Auditing An International Approach 8Th Edition By Wally Smieliauskas

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Sample Test

Chapter 03

Auditors’ Ethical and Legal Responsibilities

Multiple Choice Questions

1. An auditor’s responsibility to society can be divided into which three categories?
A.Moral, professional, and fiscal.
B. Moral, professional, and legal.
C. Fiduciary, professional, and legal.
D. Moral, spiritual, and legal

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 03-01 Outline the concept of auditor responsibilities.
Topic: 03-02 Introduction

2. The Kantian principle is a philosophical principle that places emphasis on which of the factors when deciding on the right course of action?
A.Minimizing harm to ones’ self
B. The maximization of benefits.
C. The consequences of actions
D. Following Rules

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 03-02 Explain the importance of the study of ethics in helping define auditor responsibilities.
Topic: 03-08 Philosophical Principles in Ethics

3. 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: Remember
Difficulty: Easy
Learning Objective: 03-02 Explain the importance of the study of ethics in helping define auditor responsibilities.
Topic: 03-08 Philosophical Principles in Ethics

4. Guy, CPA, is the auditor in-charge of the Big Pulp and Paper Company (BPPC). During the audit, he discovers BPPC’s safety equipment has broken down, resulting in deadly chemicals pouring into the only water source of a small village. Which of the following statements best reflects a Kantian analysis of Guy’s ethical dilemma?
A.Guy’s professional duty to protect his client and his firm is outweighed by the greater duty to ensure no harm is done to the people who depend on the water BPPC is polluting.
B. Guy’s legal obligation is to maintain the confidentiality of BPPC’s information and therefore, in this specific context, his professional responsibilities preclude his from helping the citizens impacted by the equipment breakdown.
C. When comparing the hundreds of people who would lose their jobs and suffer hardship if the chemical leak were made public, versus the small number of citizens affected by the chemical leak, Guy decides revealing the leak cause less good than if he keeps it quiet.
D. Guy’s decision will be based on what he believes are the universally true principles of his personal religious faith.

Accessibility: Keyboard Navigation
Blooms: Apply
Blooms: Understand
Difficulty: Hard
Learning Objective: 03-02 Explain the importance of the study of ethics in helping define auditor responsibilities.
Topic: 03-08 Philosophical Principles in Ethics

5. 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: Remember
Difficulty: Medium
Learning Objective: 03-03 Outline the characteristics of critical thinking.
Topic: 03-11 More on Critical Thinking

6. The goal of the critical-thinking framework reflects ________.
A.independence
B. ideal audit virtues
C. skepticism
D. ethics

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 03-03 Outline the characteristics of critical thinking.
Topic: 03-11 More on Critical Thinking

7. 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 or her judgment.
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: Understand
Difficulty: Medium
Learning Objective: 03-03 Outline the characteristics of critical thinking.
Topic: 03-11 More on Critical Thinking

8. 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 disciplinary committee
D. list of specific acts discreditable to the profession

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 03-04 Describe the purpose and contents of the codes of professional ethics established by the various professional accounting bodies.
Topic: 03-12 Codes of Professional Ethics

9. Which of the following items is the most important principle in the “fundamental statements of accepted conduct”?
A.Maintain the reputation of the profession.
B. Act with due care.
C. Maintain independence.
D. Act with professional courtesy.

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 03-04 Describe the purpose and contents of the codes of professional ethics established by the various professional accounting bodies.
Topic: 03-18 Serving the Public Interest

10. 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.
B. 204 Independence.
C. 210 Conflict of interest.
D. 215 Contingent fees.

11. 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 or material indirect 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: Understand
Difficulty: Easy
Learning Objective: 03-05 Explain the importance of an independence framework for auditors.
Topic: 03-20 Independence and Objectivity

12. The familiarity threat refers to ________.
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: Remember
Difficulty: Easy
Learning Objective: 03-05 Explain the importance of an independence framework for auditors.
Topic: 03-20 Independence and Objectivity

13. 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.
B. Self-interest threat.
C. Familiarity threat.
D. Intimidation threat.

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Easy
Learning Objective: 03-05 Explain the importance of an independence framework for auditors.
Topic: 03-20 Independence and Objectivity

14. 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
B. investigative independence
C. control independence
D. reporting independence

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 03-05 Explain the importance of an independence framework for auditors.
Topic: 03-20 Independence and Objectivity

15. 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.
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.

16. Tom, a PA, is approached by Acme Pest Control Inc. to perform the audit of their financial statements. The founder and CEO of Acme Pest Control is Jerry, how is an old high classmate and close personal friend of Tom. Consequently, before Tom accepts to perform the audit of Acme, he will need to be especially mindful of which threat to his independence?
A.Advocacy
B. Familiarity
C. Self-interest
D. Self-review

17. 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 societies, and other non-profit organizations, as long as the position is purely honorary.
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: Understand
Difficulty: Medium
Learning Objective: 03-05 Explain the importance of an independence framework for auditors.
Topic: 03-26 Honorary Positions in Non-profit Organizations

18. 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 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.
B. 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, 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 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 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.”

19. In a study of law cases of accountants’ and auditors’ legal troubles, the greatest percentage arose from ________.
A.faulty implementation of audit procedures
B. client fraud
C. misinterpretation of accounting principles
D. fraud by the auditor

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 03-06 Outline auditor legal responsibilities.
Topic: 03-41 Lawsuit Causes and Frequency

20. A private or civil wrong or injury is known as a ________.
A.breach
B. tort
C. misconduct
D. deceit

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 03-07 Outline the various types of common law liability for public accountants, citing specific case precedents.
Topic: 03-43 Liability under Common Law

21. In common law actions, the burden of proof lies with the ________.
A.Government, who initiates the legal action on behalf of society
B. defendant
C. plaintiff
D. jury

22. The failure to perform a duty with the requisite standard of care is known as _______.
A.lack of independence
B. negligence
C. lack of objectivity
D. misconduct

23. That a legal duty arises when there is a contractual agreement with the client is called ________.
A.standard of care
B. privity of contract
C. professionalism
D. independence

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 03-07 Outline the various types of common law liability for public accountants, citing specific case precedents.
Topic: 03-46 Four Elements of Negligence

24. The legal liability regime that states that a plaintiff can recover all damages from any defendant that’s named part of the lawsuit, regardless of individual responsibility, is known as ______.
A.Joint Liability Partnership
B. Unlimited liability
C. Privity of contract
D. Joint and several liability

25. 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
B. breaking even
C. proportionate liability
D. a tort

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 03-07 Outline the various types of common law liability for public accountants, citing specific case precedents.
Topic: 03-51 Statutory Law Liability

26. 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 representation letter
B. compliance letter
C. reliance letter
D. engagement letter

True / False Questions

27. Under tort law, the claimant must prove both that a loss was suffered and that the auditor caused that loss, before a claim against the auditor can be successful.
TRUE

Accessibility: Keyboard Navigation
Blooms: Apply
Blooms: Remember
Difficulty: Easy
Learning Objective: 03-07 Outline the various types of common law liability for public accountants, citing specific case precedents.
Topic: 03-43 Liability under Common Law

28. An ethical dilemma is one in which the choice of alternative actions affects the well-being of other persons.
TRUE

29. “Let your conscience be your guide” is an ethical principle that fits all situations.
FALSE

30. Utilitarianism says that the right choice is the one that maximizes utility.
FALSE

31. 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: Understand
Difficulty: Easy
Learning Objective: 03-04 Describe the purpose and contents of the codes of professional ethics established by the various professional accounting bodies.
Topic: 03-12 Codes of Professional Ethics
Topic: 03-17 Rules of Professional Conduct

32. Codes of Professional Conduct ” are organized hierarchically from general principles, to rules, then to specific interpretations of rules. The general principles are considered ideal standards and the rule and interpretations are considered to be minimum standards.
TRUE

33. The “CPA Code of Professional Conduct” need only be observed by members and firms engaged in the practice of public accounting
FALSE

34. The fundamental principles of accepted conduct are only general guidelines; therefore, they are not as important as the specific rules.
FALSE

35. If a professional accountant is convicted of a criminal offence or fraud, he or she is usually thrown out of the profession.
TRUE

36. The codified “Rules of Professional Conduct” derives its authority from the CPA Canada Handbook.
FALSE

37. 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

38. Once public accountants (PAs) retire from a firm, they are no longer required to maintain independence from former clients.
FALSE

39. Many users of audit reports expect auditors to detect fraud, theft, and illegal acts, and to report them publicly.
TRUE

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 03-06 Outline auditor legal responsibilities.
Topic: 03-42 Audit Responsibilities

40. Legal liabilities of professional accountants arise only from lawsuits brought on the basis of the law of contracts.
FALSE

41. The auditor only has a duty of care to a company that hires the auditor and has a contract with him or her under privity of contract.
FALSE

42. Critical thinking is essential to the proper comprehension of auditing standards and the development of new standards in the future.
TRUE

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 03-08 (Appendix 3A) Explain how professional judgment, critical thinking, and principles-based reasoning are related.
Topic: 03-54 1. Critical Thinking and Principles-Based Reasoning: Key Ideas and Relevant Research
Topic: 03-55 I. Essentials

43. In financial reporting, the going-concern assumption. Is considered a negative proposition, because auditors traditionally assumed that this assertion is true unless there is evidence to the contrary.
TRUE

Accessibility: Keyboard Navigation
Blooms: Remember
Blooms: Understand
Difficulty: Medium
Learning Objective: 03-08 (Appendix 3A) Explain how professional judgment, critical thinking, and principles-based reasoning are related.
Topic: 03-60 Positive and Negative Assertions
Topic: 03-61 Positive Assertions

Short Answer Questions

44. List and explain the three facets of an auditor’s responsibility towards society.

An auditor’s responsibility towards society can be broken down into three components: moral, professional, and legal responsibility. The moral aspect deals with “doing the right thing”, which is largely determined by society. It encompasses the rules and principles conforming to broad social norms of behavior. Professional responsibilities refer to the formal ethical responsibilities of auditors. They are the rules and principles for the proper conduct of an auditor in his or her work. The audit profession establishes formal rules of conduct in order to: gain the respect and confidence of the public, distinguish the professional from the general public, achieve order within the profession, and provide a means of self-policing the profession. Legal responsibilities are the risks the auditor accepts in a court of law while practicing public accounting. Legal and professional responsibilities are highly intertwined.

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 03-01 Outline the concept of auditor responsibilities.
Topic: 03-01 The Essentials of Auditors’ Ethical and Legal Responsibilities

45. 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.

46. 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.

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 03-03 Outline the characteristics of critical thinking.
Topic: 03-11 More on Critical Thinking

47. 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. For example, GAAS requires auditors to have an objective state of mind while performing the audit of financial statements and codes of conduct provide specific rule for maintaining independence when providing out audit and other assurance services

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 03-03 Outline the characteristics of critical thinking.
Topic: 03-11 More on Critical Thinking

48. 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.

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Hard
Learning Objective: 03-04 Describe the purpose and contents of the codes of professional ethics established by the various professional accounting bodies.
Topic: 03-12 Codes of Professional Ethics
Topic: 03-17 Rules of Professional Conduct

49. What is a critical thinking framework and why is it important?

A critical thinking framework is a set of principles and concepts that help an auditor structure his or her thinking so that conclusions reached are better justified. A structure for critical thinking is needed to prepare auditors to tackle the challenges of ethical and other issues of professional judgement they will face in the 21st century audit environment. In the end, the auditor must have good reasons other than that “it feels right” to support a position.

Accessibility: Keyboard Navigation
Blooms: Remember
Blooms: Understand
Difficulty: Medium
Learning Objective: 03-03 Outline the characteristics of critical thinking.
Topic: 03-11 More on Critical Thinking

50. 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.

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 03-05 Explain the importance of an independence framework for auditors.
Topic: 03-34 Professional Competence and Due Care

51. 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.

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Hard
Learning Objective: 03-05 Explain the importance of an independence framework for auditors.
Topic: 03-20 Independence and Objectivity

52. Identify five threats to the independence of a professional accountant.

53. 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.

53. 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.

54. 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.”

55. 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.

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