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Auditing: The Art and Science of Assurance Engagements, 15ce (Arens) Chapter 1 The Demand for Audit and Other Assurance Services 1.1

Define an assurance engagement.

1) What is the nature of the service provided when an auditor evaluates information using suitable criteria and issues a report that attests to the reliability of the information? A) internal audit engagement B) review engagement C) compilation engagement D) attestation engagement Answer: D Diff: 2 Learning Objective: 1-1 Define an assurance engagement. 2) The No-Name Agency conducts an independent service for a company to determine if its suppliers have complied with health and safety regulations, child labour guidelines, and other employee welfare issues. What type of service is No-Name providing? A) assurance B) attest C) review D) compilation Answer: A Diff: 2 Learning Objective: 1-1 Define an assurance engagement. 3) Which of the following is an example of an attestation engagement? A) accounting and bookkeeping services for the accounts B) an audit of internal controls over financial reporting C) preparation of the annual financial statements with notes D) completion of provincial and federal tax returns Answer: B Diff: 1 Learning Objective: 1-1 Define an assurance engagement. 4) When do individuals and organizations typically need assurance services? A) usually only when organizations obtain debt or other loans B) for five years from the start of an organization until debt is retired C) only when historical data, such as financial information, need to be audited D) whenever assurance is provided by a practitioner who is independent and unbiased Answer: D Diff: 2 Learning Objective: 1-1 Define an assurance engagement.

5) A major type of assurance service performed by large public accounting firms is A) auditing. B) reviewing. C) compilation. D) management consulting. Answer: A Diff: 1 Learning Objective: 1-1 Define an assurance engagement. 6) Two types of services provided by public accounting firms are audits and reviews. Discuss the similarities and differences between these two types of services. Which type provides the most assurance? Answer: Two primary types of services are audits of historical financial statements and reviews of historical financial statements. While both services involve the accumulation and evaluation of evidence regarding assertions made by management in the company's financial statements, an audit involves a more extensive examination and provides a higher level of assurance about the client's financial statements than a review. Diff: 1 Learning Objective: 1-1 Define an assurance engagement. 1.2

Define auditing and its purpose.

1) Which of the following illustrates the definition of auditing with respect to the evidence analysis process? A) accumulation and evaluation of evidence regarding assertions B) learning about different types of computing technology, such as mainframes C) writing an operational audit report that is tailored to the client's situation D) making sure that the auditor is competent and understands evidence gathering Answer: A Diff: 1 Learning Objective: 1-2 Define auditing and its purpose. 2) Auditing should be done by a qualified A) chartered accountant. B) certified management accountant. C) competent and independent person. D) professional accountant. Answer: C Diff: 2 Learning Objective: 1-2 Define auditing and its purpose.

3) Which of the following illustrates the definition of auditing with respect to the reporting process? A) accumulation and evaluation of evidence about balance sheet accounts B) reporting on the degree of correspondence between financial statements and ASPE/IFRS C) writing an operational audit report that is tailored to the client's situation D) making sure that the auditor is competent and understands evidence gathering Answer: B Diff: 2 Learning Objective: 1-2 Define auditing and its purpose. 4) In the audit of historical financial statements by PA firms, the criteria used are A) generally accepted auditing standards. B) relevant accounting frameworks. C) regulations of the Canada Revenue Agency. D) regulations of the provincial securities commissions. Answer: B Diff: 1 Learning Objective: 1-2 Define auditing and its purpose. 5) A large PA firm has assessed evidence collected during an engagement. Criteria used to assess the financial statements were International Financial Reporting Standards (IFRS). A high level of assurance was obtained. The type of engagement conducted was A) an audit. B) a review. C) management consulting. D) a compilation. Answer: A Diff: 2 Learning Objective: 1-2 Define auditing and its purpose. 6) The auditor and the entities being audited should agree on the criteria to be used in the audit A) well in advance before the audit starts. B) after the audit planning has been done. C) as they progress with the audit, as they can determine which criteria are most suitable. D) at the end of the audit. Answer: A Diff: 1 Learning Objective: 1-2 Define auditing and its purpose.

7) George had a conversation with the accounting personnel and documented information about how the accounting systems function. He has also placed copies of accounting forms in his files. George is performing which task? A) accounting procedures B) evidence gathering C) tax audit D) audit report preparation Answer: B Diff: 3 Learning Objective: 1-2 Define auditing and its purpose. 8) One of the reasons that an auditor must be competent is so that they can A) understand the engagement risks and the criteria used by the client. B) explain to staff how the bookkeeping should be done. C) record the transactions properly for the underlying records. D) capture the information properly in the computer files. Answer: A Diff: 2 Learning Objective: 1-2 Define auditing and its purpose. 9) One of the reasons that an auditor must be competent is so that they can A) select the type and amount of evidence to accumulate. B) explain to staff how the bookkeeping should be done. C) record the transactions properly for the underlying records. D) capture the information properly in the computer files. Answer: A Diff: 2 Learning Objective: 1-2 Define auditing and its purpose. 10) It is important for the auditor to be independent because A) otherwise, the auditor would not charge a fair rate to the client. B) otherwise, the auditor might not be as knowledgeable of the subject matter and the criteria. C) this will prevent bias in accumulating and evaluating evidence. D) the Canadian tax authorities require that the auditor be independent. Answer: C Diff: 2 Learning Objective: 1-2 Define auditing and its purpose. 11) As an external auditor is paid a fee by a client company, he or she A) is absolutely independent and may conduct an audit. B) may still be sufficiently independent to conduct an audit. C) is never considered to be independent. D) must receive approval from the relevant provincial securities commission before conducting an audit. Answer: B Diff: 1 Learning Objective: 1-2 Define auditing and its purpose. 4 Copyright © 2022 Pearson Canada, Inc.

12) The independent auditor's report is the A) communication of the outcome of auditor's evaluation to the users. B) set of audited financial statements. C) invoice of the auditor detailing the work they have performed. D) report presented to management about the possible improvements. Answer: A Diff: 2 Learning Objective: 1-2 Define auditing and its purpose. 13) In the audit of a corporate tax return, the CRA auditor should demonstrate competence in the use of A) external databases that contain economic statistics. B) standard personal and corporate tax preparation software. C) the Income Tax Act and accompanying regulations. D) database management software for the use of client-based research. Answer: C Diff: 1 Learning Objective: 1-2 Define auditing and its purpose. 14) In the audit of an individual's tax return, the criteria used would be A) an accounting framework. B) the Income Tax Act. C) the client's policies for taxable income. D) the auditor's judgment. Answer: B Diff: 2 Learning Objective: 1-2 Define auditing and its purpose. 15) In the audit of a corporate tax return, the report provided by the Canada Revenue Agency auditor would describe A) an opinion on the likelihood of tax return error. B) the likely accounting errors that could contribute to tax errors. C) management issues with respect to accurately reporting taxes. D) that the corporate income tax return is in compliance with the Income Tax Act. Answer: D Diff: 2 Learning Objective: 1-2 Define auditing and its purpose.

16) Figure 1-2

Use your knowledge of the definition of auditing and Figure 1-2: Audit of a Corporate Tax Return to explain how an auditor would conduct a Corporate Tax Return audit. Answer: First, the concept of a competent, independent person requires that the practitioner who is conducting an assurance engagement should have "adequate proficiency," which means that the tax auditor should be competent in the fields of taxation and the fields that need to be assessed, such as accounting, information systems, data management and access and internal controls. The auditor should also use due care and have an objective state of mind. This means that the auditor should be independent of the client and do their best using their skills when conducting the audit. The second part of Figure 1-2 relates to the accumulation and evaluation of evidence using a risk-based approach. This means that the auditor would collect evidence based upon risks of violations in the tax return by the client. The next three parts are connected. The auditor determines the correspondence of the information provided by the client (which could be the financial statements, tax return and the quality of the calculations within the tax return) to established criteria (the Income Tax Act). Finally, the auditor issues a report (Notice of Assessment) to summarize the findings. Diff: 2 Learning Objective: 1-2 Define auditing and its purpose.

1.3

Explain why there is a demand for audit and other assurance services.

1) A bank manager is evaluating an application for a bank loan from a new corporate client. The bank manager decides to request audited financial statements. Which of the following likely informed this decision? A) The bank manager is seeking to lower the risk-free interest rate that applies to the corporation. B) The bank manager believes the opinion of a knowledgeable third party is necessary to reduce the information risk. C) The bank manager is unsure that the client will be able to continue operating successfully in the future given the economic climate. D) The bank manager believes audited financial statements will be necessary for the Canada Revenue Agency. Answer: B Diff: 3 Learning Objective: 1-3 Explain why there is a demand for audit and other assurance services. 2) What is the most appropriate method for an organization to lower information risk related to its financial statements? A) Hire a good CPA to complete its bookkeeping work. B) Use a high-quality software package to keep track of information. C) Have an independent financial statement audit conducted. D) Have an independent operational audit conducted on effectiveness. Answer: C Diff: 2 Learning Objective: 1-3 Explain why there is a demand for audit and other assurance services. 3) Frederic is an account manager at a large Canadian bank. Frederic has to decide if the bank will make a loan to Frost Corp, a snow removal company. Further, Frederic has to decide how much they will lend to Frost and at what rate. Assuming that Frederic makes the loan, what factors will he use to decide the rate of interest? What factors are impacted by auditing and how? Answer: Factors: 1. Risk-free interest rate: The rate the bank could earn in a risk-free investment such as Canada Treasury bills. 2. Business risk for the customer: Possibility that the customer will not be able to repay their loan because of economic or business conditions. 3. Information risk: Possibility that the information upon which the business decisions are made were inaccurate. Audits impact information risk. Having a set of audited financial statements can reduce the information risk and increase the likelihood that the bank will make the loan and even at a reduced interest rate due to the reliance it can place on the audited financial statements. Diff: 3 Learning Objective: 1-3 Explain why there is a demand for audit and other assurance services. 7 Copyright © 2022 Pearson Canada, Inc.

4) ZK3 Ltd. is a successful 20-year-old private Canadian family-owned business. The company is owned equally by four siblings who are all involved in managing the daily operations of the company. A private equity company is contemplating an investment in ZK3 and insists on audited financial statements. The following are likely explanations for the private equity company's request except A) biases and motives of ZK3 management. B) Canada Revenue Agency requirements for audited financial statements. C) reducing information risk to the private equity investor. D) remoteness of information related to ZK3's operations. Answer: B Diff: 2 Learning Objective: 1-3 Explain why there is a demand for audit and other assurance services. 5) Information risk can be caused through any one of the following except A) remoteness of information. B) low volume of data. C) biases and motives of the provider. D) complex exchange transactions. Answer: B Diff: 2 Learning Objective: 1-3 Explain why there is a demand for audit and other assurance services. 6) The underlying conditions that create demand by users for reliable financial information include the fact that A) more reliable information will allow investors to calculate the rate of return on their investment. B) governments rely on such information to create tax policies. C) there is a need for the expression of an opinion as to the fairness of financial statements. D) users are separated from accounting records by distance and time. Answer: D Diff: 2 Learning Objective: 1-3 Explain why there is a demand for audit and other assurance services. 7) Michael & Oliver Properties Ltd. is a successful real estate company with headquarters in Oakville, Ontario. Most of its operations occur internationally in Nigeria. Michael & Oliver have a reliable CPA on staff in the Nigerian office who does the bookkeeping and compiles the financial statements. The bookkeeper reports to the CFO in Oakville, who is responsible for filing the taxes in Canada. Lala Inc., a partner on a new development project in Burlington, is insisting on audited financial statements. Which of the following concerns can Lala's financial statement auditors assist in addressing? A) Concerns over business risk B) Concerns over remoteness of information C) Concerns over client risk D) Concerns over assessment risk. Answer: B Diff: 2 Learning Objective: 1-3 Explain why there is a demand for audit and other assurance services. 8 Copyright © 2022 Pearson Canada, Inc.

8) Annual financial statement audits are required for which of the following situations? A) Canadian corporations as part of their tax filings with the Canadian Revenue Agency B) American corporations as part of filing their tax returns with the IRS C) Public companies and large not-for-profit organizations D) Private companies Answer: C Diff: 2 Learning Objective: 1-3 Explain why there is a demand for audit and other assurance services. 9) How does a financial statement auditor help reduce information risk, and make financial statements more trustworthy and reliable? A) By bringing integrity, independence, competence, and knowledge of financial statement reporting to the audit of the financial statements. B) By ensuring the business is using its resources efficiently. C) By verifying that the company has a credible CSR plan. D) By confirming that the company is only taking reasonable business risk. Answer: A Diff: 2 Learning Objective: 1-3 Explain why there is a demand for audit and other assurance services. 10) Information risk can be reduced through any one of the following except A) having the user verify the information. B) providing audited financial statements to users. C) having the chief financial officer certify and sign off on the financial statements. D) having the user share information risk with management. Answer: C Diff: 2 Learning Objective: 1-3 Explain why there is a demand for audit and other assurance services. 11) A bank manager is evaluating a loan application for Leonard & Ebelle, the private parent company with three subsidiaries in different sectors, including real estate, retail, and banking. The bank manager has received the unaudited consolidated financial statements for Leonard & Ebelle. The bank manager decides to request audited financial statements from Leonard & Ebelle as a precondition for approving the loan. The following could justify the bank manager's request, except A) audits are mandatory for large private companies. B) concerns over remoteness of information. C) concerns over voluminous data. D) concerns over complex exchange transactions. Answer: A Diff: 2 Learning Objective: 1-3 Explain why there is a demand for audit and other assurance services.

1.4

Explain why there is a demand for audit and other assurance services.

1) Blader Ng. Inc. has recently placed new air-cleaning systems in their smokestacks to meet air quality regulations. An auditing firm has been engaged to assess air quality and compare results to legislated requirements. What type of audit or engagement is the auditor conducting? A) financial statement B) compliance C) operational D) review Answer: B Diff: 3 Learning Objective: 1-4 Describe major types of assurance engagements and auditors. 2) As part of its loan agreement, Big Bank requires that only accounts receivable less than 60 days old be used as collateral. An auditor has been engaged to provide assurance that the accounts receivable on the list provided to the bank are indeed less than 60 days old. What type of engagement is the auditor conducting? A) financial statement B) compliance C) operational D) review Answer: B Diff: 3 Learning Objective: 1-4 Describe major types of assurance engagements and auditors. 3) A review of any part of an organization's procedures and methods for the purpose of evaluating efficiency and effectiveness is classified as a(n) A) audit of financial statements. B) compliance audit. C) operational audit. D) production audit. Answer: C Diff: 1 Learning Objective: 1-4 Describe major types of assurance engagements and auditors. 4) Which of the following is most difficult to evaluate objectively? A) efficiency and effectiveness of operations B) compliance with government regulations C) presentation of financial statements in accordance with a generally accepted accounting framework D) internal controls in use at a small company Answer: A Diff: 3 Learning Objective: 1-4 Describe major types of assurance engagements and auditors.

5) A typical objective of an operational audit is for the auditor to A) determine whether the financial statements fairly present the entity's operations. B) evaluate the feasibility of attaining the entity's operational objectives. C) evaluate the effectiveness of an internal process. D) report on the entity's relative success in attaining profit maximization. Answer: C Diff: 1 Learning Objective: 1-4 Describe major types of assurance engagements and auditors. 6) Which of the following audits can be regarded as being solely "compliance" audits? A) Canada Revenue Agency's examinations of the returns of taxpayers. B) the Auditor General's evaluation of the computer operations of governmental units. C) an internal auditor's review of his employer's payroll authorization procedures. D) a public accounting firm's audit of the local school district. Answer: A Diff: 2 Learning Objective: 1-4 Describe major types of assurance engagements and auditors. 7) Which of the following is an example of a financial statement audit? A) determining whether ABC's financial statements overall do not violate any debt covenants B) determining whether ABC's overall financial statements are stated in conformity with IFRS C) evaluating the effectiveness and efficiency of internal controls used to create account balance D) evaluating the effectiveness and efficiency of internal controls used to record transactions Answer: B Diff: 2 Learning Objective: 1-4 Describe major types of assurance engagements and auditors. 8) What is the primary difference between internal and external auditors? A) the methodology used to conduct financial statement audits B) the level of competence required C) the parties to whom the auditor is responsible D) the level of objectivity required Answer: C Diff: 2 Learning Objective: 1-4 Describe major types of assurance engagements and auditors. 9) Which of the following organizations establishes ethical standards and standards for the practice of Internal Auditing? A) Information Systems Audit and Control Association (ISACA). B) Institute of Internal Auditors (IIA). C) Society of Management Accountants of Canada (SMAC). D) Chartered Professional Accountants of Canada (CPA). Answer: B Diff: 1 Learning Objective: 1-4 Describe major types of assurance engagements and auditors.

10) Auditors General are responsible for auditing which types of organizations? A) public companies with shares issued to investors B) private companies that have loans outstanding to banks or other creditors C) ministries, departments, agencies that report to Government D) any organization that submits tax returns to the tax authorities Answer: C Diff: 2 Learning Objective: 1-4 Describe major types of assurance engagements and auditors. 11) The extent and the scope of the audits conducted by Auditors General are determined by A) legislation in the Auditor General's jurisdiction. B) audit partner planning and audit program development. C) the Auditor General and his/her staff. D) the financial statement auditors of the client. Answer: A Diff: 3 Learning Objective: 1-4 Describe major types of assurance engagements and auditors. 12) To operate effectively, an internal auditor must be independent of the A) line functions of the organization. B) entity that is being audited. C) employer-employee relationship that exists for other employees in the organization. D) outsourcing organizations used. Answer: A Diff: 3 Learning Objective: 1-4 Describe major types of assurance engagements and auditors. 13) The internal audit group typically reports directly to the A) board of directors. B) management of the company. C) external auditor. D) audit committee. Answer: D Diff: 3 Learning Objective: 1-4 Describe major types of assurance engagements and auditors. 14) An example of a forensic accounting assignment might be A) determining whether overall financial statements are stated in conformity with IFRS. B) estimating the value of inventory lost in a warehouse theft. C) evaluating the effectiveness of an internal process. D) ensuring compliance with specific legislation. Answer: B Diff: 3 Learning Objective: 1-4 Describe major types of assurance engagements and auditors.

15) In operational auditing, the auditor studies business operations and makes recommendations about all of the following except A) economic and efficient use of resources. B) the fairness of the financial statements. C) effective achievement of business objectives. D) compliance with company policies. Answer: B Diff: 3 Learning Objective: 1-4 Describe major types of assurance engagements and auditors. 16) We discuss four types of auditors: public accountants, government auditors, Canada Revenue Agency auditors, and internal auditors. Briefly describe the work and responsibilities of each type of auditor. Answer: Public Accountants: Primary function is the audit of financial statements of publicly traded companies and of other organizations requiring audits. The type of audit normally performed is known as an attestation engagement because they attest to the fair presentation of the financial statements. To conduct the audit of financial statements, the auditor must be a licensed public accountant. Government Auditors: Primary function is the audit of ministries, departments, and agencies that report to the government. A government auditor performs the audit function for the government. Canada Revenue Agency Auditors: Primary responsibility is the enforcement of federal tax laws. The Canada Revenue Agency auditors audit the returns of taxpayers to determine whether they have complied with the tax laws. They only perform compliance audits. Internal Auditors: Internal auditors are normally members of the IIA and work for individual companies to audit for management. The internal auditor's responsibilities can vary considerably but often include operations auditing and reporting their findings directly to the board of directors and audit committee. The internal auditor must be independent from the line function in the organization he/she is auditing. Diff: 3 Learning Objective: 1-4 Describe major types of assurance engagements and auditors.

17) To do an audit, it is necessary to have information in a verifiable form and some criteria by which the auditor can evaluate the information. Required: A. What information and criteria would a public accounting firm use when auditing a company's financial statements? B. What information and criteria would a Canada Revenue Agency auditor use when auditing that same company's tax return? C. What information and criteria would an internal auditor use when performing an operational audit to evaluate whether the company's computerized payroll processing system is operating efficiently and effectively? Answer: A. The information used by a public accounting firm in a financial statement audit is the financial information in the company's financial statements. The criteria used are a relevant accounting framework such as IFRS or ASPE. B. The information used by a Canada Revenue Agency auditor is the financial information in the auditee's federal tax return. The criteria are the Income Tax Act and interpretations. C. The information used by an internal auditor when performing an operational audit of the payroll system could include various items such as the number of errors made, costs incurred by the payroll department, and number of payroll records processed each month. The criteria would consist of company standards for departmental efficiency and effectiveness. Diff: 3 Learning Objective: 1-4 Describe major types of assurance engagements and auditors.

18) Mega Manufacturing Company (Mega) is thinking about acquiring Localized Small Producer Inc. (LSP), a small manufacturing company that produces related products. Mega has examined the financial statements of LSP, which show only a small profit in the last five years. Management of LSP has taken reasonable salaries, and the cost of goods sold is higher than the industry average for LSP. Mega believes that it will be able to introduce operational efficiencies at LSP, improving the profitability of the small company, if acquired. Required: A. What type of engagement should be conducted to assess the operational efficiencies of LSP? Justify your response. B. Who should be engaged to conduct the engagement? C. What major problems might the auditors encounter when conducting the audit and writing the report? Answer: A. Mega should have an operational audit conducted. An operational audit is a review of any part of an organization's operating procedures and methods for the purpose of evaluating economy, efficiency, and effectiveness. B. The operational audit could be conducted by Mega's internal auditors, assuming that they have internal auditors. It could also be conducted by a public accounting firm. For reasons of independence, if Mega is a listed company, then Mega should engage a different public accounting firm than its present auditors. C. Operational audits are not easily defined. First, the auditors would need to prepare criteria with the assistance of management to define efficiency. Then, the auditors would need to consider the type of evidence that might be available. For example, if LSP has older manufacturing equipment than Mega, LSP might be operating at peak efficiency - evidence will need to be geared to the criteria. Then, the report will need to be prepared in the context of the criteria and the evidence that will be collected. As there are no standard reports in operational auditing, the auditors will need to customize the report based upon the criteria and evidence collected. Diff: 2 Learning Objective: 1-4 Describe major types of assurance engagements and auditors.

19) Jordan set up a not-for-profit corporation several years ago to provide scholarships to disadvantaged youth in his community. Scholarships Get Up and Go Foundation now has assets of over $5 million and provides about ten university scholarships every year. Jordan is proud of the new doctors, dentists, and other healthcare practitioners that his foundation has funded. Jordan is thinking of starting another foundation in an old building that he has purchased. It would be a youth drop-in centre offering music lessons, art facilities, and gym facilities, and would have links to local high schools to offer homework clubs to encourage good grades. Required: A. Why should Jordan have the financial statements of both of these foundations audited? B. Who would be the users of the financial statements of the foundations? C. What other types of services could PAs provide to Jordan and the foundations? Answer: A. Auditing provides added assurance with respect to the information provided in the financial statements: perhaps he could get a better interest rate on invested funds at a financial institution. It might also give added credibility to potential donors of funds, and would also show the assets, liabilities, and any surplus/deficit are reported in the proper entity and have not been reported or used in the wrong entity. B. Users could be financial institutions that are holding the Foundations' money, Jordan, his employees, donors and potential donors, tax authorities, and organizations that regulate charitable organizations, such as provincial and federal regulatory agencies. If the foundations receive government funding, then the organizations providing funding would also be users of the financial statements. C. PAs could provide advice on how to invest the capital funding that is used for the scholarships. They could help design the accounting procedures in place at both foundations. They could provide bookkeeping and compilation assistance, as well as prepare tax returns and any regulatory filings. They could assist the foundation in obtaining working capital funding for the new drop-in centre, if needed. Diff: 2 Learning Objective: 1-4 Describe major types of assurance engagements and auditors.

1.5

Distinguish between accounting and financial statement auditing.

1) Joe is recording sales transactions in the accounting system so that they can be summarized in a logical manner for the purpose of providing financial information for decision-making. Joe is performing A) accounting. B) auditing. C) review. D) management consulting. Answer: A Diff: 2 Learning Objective: 1-5 Distinguish between accounting and financial statement auditing. 2) Which of the following is an example of accounting rather than auditing? A) gathering evidence about the quality of accounts receivable B) entering sales transactions into the sales order system C) reviewing sales invoices to see if they have been calculated correctly D) comparing bank deposit documents to the recorded cash received Answer: B Diff: 3 Learning Objective: 1-5 Distinguish between accounting and financial statement auditing. 3) In auditing accounting data, the concern is with A) evaluating whether recorded information reasonably reflects the economic events that occurred during the accounting period within specified dollar ranges. B) determining if fraud has occurred. C) determining if taxable income has been calculated correctly. D) analyzing the financial information to be sure that it complies with government requirements. Answer: A Diff: 1 Learning Objective: 1-5 Distinguish between accounting and financial statement auditing. 4) Which of the following is an example of auditing rather than accounting? A) recording purchase amounts in the expense accounts B) posting the daily sales totals to the general ledger C) recording cash received in the customer account files D) evaluating whether accounts receivable are collectible Answer: D Diff: 2 Learning Objective: 1-5 Distinguish between accounting and financial statement auditing.

5) An accountant records information. When conducting an audit, the auditor must possess A) an ability to interpret relevant accounting frameworks. B) an education beyond the bachelor's degree. C) an ability to classify transactions by type. D) an ability to organize and summarize economic events. Answer: A Diff: 2 Learning Objective: 1-5 Distinguish between accounting and financial statement auditing. 6) Auditors are licensed to perform financial statement audits, while accountants are not. Which of the following is a requirement for individuals who perform audits, but not for those performing accounting? A) Objectivity B) Independence C) Integrity D) Requisite education and training Answer: B Diff: 2 Learning Objective: 1-5 Distinguish between accounting and financial statement auditing. 7) Discuss the differences and similarities between the roles of accountants and auditors. What additional expertise must an auditor possess beyond that of an accountant? Answer: The role of accountants is to record, classify, and summarize economic events in a logical manner for the purpose of providing financial information for decision making. To do this, accountants must have a thorough understanding of the principles and rules that provide the basis for preparing the accounting information. In addition, accountants also help to develop systems to ensure that the entity's economic events are properly recorded in a timely manner and at a reasonable cost. The role of auditors is to determine whether the recorded financial information prepared by accountants reasonably reflects the economic events that occurred. To do this, the auditor must not only understand the principles and rules that provide the basis for preparing financial information, but must also possess expertise in the accumulation and evaluation of audit evidence. It is this latter expertise that distinguishes auditors from accountants. Diff: 1 Learning Objective: 1-5 Distinguish between accounting and financial statement auditing.

1.6 Describe assurance and nonassurance services provided by public accountants and distinguish the financial statement audit from other assurance services. 1) What impact is the presence of factors such as real-time information (such as via the Internet) expected to have upon the demand for assurance services? A) Demand is expected to decline due to the lack of adequate resources. B) Demand is expected to grow due to the increase in large corporations. C) Demand is expected to grow due to the need for forward-looking information. D) Demand is expected to decline as small businesses use the Internet more. Answer: C Diff: 2 Learning Objective: 1-6 Describe assurance and nonassurance services provided by public accountants and distinguish the financial statement audit from other assurance services. 2) The need to implement philosophies and practices commonly referred to as "improved business practices" comes from A) increased competition resulting in public accounting firms being concerned about keeping clients and maintaining a reasonable profit. B) a CAS pronouncement. C) an IFRA pronouncement. D) a need to increase profitability on assurance type mandates. Answer: A Diff: 2 Learning Objective: 1-6 Describe assurance and nonassurance services provided by public accountants and distinguish the financial statement audit from other assurance services. 3) In Canada, publicly traded companies are A) required to have audits. B) strongly encouraged to have audits. C) not required to have an audit if they have a review. D) not required to have an audit. Answer: A Diff: 2 Learning Objective: 1-6 Describe assurance and nonassurance services provided by public accountants and distinguish the financial statement audit from other assurance services. 4) A shareholder of a public Canadian firm can have access to the audited financial statements A) on the Internet. B) by calling the accounting department of the company. C) by requesting a copy from the auditors. D) if he/she holds more than 1% of the shares of the company. Answer: A Diff: 1 Learning Objective: 1-6 Describe assurance and nonassurance services provided by public accountants and distinguish the financial statement audit from other assurance services.

5) What type of information is available from www.sedar.com (System for Electronic Document Analysis and Retrieval)? A) minutes of shareholders and directors meetings B) transaction reports from major credit card companies C) annual reports and management discussion and analysis D) listings of all of the shareholders on record Answer: C Diff: 2 Learning Objective: 1-6 Describe assurance and nonassurance services provided by public accountants and distinguish the financial statement audit from other assurance services. 6) A reason for a not-for-profit organization to be audited is to A) comply with the laws requiring them to be audited. B) meet requirements of lenders or funding sources. C) have a professional accountant perform their bookkeeping. D) ensure that their financial statements do not contain errors. Answer: B Diff: 3 Learning Objective: 1-6 Describe assurance and nonassurance services provided by public accountants and distinguish the financial statement audit from other assurance services. 7) Which of the following services provides a moderate level of assurance about the client's financial statements? A) forecasts and projections B) compliance C) review D) audit Answer: C Diff: 1 Learning Objective: 1-6 Describe assurance and nonassurance services provided by public accountants and distinguish the financial statement audit from other assurance services. 8) Which of the following is an advantage of a review engagement as compared to an audit engagement? A) For the review engagement, information risk is reduced more than for an audit. B) For the review engagement, the documentation to be provided by the client is greater. C) For the review engagement, the financial statements assessed will have more detail. D) The review engagement requires considerably less work, so is less costly. Answer: D Diff: 2 Learning Objective: 1-6 Describe assurance and nonassurance services provided by public accountants and distinguish the financial statement audit from other assurance services.

9) The Sarbanes-Oxley Act requires the auditor to attest to the A) accuracy of the financial statements. B) efficiency of the internal controls in financial reporting. C) effectiveness of internal controls. D) compliance of the company with the generally accepted accounting framework. Answer: C Diff: 1 Learning Objective: 1-6 Describe assurance and nonassurance services provided by public accountants and distinguish the financial statement audit from other assurance services. 10) The reasoning behind the requirements of the Sarbanes-Oxley Act's section 404 (attestation on internal control over financial reporting) is that A) effective controls result in greater profits to organizations, reducing business failures. B) effective controls reduce the likelihood of future misstatements in the financial statements. C) better internal controls can be implemented at a lower cost, improving product quality. D) automated controls improve customer service, resulting in higher product sales. Answer: B Diff: 3 Learning Objective: 1-6 Describe assurance and nonassurance services provided by public accountants and distinguish the financial statement audit from other assurance services. 11) There is an increasing demand for assurance about computer controls surrounding financial information transacted electronically and the security of the information related to the transaction. This is in large part due to A) the increasing presence of Internet sales in many businesses. B) the use of computer-assisted auditing tools. C) the large volume of transactions and information shared online and in real-time by companies. D) client's uncertainty about the proper functioning of their computer systems. Answer: C Diff: 2 Learning Objective: 1-6 Describe assurance and nonassurance services provided by public accountants and distinguish the financial statement audit from other assurance services. 12) Which of the following services provides no assurance about the client's financial statements? A) compilation B) review C) audit D) SysTrust Answer: A Diff: 1 Learning Objective: 1-6 Describe assurance and nonassurance services provided by public accountants and distinguish the financial statement audit from other assurance services.

13) Herbert Zora is having financial statements prepared by his PA to accompany his tax return. His primary concern is cost. Of the following, the lowest-cost engagement that the PA can perform for Zora's financial statements is A) compilation. B) review. C) audit. D) WebTrust. Answer: A Diff: 2 Learning Objective: 1-6 Describe assurance and nonassurance services provided by public accountants and distinguish the financial statement audit from other assurance services. 14) When readers are cautioned that the financial statements may not be appropriate for their purposes, the non-assurance service is called a(n) A) SysTrust. B) compilation. C) review. D) audit. Answer: B Diff: 3 Learning Objective: 1-6 Describe assurance and nonassurance services provided by public accountants and distinguish the financial statement audit from other assurance services.

15) As a PA, you have been asked to prepare your sister Betty's year-end financial statements. Betty is a photographer and is the sole shareholder of a small company called Best Weddings Ltd. She photographs weddings, graduations, and schools, and earns about $75 000 per year. Betty has said that she only needs the financial statements for her tax returns and would like you to prepare the tax returns too. Required: A. Would you be able to prepare the financial statements for your sister? Why or why not? B. If yes, what type of report would you prepare to accompany the financial statements? C. Would you be able to prepare the tax returns for your sister? Why or why not? Answer: A. Yes, the PA would be able to prepare the financial statements as a bookkeeping (or compilation) assignment. No assurance is provided for a compilation, so independence is not required. An audit or review could not be prepared because for those engagements, assurance is provided, which means that the PA would need to be independent. B. A compilation report would be prepared to accompany the financial statements. The report would need to disclose the relationship and that independence was absent. C. Yes, the PA would be able to prepare the tax returns, as assurance is not required for tax returns. Identification of the preparer is required on tax returns. It would be important to discuss with your sister why she wants you to prepare the tax returns (Does she just want to save some money? Or is she trying to prepare tax returns that are fraudulent?). It would be inappropriate (and professionally dangerous) to be associated with false and misleading information, as one could be sued by the tax department and expelled from the profession. Diff: 3 Learning Objective: 1-6 Describe assurance and nonassurance services provided by public accountants and distinguish the financial statement audit from other assurance services.

Auditing: The Art and Science of Assurance Engagements, 15ce (Arens) Chapter 2 The Public Accounting Profession and Audit Quality 2.1

Describe the public accounting industry.

1) One of the main advantages of a "big" public accounting firm is A) their lower professional fees due to economies of scale. B) their ability to share with the client knowledge and experience from similar companies they have audited. C) their ability to audit nearly all the largest companies worldwide. D) the increased reliability of their audit reports. Answer: C Diff: 2 Learning Objective: 2-1 Describe the public accounting industry. 2) National network firms are those with A) offices in all major OECD nations. B) international representation in most cities around the world. C) offices in all major Canadian cities. D) national and international affiliations providing services in all major centres. Answer: C Diff: 3 Learning Objective: 2-1 Describe the public accounting industry. 3) Public accounting firms in Canada that have more than 50 professional staff are called A) the "Big Four" firms. B) national network firms. C) large regional and local firms. D) small local firms. Answer: C Diff: 3 Learning Objective: 2-1 Describe the public accounting industry. 4) What is the size of most small local public accounting firms in Canada? A) fewer than 25 employees B) between 25 and 49 employees C) between 50 and 75 employees D) more than 75 employees Answer: A Diff: 3 Learning Objective: 2-1 Describe the public accounting industry.

5) The most common organizational form used by public accounting firms is A) sole proprietorship or partnership. B) limited liability corporation. C) corporation. D) co-operative. Answer: A Diff: 1 Learning Objective: 2-1 Describe the public accounting industry. 6) Large accounting firms are often limited liability partnerships (LLPs) because if their audits are conducted in accordance with CAS (Canadian Auditing Standards), A) partners not on the engagement would not be liable to pay with their personal assets when the LLP is sued. B) improved quality control practices can be initiated using technical personnel. C) more formal requirements are in place when reporting to federal tax authorities. D) partners are liable to pay with only a limited portion of their personal assets when the LLP is sued. Answer: A Diff: 3 Learning Objective: 2-1 Describe the public accounting industry. 7) Most international and national accounting firms in Canada are comprised of professional accountants with the designation A) CIA. B) CPA. C) CFE. D) CISA. Answer: B Diff: 2 Learning Objective: 2-1 Describe the public accounting industry. 8) What are the staff levels and responsibilities at public accounting firms? Answer: 1. Partner - Leads the engagement, reviews the overall audit work, and is involved in significant audit decisions. A partner has the ultimate responsibility for conducting the audit and maintaining client relations. Average experience of 10 years. 2. Senior manager - Leads the engagement and reviews the team's work. Works directly with the partner and assists them in client relationships. Average experience of 7-10 years. 3. Manager - Helps the in-charge plan and manage the audit, reviews the in-charge's work, and manages relations with the client. A manager may be responsible for more than one engagement at the same time. Average experience of 5-7 years. 4. Senior or in-charge auditor - Coordinates and is responsible for the audit field work, including supervising and reviewing staff work. Average experience of 2 to 5 years. 5. Staff accountant - Performs most of the detailed audit work. Average experience of 0-2 years. Diff: 2 Learning Objective: 2-1 Describe the public accounting industry. 2 Copyright © 2022 Pearson Canada, Inc.

9) What are the different business organization structures that an accountant may use? What are the advantages of these structures? Answer: Accountants may establish a sole proprietorship, a partnership, a limited liability partnership, or a limited liability corporation. The latter two structures are permitted only in certain provinces, based upon provincial legislation. Advantages: A sole proprietorship is the only choice if there is only one PA. It is a simple business structure. A partnership is used to allocate income to all partners and helps ensure that all partners are responsible for the actions of the organization. A limited liability partnership (or limited liability corporation) is used to limit liability to only those partners who worked on or supervised a particular engagement. This helps protect the personal assets of partners. Diff: 2 Learning Objective: 2-1 Describe the public accounting industry. 2.2

Identify the organizations that affect the public accounting profession and their role.

1) The Canada Business Corporation Act gave authority to Canadian accounting and auditing standard-setters by stating that financial statements A) must be compiled in accordance with International Financial Reporting Standards. B) should be prepared in accordance with the standards in the CPA Canada Handbook. C) must be audited by accountants that reside in Canada. D) should be prepared in accordance with local financial reporting standards. Answer: B Diff: 2 Learning Objective: 2-2 Identify the organizations that affect the public accounting profession and their role. 2) The reason for adopting the CASs is to A) comply with requirements in the Canada Business Corporations Act. B) respond to the increased litigation risks faced by auditors. C) be consistent with the international standards of auditing. D) simplify the auditing process. Answer: C Diff: 2 Learning Objective: 2-2 Identify the organizations that affect the public accounting profession and their role.

3) The implementation of the Sarbanes-Oxley requirements in the U.S. resulted in the creation of the PCAOB to oversee listed companies' auditors and develop audit standards. The impact of this requirement in Canada was A) the creation of new auditing standards to ensure better quality control for audits. B) revision to the rules of professional conduct for CPAs. C) additional training requirements for becoming an auditor. D) the creation of the CPAB to oversee Canadian audit professionals. Answer: D Diff: 3 Learning Objective: 2-2 Identify the organizations that affect the public accounting profession and their role. 4) Zara works as an auditor for Quincy, Quentin and Quaid, a public accounting firm in Richmond Hill, Ontario. Zara has decided to leave the firm and establish her own firm in Whitby, Ontario. She plans to offer audits and taxation services. Which organization is responsible for licensing Zara? A) CPA Canada B) CPAB C) PCAOB D) CPA Ontario Answer: D Diff: 3 Learning Objective: 2-2 Identify the organizations that affect the public accounting profession and their role. 5) What is the purpose of assurance standards issued by the AASB (Auditing and Assurance Standards Board) in Canada? A) to expose the newly established standards to as many groups as possible B) to provide current copies of the standards in advance of being placed in the CPA Handbook C) to provide supporting reference material and other resources D) to set standards for engagements such as reviews and compilations Answer: D Diff: 2 Learning Objective: 2-2 Identify the organizations that affect the public accounting profession and their role.

6) Lala graduated from York University with a Bachelor of Commerce. He now lives and works in Kingston, Ontario for a small local audit firm. Lala has written and passed the Common Final Exam (CFE) to become a CPA. Which organization is responsible for awarding Lala the CPA designation? A) CPA Canada B) CPA Ontario C) PCAOB D) CPAB Answer: B Diff: 2 Learning Objective: 2-2 Identify the organizations that affect the public accounting profession and their role. 7) Securities regulations in Canada are the responsibility of A) a national securities commission. B) provincial securities commissions. C) the professional accounting organizations. D) office of the Auditor General of Canada. Answer: B Diff: 1 Learning Objective: 2-2 Identify the organizations that affect the public accounting profession and their role. 8) Hannah graduated from York University with a Bachelor of Commerce and is now preparing to write the Common Final Exam (CFE). Which organization is responsible for setting the examination and establishing examination standards? A) CPA Canada B) CPA Ontario C) PCAOB D) CPAB Answer: A Diff: 2 Learning Objective: 2-2 Identify the organizations that affect the public accounting profession and their role. 9) Who is responsible for developing financial statement audit and assurance standards in Canada? A) AASB (Auditing and Assurance Standards Board) B) standards staff at CPA Canada C) provincial securities commissions D) the accounting firms who conduct financial statement audits Answer: A Diff: 1 Learning Objective: 2-2 Identify the organizations that affect the public accounting profession and their role.

10) A PA firm is conducting an audit of a public company that has operations in both Canada and Finland. There is a conflict between ISAs (International Statements on Auditing) and CASs (Canadian Auditing Standards) for the foreign operations that will be consolidated with the Canadian operations. Which reporting standards should the PA firm follow? A) Finnish reporting standards B) Canadian reporting standards C) international financial reporting standards D) the best of Canadian or international standards Answer: C Diff: 3 Learning Objective: 2-2 Identify the organizations that affect the public accounting profession and their role. 11) CPAB's purpose is to A) develop auditing standards. B) provide training and continuing education to auditors. C) clarify and communicate the role of the auditor to the public. D) improve the public's confidence in independent auditing. Answer: D Diff: 2 Learning Objective: 2-2 Identify the organizations that affect the public accounting profession and their role. 12) Nancy is a partner at a small local accounting firm in Markham, Ontario licensed to perform audits. She has been approached by n-Newi Technologies Inc., a TSX-listed public company, to complete the audit of its financial statements. This is Nancy's firm's first public company client. Which organization is responsible for licensing Nancy to complete n-Newi's audit? A) CPA Canada B) CPAB C) PCAOB D) CPA Ontario Answer: B Diff: 3 Learning Objective: 2-2 Identify the organizations that affect the public accounting profession and their role.

13) CPA Canada is the professional accounting organization for Chartered Professional Accountants (CPAs) in Canada. Describe the role and responsibilities of the organization in serving its members. Answer: Research and Publication: CPA Canada publishes the CPA Discussion & Analysis (D&A) Magazine along with accounting and auditing research studies. CPA Canada also coordinates the CFE exam. Continuing Education: CPA Canada provides courses, seminars, and online material to update its members on a variety of topics relating to accounting and auditing. It also has six specific specializations for its members. Establishing Standards and Rules: CPA Canada sets accounting and auditing standards that are published by the CPA and that must be followed by public accountants. Diff: 2 Learning Objective: 2-2 Identify the organizations that affect the public accounting profession and their role. 14) For each of the following situations, state which element of the profession or society encourages the public accountant to conduct himself or herself at a high level. A. Marco attended a seminar on the topic of business combinations to ensure he was up to date with the new standard. B. Barbara referred to the standard on hedging to ensure that her client had the appropriate documentation to qualify for hedge accounting. C. Gretchen refused to perform the audit of her uncle's restaurant chain. D. Walid worked overtime all week to ensure that the file was properly documented and met the quality control requirements. E. Sarah took the summer off to study for the Common Final Examination (CFE) to ensure that she would pass the entrance exam to become a Chartered Professional Accountant. Answer: A. Continuing Education. B. CPA Canada Handbook. C. Code of professional conduct. D. CPAB review and quality control. E. Professional examination. Diff: 2 Learning Objective: 2-2 Identify the organizations that affect the public accounting profession and their role.

2.3 Describe how the CPA Canada Handbook–Assurance and Canadian Auditing Standards are organized. 1) When the CPA Canada Handbook is silent on an auditing issue, which of the following is the best of the other authoritative sources that the auditor could use? A) Assurance and Related Services Guidelines (AuG) B) audit firm practice manuals C) past practice at the client D) the PA firm's audit standards partner Answer: A Diff: 2 Learning Objective: 2-3 Describe how the CPA Canada Handbook–Assurance and Canadian Auditing Standards are organized. 2) The most authoritative requirements for public accountants performing financial statement audits in Canada are the A) standards used by the client. B) industry-specific standards. C) CPA Canada Handbook requirements. D) assurance guidelines. Answer: C Diff: 2 Learning Objective: 2-3 Describe how the CPA Canada Handbook–Assurance and Canadian Auditing Standards are organized. 3) Which standards relate to public accounting firms' systems of quality control? A) Canadian auditing standards. B) Assurance and related services guidelines. C) Canadian standards on quality control. D) Provincial securities commissions standards. Answer: C Diff: 2 Learning Objective: 2-3 Describe how the CPA Canada Handbook–Assurance and Canadian Auditing Standards are organized. 4) As per Canadian Auditing Standards CAS 200.11, the CAS helps the auditors fulfill which of the overall objectives relating to financial statement audits? Answer: 1. To provide reasonable assurance that the financial statements are not materially misstated. 2. To consider both potential fraud and error. 3. To communicate whether the financial statements comply with an applicable financial reporting framework by using the expression of an opinion. 4. To report on the financial statements, and communicate auditor findings in accordance with the CASs. Diff: 3 Learning Objective: 2-3 Describe how the CPA Canada Handbook–Assurance and Canadian Auditing Standards are organized. 8 Copyright © 2022 Pearson Canada, Inc.

2.4

Explain the purpose of and the principles underlying the financial audit.

1) What is an auditor required to do with respect to a client's financial reporting framework? A) assess whether the framework selected by management is suitable B) select an applicable framework for use with the financial statements C) make sure that ASPE or ASNPO are in use for publicly listed companies D) select the accounting principles to be used as part of the reporting framework Answer: A Diff: 2 Learning Objective: 2-4 Explain the purpose of and the principles underlying the financial audit. 2) When the criteria to be used in the financial statement audit are established, the auditor's responsibility is to A) evaluate the reporting framework used. B) select the acceptable financial reporting framework. C) make a recommendation to management for selecting the framework. D) create and document the framework used. Answer: A Diff: 2 Learning Objective: 2-4 Explain the purpose of and the principles underlying the financial audit. 3) What is one of the ways that the Canadian Auditing Standards (CASs) make management directly responsible for an organization's financial statements? A) all listed company management must certify the accuracy of the evidence provided B) management must provide evidence to support financial statement data C) management must implement and carry out the development of high-quality internal controls D) companies must use internal auditors to assess the quality of the financial statements Answer: B Diff: 3 Learning Objective: 2-4 Explain the purpose of and the principles underlying the financial audit. 4) What is one of the ways that the Canadian Auditing Standards (CASs) make management directly responsible for an organization's financial statements? A) All listed company management must certify the accuracy of the evidence provided. B) Management must implement and carry out the development of high-quality internal controls. C) Management must acknowledge and understand its responsibilities. D) Companies must use internal auditors to assess the quality of the financial statements. Answer: C Diff: 2 Learning Objective: 2-4 Explain the purpose of and the principles underlying the financial audit.

5) Canadian Auditing Standards (CASs) require that an audit be conducted using A) a controls-testing approach. B) a risk-assessment approach. C) a substantive approach. D) a standard approach. Answer: B Diff: 3 Learning Objective: 2-4 Explain the purpose of and the principles underlying the financial audit. 6) Canadian Auditing Standards (CASs) are best described as A) the CPA Canada Handbook, plus published research and public accounting firm practices in auditing. B) Canadian generally accepted auditing practices developed by public accounting firms. C) material that is fully codified in the CPA Canada Handbook developed in Canada. D) standards for financial statement audits based only on International Standards on Auditing (ISAs). Answer: A Diff: 1 Learning Objective: 2-4 Explain the purpose of and the principles underlying the financial audit. 7) When conducting an audit, the auditor should look at Canadian Auditing Standards as A) minimum standards of performance. B) normal standards of performance. C) ultimate standards of performance. D) practical standards of performance. Answer: A Diff: 2 Learning Objective: 2-4 Explain the purpose of and the principles underlying the financial audit. 8) Which of the following rights is necessary for the completion of an audit? A) The right to obtain copies of all documentation needed to conduct the audit. B) The right to advise management regarding how it should set up its records. C) The right to publish information when management engages in fraud. D) The right to have access to the necessary records, information, and explanations. Answer: D Diff: 3 Learning Objective: 2-4 Explain the purpose of and the principles underlying the financial audit.

9) The codes of professional conduct of the various accounting bodies are meant to A) provide a standard of conduct for all members, including those in public practice. B) interpret the assurance recommendations and views of the AASB. C) provide the rules underlying the audits and related service activities carried on by the accountants. D) establish the norms for quality control of an audit. Answer: A Diff: 2 Learning Objective: 2-4 Explain the purpose of and the principles underlying the financial audit. 10) General qualifications and conduct standards indicate that performance of all aspects of auditing should be performed with due care. This means that the auditor must fulfill his/her duties A) in accordance with the CAS. B) carefully and in a timely manner. C) to the satisfaction of the client. D) diligently and carefully. Answer: D Diff: 2 Learning Objective: 2-4 Explain the purpose of and the principles underlying the financial audit. 11) Adequate planning and execution to reduce risk to an acceptable level is a requirement of which category of Canadian auditing standards (CAS)? A) purpose of the audit B) performance responsibility C) personal responsibility D) reporting Answer: B Diff: 2 Learning Objective: 2-4 Explain the purpose of and the principles underlying the financial audit. 12) The third step of performance responsibility standard in the financial statement audit using a risk assessment approach is to A) identify risks of material misstatement. B) determine and apply materiality levels. C) evaluate audit evidence. D) ensure adequate planning and supervision. Answer: A Diff: 3 Learning Objective: 2-4 Explain the purpose of and the principles underlying the financial audit.

13) The risk response phases of conducting the financial statement audit using a risk assessment approach includes A) conducting an independence threat analysis to evaluate independence. B) preparation of the final auditor's report in response to audit findings. C) identification of risks of material misstatement at the client. D) gathering evidence to assess the likelihood of material misstatement. Answer: D Diff: 2 Learning Objective: 2-4 Explain the purpose of and the principles underlying the financial audit. 14) During which phase(s) of the financial statement audit does the auditor "evaluate evidence" when using a risk assessment approach? A) the risk assessment phase B) the risk response phase C) the reporting phase D) the performance and reporting phases Answer: D Diff: 3 Learning Objective: 2-4 Explain the purpose of and the principles underlying the financial audit. 15) Communicating the findings of the audit in accordance with CASs is a requirement of which category of generally accepted auditing standards? A) general B) performance C) reporting D) quality Answer: C Diff: 2 Learning Objective: 2-4 Explain the purpose of and the principles underlying the financial audit. 16) A strategic and risk-based audit approach means that the client must be assessed in the context of the business environment, including which of the following? A) ensuring that accounting complies with IFRS or ASPE B) completion of an independence threat analysis with supporting documentation C) corporate governance process and quality of internal controls D) talking to those audit committee members who are also part of management Answer: C Diff: 2 Learning Objective: 2-4 Explain the purpose of and the principles underlying the financial audit.

17) During which phases of the financial statement audit does the auditor "conduct quality control" when using a risk assessment approach? A) the risk assessments B) the risk responses C) the reporting process D) performance and reporting phases Answer: D Diff: 2 Learning Objective: 2-4 Explain the purpose of and the principles underlying the financial audit. 18) Who do the external auditors and the internal auditors usually report to? A) senior management B) audit committee C) chief executive officer D) director of internal audit Answer: B Diff: 1 Learning Objective: 2-4 Explain the purpose of and the principles underlying the financial audit. 19) Adequate technical training and proficiency in auditing is a requirement of which category of generally accepted auditing standards? A) personal B) examination C) reporting D) quality control Answer: A Diff: 2 Learning Objective: 2-4 Explain the purpose of and the principles underlying the financial audit. 20) CAS 200 provides overall objectives of the independent auditor during the conduct of an audit in four categories. How do these standards provide guidance to auditors? A) They detail what an auditor should do during each financial statement audit. B) They represent a framework for further discussion of detailed standards. C) They provide specific rules about how work should be done for evidence gathering. D) They explain how the audit report should be developed and distributed. Answer: B Diff: 2 Learning Objective: 2-4 Explain the purpose of and the principles underlying the financial audit.

21) CAS 200 explains that as part of general qualifications and conduct, the auditor should be professionally competent. Which of the following help the auditor achieve competence? A) using due care in the performance of all aspects of auditing B) having an objective state of mind and independence from the client C) having formal education and practical experience, and pursuing continuing education D) conducting the audit using a risk-based approach and being skeptical Answer: C Diff: 3 Learning Objective: 2-4 Explain the purpose of and the principles underlying the financial audit. 22) CAS 200 explains that as part of general qualifications and conduct, the auditor should exercise due care in the performance of all aspects of auditing. Which of the following is an illustration of due care? A) having an objective state of mind and independence from the client B) having formal education and practical experience in the conduct of auditing C) issuing a standard audit report using the CPA Canada Handbook specified wording D) considering the completeness of the working papers Answer: D Diff: 3 Learning Objective: 2-4 Explain the purpose of and the principles underlying the financial audit. 23) Professional skepticism during the financial statement audit requires an appropriate state of mind: being impartial and objective and continuing to be throughout the whole audit engagement. Which of the following illustrates an appropriate state of mind? A) not having any ownership in the client's shares or being a debt-holder B) carefully assessing documents and not being the company's advocate C) matching documents to make sure that they are accurate and fair D) being aware that there could be material misstatements in the financial statements Answer: D Diff: 2 Learning Objective: 2-4 Explain the purpose of and the principles underlying the financial audit.

24) The Canadian Auditing Standards are organized around four principles. List and state the nature of these principles. Answer: 1. Purpose of the Audit: • Purpose is to provide an opinion on the financial statements. 2. Personal Responsibilities: • Possess appropriate competence and capabilities. • Comply with ethical and independence requirements. • Maintain professional skepticism and exercise professional judgment. 3. Performance Responsibilities: •Obtain reasonable assurance about whether financial statements are free of material misstatement through performing the following: • Plan audit and supervise engagement team. • Determine and apply materiality level or levels. • Identify and assess risks of material misstatement based on understanding entity and its environment including internal controls. • Obtain sufficient appropriate audit evidence. 4. Reporting Responsibilities: • Express opinion on financial statements in a written report. • State whether financial statements were presented in accordance with financial reporting framework. Diff: 2 Learning Objective: 2-4 Explain the purpose of and the principles underlying the financial audit. 25) Canadian Auditing Standards (including the CPA Canada Handbook) are the authoritative standards for the conduct of financial statement audits in Canada. How would this affect the audit of a Canadian company that is owned by a Swedish company that must also report using Swedish (International) auditing standards? Answer: • the audit of the foreign subsidiary must be conducted using Canadian Auditing Standards. • as long as the audit complies with CAS, it may also be conducted in accordance with international GAAS. • the auditor may report that the audit was conducted using both Canadian and Swedish (International) Auditing Standards. • Canadian Auditing Standards would be the floor (or minimum standards). • differences between the two sets of standards may need to identified. • where there are differences between the two sets of standards, the auditor should follow Canadian reporting standards. • the CPA Canada Handbook takes precedence over the ISAs when there is a conflict. Diff: 3 Learning Objective: 2-4 Explain the purpose of and the principles underlying the financial audit.

2.5 Understand the drivers of audit quality and explain the competing pressures auditors face that threaten audit quality. 1) What is one of the ways that high-profile business failures (such as Enron, WorldCom, and Nortel) have affected the auditing profession? A) raised the cost of hiring accounting-firm professionals B) resulted in a need for decreased paperwork on audits C) lowered the number of professionals working on an audit engagement D) created increased focus on standards and high-quality audits Answer: D Diff: 1 Learning Objective: 2-5 Understand the drivers of audit quality and explain the competing pressures auditors face that threaten audit quality. 2) There are many elements of quality control at the firm level. Which element does the statement "an organizational culture that emphasizes that quality should be present for audit and review engagements" fall under? A) leadership responsibilities within the firm B) general ethical requirements C) general human resource policies D) engagement performance Answer: A Diff: 2 Learning Objective: 2-5 Understand the drivers of audit quality and explain the competing pressures auditors face that threaten audit quality. 3) What are the four areas that CPAB recommends PA firms should emphasize to improve audit quality? Answer: 1. Build the right teams. 2. Provide the right support. 3. Conduct in-process reviews. 4. Assign accountability for audit quality. Diff: 3 Learning Objective: 2-5 Understand the drivers of audit quality and explain the competing pressures auditors face that threaten audit quality.

2.6 Identify quality control standards and practices within the auditing profession and apply those standards and practices to enhance audit quality. 1) According to Canadian Standards on Quality Control (CSQC), which of the following is not one of the elements of quality control? A) monitoring B) engagement performance C) leadership responsibilities D) consistency with prior years Answer: D Diff: 3 Learning Objective: 2-6 Identify quality control standards and practices within the auditing profession and apply those standards and practices to enhance audit quality. 2) A PA firm has an organizational structure that assures the technical review of every engagement by a partner who has expertise in the client's industry. This is an example of good A) entity-level controls. B) adherence to professional standards. C) business risk management. D) quality controls. Answer: D Diff: 3 Learning Objective: 2-6 Identify quality control standards and practices within the auditing profession and apply those standards and practices to enhance audit quality. 3) There are many elements of quality control at the firm level. Which element does the statement "quality control procedures should be developed, documented, implemented, and communicated" fall under? A) leadership responsibilities within the firm B) general ethical requirements C) general human resource policies D) engagement quality control review Answer: A Diff: 2 Learning Objective: 2-6 Identify quality control standards and practices within the auditing profession and apply those standards and practices to enhance audit quality.

4) There are many elements of quality control at the firm level. Which element does the statement "management within a firm should ensure that qualified personnel monitor and address non-compliance with quality-control procedures" fall under? A) leadership responsibilities within the firm B) general ethical requirements C) general human resource policies D) engagement quality control review Answer: A Diff: 2 Learning Objective: 2-6 Identify quality control standards and practices within the auditing profession and apply those standards and practices to enhance audit quality. 5) There are many elements of quality control at the firm level. Which element does the statement "a firm should establish a formal code of conduct that includes procedures for individuals to disclose differences of opinion and any inappropriate conduct" fall under? A) leadership responsibilities within the firm B) general ethical requirements C) general human resource policies D) engagement quality control review Answer: A Diff: 2 Learning Objective: 2-6 Identify quality control standards and practices within the auditing profession and apply those standards and practices to enhance audit quality. 6) Farah is currently auditing Software Synx, a public company. After a long day of work, Farah goes for a drink with her friend John who mentions that he owns shares of Software Synx. Farah indicates that John should hold on to his shares as they will go up next week when the financial statements are released and show an increase of 12% for revenues. Which element of quality control is compromised by Farah? A) relevant ethical requirements B) independence C) human resources D) engagement performance Answer: A Diff: 2 Learning Objective: 2-6 Identify quality control standards and practices within the auditing profession and apply those standards and practices to enhance audit quality.

7) Gary West is a sole practitioner. He has conducted the audit of Reggie's Farm for the past 12 years. In the current year, Reggie's Farm expanded by acquiring two other farms, installed a new accounting system, and also started to export to the United States. Gary accepted the audit of Reggie's Farm for the upcoming year even though he has no experience with exports to the U.S. or companies the size of Reggie's Farm. Which element of quality control is compromised for Gary's firm? A) independence B) client acceptance or continuance C) extent of professional development D) general ethical requirements Answer: B Diff: 2 Learning Objective: 2-6 Identify quality control standards and practices within the auditing profession and apply those standards and practices to enhance audit quality. 8) Kobi MacDonald is a partner at a "Big Four" firm. He is responsible for testing the firm's quality control procedures annually to ensure that the firm is in compliance with Canadian Auditing Standards. Which element of quality control is Kobi performing? A) relevant ethical requirements B) independence C) engagement performance D) monitoring Answer: D Diff: 2 Learning Objective: 2-6 Identify quality control standards and practices within the auditing profession and apply those standards and practices to enhance audit quality. 9) There are many elements of quality control at the firm level. Which element does "adequate hiring policies (and documentation of their implementation) that ensure competence and integrity of personnel" relate to? A) leadership responsibilities B) independence C) human resources D) extent of professional development Answer: C Diff: 2 Learning Objective: 2-6 Identify quality control standards and practices within the auditing profession and apply those standards and practices to enhance audit quality.

10) An auditor prepares and mails a letter to the predecessor auditor for world renowned chocolatier Nancy & Chelsea Inc. Which element of audit quality control is this related to? A) leadership responsibilities B) acceptance and continuation of engagements C) engagement performance D) extent of professional development Answer: B Diff: 2 Learning Objective: 2-6 Identify quality control standards and practices within the auditing profession and apply those standards and practices to enhance audit quality. 11) There are many elements of quality control at the firm level. Which element does "employees should be adequately trained in the skills needed to conduct audits and reviews" relate to? A) leadership responsibilities B) independence C) human resources D) extent of professional development Answer: C Diff: 2 Learning Objective: 2-6 Identify quality control standards and practices within the auditing profession and apply those standards and practices to enhance audit quality. 12) Jessica is a summer junior at Branes & Castle, a PA firm. Jessica has only completed three accounting courses in university and has not yet taken her auditing class. A team of auditors from Branes & Castle are starting an audit and Jessica was sent to help them. Jessica A) can perform work for the audit engagement as long as she is supervised and proper review of her work is performed. B) should not perform any work pertaining to the audit engagement since she doesn't have sufficient knowledge. C) should be limited to assisting the audit team with support functions such as photocopying and file assembly. D) can perform work for the audit engagement on cycles where risk was assessed as low. Answer: A Diff: 2 Learning Objective: 2-6 Identify quality control standards and practices within the auditing profession and apply those standards and practices to enhance audit quality.

13) There are many elements of quality control at the firm level. Which element does "adequate processes and procedures should be in place to ensure that the audit or review is conducted in accordance with GAAS, that quality control procedures are followed for each engagement, and that the audit is appropriately documented" relate to? A) leadership responsibilities B) human resources C) extent of professional development D) engagement performance Answer: D Diff: 2 Learning Objective: 2-6 Identify quality control standards and practices within the auditing profession and apply those standards and practices to enhance audit quality. 14) There are many elements of quality control at the firm level. Which element does "policies in place should include use of second or independent partner review, technical review, documentation, and compliance with quality control processes" relate to? A) leadership responsibilities B) engagement performance C) documentation D) human resources Answer: B Diff: 2 Learning Objective: 2-6 Identify quality control standards and practices within the auditing profession and apply those standards and practices to enhance audit quality. 15) There are many elements of quality control at the firm level. Which element does "processes should exist for following up internal and external complaints" relate to? A) engagement performance B) engagement quality control review C) monitoring D) human resources Answer: A Diff: 2 Learning Objective: 2-6 Identify quality control standards and practices within the auditing profession and apply those standards and practices to enhance audit quality. 16) For a CPA working as a sole practitioner or working in a small public accounting office, the provincial practice inspectors will likely come to review audit files A) every three years. B) every five years. C) every year. D) never: files are not reviewed in person. Answer: A Diff: 1 Learning Objective: 2-6 Identify quality control standards and practices within the auditing profession and apply those standards and practices to enhance audit quality. 21 Copyright © 2022 Pearson Canada, Inc.

17) How do practice inspections affect the ability of a PA firm to have articling students work at the firm? Practice inspectors A) only permit students to work there if the quality controls are good. B) review the ability of the office to provide sufficient, appropriate hours. C) require that students work only on audit engagements, not reviews. D) consider only work completed by qualified PAs, not students. Answer: B Diff: 3 Learning Objective: 2-6 Identify quality control standards and practices within the auditing profession and apply those standards and practices to enhance audit quality. 18) Which of the following is a typical consequence to a PA or PA firm if practice inspectors find any files or quality control procedures to be unsatisfactory? The PA A) will lose the right immediately to conduct audit engagements. B) will no longer be allowed to sign audit reports for a period of time (such as a year). C) may be required to revise processes or attend training courses. D) will be required to rewrite the professional qualification examinations. Answer: C Diff: 2 Learning Objective: 2-6 Identify quality control standards and practices within the auditing profession and apply those standards and practices to enhance audit quality. 19) Stafford & Sandiford is a public accounting firm with 30 clients who are reporting issuers. Stafford & Sandiford can expect to be inspected by the CPAB A) once per year. B) once every 3 years. C) once every 5 years. D) randomly. Answer: B Diff: 1 Learning Objective: 2-6 Identify quality control standards and practices within the auditing profession and apply those standards and practices to enhance audit quality. 20) Larger audits may have established procedures that utilize an audit committee whenever there is a dispute between management and the auditors. What is the purpose of such procedures? A) to ensure that the auditor understands management's point of view B) to improve the competence of the financial statement auditors C) to facilitate the auditors' independence from management D) to help make sure the audit is conducted following GAAS Answer: C Diff: 2 Learning Objective: 2-6 Identify quality control standards and practices within the auditing profession and apply those standards and practices to enhance audit quality.

21) Danford, a PA, is setting up his accounting firm as a sole practitioner. Which of the following is not 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 Answer: B Diff: 2 Learning Objective: 2-6 Identify quality control standards and practices within the auditing profession and apply those standards and practices to enhance audit quality. 22) A. Outline the reasons why provincial CPA organizations conduct practice inspections. B. How often are these CPA practice inspections done? C. What are the implications of these CPA practice inspections? Answer: A. The provincial CPA organizations conduct practice inspections for two reasons: • to protect the public interest by ensuring that public accountants are adhering to professional standards set out in the CPA Canada Handbook–Assurance; and • to help public accountants improve their professional standards. These inspections, which are mandatory for CPAs in public practice, involve reviewing quality control processes as well as individual audit and/or review engagement files. B. Practice inspections are normally completed every three years; they can be done annually if the inspectors conclude that the practice unit does not maintain adequate practice standards. In addition to the practice inspections, the CPAB conducts annual inspections for audit firms that have 100 or more reporting issuers. There are 14 firms that fall into this category–all of the Big Four plus 10 other firms. CPAB also inspects, at least every two years, firms with between 50 and 99 reporting issuer audits. Over three years, the majority of the 163 Canadian audit firms registered with CPAB are inspected. Many of the foreign firms are subject to oversight by other audit regulators. These firms are inspected periodically based on CPAB's risk analysis. C. The provincial practice inspection committee can impose sanctions. These include reinspection the following year and referral to the provincial association's professional conduct committee, which can require the member to take courses, remove the practice unit's right to train students, expel the member from the professional body, and withdraw the member's right to use the "Chartered Professional Accountant" (CPA) designation. Diff: 3 Learning Objective: 2-6 Identify quality control standards and practices within the auditing profession and apply those standards and practices to enhance audit quality.

Auditing: The Art and Science of Assurance Engagements, 15ce (Arens) Chapter 3 Professional Ethics and Legal Liability 3.1

Explain the fundamental principles that guide public accountants' professional ethics.

1) Ethical behaviour is considered to be a cornerstone for trust in everyday life as well as in business practices. Ethics are A) beliefs that we have about our own behaviour. B) a set of moral principles or values. C) rules in society that help us to do the right thing. D) laws that govern how businesses should behave. Answer: B Diff: 1 Learning Objective: 3-1 Explain the fundamental principles that guide public accountants' professional ethics. 2) Society has attached a special meaning to the term professional. A professional is A) someone who has passed a qualifying exam to enter the job market. B) any person who receives payment for the services performed. C) a person who is expected to conduct himself or herself at a higher level than the requirements of society's laws or regulations. D) someone who has both an education in the trade and on-the-job experience received under an experienced supervisor. Answer: C Diff: 1 Learning Objective: 3-1 Explain the fundamental principles that guide public accountants' professional ethics. 3) The underlying reason for a high level of professional conduct, such as exemplified in a code of conduct, for any profession is A) the need for public confidence in the quality of service of the profession. B) that it provides a safeguard to keep unscrupulous people out. C) that it is required by federal legislation. D) that it allows licensing agencies to have a standard to measure deficient performance. Answer: A Diff: 2 Learning Objective: 3-1 Explain the fundamental principles that guide public accountants' professional ethics.

4) According to the CPA Code of Professional Conduct, ethical principles are aimed at A) the emphasis on serving the public interest and at achieving orderly and courteous conduct within the profession. B) the ability to enforce the ideals. C) the enforceability of minimum behaviour and performance standards. D) the tendency to define the rules as maximum rather than minimum standards. Answer: A Diff: 2 Learning Objective: 3-1 Explain the fundamental principles that guide public accountants' professional ethics. 5) A code of professional conduct typically includes principles, rules of conduct, and interpretations or examples. What is the purpose of the principles? A) to state what a practitioner must do for each audit engagement conducted B) to provide discussions of the rules of conduct and how they relate to practical situations C) to provide minimum standards of ethical conduct stated specifically D) to provide ideal standards of ethical conduct aimed to serve the public interest Answer: D Diff: 2 Learning Objective: 3-1 Explain the fundamental principles that guide public accountants' professional ethics. 6) CPAs do not allow their professional or business judgment to be compromised by bias or the undue influence of others. Under the fundamental ethical principles of the CPA Ontario Code of Professional Conduct, this is an example of A) confidentiality B) objectivity C) professional behaviour D) professional competence Answer: B Diff: 2 Learning Objective: 3-1 Explain the fundamental principles that guide public accountants' professional ethics. 7) CPAs are required to maintain professional competence. Which of the following is a description of maintaining professional competence? A) Conducting themselves in a manner that maintains the good reputation of the profession B) Acting diligently and in accordance with applicable technical and professional standards when providing services C) Ensuring their professional or business judgment is not compromised by bias. D) Maintaining individual professional skills, and keeping abreast of and complying with developments in the professional standards Answer: D Diff: 2 Learning Objective: 3-1 Explain the fundamental principles that guide public accountants' professional ethics. 2 Copyright © 2022 Pearson Canada, Inc.

3.2 Recognize ethical dilemmas that public accountants typically encounter and recommend acceptable courses of action. 1) Ethical dilemmas occur when A) you know what you want to do but the rules say otherwise. B) businesses disregard the laws and engage in illegal behaviour. C) a person chooses to act in his/her own interest. D) a choice must be taken about appropriate behaviour. Answer: D Diff: 2 Learning Objective: 3-2 Recognize ethical dilemmas that public accountants typically encounter and recommend acceptable courses of action. 2) A public accountant would be facing an ethical dilemma when deciding whether or not to A) overlook a material overstatement of revenues to maintain a good client relationship. B) overlook a non-material error in the financial statements. C) accept an invitation from the client to go golfing in order to maintain a good client relationship. D) participate in a charitable activity organized by the client. Answer: A Diff: 3 Learning Objective: 3-2 Recognize ethical dilemmas that public accountants typically encounter and recommend acceptable courses of action. 3) Formal frameworks have been developed to help people resolve ethical dilemmas. After obtaining the relevant facts and identifying the ethical issues from the facts, what is the next step in the five-step ethical framework described in the chapter? A) Decide on the appropriate action to be taken in resolving the ethical dilemma. B) Identify the likely consequences of actions that will be taken. C) Identify who is affected and how each is affected. D) Identify the alternatives available to the person who must resolve the dilemma. Answer: C Diff: 3 Learning Objective: 3-2 Recognize ethical dilemmas that public accountants typically encounter and recommend acceptable courses of action. 4) An auditor for Grover & Oscar Studios Ltd. identifies an ethical dilemma. Which of the following is least relevant to resolving the ethical issue? A) Would the issue affect the public interest? B) Would the issue affect the reputation of the client? C) Are there threats to independence? D) Would the issue affect the reputation of the profession? Answer: C Diff: 3 Learning Objective: 3-2 Recognize ethical dilemmas that public accountants typically encounter and recommend acceptable courses of action. 3 Copyright © 2022 Pearson Canada, Inc.

5) 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. Answer: The engagement indicates a lack of planning, as you were only aware of the problems with the accounts receivable confirmation process after you had received the replies. The likelihood of non-response should have been considered before selecting and sending the confirmations. The pressures by the supervisor to sign off on the audit engagement without completing the necessary audit procedures indicate a poor human resources environment at your audit firm. It also means that this audit (and other audits) may have inadequate evidence on file to support an opinion on the financial statements. This violates the general principle of due care and the third examination standard of sufficient appropriate audit evidence under GAAS. Diff: 2 Learning Objective: 3-2 Recognize ethical dilemmas that public accountants typically encounter and recommend acceptable courses of action. 6) List the components of the auditor's ethical decision-making framework. Answer: Following are the five components of auditor's ethical decision-making framework: 1. obtain relevant facts and identify the issues. 2. identify the ethical issues. 3. identify who is affected and how each is affected. 4. consider and evaluate courses of action. 5. implement the course of action. Diff: 3 Learning Objective: 3-2 Recognize ethical dilemmas that public accountants typically encounter and recommend acceptable courses of action.

7) Describe an ethical dilemma that an auditor or an accountant might face in his or her business career. Then illustrate how the auditor or accountant might use the five-step approach presented in Chapter 3 to resolve the dilemma. Be specific. Answer: Although students' answers will vary depending on the dilemma, their answer should list the following steps, along with a discussion of how each step relates to their particular dilemma. 1. Obtain the relevant facts and identify issue. Students should list the key facts from their dilemma. 2. Identify the ethical issues. Students should identify the key ethical issue(s) in their dilemma. 3. Identify who is affected and how each is affected. Students should identify who is involved and how each party is affected by the dilemma. 4. Consider and evaluate courses of action. Students should list the alternatives available to the auditor or accountant. Students should identify both the short- and long-term effects of each alternative. 5. Implement the course of action. Students should indicate how the best solution should be implemented. Diff: 3 Learning Objective: 3-2 Recognize ethical dilemmas that public accountants typically encounter and recommend acceptable courses of action. 3.3

Explain the impact of ethical blind spots on auditors' ethical reasoning.

1) What is an ethical blind spot? Answer: An ethical blind spot is an unconscious judgmental tendency that can hinder the ethical decision-making process or cause the decision maker to fail to recognize the ethical dimension of a choice. Diff: 2 Learning Objective: 3-3 Explain the impact of ethical blind spots on auditors' ethical reasoning. 2) Katarina is about to finalize the audit of her firm's first public company. This is exciting news because her audit firm can now grow its public-company audit business. An email comes in and Katarina realizes that she was copied accidentally on an email between her client's managers. The email indicates that the client's new product, which is being launched in six weeks to coincide with the company's Initial Public Offering (IPO), is materially defective. Katarina decides to do nothing because acting would have significant financial implications to the client and, also, she was accidentally copied on the email that was clearly marked confidential. Explain how this is a blind spot. What form of blind spot is this? Answer: It is an ethical blind spot known as motivated blindness. The auditor fails to see the ethical issue because of her client's interest and also potentially because of her own self-interest. Diff: 3 Learning Objective: 3-3 Explain the impact of ethical blind spots on auditors' ethical reasoning.

3.4 Understand the rules of professional conduct and apply that knowledge to resolve ethical conflicts. 1) 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 Answer: B Diff: 3 Learning Objective: 3-4 Understand the rules of professional conduct and apply that knowledge to resolve ethical conflicts. 2) Generally, all of the rules of professional conduct for CPAs apply to A) students in public practice. B) students and members in firms. C) members in public practice. D) all members and firms. Answer: D Diff: 3 Learning Objective: 3-4 Understand the rules of professional conduct and apply that knowledge to resolve ethical conflicts. 3) 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. Answer: D Diff: 2 Learning Objective: 3-4 Understand the rules of professional conduct and apply that knowledge to resolve ethical conflicts. 4) "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. Answer: C Diff: 1 Learning Objective: 3-4 Understand the rules of professional conduct and apply that knowledge to resolve ethical conflicts.

5) 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. Answer: A Diff: 1 Learning Objective: 3-4 Understand the rules of professional conduct and apply that knowledge to resolve ethical conflicts. 6) 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. Answer: B Diff: 2 Learning Objective: 3-4 Understand the rules of professional conduct and apply that knowledge to resolve ethical conflicts. 7) Financial statement users cannot be expected to evaluate audit performance because they will not have the time or the competence to do so. In such a situation, public confidence in the quality of professional services is enhanced when there are A) only business majors hired to work as auditing students with public accounting firms. B) adequate controls at the public accounting firm to limit the amount of overtime worked. C) high standards of performance and conduct on the part of all practitioners. D) strict rules about the type of work that employees should complete on a daily basis. Answer: C Diff: 2 Learning Objective: 3-4 Understand the rules of professional conduct and apply that knowledge to resolve ethical conflicts.

8) In which of the following circumstances would ethics bind a public accountant 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. Answer: B Diff: 2 Learning Objective: 3-4 Understand the rules of professional conduct and apply that knowledge to resolve ethical conflicts. 9) 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 that subpoenas them. B) the relevant provincial institute as part of a practice inspection. C) another public accounting firm that has just purchased the public accountant's entire practice. D) an investigative or disciplinary body of the relevant provincial institute that is conducting a review of the public accountant's practice. Answer: C Diff: 3 Learning Objective: 3-4 Understand the rules of professional conduct and apply that knowledge to resolve ethical conflicts. 10) 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. Answer: D Diff: 1 Learning Objective: 3-4 Understand the rules of professional conduct and apply that knowledge to resolve ethical conflicts.

11) 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 Answer: C Diff: 2 Learning Objective: 3-4 Understand the rules of professional conduct and apply that knowledge to resolve ethical conflicts. 12) How is the 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 CAS as set out in the CPA Canada 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. Answer: A Diff: 3 Learning Objective: 3-4 Understand the rules of professional conduct and apply that knowledge to resolve ethical conflicts. 13) 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. Answer: A Diff: 3 Learning Objective: 3-4 Understand the rules of professional conduct and apply that knowledge to resolve ethical conflicts.

14) 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. Answer: A Diff: 2 Learning Objective: 3-4 Understand the rules of professional conduct and apply that knowledge to resolve ethical conflicts. 15) 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. Answer: B Diff: 2 Learning Objective: 3-4 Understand the rules of professional conduct and apply that knowledge to resolve ethical conflicts. 16) 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 Answer: B Diff: 2 Learning Objective: 3-4 Understand the rules of professional conduct and apply that knowledge to resolve ethical conflicts.

17) 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. Answer: A Diff: 2 Learning Objective: 3-4 Understand the rules of professional conduct and apply that knowledge to resolve ethical conflicts. 18) 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 that 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. Answer: A Diff: 1 Learning Objective: 3-4 Understand the rules of professional conduct and apply that knowledge to resolve ethical conflicts. 19) The Rules of Professional Conduct require that auditors not resign from audit engagements that are underway without good and sufficient reason. Which of the following reasons is insufficient for resigning from an engagement? A) The client pressures the auditor to perform illegal acts. B) The auditor loses trust in the client. C) The auditor discovers facts that establish that the auditor's independence can be reasonably questioned. D) The auditor discovers that the time and scope of work required exceeds the auditor's planning estimates. Answer: D Diff: 1 Learning Objective: 3-4 Understand the rules of professional conduct and apply that knowledge to resolve ethical conflicts.

20) What is the difference between auditors and lawyers with respect to privileged information? Answer: Public accountants do not have the right under common law to withhold information from the courts on the grounds that the information is privileged. A court can subpoena information in an auditor's working papers. Lawyers can withhold confidential information from the courts. Diff: 2 Learning Objective: 3-4 Understand the rules of professional conduct and apply that knowledge to resolve ethical conflicts.

21) 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, 2021, Page Dane, public accountant, issued the audit report on Borhut Corporation's June 30, 2021, financial statements. On August 30, 2021, Borhut paid Page's audit fee with stock rather than cash. Page sold the stock on September 15, 2021, two months prior to the beginning of the planning phase for the audit of the June 30, 2022, financial statements. Violation? Yes No Explanation: Answer: A. Violation. A public accountant may not pay a referral fee to a non-public accountant. B. Violation. This is a contingent fee agreement, which is prohibited by the Rules of Professional Conduct. C. Violation. Participants in an audit are prohibited from having a financial interest in the client. The rule also applies to the participant's dependents. D. Violation. Public accountants are prohibited from owning stock in a client. Diff: 3 Learning Objective: 3-4 Understand the rules of professional conduct and apply that knowledge to resolve ethical conflicts.

22) 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. Answer: Kimora might not be independent in appearance, given that she knows Brad who is overseeing the financial reporting of the company. However, Kimora can likely remain independent in fact because: • she has not been in contact with Brad for 20 years. • she doesn't have any close relationship with Brad or any personal interest in the company. • going to a hockey game with a client is not a breach of independence. Diff: 2 Learning Objective: 3-4 Understand the rules of professional conduct and apply that knowledge to resolve ethical conflicts. 23) 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 CPA 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, $1000 for a review, and $5000 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 working for your firm - there were many 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 really soon! Required: Identify the violations in the professional rules of conduct and explain why they are violations. Answer: Gino is actively soliciting clients of other firms (including his former employer), which is a violation. He should be placing general advertisements or providing only announcements. Gino is providing fixed fee engagements, without conducting any planning or assessing the risk in the engagements. This means that he may be likely to conduct inadequate field work, violating GAAS. Not charging for the tax work is also a violation since this creates the same type of pressure for Gino to not conduct his remaining audit work in accordance with GAAS. Diff: 2 Learning Objective: 3-4 Understand the rules of professional conduct and apply that knowledge to resolve ethical conflicts.

24) 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 online. She also ensured that they had their professional designation and enquired with the CPA 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.

Answer: - Contacting the previous auditor is a good step, however, Sandra did not wait to have a response before accepting. Sandra should have waited to hear from the previous auditor. - Reviewing the working papers of the previous auditor is a good step, however, when she learned that the client had aggressive expense deferral policies, Sandra should not have been so quick to dismiss this based on materiality. The deferral of expenses might exceed materiality in the upcoming year, causing the financial statements to be misstated, and this is also evidence of questionable management integrity. Sandra should have considered ending the relationship with the client upon learning this information. - It appears that Sandra did not assess management integrity prior to accepting the client. This creates a higher audit risk. - Sandra did a good job in verifying the credentials of the other audit firm upon which she is going to rely. It is correct to accept a client even if you cannot perform the entire audit yourself. If you can find an expert to assist you in the process and you can ensure that the work of the expert is properly done, you will be following GAAS. The steps to verify the qualification of the other auditors appear to be sufficient. Note that Sandra will also have to review their work, once it is done. - Sandra should have done an engagement letter prior to starting the work. - If the time frame is too short, Sandra should have indicated to the client that she will need additional time to complete the work. - Sandra should have conducted a thorough risk assessment of both management and the industry before accepting the audit. Diff: 3 Learning Objective: 3-4 Understand the rules of professional conduct and apply that knowledge to resolve ethical conflicts.

3.5 Identify and evaluate threats to independence and recommend appropriate safeguards to eliminate or reduce the threats to an acceptable level. 1) How do quality control processes for the financial statement audit process incorporate consideration of legislation that affects the client? A) they require a second partner review of all working papers that relate to legislative matters B) they provide auditors with copies of legislation that affects their client C) they require the training of all auditors in legislation details that could affect all clients D) they include in audit checklists questions that address relevant new legislation Answer: D Diff: 3 Learning Objective: 3-5 Identify and evaluate threats to independence and recommend appropriate safeguards to eliminate or reduce the threats to an acceptable level. 2) Independence is assessed in the eyes of external users and regulators. Which of the following is a tool that helps the auditor identify whether the auditor is independent for a particular audit engagement? A) completion of independence forms at time of employment B) an independence threat analysis C) an audit risk model assessment for each engagement D) professional skepticism when assessing control risks Answer: B Diff: 2 Learning Objective: 3-5 Identify and evaluate threats to independence and recommend appropriate safeguards to eliminate or reduce the threats to an acceptable level. 3) Joe Blue, an audit partner, is an ardent dog lover. He is a volunteer and one of the most regular commentators on Canine's First, a non-profit that operates one of the top three blogs globally for all matters related to dogs. Canine's First is a CSR venture of Chow Down Corp., a dog food manufacturer. The CFO of Chow Down has been impressed by Joe's volunteerism and has asked if Joe is willing to accept Chow Down Corp. as an audit client. What threat to independence, if any, might Joe be faced with? A) self-review B) self-interest C) advocacy D) intimidation Answer: C Diff: 2 Learning Objective: 3-5 Identify and evaluate threats to independence and recommend appropriate safeguards to eliminate or reduce the threats to an acceptable level.

4) 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. Answer: B Diff: 3 Learning Objective: 3-5 Identify and evaluate threats to independence and recommend appropriate safeguards to eliminate or reduce the threats to an acceptable level. 5) 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. Answer: A Diff: 3 Learning Objective: 3-5 Identify and evaluate threats to independence and recommend appropriate safeguards to eliminate or reduce the threats to an acceptable level. 6) Which of the following situations would be an example of a self-review threat? Prior to commencing the audit engagement, PA has completed A) personal and corporate tax returns. B) the audit of a company where the client owns a minority interest. C) a purchase price allocation calculation for a company that the client purchased during the year. D) an audit of the not-for-profit organization of the client. Answer: C Diff: 3 Learning Objective: 3-5 Identify and evaluate threats to independence and recommend appropriate safeguards to eliminate or reduce the threats to an acceptable level.

7) The CEO of Kleen Ventures Ltd. informs the auditor that Kleen will not be paying the invoice because the auditor issued a qualified opinion. What threat to independence is the auditor faced with? A) familiarity B) litigation C) intimidation D) advocacy Answer: C Diff: 2 Learning Objective: 3-5 Identify and evaluate threats to independence and recommend appropriate safeguards to eliminate or reduce the threats to an acceptable level. 8) 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. Answer: A Diff: 2 Learning Objective: 3-5 Identify and evaluate threats to independence and recommend appropriate safeguards to eliminate or reduce the threats to an acceptable level. 9) 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 Answer: D Diff: 2 Learning Objective: 3-5 Identify and evaluate threats to independence and recommend appropriate safeguards to eliminate or reduce the threats to an acceptable level. 10) 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. Answer: B Diff: 2 Learning Objective: 3-5 Identify and evaluate threats to independence and recommend appropriate safeguards to eliminate or reduce the threats to an acceptable level.

11) 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. Answer: C Diff: 3 Learning Objective: 3-5 Identify and evaluate threats to independence and recommend appropriate safeguards to eliminate or reduce the threats to an acceptable level. 12) An intimidation threat occurs when A) it is difficult to believe the actions of management because there is a suspicion of irregular activity in 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. Answer: D Diff: 2 Learning Objective: 3-5 Identify and evaluate threats to independence and recommend appropriate safeguards to eliminate or reduce the threats to an acceptable level. 13) 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 are 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. Answer: B Diff: 1 Learning Objective: 3-5 Identify and evaluate threats to independence and recommend appropriate safeguards to eliminate or reduce the threats to an acceptable level.

14) 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 a listed entity C) audit of a non-listed entity D) an assurance engagement other than an audit Answer: A Diff: 1 Learning Objective: 3-5 Identify and evaluate threats to independence and recommend appropriate safeguards to eliminate or reduce the threats to an acceptable level. 15) 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. Answer: B Diff: 2 Learning Objective: 3-5 Identify and evaluate threats to independence and recommend appropriate safeguards to eliminate or reduce the threats to an acceptable level. 16) At a small practice where the bulk of the work is accounting, bookkeeping, and review engagements, what is an important procedure that the PA should follow 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. Answer: C Diff: 3 Learning Objective: 3-5 Identify and evaluate threats to independence and recommend appropriate safeguards to eliminate or reduce the threats to an acceptable level.

17) 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 where the cousin of a staff member works in the marketing department. Answer: A Diff: 3 Learning Objective: 3-5 Identify and evaluate threats to independence and recommend appropriate safeguards to eliminate or reduce the threats to an acceptable level. 18) 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 the 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. Answer: A Diff: 3 Learning Objective: 3-5 Identify and evaluate threats to independence and recommend appropriate safeguards to eliminate or reduce the threats to an acceptable level.

19) 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 auditsensitive 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:

Answer: A. No violation. Although partners in public accounting firms are not allowed to have close relatives employed in a position of significant influence by a client, it is acceptable to have a close relative employed in an audit-sensitive position (with no significant influence), particularly as Mike is not involved in the audit engagement. B. No violation. The Rules of Professional Conduct do not prohibit public accounting firms from providing bookkeeping, tax, and audit services to the same client as long as the client is not a listed entity and management approves the transactions and journal entries. C. Violation. When there is a lawsuit or intent to start a lawsuit between a public accountant and an audit client's management, independence is impaired. D. No violation. While independence may be impaired if fees remain unpaid for services provided more than one year prior to the date of the report in some cases, there is no requirement under the Rules of Professional Conduct not to continue in the role as auditor. Melissa should document in her audit file how she has dealt with this self-interest threat and the steps that the client is taking to pay fees. Diff: 3 Learning Objective: 3-5 Identify and evaluate threats to independence and recommend appropriate safeguards to eliminate or reduce the threats to an acceptable level.