Questions and Answers of Auditing International Approach

Under limited circumstances, CPAs may express unqualified opinions on financial statements that utilize accounting principles other than those for- mulated by designated bodies. Give two examples of
Describe the dual responsibility borne by CPAs.
What protection is given to professionals who have privileged communications?
What is a contingent fee?
To which types of services does the rule on contingent fees apply? Why?
Describe the advertising of four activities that CPAs might consider to be false, misleading, or deceptive.
Describe the professional services for which the re- ceipt of commissions is prohibited.
Describe one purpose of the rule on form of organization and name.
A violation of the profession's ethical standards most likely would have occurred when a CPAa. Issued an unqualified opinion on the 19X2 financial statements when fees for the 19X1 audit were
Which of the following is not a general common- ality among professions' codes of conduct?a. Members of each profession are usually ex- pected to maintain a higher standard of con- duct than is
All of the following are part of the structure of the Code of Professional Conduct excepta. Principles of Professional Conduct.b. Concepts.c. Rules of Professional Conduct.d. Interpretations of rules
The principles of the AICPA's Code of Professional Conduct emphasize certain responsibilities. Which of the following is an incomplete statement of those responsibilities?a. CPAs must serve their
Ethical behavior requires an individual toa. Act only in accord with the law.b. Perceive the ethical implications of a situation only if it involves the possibility of unlawful conduct.c. Consider a
In using a general model for making ethical decisions, the CPA should do all of the following excepta. Gather or identify all the relevant facts about the situation that raises the ethical issue.b.
According to the profession's ethical standards, a CPA would be considered independent in which of the following instances?a. A client leases part of an office building from the CPA, resulting in a
The issue of audit independence might be raised by the auditor's participation in management consulting engagements. Which of the following statements is most consistent with the profession's
May a CPA hire for the CPA's public accounting firm a non-CPA systems analyst who specializes in developing computer systems?a. Yes, provided the CPA is qualified to perform each of the specialist's
According to the AICPA Code of Professional Con- duct, a CPA who has a financial interest in a partnership that invests in a client is considered to havea. An indirect financial interest in the
A violation of the profession's ethical standards most likely would have occurred when a CPAa. Compiled the financial statements of a client that employed the CPA's spouse as a book- keeper.b.
A CPA discovered irregularities in the tax return of a client and withdrew from the engagement. Which course of action should the CPA take?a. Take the matter to the Internal Revenue Ser- vice.b.
A CPA is an elected legislator in a local government. The city manager is responsible for all administrative functions. Would the CPA's independence be impaired with respect to an audit of the local
A CPA has been asked to audit a municipal authority. The CPA owns some of the authority's outstanding bonds. The amount is immaterial. Would the CPA's independence be impaired with respect to an
For each description, list the letter or letters of the term or terms that define the description. Each term may be used once, more than once, or not at all. Description 1. Does not extend to
Each of the following statements is incorrect. In the spaces provided, write the correct statement and the reason why the original statement is incorrect. [Hint: The chapter material is background
In each of the following cases, indicate whether there is a violation of the rule on independence of the AICPA Code of Professional Conduct. Support your answer.a. A CPA is a director of a charitable
Savage, CPA, has been requested by an audit client to perform a nonrecurring engagement involving the implementation of a computer information and control system. The client requests that in setting
The president of Shambra Products has consulted you in regard to an audit. Shambra, which has never been audited, has been developing a process to convert swamp gas into natural gas. Although
Judy Hanlon, CPA, performed an audit and prepared the federal income tax return for the Guild Corporation for the year ended December 31, 19X2. This was Ms. Hanlon's first engagement for this client.
Meek, CPA, discovers that an audit client has a pending lawsuit against it for a significant sum of money. If the lawsuit is lost, the client's assets will be reduced by a substantial amount. Meek
During the course of an audit, Fred Curious, the senior, noticed that several employees were paid at a rate less than that required for the federal minimum wage law. He checked into this matter and
During the audit of Park Company, a bottler and distributor of "Marshwater" soft drink, your discussion with the financial vice-president reveals that the company is paying rebates to certain of its
Mr. Ambit was employed by Keen & Keen, CPAs, in early June 19X2.a. Prior to employment, Mr. Ambit owned considerable stock in several of Keen & Keen's audit clients. Upon employment, he sold all the
You are a member of the ethics committee of your state society. You are reviewing the work of Mr. Quest, a CPA who practices in your state. In recent years numerous complaints have been made against
For each of the ethical situations listed below, indicate (1) whether or not a rule of profes- sional conduct has been violated and (2) which rule has been violated (if your answer to (1), above, is
Tucei, CPA, is the auditor of LGS, Inc., a midsized diversified public company with several subsidiaries; one of which sells life insurance. The chief executive officer of LGS met with Tucei to
Custom Furniture Company enjoyed reasonably good profits during all of its years. But at the beginning of 19X4, the company's new board of directors decided to expand the line of furniture to capture
Give two reasons why there is an expectation gap.
Name and define four legal relationships between plaintiffs and the auditor.
Name and define four standards of proof.
What is the difference between statutory law and common law?
Describe the ways in which the scope of many audits in the early 1900 s was significantly different from what it is today.
Describe the triangle of relationships shown in Figure 4.2 . FIGURE 4.2 Auditor, Client, and Third-party Relationships is hired by and owes a duty of due care to The Auditor may owe a duty to The
Describe the two auditing implications of the \(U l\) tramares case as shown in Figure 4.3. FIGURE 4.3 Common Law Relationships Established by the Ultramares Case Auditor's Liability under Common Law
What effect did each of these cases have on auditors' ordinary negligence liability to third parties?a. C.I.T. Financial Corporation.b. Rusch Factors, Inc. v. Levin.c. Rosenblum v. Adler.
Describe the three-part test established in the Credit Alliance v. Arthur Andersen \& Co. case.
Describe the two provisions of Section 11 (a) of the Securities Act of 1933 that impose strict standards of responsibility on the auditor.
What was the significance of the Barchris case?
Explain the significant differences between the standards of liability under Section 11 (a) of the Securities Act of 1933 and Section 18 (a) of the Securities Exchange Act of 1934.
In what way did the Hochfelder case put limitations on auditor liability under Section 10 (b) of the Securities Exchange Act of 1934 ?
Describe the four suggestions made by the SEC after an investigation into the McKesson \(\mathcal{O}\) Robbins case.
Why were criminal charges made against the auditors in the Continental Vending case?
What conflict did the ZZZZ Best case cause between the auditor's "public duty" and the Code of Professional Conduct?
What is the relationship between the ESM Government Securities Case and the accounting profession's quality control?
Answer the following questions:a. What is the auditor's liability for ordinary negligence under common law?b. How has the auditor's liability to third parties been widened under statutorv law?
What is the difference between business failures and audit failures?
How have auditors responded to the increasingly litigious environment?
Describe the reforms being addressed by the Coalition to Eliminate Abusive Securities Suits (CEASS).
Describe the phases of the liability cycle
Describe two litigation guidelines.
Which of the following is least likely to be an example of ordinary negligence?a. The auditor misinterprets a transaction because he or she did not read the invoice carefully.b. The auditor reads the
Which of the following is most likely to be an example of fraud?a. The auditor fails to properly determine the reason why so many of the client's customers complain that they have been overcharged.b.
Which of the following is an example of a privity relationship?a. A third party for whom the audit is being primarily conducted is known by the auditor.b. A third party unknown specifically by the
Which of the following is more likely to be a foreseen party?a. The president of the auditor's client.b. A local bank that might be expected to lend the client money relying, in part, on the audited
Which of the following is more likely to be a foreseeable party?a. A member of the general public, unknown to the auditor, who invests in stock of the auditor's client and relies on the audited
In the Ultramares case the plaintiff's charge of negligencea. Was disallowed because the plaintiff was not a foreseen party.b. Was disallowed because the plaintiff had a privity relationship with the
The C.I.T. Financial Corporation case resulted in extending the auditor's liability to third parties for ordinary negligence under common law toa. Foreseen parties.b. Foreseeable parties.c. Primary
The Rusch Factors case resulted in extending the auditor's liability to third parties for ordinary negligence under common law toa. Foreseen parties.b. Foreseeable parties.c. Primary beneficiaries.d.
The Rosenblum v. Adler case extended the auditor's liability for ordinary negligence under common law toa. Foreseen parties.b. Foreseeable parties.c. Primary beneficiaries.d. Those with privity
The three-point test for third-party lawsuits established in the Credit Alliance case included all of the following excepta. The accountant must be aware that a financial report will be used for a
Which of the following statements about the Securities Act of 1933 is not true?a. Third parties must prove that the auditor was guilty of negligence.b. Third parties' prima facie case is an alleged
Which of the following statements about the Securities Exchange Act of 1934 is not true?a. Third parties must prove that they relied on the financial statements and the auditor's opinion in making an
In the Hochfelder case, all of the following were factors in the case excepta. The Securities Exchange Act of 1934.b. Violation of federal criminal statutes.c. Scienter.d. Negligence.
For each of the following descriptions, indicate the letter or letters associated with that description. You may use a letter more than once or not at all. Description 1. Third parties that, in some
Indicate why each of the following statements is incorrect. Provide the correct statement.a. Using a foreseen standard for determining ordinary negligence, only clients could sue an auditor for
For each of the following scenarios, indicate whether action by the indicated party could be successfully brought against the auditor for (a) ordinary negligence under common law, (b) gross
Susan Jason, CPA, had been auditing the financial statements of Rosfeld Stores, Inc,, a large department store, for several years. During the last two years a nationwide economic recession had
XYZ Oil Co. had been a problem for its auditor, Joe Jones, CPA, for several years. The company's stock was traded in the over-the-counter market, and management was concerned with keeping net
Mr. Clyde Neglent, CPA, was engaged to perform an audit of Hidden Records, Inc., a retail department store. Mr. Neglent had investigated the business and its owners before accepting the engagement
Amy Love gingerly seated herself in the witness chair directly below the gently rotating fan hanging from the top of the high, arched ceiling. Her palms were slightly damp, but she hid this fact by
Potential conflicts of interest and other ethical matters were resolved between Custom Furniture Company and Ms. Hunt, and she began the audit. The loan officer of the bank was notified and told that
Briefly describe the purpose of the COSO framework of internal control effectiveness in the audit of internal control over financial reporting.
What are two statistical approaches available to the audit team for variables sampling?
What are the three phases that need to be conducted to determine whether an audit team can rely on IT controls?
Why should auditors be concerned about the source of data obtained from a client?
Define probability proportional to size sampling (PPS). What is the unique feature of PPS?
Is the audit team required to gain a comprehensive understanding of the audit client’s IT systems, processes, and infrastructure on each audit?
Describe how an auditor may use ADA in performing preliminary analytical procedures.
Describe what is meant by the IT dependency of a control activity. Why is it important for an auditor to understand this concept before testing the control activity for operating effectiveness?
What is meant by a predictable relationship when considering using ADA as a substantive analytical procedure?
What are the differences between an audit of internal control over financial reporting on an issuer and an evaluation of internal control on a financial statement audit for a non issuer?
Provide an example of a manual control activity that is dependent on a system-generated report for its effective operation.
Do the auditing standards provide explicit guidance for determining the level of evidence provided by ADA used as tests of details?
According to the AICPA, what are the five steps that need to be conducted when completing ADA?
When planning the ADA, what is the first step that needs to be taken?
How would an audit team best evaluate where the control activities are effective at an issuer?
Explain what is meant by information produced by the entity (IPE).
How would an audit team best evaluate whether the information and communication component is effective at an issuer?
In accessing client data, the auditor must consider the completeness and accuracy of the information produced by the entity, as well as the appropriateness of the data for the purposes of the
Under what circumstances should the audit team test IPE? What are the key objectives for the audit team’s test of IPE?
In a PPS application, how is the population size defined? What is the relationship between population size and sample size?

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