Test_Bank_for_Auditing_An_International_Approach_7th_Edition__Test_Bank.docx

Test Bank for Auditing An International Approach 7th Edition- Test Bank To Purchase this Complete Test Bank with Answers Click the link Below If face any problem or Further information contact us At Sample Test c3 Student: Which of the following philosophical principles in ethics places emphasis on the importance of following rules rather than on weighing the consequences of actions? A. Kantian principle. 1 . B. Utilitarian principle. C. Consequentialism principle. D. Moral principle. Which of the following philosophical principles of ethics places emphasis on the consequences of action, rather than on following the rules? A. Imperative principle. 2 B. Utilitarianism principle. . C. Generalization principle. D. Moral principle. What is a key characteristic of critical thinking? A. It is a means of eliminating alternatives to arrive at one right answer. 3 B. It requires making the right assumptions to support an argument. . C. It requires a questioning mind. D. It is a means of picking out things wrong with another person’s argument. The goal of the critical-thinking framework reflects . 4 A. independence . B. ideal audit virtues C. skepticism D. ethics What is the meaning of the rule of professional conduct that requires an auditor to be objective? A. The auditor may have a material, indirect financial interest in a client’s business as long as it does not affect his 5 B. The auditor has an obligation to CPA Canada to not use his or her training for personal advantage. . C. The auditor has an obligation to serve the needs of the audit client. D. The auditor must have an attitude of professional skepticism toward an auditee’s management. 6 The CPA Ontario Rules of Professional Conduct contain both general . ethical principles that are idealistic in character and also a . A. list of violations that would cause the automatic suspension of a member’s license B. set of specific, mandatory rules describing minimum levels of conduct required of members C. description of the procedures to be followed by a member who must respond to an inquiry from the disciplina D. list of specific acts discreditable to the profession Which of the following items is the most important principle in the “fundamental statements of accepted conduct”? A. Maintain the reputation of the profession. 7 B. Act with due care. . C. Maintain independence. D. Act with professional courtesy. A complaint has been made against a member for an audit failure. If this complaint is found to have merit, under which CPA Ontario Rule of Professional Conduct is the member likely to be charged? A. 202 Integrity and due care. 8 . B. 204 Independence. C. 210 Conflict of interest. D. 215 Contingent fees. 9 A succinct, but comprehensive definition of independence is that an . auditor . A. must be independent in fact and in appearance in order to maintain credibility B. must not have a direct financial interest in a client C. must have a license to practice as a public accountant D. must not take on as an audit client a company owned by a member of his or her immediate family The familiarity threat refers to . A. becoming too sympathetic to a client’s interests 1 B. providing assurance on one’s own work 0 . C. promoting a client’s position or opinion D. benefiting from a financial interest in a client In the course of performing an audit, an auditor begins dating the CFO of the auditee. What kind of threat to independence might arise? 1 A. Self-review threat. 1 . B. Self-interest threat. C. Familiarity threat. D. Intimidation threat. A client’s management claims that they have to restrict an auditor’s access to a research laboratory to protect the safety of the auditor. This could be an example of a lack of . A. programming independence 1 2 B. investigative independence . C. control independence D. reporting independence According to the profession’s rules of conduct, an auditor would be considered independent in which of the following instances? A. The auditor is the officially appointed stock transfer agent of a client. 1 3 B. The auditor has a personal chequing account in a branch of a client bank. . C. The client has not paid its audit fees for the past three years. D. The client is the only tenant in a commercial building owned by the auditor. How can competence and due care best be described? A. Competence and due care both refer to the PA doing their best for their clients. 1 B. Competence refers to technical ability; due care refers to strictly following official pronouncements of accoun 4 . C. Competence is knowing what do; due care is doing it to the best of one’s abilities. D. Competence and due care both refer to ongoing technical training. Regarding honorary positions in non-profit organizations, which of the following statements is FALSE? A Professional accountants can be honorary directors of charity hospitals, fund drives, symphony orchestra societi . purely honorary. 1 5 B. The professional accountant cannot be identified as an honorary director on letterheads and other literature. . C. The only form of participation is the use of the professional accountant’s name. D. The professional accountant does not vote with the board or participate in management functions. Which of the following statements regarding independence with respect 1 to accounting and other services is FALSE? 6 . A If a professional accountant (PA) performs the bookkeeping and makes accounting decisions for a company and . statements to take primary responsibility for them, the PA cannot be considered independent for assurance ser If a PA performs the bookkeeping and makes accounting decisions for a company and the management does no B. responsibility for them, it might be perceived that the PA has both prepared the financial statements or other d own work. C. The PA cannot perform the bookkeeping for a company and also provide assurance services. D. The PA can counsel the client management about the accounting principle choices, but in the final analysis the statements (or other data); we made the choices of accounting principles; we take primary responsibility for th In a study of law cases of accountants’ and auditors’ legal troubles, the greatest percentage arose from . A. faulty implementation of audit procedures 1 7 B. client fraud . C. misinterpretation of accounting principles D. fraud by the auditor A private or civil wrong or injury is known as a . A. breach 1 8 . B. tort C. misconduct D. deceit In common law actions, the burden of proof lies with the . A. bailiff 1 B. defendant 9 . C. plaintiff D. jury The failure to perform a duty with the requisite standard of care is known as . A. lack of independence 2 0 B. negligence . C. lack of objectivity D. misconduct That a legal duty arises when there is a contractual agreement with the client is called . A. standard of care 2 1 B. privity of contract . C. professionalism D. independence In addition to liabilities imposed by common law, auditors need also be concerned about what other type of liability? A. Statutory law. 2 2 B. Tort law. . C. Professional liability. D. Negligence. 2 If a party is found to be partially liable and thus only responsible for 3 paying part of the damages relative to their share of the blame, this is . known as . A. due care B. breaking even C. proportionate liability D. a tort A letter where accountants sign that they have been notified that a particular recipient of the financial statements and audit report intends to rely upon them for particular purposes is known as a(n) . A. management letter 2 4 B. compliance letter . C. reliance letter D. engagement letter Historically, auditors’ liability in Canada has been based on common law 25 liability. . True False An ethical dilemma is one in which the choice of alternative actions 26 affects the well-being of other persons. . True False “Let your conscience be your guide” is an ethical principle that fits all 27 situations. . True False Consequentialism says that the right choice is the one that results in the 28 greatest good for the greatest number of people. . True False Rules of professional conduct provide some direct solutions to specific, 29 profession-related problems that may not be easily derived from general . theories of ethics. True False The “Rules of Professional Conduct, ” state the set of very specific rules 30 that flow from the general principles and are considered to be minimum . standards. True False The “Rules of Professional Conduct” for professional accountants apply 31 to services performed by members in both public and private practice. . True False The fundamental principles of accepted conduct are only general 32 guidelines; therefore, they are not as important as the specific rules. . True False 33 If a professional accountant is convicted of a criminal offence or fraud, he or she is usually thrown out of the profession. . True False The codified “Rules of Professional Conduct” derives its authority from 34 the CPA Canada Handbook. . True False If a public accountant (PA) performs the bookkeeping and makes accounting decisions for a company and the management does not 35 know enough about the financial statements to take primary . responsibility for them, the PA cannot be considered independent for assurance services. True False Once public accountants (PAs) retire from a firm, they are no longer 36 required to maintain independence from former clients. . True False Many users of audit reports expect auditors to detect fraud, theft, and 37 illegal acts, and to report them publicly. . True False Legal liabilities of professional accountants arise only from lawsuits 38 brought on the basis of the law of contracts. . True False 39 The auditor has a duty of care to a company that hires the auditor and has a contract with him or her under privity of contract. . True False 40 Auditors need not be concerned about statutory law liability. . True False Ethical theories can be divided into two types: monistic and pluralistic. Explain each. 41 . What is professional skepticism? 42 . It is sometimes said that there is a strong link between codes of conduct and GAAS. Explain. 43 . 44 Explain how CPA Ontario enforces the “fundamental statements of . accepted conduct” and the “Rules of Professional Conduct.” Summarize the professional competence and due care rules of the various codes of conduct. 45 . Explain the difference among integrity, independence, and objectivity. 46 . Identify five threats to the independence of a professional accountant. 47 . Discuss how a public accountant (PA) can preserve independence while accepting an honorary position in non-profit organizations. 48 . 49 Discuss the rules relating to the provision of accounting and other services by a public accountant (PA). . When a professional accountant is sued, what is the lawsuit typically based on? 50 . What is meant by “privity?” 51 . What must a plaintiff prove regarding an action brought under common law against a PA? 52 . What is joint and several liability? 53 . c3 Key Which of the following philosophical principles in ethics places emphasis on the importance of following rules rather than on weighing the consequences of actions? A Kantian principle. . 1 . B. Utilitarian principle. C. Consequentialism principle. D. Moral principle. Accessibility: Keyboard Navigation Blooms: Knowledge Difficulty: Moderate Learning Objective: 03-02 Explain the importance of the study of ethics in helping define auditor responsibilities. Smieliauskas – Chapter 03 #1 Topic: 03-06 Philosophical Principles in Ethics 2 Which of the following philosophical principles of ethics places emphasis . on the consequences of action, rather than on following the rules? A Imperative principle. . B Utilitarianism principle. . C. Generalization principle. D. Moral principle. Accessibility: Keyboard Navigation Blooms: Knowledge Difficulty: Easy Learning Objective: 03-02 Explain the importance of the study of ethics in helping define auditor responsibilities. Smieliauskas – Chapter 03 #2 Topic: 03-06 Philosophical Principles in Ethics 3 What is a key characteristic of critical thinking? . A It is a means of eliminating alternatives to arrive at one right answer. . B. It requires making the right assumptions to support an argument. C. It requires a questioning mind. D. It is a means of picking out things wrong with another person’s argument. Accessibility: Keyboard Navigation Blooms: Knowledge Difficulty: Moderate Learning Objective: 03-03 Outline the characteristics of critical thinking. Smieliauskas – Chapter 03 #3 Topic: 03-07 More on Critical Thinking The goal of the critical-thinking framework reflects . A independence . 4 B ideal audit virtues . . C. skepticism D. ethics Accessibility: Keyboard Navigation Blooms: Knowledge Difficulty: Moderate Learning Objective: 03-03 Outline the characteristics of critical thinking. Smieliauskas – Chapter 03 #4 Topic: 03-07 More on Critical Thinking What is the meaning of the rule of professional conduct that requires an auditor to be objective? A The auditor may have a material, indirect financial interest in a client’s business as long as it does not affect his o . 5 . B. The auditor has an obligation to CPA Canada to not use his or her training for personal advantage. C. The auditor has an obligation to serve the needs of the audit client. D. The auditor must have an attitude of professional skepticism toward an auditee’s management. Accessibility: Keyboard Navigation Blooms: Comprehension Difficulty: Moderate Learning Objective: 03-03 Outline the characteristics of critical thinking. Smieliauskas – Chapter 03 #5 Topic: 03-07 More on Critical Thinking The CPA Ontario Rules of Professional Conduct contain both general ethical principles that are idealistic in character and also a . A list of violations that would cause the automatic suspension of a member’s license . 6 . B set of specific, mandatory rules describing minimum levels of conduct required of members . C. description of the procedures to be followed by a member who must respond to an inquiry from the disciplinary D. list of specific acts discreditable to the profession Accessibility: Keyboard Navigation Blooms: Knowledge Difficulty: Easy Learning Objective: 03-04 Describe the purpose and contents of the codes of professional ethics established by the various professional accounting associations. Smieliauskas – Chapter 03 #6 Topic: 03-08 Codes of Professional Ethics Which of the following items is the most important principle in the “fundamental statements of accepted conduct”? A Maintain the reputation of the profession. . 7 . B. Act with due care. C. Maintain independence. D. Act with professional courtesy. Accessibility: Keyboard Navigation Blooms: Comprehension Difficulty: Moderate Learning Objective: 03-04 Describe the purpose and contents of the codes of professional ethics established by the various professional accounting associations. Smieliauskas – Chapter 03 #7 Topic: 03-10 Serving the Public Interest A complaint has been made against a member for an audit failure. If this complaint is found to have merit, under which CPA Ontario Rule of Professional Conduct is the member likely to be charged? A 202 Integrity and due care. . 8 . B. 204 Independence. C. 210 Conflict of interest. D. 215 Contingent fees. Accessibility: Keyboard Navigation Blooms: Comprehension Difficulty: Moderate Learning Objective: 03-04 Describe the purpose and contents of the codes of professional ethics established by the various professional accounting associations. Smieliauskas – Chapter 03 #8 Topic: 03-08 Codes of Professional Ethics 9 A succinct, but comprehensive definition of independence is that an auditor . A must be independent in fact and in appearance in order to maintain credibility . . B. must not have a direct financial interest in a client C. must have a license to practice as a public accountant D. must not take on as an audit client a company owned by a member of his or her immediate family Accessibility: Keyboard Navigation Blooms: Comprehension Difficulty: Easy Learning Objective: 03-05 Explain the importance of an independence framework for auditors. Smieliauskas – Chapter 03 #9 Topic: 03-12 Independence and Objectivity 1 The familiarity threat refers to . 0 . A becoming too sympathetic to a client’s interests . B. providing assurance on one’s own work C. promoting a client’s position or opinion D. benefiting from a financial interest in a client Accessibility: Keyboard Navigation Blooms: Knowledge Difficulty: Easy Learning Objective: 03-05 Explain the importance of an independence framework for auditors. Smieliauskas – Chapter 03 #10 Topic: 03-12 Independence and Objectivity In the course of performing an audit, an auditor begins dating the CFO of the auditee. What kind of threat to independence might arise? A Self-review threat. . 1 1 B. Self-interest threat. . C. Familiarity threat. D. Intimidation threat. Accessibility: Keyboard Navigation Blooms: Application Difficulty: Easy Learning Objective: 03-05 Explain the importance of an independence framework for auditors. Smieliauskas – Chapter 03 #11 Topic: 03-12 Independence and Objectivity A client’s management claims that they have to restrict an auditor’s access to a research laboratory to protect the safety of the auditor. This could be an example of a lack of . A programming independence . 1 2 B investigative independence . . C. control independence D. reporting independence Accessibility: Keyboard Navigation Blooms: Application Difficulty: Moderate Learning Objective: 03-05 Explain the importance of an independence framework for auditors. Smieliauskas – Chapter 03 #12 Topic: 03-12 Independence and Objectivity According to the profession’s rules of conduct, an auditor would be 1 considered independent in which of the following instances? 3 . A The auditor is the officially appointed stock transfer agent of a client. . B The auditor has a personal chequing account in a branch of a client bank. . C. The client has not paid its audit fees for the past three years. D. The client is the only tenant in a commercial building owned by the auditor. Accessibility: Keyboard Navigation Blooms: Application Difficulty: Moderate Learning Objective: 03-05 Explain the importance of an independence framework for auditors. Smieliauskas – Chapter 03 #13 Topic: 03-13 Detailed Independence Rules Topic: 03-14 Permitted Loans How can competence and due care best be described? A Competence and due care both refer to the PA doing their best for their clients. . 1 4 B. Competence refers to technical ability; due care refers to strictly following official pronouncements of accountin . C. Competence is knowing what do; due care is doing it to the best of one’s abilities. D. Competence and due care both refer to ongoing technical training. Accessibility: Keyboard Navigation Blooms: Comprehension Difficulty: Easy Learning Objective: 03-05 Explain the importance of an independence framework for auditors. Smieliauskas – Chapter 03 #14 Topic: 03-16 Professional Competence and Due Care Regarding honorary positions in non-profit organizations, which of the following statements is FALSE? A Professional accountants can be honorary directors of charity hospitals, fund drives, symphony orchestra societi . position is purely honorary. 1 5 B The professional accountant cannot be identified as an honorary director on letterheads and other literature. . . C. The only form of participation is the use of the professional accountant’s name. D. The professional accountant does not vote with the board or participate in management functions. Accessibility: Keyboard Navigation Blooms: Comprehension Difficulty: Moderate Learning Objective: 03-05 Explain the importance of an independence framework for auditors. Smieliauskas – Chapter 03 #15 Topic: 03-15 Other Issues Related to the Independence Principle Which of the following statements regarding independence with respect to accounting and other services is FALSE? A If a professional accountant (PA) performs the bookkeeping and makes accounting decisions for a company and . financial statements to take primary responsibility for them, the PA cannot be considered independent for assu 1 If a PA performs the bookkeeping and makes accounting decisions for a company and the management does no 6 B. primary responsibility for them, it might be perceived that the PA has both prepared the financial statements or . on his or her own work. C. The PA cannot perform the bookkeeping for a company and also provide assurance services. D. The PA can counsel the client management about the accounting principle choices, but in the final analysis the statements (or other data); we made the choices of accounting principles; we take primary responsibility for th Accessibility: Keyboard Navigation Blooms: Comprehension Difficulty: Moderate Learning Objective: 03-05 Explain the importance of an independence framework for auditors. Smieliauskas – Chapter 03 #16 Topic: 03-15 Other Issues Related to the Independence Principle In a study of law cases of accountants’ and auditors’ legal troubles, the 1 greatest percentage arose from . 7 A faulty implementation of audit procedures . . B. client fraud C. misinterpretation of accounting principles D. fraud by the auditor Accessibility: Keyboard Navigation Blooms: Knowledge Difficulty: Easy Learning Objective: 03-06 Outline auditor legal responsibilities. Smieliauskas – Chapter 03 #17 Topic: 03-20 Lawsuit Causes and Frequency A private or civil wrong or injury is known as a . A breach . 1 B tort 8 . . C. misconduct D. deceit Accessibility: Keyboard Navigation Blooms: Knowledge Difficulty: Easy Learning Objective: 03-06 Outline auditor legal responsibilities. Smieliauskas – Chapter 03 #18 Topic: 03-19 The Legal Environment and Auditor Legal Responsibilities In common law actions, the burden of proof lies with the . A bailiff . 1 9 B. defendant . C. plaintiff D. jury Accessibility: Keyboard Navigation Blooms: Knowledge Difficulty: Easy Learning Objective: 03-07 Outline the various types of common law liability for public accountants; citing specific case precedents. Smieliauskas – Chapter 03 #19 Topic: 03-23 Characteristics of Common Law Actions 2 The failure to perform a duty with the requisite standard of care is known 0 as . . A lack of independence . B negligence . C. lack of objectivity D. misconduct Accessibility: Keyboard Navigation Blooms: Knowledge Difficulty: Easy Learning Objective: 03-07 Outline the various types of common law liability for public accountants; citing specific case precedents. Smieliauskas – Chapter 03 #20 Topic: 03-24 Four Elements of Negligence That a legal duty arises when there is a contractual agreement with the client is called . A standard of care . 2 1 . B . privity of contract C. professionalism D. independence Accessibility: Keyboard Navigation Blooms: Comprehension Difficulty: Moderate Learning Objective: 03-07 Outline the various types of common law liability for public accountants; citing specific case precedents. Smieliauskas – Chapter 03 #21 Topic: 03-24 Four Elements of Negligence In addition to liabilities imposed by common law, auditors need also be concerned about what other type of liability? A Statutory law. . 2 2 B. Tort law. . C. Professional liability. D. Negligence. Accessibility: Keyboard Navigation Blooms: Knowledge Difficulty: Easy Learning Objective: 03-07 Outline the various types of common law liability for public accountants; citing specific case precedents. Smieliauskas – Chapter 03 #22 Topic: 03-25 Limited Liability Partnerships If a party is found to be partially liable and thus only responsible for paying part of the damages relative to their share of the blame, this is known as . A due care . 2 3 . B. breaking even C. proportionate liability D. a tort Accessibility: Keyboard Navigation Blooms: Knowledge Difficulty: Moderate Learning Objective: 03-07 Outline the various types of common law liability for public accountants; citing specific case precedents. Smieliauskas – Chapter 03 #23 Topic: 03-25 Limited Liability Partnerships 2 A letter where accountants sign that they have been notified that a 4 particular recipient of the financial statements and audit report intends to . rely upon them for particular purposes is known as a(n) . A management letter . B. compliance letter C. reliance letter D. engagement letter Accessibility: Keyboard Navigation Blooms: Knowledge Difficulty: Easy Learning Objective: 03-07 Outline the various types of common law liability for public accountants; citing specific case precedents. Smieliauskas – Chapter 03 #24 Topic: 03-24 Four Elements of Negligence 25. Historically, auditors’ liability in Canada has been based on common law liability. TRUE Accessibility: Keyboard Navigation Blooms: Knowledge Difficulty: Easy Learning Objective: 03-01 Outline the concept of auditor responsibilities. Smieliauskas – Chapter 03 #25 Topic: 03-01 Introduction 26. An ethical dilemma is one in which the choice of alternative actions affects the well-being of other persons. TRUE Accessibility: Keyboard Navigation Blooms: Knowledge Difficulty: Easy Learning Objective: 03-02 Explain the importance of the study of ethics in helping define auditor responsibilities. Smieliauskas – Chapter 03 #26 Topic: 03-03 Overview Topic: 03-06 Philosophical Principles in Ethics 27. “Let your conscience be your guide” is an ethical principle that fits all situations. FALSE Accessibility: Keyboard Navigation Blooms: Knowledge Difficulty: Easy Learning Objective: 03-02 Explain the importance of the study of ethics in helping define auditor responsibilities. Smieliauskas – Chapter 03 #27 Topic: 03-06 Philosophical Principles in Ethics 28. Consequentialism says that the right choice is the one that results in the greatest good for the greatest number of people. FALSE Accessibility: Keyboard Navigation Blooms: Knowledge Difficulty: Easy Learning Objective: 03-02 Explain the importance of the study of ethics in helping define auditor responsibilities. Smieliauskas – Chapter 03 #28 Topic: 03-06 Philosophical Principles in Ethics 29. Rules of professional conduct provide some direct solutions to specific, profession-related problems that may not be easily derived from general theories of ethics. TRUE Accessibility: Keyboard Navigation Blooms: Comprehension Difficulty: Easy Learning Objective: 03-04 Describe the purpose and contents of the codes of professional ethics established by the various professional accounting associations. Smieliauskas – Chapter 03 #29 Topic: 03-08 Codes of Professional Ethics 30. The “Rules of Professional Conduct, ” state the set of very specific rules that flow from the general principles and are considered to be minimum standards. TRUE Accessibility: Keyboard Navigation Blooms: Knowledge Difficulty: Easy Learning Objective: 03-04 Describe the purpose and contents of the codes of professional ethics established by the various professional accounting associations. Smieliauskas – Chapter 03 #30 Topic: 03-09 Rules of Professional Conduct 31. The “Rules of Professional Conduct” for professional accountants apply to services performed by members in both public and private practice. FALSE Accessibility: Keyboard Navigation Blooms: Knowledge Difficulty: Easy Learning Objective: 03-04 Describe the purpose and contents of the codes of professional ethics established by the various professional accounting associations. Smieliauskas – Chapter 03 #31 Topic: 03-09 Rules of Professional Conduct 32. The fundamental principles of accepted conduct are only general guidelines; therefore, they are not as important as the specific rules. FALSE Accessibility: Keyboard Navigation Blooms: Knowledge Difficulty: Easy Learning Objective: 03-04 Describe the purpose and contents of the codes of professional ethics established by the various professional accounting associations. Smieliauskas – Chapter 03 #32 Topic: 03-08 Codes of Professional Ethics 33. If a professional accountant is convicted of a criminal offence or fraud, he or she is usually thrown out of the profession. TRUE Accessibility: Keyboard Navigation Blooms: Comprehension Difficulty: Easy Learning Objective: 03-04 Describe the purpose and contents of the codes of professional ethics established by the various professional accounting associations. Smieliauskas – Chapter 03 #33 Topic: 03-10 Serving the Public Interest 34. The codified “Rules of Professional Conduct” derives its authority from the CPA Canada Handbook. FALSE Accessibility: Keyboard Navigation Blooms: Comprehension Difficulty: Easy Learning Objective: 03-04 Describe the purpose and contents of the codes of professional ethics established by the various professional accounting associations. Smieliauskas – Chapter 03 #34 Topic: 03-08 Codes of Professional Ethics 35. If a public accountant (PA) performs the bookkeeping and makes accounting decisions for a company and the management does not know enough about the financial statements to take primary responsibility for them, the PA cannot be considered independent for assurance services. TRUE Accessibility: Keyboard Navigation Blooms: Comprehension Difficulty: Moderate Learning Objective: 03-05 Explain the importance of an independence framework for auditors. Smieliauskas – Chapter 03 #35 Topic: 03-15 Other Issues Related to the Independence Principle 36. Once public accountants (PAs) retire from a firm, they are no longer required to maintain independence from former clients. FALSE Accessibility: Keyboard Navigation Blooms: Knowledge Difficulty: Easy Learning Objective: 03-05 Explain the importance of an independence framework for auditors. Smieliauskas – Chapter 03 #36 Topic: 03-15 Other Issues Related to the Independence Principle 37. Many users of audit reports expect auditors to detect fraud, theft, and illegal acts, and to report them publicly. TRUE Accessibility: Keyboard Navigation Blooms: Knowledge Difficulty: Easy Learning Objective: 03-06 Outline auditor legal responsibilities. Smieliauskas – Chapter 03 #37 Topic: 03-21 Audit Responsibilities 38. Legal liabilities of professional accountants arise only from lawsuits brought on the basis of the law of contracts. FALSE Accessibility: Keyboard Navigation Blooms: Knowledge Difficulty: Easy Learning Objective: 03-07 Outline the various types of common law liability for public accountants; citing specific case precedents. Smieliauskas – Chapter 03 #38 Topic: 03-22 Liability Under Common Law 39. The auditor has a duty of care to a company that hires the auditor and has a contract with him or her under privity of contract. TRUE Accessibility: Keyboard Navigation Blooms: Comprehension Difficulty: Moderate Learning Objective: 03-07 Outline the various types of common law liability for public accountants; citing specific case precedents. Smieliauskas – Chapter 03 #39 Topic: 03-24 Four Elements of Negligence 40. Auditors need not be concerned about statutory law liability. FALSE Accessibility: Keyboard Navigation Blooms: Knowledge Difficulty: Easy Learning Objective: 03-07 Outline the various types of common law liability for public accountants; citing specific case precedents. Smieliauskas – Chapter 03 #40 Topic: 03-25 Limited Liability Partnerships 41. Ethical theories can be divided into two types: monistic and pluralistic. Explain each. Monistic theories assume that universal principles apply regardless of the specific facts. Pluralistic theories assume that there are no universal principles and that the best approach is to use the principles that are most relevant to a specific case. Blooms: Knowledge Difficulty: Moderate Learning Objective: 03-02 Explain the importance of the study of ethics in helping define auditor responsibilities. Smieliauskas – Chapter 03 #41 Topic: 03-06 Philosophical Principles in Ethics 42. What is professional skepticism? The auditor’s tendency not to believe management assertions, but instead to find sufficient support for the assertions through appropriate audit evidence. It recognizes that circumstances causing the financial statements to be materially misstated may exist. Blooms: Knowledge Difficulty: Moderate Learning Objective: 03-03 Outline the characteristics of critical thinking. Smieliauskas – Chapter 03 #42 Topic: 03-07 More on Critical Thinking 43. It is sometimes said that there is a strong link between codes of conduct and GAAS. Explain. Codes of conduct can be viewed as a means of fulfilling auditor responsibilities for GAAS and assurance standards. Blooms: Application Difficulty: Moderate Learning Objective: 03-03 Outline the characteristics of critical thinking. Smieliauskas – Chapter 03 #43 Topic: 03-07 More on Critical Thinking 44. Explain how CPA Ontario enforces the “fundamental statements of accepted conduct” and the “Rules of Professional Conduct.” The fundamental statements of accepted conduct are positive principles that represent the image of ideal conduct. As a result, they are not enforceable. Rules of professional conduct are specific rules that delineate minimum acceptable behaviour. The rules are administered and enforced by the provincial institutes through professional conduct committees and disciplinary committees. Blooms: Comprehension Difficulty: Difficult Learning Objective: 03-04 Describe the purpose and contents of the codes of professional ethics established by the various professional accounting associations. Smieliauskas – Chapter 03 #44 Topic: 03-08 Codes of Professional Ethics Topic: 03-09 Rules of Professional Conduct 45. Summarize the professional competence and due care rules of the various codes of conduct. Professional competence: Undertake only those professional services that the member or the member’s firm can reasonably expect to be completed with professional competence. Due professional care: Exercise due professional care in the performance of professional services. Planning and supervision: Adequately plan and supervise the performance of professional services. Sufficient relevant data: Obtain sufficient relevant data to afford a reasonable basis for conclusions or recommendations in relation to any professional services performed. Blooms: Knowledge Difficulty: Moderate Learning Objective: 03-05 Explain the importance of an independence framework for auditors. Smieliauskas – Chapter 03 #45 Topic: 03-16 Professional Competence and Due Care 46. Explain the difference among integrity, independence, and objectivity. Integrity: Integrity is the duty to be honest and conscientious in performing professional services. Independence: Independence is synonymous with objectivity. The term independence implies that that the person exhibiting the quality is free from bias or conflict of interest. Objectivity: Objectivity is defined by CPA Ontario as being “free of any influence, interest, or relationship which, in respect of the engagement, impairs member’s professional judgement or objectivity or which, in the view of a reasonable observer” would do so. Like independence, the term objectivity implies freedom from bias or conflict of interest. The important distinction when discussing independence, or objectivity, is the difference between fact and appearance. A person may be truly unbiased and free of conflict of interest-that is, objective in fact. This quality, however, is a mental attitude that is incapable of measurement or observation. As a result, public accountants must also be independent, or objective, in appearance; that is, any knowledgeable person observing the accountant’s actions should be able to conclude that the accountant is unbiased. Integrity is an overriding principle. Blooms: Comprehension Difficulty: Difficult Learning Objective: 03-05 Explain the importance of an independence framework for auditors. Smieliauskas – Chapter 03 #46 Topic: 03-12 Independence and Objectivity 47. Identify five threats to the independence of a professional accountant. 1. Self-review-providing assurance on his or her own work. 2. Self-interest-for example, benefiting from a financial interest in a client. 3. Advocacy-promoting a client’s position or opinion. 4. Familiarity-becoming too sympathetic to a client’s interests. 5. Intimidation-being deterred from acting objectively by actual or perceived threats from a client. Blooms: Knowledge Difficulty: Moderate Learning Objective: 03-05 Explain the importance of an independence framework for auditors. Smieliauskas – Chapter 03 #47 Topic: 03-12 Independence and Objectivity 48. Discuss how a public accountant (PA) can preserve independence while accepting an honorary position in non-profit organizations. Ordinarily, independence is impaired if a PA serves on an organization’s board of directors. However, members can be honorary directors of charity hospitals, fund drives, symphony orchestra societies, and other non-profit organizations as long as (1) the position is purely honorary, (2) the PA is identified as an honorary director on letterheads and other literature, (3) the only form of participation is the use of the PA’s name, and (4) the PA does not vote with the board or participate in management functions. When all these criteria are satisfied, the PA/board member can perform assurance services because the appearances of independence will have been preserved. Blooms: Comprehension Difficulty: Moderate Learning Objective: 03-05 Explain the importance of an independence framework for auditors. Smieliauskas – Chapter 03 #48 Topic: 03-15 Other Issues Related to the Independence Principle 49. Discuss the rules relating to the provision of accounting and other services by a public accountant (PA). If a PA performs the bookkeeping and makes accounting decisions for a company and the management does not know enough about the financial statements to take primary responsibility for them, the PA cannot be considered independent for assurance services. It might be perceived that the PA has both prepared the financial statements or other data and given an audit report or other assurance on his own work. The PA can perform the bookkeeping and counsel the client management about the accounting principle choices, but in the final analysis the management must be able to say, “These are our financial statements (or other data); we made the choices of accounting principles; we take primary responsibility for them.” Blooms: Comprehension Difficulty: Moderate Learning Objective: 03-05 Explain the importance of an independence framework for auditors. Smieliauskas – Chapter 03 #49 Topic: 03-15 Other Issues Related to the Independence Principle 50. When a professional accountant is sued, what is the lawsuit typically based on? Legal liabilities of PAs arise from lawsuits brought on the basis of the law of contracts or as tort actions for negligence. Most lawsuits stem from a breach of contract claim that the accounting or auditing services were not performed as agreed. Blooms: Knowledge Difficulty: Easy Learning Objective: 03-07 Outline the various types of common law liability for public accountants; citing specific case precedents. Smieliauskas – Chapter 03 #50 Topic: 03-22 Liability Under Common Law 51. What is meant by “privity?” The relationship of direct involvement between parties to a contract is known as privity. When privity exists, a plaintiff usually needs only to show that the defendant accountant was negligent, and showed a lack of reasonable care in the performance of professional accounting tasks. Blooms: Knowledge Difficulty: Moderate Learning Objective: 03-07 Outline the various types of common law liability for public accountants; citing specific case precedents. Smieliauskas – Chapter 03 #51 Topic: 03-24 Four Elements of Negligence 52. What must a plaintiff prove regarding an action brought under common law against a PA? 1) He or she was damaged or suffered a loss. 2) There was a beneficiary relationship with the defendant. 3) The financial statements were materially misleading or the accountant’s advice was faulty. 4) He or she relied on the statements or advice. 5) They were the direct cause of the loss. 6) The accountant was negligent, grossly negligent, deceitful, or otherwise responsible for the damage. Blooms: Knowledge Difficulty: Moderate Learning Objective: 03-07 Outline the various types of common law liability for public accountants; citing specific case precedents. Smieliauskas – Chapter 03 #52 Topic: 03-23 Characteristics of Common Law Actions 53. What is joint and several liability? This is a doctrine that allows a successful plaintiff to recover the full amount of damage award from the defendants who have money or insurance. In other words, any of several defendants who have caused part of the damages are liable to the plaintiffs for the entire amount of damages. The accounting profession would like to replace this doctrine such that defendants pay damages only to the extent that they are at fault. Blooms: Knowledge Difficulty: Easy Learning Objective: 03-07 Outline the various types of common law liability for public accountants; citing specific case precedents. Smieliauskas – Chapter 03 #53 Topic: 03-24 Four Elements of Negligence c3 Summary Category # of Q uestio ns Accessibility: Keyboard Navigation 40 Blooms: Application 4 Blooms: Comprehension 17 Blooms: Knowledge 32 Difficulty: Difficult 2 Difficulty: Easy 28 Difficulty: Moderate 23 Learning Objective: 03-01 Outline the concept of auditor responsibili ties. 1 Learning Objective: 03-02 Explain the importance of the study of eth ics in helping define auditor responsibilities. 6 Learning Objective: 03-03 Outline the characteristics of critical thinki ng. 5 Learning Objective: 03-04 Describe the purpose and contents of the codes of professional ethics established by the various professional 10 accounting associations. Learning Objective: 03-05 Explain the importance of an independen ce framework for auditors. 15 Learning Objective: 03-06 Outline auditor legal responsibilities. 3 Learning Objective: 03-07 Outline the various types of common law liability for public accountants; citing specific case precedents. 13 Smieliauskas – Chapter 03 53 Topic: 03-01 Introduction 1 Topic: 03-03 Overview 1 Topic: 03-06 Philosophical Principles in Ethics 6 Topic: 03-07 More on Critical Thinking 5 Topic: 03-08 Codes of Professional Ethics 6 Topic: 03-09 Rules of Professional Conduct 3 Topic: 03-10 Serving the Public Interest 2 Topic: 03-12 Independence and Objectivity 6 Topic: 03-13 Detailed Independence Rules 1 Topic: 03-14 Permitted Loans 1 Topic: 03-15 Other Issues Related to the Independence Principle 6 Topic: 03-16 Professional Competence and Due Care 2 Topic: 03-19 The Legal Environment and Auditor Legal Responsibilit 1 ies Topic: 03-20 Lawsuit Causes and Frequency 1 Topic: 03-21 Audit Responsibilities 1 Topic: 03-22 Liability Under Common Law 2 Topic: 03-23 Characteristics of Common Law Actions 2 Topic: 03-24 Four Elements of Negligence 6 Topic: 03-25 Limited Liability Partnerships 3 c4 Student: In which of the following circumstances is a public accountant (PA) 1 considered associated with a company’s financial information? . A. The PA is a former employee of the company and prepared the statements. B. Financial statements are reproduced on the PA’s letterhead. C. The PA is engaged by the company’s auditors to do limited procedures in a remote location. D. The PA is married to the company’s Chief Financial Officer. Without the public accountant’s knowledge or consent, the enterprise indicates that the public accountant (PA) was involved with information issued by the enterprise. Which of the following statements is true? A. The PA has no responsibilities with respect to the information. 2 . B. The PA should issue an opinion on the information. C. The PA is not associated with the information. D. The PA is associated with the information. Under which of the following circumstances does an accountant become associated with a financial report? A. The accountant works for the enterprise that issues the report. 3 . B. The accountant sits on the board of directors of the enterprise that issues the report. C. The enterprise indicates that the accountant audited or reviewed the information included in the report. D. The report does not mention that the accountant prepared or performed other services with respect to the inf Levels of assurance refer to . A. the nature of the work performed and the conclusions auditors can render about financial statements 4 B. generally accepted auditing standards . C. qualifications, modifications, and expansions D. changes in the language of the audit report Which level of assurance is provided by a public accountant as a result of an audit? A. Complete assurance. 5 B. Moderate assurance. . C. Negative assurance. D. Positive assurance. Which level of assurance requires a public accountant (PA) to gather the most evidence? A. Audit. 6 B. Review. . C. Examination. D. Compilation. Many users interpret audit reports based on the number of paragraphs. In a standard audit report on financial statements, how many paragraphs are there? A. Three paragraphs. 7 . B. Four paragraphs. C. Five paragraphs. D. Six paragraphs. 8 What is the best description of the basis on which an auditor issues his or . her report on financial statements? A. Reporting standards. B. Sufficiency and appropriateness of evidence. C. Application of GAAP. D. Integrity of management. CPA has been engaged to audit the financial statements of Marchano Ltd., a manufacturer of toys. Several individuals are suing the company because of a toy that injured children. The company has not disclosed the lawsuit in its financial statements. What type of audit report should be issued? A. Adverse. 9 . B. A GAAP qualification. C. A scope qualification. D. Disclaimer or denial An audit report included an additional paragraph disclosing a difference of opinion between the auditor and the client. The auditor believed that an adjustment should be made to the financial statements. What should the 1 opinion paragraph of the audit report express? 0 . A. An unqualified opinion. B. An “except for” opinion citing a departure from generally accepted accounting principles. C. An “except for” opinion citing a scope limitation. D. A disclaimer of opinion. “The company has not made an allowance for bad debts for an account deemed uncollectible in the amount of $250,000 as of the year ended December 31, 2016.” is an example of a . A. GAAP change requiring a qualified opinion 1 1 B. scope limitation . C. departure from GAAP D. report with a disclaimer of opinion In which of the following situations would an auditor ordinarily choose between expressing an “except for” qualified opinion or an adverse opinion? 1 A. The auditor did not observe the entity’s physical inventory and is unable to become satisfied as to its balance b 2 . B. The financial statements fail to disclose information that is required by generally accepted accounting principl C. The auditor is asked to report only on the entity’s balance sheet and not on the other basic financial statemen D. Events disclosed in the financial statements cause the auditor to have substantial doubt about the entity’s abili An auditor will issue an adverse opinion when . A. a severe scope limitation has been imposed by the client 1 B. a violation of GAAP is sufficiently material that a qualified opinion is not justified 3 . C. a qualified opinion cannot be rendered because the auditor lacks independence D. the company’s ability to continue as a going concern is subject to substantial doubt A holding company has decided to carry its wholly owned subsidiary companies on the balance sheet using the equity method. The type of audit report required is . A. unqualified 1 4 B. qualified . C. adverse D. disclaimer In which of the following circumstances is an auditor most likely to express an adverse opinion? A. The chief executive officer refuses the auditor access to minutes of board of directors’ meetings. 1 5 B. Tests of controls show that the entity’s internal control system is so poor that it cannot be relied upon. . C. The financial statements are not in accordance with the CPA Canada Handbook regarding the capitalization of D. Information comes to the auditor’s attention that raises substantial doubt about the entity’s ability to continu If financial statements contain a very material departure from GAAP such that the financial statements are virtually useless, the auditor can render a(an) . A. qualified “except for” opinion with reference to the departure 1 6 B. adverse opinion with scope limitation reference . C. adverse opinion with reference to the departure D. disclaimer of opinion 1 Restrictions imposed by a client prohibited the observation of physical 7 inventories that account for 35% of total assets. Alternative audit . procedures for inventory were not feasible, although the auditor was able to obtain satisfactory evidence for all other items in the financial statements. The auditor should express . A. an “except for” qualified opinion referring to a departure from generally accepted accounting principles