accident. Mark has signing authority on cheques and makes investment decisions.

Q: Conflict between financial statement users and auditors often arises because of the A) high cost of performing an audit. B) extremely technical vocabulary which the auditor uses in the report. C) placement of the auditor's report in the back of the client's annual report where it is hard to locate. D) expectation gap.

Q: An example of an audit failure is that the A) auditor issues an erroneous audit opinion as the result of a failure to comply with the requirements of GAAS. B) audit opinion is qualified. C) company files for bankruptcy less than 12 months after receiving an unqualified opinion. D) auditor issues an erroneous audit opinion as the result of an undiscovered fraud that took place in the period being audited.

Q: When the 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 A) business failure. B) audit failure. C) audit risk. D) business risk.

Q: Amin is distraught. There is a big box stereo store that opened just down the block from his independent stereo and music business six months ago, and he is unable to continue operating his business. Only eight months ago, you issued an unqualified audit opinion on his financial statements, which 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.

Q: 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 A) known third party liability. B) client liability. C) liability under provincial securities law. D) criminal liability.

Q: Canadian PAs are required to have controls in place to identify and track suspicious transactions and comply with the reporting requirements of the Proceeds of Crime and Terrorist Financing Act. This Act requires PAs to report to FINTRAC any A) cash payment of $10,000 or more. B) cash payment of $100,000 or more. C) transaction of $1,000 or more from clients suspected of being terrorists. D) cash payment to a related party.

Q: What situation represents a fiduciary duty? A) A professional accountant acts as a director of an organization. B) A professional accountant performs an audit. C) The owner of a private company prepares financial statements. D) A professional accountant performs a non-assurance engagement.

Q: In rare cases, auditors have been held liable for criminal acts. A criminal conviction against an auditor can result only when it is demonstrated that the auditor A) was negligent. B) was grossly negligent. C) intended to deceive or harm others. D) caused a financial loss to an innocent third party.

Q: While performing services for their clients, professionals have always had a duty to provide a level of care which is A) reasonable. B) greater than average. C) superior. D) guaranteed to be free from error.

Q: Auditing, 12e (Arens) 4.1 Explain how sources of legal liability are related to a distinction between business failure and audit failure

Q: How do quality control processes for the financial statement audit process incorporate consideration of legislation that affects the client? A) requiring second partner review of all working partners that relate to legislative matters B) provide auditors with copies of legislation that affects their client C) train all auditors in legislation details that could affect all clients D) include in audit checklists questions that address relevant new legislation

Q: Sandra is a new partner at a PA firm. Sandra recently signed a new contract with Gretchen Fabrics to become its auditor. In the process of accepting the client and planning the first year's audit, Sandra did the following: - Sandra contacted the previous auditor to enquire if there were any reasons not to accept the audit of this client. Unfortunately, the previous auditor was on vacation and did not respond to Sandra before she accepted the client. - Upon his return, the previous auditor did communicate with Sandra and indicated that the client had aggressive expense deferral policies that they disagreed on. Sandra asked to review the working papers of the previous auditor with regards to these expenses and found them to be right below the materiality threshold. - Gretchen Fabrics imports most of its fabrics and has two production facilities in Asia. The company therefore has a complex tax structure and many import duties. Since this is not the area of expertise of Sandra, she asked another auditing firm to provide the required audit procedures for the international taxes and duties expense. When selecting the other audit firm, Sandra researched the firm on the internet. She also ensured that they had their professional designation and enquired with the CICA and provincial association if the firm had any complaints or litigation outstanding for malpractice. - Since the bidding process took time, Sandra had to start the audit almost right after learning she had the winning bid. She did not prepare an engagement letter before starting the work. She does not see this as being a problem since waiting until the audit has begun will provide her with a better idea of what work has to be done and what the engagement letter should include. Required: Identify the good and bad steps that Sandra has undertaken in reducing her exposure to legal liability.

Q: A) Describe some of the steps the CICA and the accounting profession as a whole can and are taking to reduce the practitioner's exposure to lawsuits. B) Describe some of the steps individual practising auditors can take to minimize their legal liability.

Q: There are a number of things that the practising auditor can do to reduce the liability in lawsuits. One of them is to A) lobby for changes in laws. B) carry adequate insurance. C) establish peer review requirements. D) revise auditing standards to meet the changing needs of society.

Q: Danford, PA, is setting up his accounting firm as a sole practitioner. Which of the following is an important way that Danford can reduce legal liability with respect to the work completed by his office? A) participate in the standard setting process for audit engagements B) find out when his practice is due for practice inspection C) hire only qualified personnel and train them well D) sanction other PAs who engage in improper conduct

Q: There are a number of things that the CICA, representing the profession as a whole, can do to reduce the practitioner's exposure to lawsuits. One of them is to A) sanction members for improper conduct and performance. B) deal only with clients possessing integrity. C) hire qualified auditors and train and supervise them. D) perform quality audits.

Q: One of the lessons learnt from accounting scandals such as Enron is that generally accepted accounting principles (now under an acceptable financial reporting framework) cannot be relied upon exclusively in deciding whether financial statements are fairly presented. Why is this the case?

Q: Bigland and Betton, PAs, is being sued by a bank for potential negligence during an audit engagement which was completed over five years ago. Which one of the following actions during that audit engagement will help ensure that the suit is fairly assessed? A) good quality documentation B) honest management at the client C) low employee turnover D) good employee memory of events

Q: Individuals who accept fees (or property), should they know or be willfully blind to the fact that the property was obtained illegally can be charged with money laundering, a criminal offence. Which of the following techniques will help a PA prevent such charges? A) ensure that the financial statements are in accordance with an acceptable reporting framework B) require that clients carefully document the sources of their funds. C) carefully assess management integrity. D) obtain a detailed letter of representation from management confirming the sources of their funds.

Q: Xiao, PA, is the audior of Minkle Credit Union, a medium-sized credit union. Xiao has prepared a management letter with several serious control weaknesses. Management agrees with the facts, but does not want to present the letter with the weaknesses to the audit committee or the board of directors. Management has implied that they will request a change of auditors if your firm presents the management letter to the board. Required: Discuss the actions that Xiao should take. Justify your response.

Q: 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.

Q: You are the senior in charge of the accounts receivable section of the audit of a large clothing manufacturer downtown in the clothing district. The client sells to local clothing stores as well as to other retailers in the province. Accounts receivables seem to be deteriorating, with many more accounts in the over 90 days column than in the past. You sent out twenty accounts receivable confirmations, but only six were returned. Of these six, only three confirmed the balance as in agreement with the client, while the others indicated that they kept their records on an open item basis (rather than a balance forward basis) and were unable to respond to the confirmation request. When you looked at the prior year's file, it seemed that the same thing had happened last year. When you phoned the supervisor in charge of the audit engagement, she told you to not bother with follow up, as the engagement was already over budget and costs need to be kept down. You were concerned that you would be unable to state a conclusion with respect to the fairness of the accounts receivable balance and she was really angry with you, saying that she would have to sign off for you then. Required: Discuss the ethical and quality issues raised by this audit engagement.

Q: 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 Explanation: 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 Explanation: 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 Explanation: D) On August 5, 2012, Page Dane, public accountant, issued the audit report on Borhut Corporation's June 30, 2012 financial statements. On August 30, 2012, Borhut paid Page's audit fee with stock rather than cash. Page sold the stock on September 15, 2012, two months prior to the beginning of the planning phase for the audit of the June 30, 2013, financial statements. Violation? Yes No Explanation:

Q: Many PAs prepare tax returns for individuals and for corporations. Under what circumstances is liability insurance required to cover the preparation of tax returns? When A) the PA is a member of a professional accounting association. B) any number of tax returns are prepared, including no charge tax returns. C) fees are being charged and more than a handful of returns are being prepared. D) the bulk of the PA's income comes from preparing tax returns.

Q: The Rules of Professional Conduct require a successor auditor to communicate with the previous auditor. The primary concern in this communication is A) to acquire information which will help the successor auditor determine whether the client management has integrity. B) to learn about the client by examining the predecessor's working papers. C) to enable the successor to perform a more efficient audit. D) to save the successor auditor time and money in gathering data.

Q: PA has been asked to accept the audit engagement of BarneyBlues Corporation. PA sent a letter to the predecessor auditor asking whether there was any reason why he should not accept the engagement. Assuming that the prior year audit went smoothly, what would be an appropriate response by the predecessor auditor? A) Provide a brief statement that there is no reason of which he or she is aware that would prevent accepting the engagement. B) Send a copy of the entire working paper file to PA. C) Telephone PA and say that PA should not take the engagement because the fee charged was too large. D) Send a copy of the tax returns and tax assessments to PA.

Q: For which of the following engagements is a contingent fee permitted? A) An audit engagement of a large listed corporation B) A tax consulting assignment assessing the excise tax payment processes C) A review engagement of a small manufacturing corporation D) An assurance engagement of leasehold payments for a rental agreement

Q: Which one of the following situations is a violation of the professional rules of conduct? PA A) looked the other way when he noticed that one of his firm's accounting staff accepted money from client management. B) resigned so that he could accept a position on the Board of Directors at a major client. C) prepared personal and corporate tax returns for a client and all of its executive officers. D) placed an advertisement in the local paper indicating that she conducted audit engagements for five major insurance companies.

Q: Which one of the following forms of advertisement would violate solicitation rules? PA A) placed an advertisement in a newspaper indicating the opening of a new office. B) conducted a cold-calling campaign where companies were asked if they would like to change PA firms. C) placed a media advertisement listing the different types of expertise available at the firm's major office locations. D) conducted a survey asking companies about the types of services that are provided by their accounting firms.

Q: How is use of an applicable accounting framework enforced via legislation? A) The Canada Business Corporations Act and many provincial incorporating acts require that financial statements be prepared in accordance with the CICA Handbook. B) PAs who do not prepare financial statements in accordance with such frameworks are expelled from their professional association. C) Tax authorities may sue corporations who do not prepare their financial statements in accordance with such frameworks. D) Financial executives may be sued if the financial statements prepared by their company are not in conformance with such frameworks.

Q: What should a PA do if approached by a client where he and his firm lack or do not have access to the technical knowledge required to complete the audit? A) Subcontract the audit to another firm B) Indicate that they can do a review engagement, not an audit C) Decline the new audit engagement D) Conduct the engagement, but prepare a qualified audit report

Q: 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 A) ability to maintain an impartial attitude on all matters that come under the public accountant's review. B) ability to distinguish independently between accounting practices that are acceptable and those that are not. C) ability to be unyielding in all matters dealing with auditing procedures. D) reputation for honesty and fair dealing.

Q: The rules of accounting bodies in Canada require their members to behave in the best interest of the profession and the public. Identify the situation where the accountant is acting in the best interest of the profession. An accountant A) reports a fellow accountant after noticing that the accountant helped a client with tax evasion. B) openly criticizes a fellow accountant's competencies after having lost a bid for a new client. C) brags about his competence and professional title, and encourages clients to invest in a new venture he is starting. D) refuses to cooperate with the new auditor after having lost a client.

Q: The confidential relationship will be violated if, without the client's permission, the public accountant provides working papers about a client to A) a court of law which subpoenas them. B) the relevant provincial institute as part of a practice inspection. C) another public accounting firm which has just purchased the public accountant's entire practice. D) an investigative or disciplinary body of the relevant provincial institute which is conducting a review of the public accountant's practice.

Q: In which of the following circumstances would a public accountant be bound by ethics to refrain from disclosing any confidential information obtained during the course of a professional engagement? A) The public accountant is issued a subpoena that orders the public accountant to present confidential information. B) A major shareholder of a client company seeks accounting information from the public accountant after management declined to disclose the requested information. C) Confidential client information is made available as part of a practice inspection of the public accountant's practice. D) An inquiry by a disciplinary body of a provincial institute requests confidential client information.

Q: For listed clients, the audit committee should approve both the appointment of the auditor and A) all services that the PA firm provides to the client. B) an engagement that might affect the appearance of independence, such as design of control systems. C) any services that are provided for senior management. D) the material that is included in the management letter by the PA firm.

Q: To ensure that employees remain independent, an audit firm should A) ask employees to sign a form confirming that they do not have an investment in a company that they are auditing. B) prohibit an employee from the Toronto office to have an investment in a company audited by the Hong Kong branch of the PA firm. C) include a section in the code of conduct indicating that the employees should not invite their client to dinner. D) refuse an audit mandate where the cousin of a staff member works in the marketing department.

Q: At a small practice where the bulk of the work is accounting, bookkeeping, and review engagements, what is an important procedure that should be followed by the PA to help ensure independence? A) Management should be trained in accounting principles so that they can adequately assess the PAs work. B) All transactions should be prepared and processed by client personnel. C) Transactions and journal entries should be discussed with and approved by the client. D) The accountant should avoid doing bookkeeping for review engagements, and restrict this to compilation engagements only.

Q: Where an independence threat occurs, it may be that only the person affected needs to be removed from the engagement. In this case, other members of the firm can complete the engagement. An example of a situation where only the student or member would be excluded from the engagement is where PA A) has a significant financial interest in the client, such that influence could be exerted. B) used to be a controller at the client, but now works for the PA firm. C) owns ten percent of the shares of the client. D) is a board member of the client with signing authority for cheques.

Q: Some independence rules apply to all assurance engagements, while others apply only to a listed entity. For the purposes of assessing the independence rules, a listed entity is defined as A) an organization with share capital exceeding $10 million that has public accountability. B) an entity whose debt or shares is listed on a stock exchange, with market capitalization and total assets greater than $10 million. C) any organization that has shares or debt listed on a stock exchange. D) an organization that has shares or debt listed on a stock exchange, and that has redeemed shares.

Q: If a PA firm provided corporate finance services to a company during the year, which of the following engagements could the PA firm accept to provide to the same company? A) Non-assurance services B) Audit of listed entity C) Audit of non-listed entity D) Other assurance engagement

Q: An intimidation threat occurs when A) it is difficult to believe the actions of management because there is a suspicion of irregular activity with respect to the recording of transaction activity. B) the auditor suspects that fraud has occurred at the middle management level of the organization. C) the auditor has been working on a client engagement for many years and has trouble believing that management would deceive the auditors. D) a client threatens the firm or its staff with respect to the content of the financial statements or with respect to the conduct of the audit.

Q: Which of the following is the best example of an intimidation threat? Management A) has decided to sue you because the audit fee was twice as high as they expected. B) has changed auditors of all of its subsidiary companies as they can get the audit done for a lower cost. C) threatens to change auditors if you do not let them overstate accounts receivable by $100,000 (the bad debt allowance is too low). D) threatens to resign from the company if the board of directors does not give them a 15% raise.

Q: A familiarity threat at an audit engagement occurs when A) the member has a financial interest in the client. B) it is difficult to behave with professional skepticism. C) PA promotes the client's position to third parties. D) the member discloses financial information about the client.

Q: Which of the following situations best describes a familiarity threat? A) Design and implementation of a new payroll system B) Preparation and entry of bookkeeping transactions C) Completion of corporate transactions for subsidiary companies D) PA has been working with this client for ten years, first as a manager, now as a partner

Q: According to the profession's ethical standards, an auditor would be considered independent in which of the following instances? The A) auditor's chequing account, which is fully insured by CDIC, is held at a client financial institution. B) client comprises 75% of the auditor's fees. C) auditor does not have enough employees to meet the client's reporting deadline. D) client owes the auditor fees for two consecutive annual audits.

Q: Why does a self-review threat pose a problem when conducting an audit engagement? A) The audit can be conducted more efficiently. B) You are auditing your own work, and may not detect inadequacies. C) The audit is more expensive, as you have to provide clear documentation. D) The auditor may not have the expertise to complete the special work.

Q: Which of the following situations would be an example a of self-review threat? Prior to commencing the audit engagement, PA has completed A) personal and corporate tax returns. B) audit of a company where the client owns a minority interest. C) purchase price allocation calculation for a company that the client purchased during the year. D) audit of the non-for profit organization of the client.

Q: Which of the following situations best describes an advocacy threat? PA has been hired to A) consult with the corporate controller and the bank manager about the conditions for financing a loan. B) manage the accounting department for three weeks while the corporate controller is on vacation. C) complete the personal tax returns of all executive management. D) prepare the year end journal entries for a subsidiary company.

Q: Which of the following situations would be an example of a self-interest threat that would prevent a PA from auditing the client? A) The PA's uncle owns the business that the PA is auditing. B) For the last two years, the client could not pay their fees, so the PA created a loan agreement covering the fees, with the client paying 10% interest on the fees. C) The PA has a small bank loan at normal business interest rates with the bank that his firm is auditing. D) The PA has purchased a used car from one of the employees of the client.

Q: When should a PA assess the five threats to independence with respect to an audit engagement? A) When deciding to accept a client or whether to continue an existing engagement B) After signing the engagement letter and before commencing field work C) After the completion of this year's audit, before starting the next engagement D) After a discussion with the Board of Directors

Q: When the users of financial statements have confidence in the independence of the public accountant, it is referred to as independence in A) fact. B) appearance. C) conduct. D) total.

Q: When public accountants are able to maintain an independent attitude in fulfilling their responsibility, it is referred to as independence in A) fact. B) appearance. C) conduct. D) total.

Q: "Independence" in auditing means A) remaining aloof from the client. B) not being financially dependent on the client. C) impartiality in performing professional services. D) being an advocate for the client.

Q: You are having lunch with a former employee of your firm, a friend of yours. Gino had been laid off last year when he had failed to pass his professional examinations for the third year in a row. Gino told you that he managed to obtain a CMA designation in the past year, and has started his public practice. He has been circulating flyers and electronic email announcements with fixed rates: $400 for a compilation engagement, $1,000 for a review, and $5,000 for an audit where revenues are less than $1 million, $15,000 for an audit for a client with revenues up to $5 million. He already has clients to keep him busy for the next three months. He even has some feelers for clients that he personally handled while he was working for your firm - there were a lot of contacts developed during the five years that he was working there! To help attract some of the larger clients, he is considering not charging any fee for the first ten hours spent on tax-related services. Gino ended the conversation by asking you if you would like to join him in his new firm, because at this rate he'll need a second person real soon! Required: Identify the violations in the professional rules of conduct and explain why they are violations.

Q: Raul, PA, received a call from his friend Cristobal Franco. He needed an audit urgently, because the bank might call his loan for his computer store CF Ltd. Since Cristobal had been his high school friend and they still played soccer together every two weeks, Raul agreed. Raul and Cristobal had a quick meeting, where Raul fixed the audit fee at $10,000. Cristobal stressed the importance of an unqualified opinion for the bank. Raul sent two available junior staff to CF's offices. The junior staff were experienced in review engagements, and had been working for Raul for about six months. The two staff had a quick look around the store, noting the documents strewn everywhere. The accounting staff came in and chatted briefly after their smoke break. They were about a month behind on recording transactions, because Cristobal had laid off one sales person. The accounting staff also helped out with providing sales quotes and Cristobal did all of the technical work. At the end of the day, the junior staff were each given a $250 gift certificate to be used in the computer store. This was great, because CF also sold MP3 players and supplies such as CDs and DVDs. At dinner that night, the junior staff told their family that it would probably be a great idea to hold off on any computer supplies or equipment purchases that they needed, since CF would likely hold a sale in the next month or two to improve cash flow. Required: Identify and discuss the violations in the rules of conduct with respect to CF.

Q: 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) Carla is the CFO of Xenon Company. Carla was very happy after her husband Dwayne, a partner at a large PA firm was assigned as the new auditor of the company. Carla is confident that this will be helpful to Xenon since Dwayne already knows so much about the business. Violation? Yes No Explanation: B) Jeremy accepted a summer internship at a PA firm. Jeremy's parents own 0.1% of Raven Inc, a large public company in Austria. Raven Inc. is a client of the Austrian branch of the PA firm. Jeremy reported this to the partner of his office. Violation? Yes No Explanation: C) Ken Burns is a partner at Burns and Fields LLP, a PA firm. Ken was approached by a friend who asked him to invest in Safran Group Inc., a growing high tech company. The proposal would be for Ken to invest $650,000 to obtain 1% of the company. Ken decided to go ahead with the investment because Safran is a client from their Seattle office and he has never provided any services to Safran Inc. Ken indicates that he will ensure that he does not work on the audit of Safran. Violation? Yes No Explanation: D) Sintron Inc. is a payroll processing company. Over the past 5 years, Clarkson Coppers LLP, a PA firm, has outsourced its payroll processing and other human resources tasks to Sintron. Clarkson Coopers LLP is happy to outsource more functions to Sintron as Sintron has asked Clarkson for additional consulting services with regards to system implementation and application of new accounting policies. Violation? Yes No Explanation:

Q: 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 Explanation:

Q: Identify and describe each of the three parts to the Code of Professional Conduct. Also discuss which parts are officially enforceable and which are not.

Q: Discuss the ways the accounting profession and society encourage public accountants to conduct themselves in a professional manner; i.e., the factors that influence the ethical conduct of audit practitioners.

Q: As a member of a professional accounting association, when considering the applicability of the rules of professional conduct, a PA would be responsible for compliance by A) themselves only. B) their partners in the practice and themselves. C) their employees. D) themselves, their employees, and partners.

Q: Generally, all of the rules of professional conduct for CAs apply to A) students in public practice. B) students and members. C) all members. D) members in public practice.

Q: One difference between auditors and other professionals is that most professionals A) need not be concerned about maintaining independence. B) don't have requirements for continuing education beyond university. C) don't have to pass a rigorous examination. D) aren't expected to act in the public interest.

Q: Which portions of the code of professional conduct are enforceable? A) Principles and rules B) The rules of conduct C) Interpretations D) Rules and interpretations

Q: A code of professional conduct typically includes principles, rules of conduct, and interpretations or examples. What is the purpose of the principles? A) state what a practitioner must do for each audit engagement conducted B) provide discussions of the rules of conduct and how they relate to practical situations C) provide minimum standards of ethical conduct stated specifically D) provide ideal standards of ethical conduct stated in philosophical terms