Auditor's Liability & Ethics, Independence and Corporate Governance - Week 2 Flashcards
Learn and memorize answers in this deck ASAP!
What is negligence? Explain.
Negligence is a conduct that is careless or unintentional in nature and entails a breach of any contractual duty or duty of care in tort owed to another person or persons.
Claim for negligence under common law, involves (Q.2.11 of textbook):
- Duty of care must be owed to the plaintiff by the defendant.
- Duty of care must be breached by the defendant.
- Loss or damage was suffered by the plaintiff.
- There is a causal relationship between the breach of duty of care and the harm suffered by the plaintiff.
- Outcome was reasonably foreseeable.
What are the 10 principles obtained from the Pacific Acceptance Case?
- Duty of reasonable care and skill must be provided.
- Duty to check and see for themselves.
- Audit the entire year.
- Appropriately supervise and review.
- Appropriately document procedures.
- Duty to warn and inform appropriate level of management.
- Duty to undertake further action when suspicion is aroused.
- Reliance on others is not a substitute for the auditor’s own procedures.
- Expectation of discovering error or fraud
- Professional standards are meant to be used as a guide.
What is contributory negligence?
Contributory negligence is the failure by the plaintiff to meet the standard of care required for its own protection as well as failure on the part of the auditor to meet his/her duty of care that is required (refer to AWA 1990 case always!)
What are the five fundamental ethical principles an auditor must stand by (Q.3.4 of textbook)? Describe them, too.
- Integrity - ensure all work relationships are straightforward and honest.
- Objectivity - ensure that there are no biases, conflict of interest or undue influence of others.
- Professional competence and due care - To attain professional knowledge, skill and care at the level required (e.g. go for training if needed).
- Confidentiality - ensure that all private information is kept secret. Refrain from telling others about private business relationships without proper and specific authority (unless there’s a legal duty to disclose) or using confidential information to their personal advantage.
- Professional behavior - Members should be honest and truthful. Refrain from making exaggerated claims or disparaging references.
What is perceived and actual Independence? Differences? (Describe them - Q3.6 of textbook)
Actual independence is the achievement of freedom from bias and undue influence of others.
Perceived independence is the appearance of freedom from bias and undue influence of others.
Both are needed to ensure excellent credibility of an auditor.
What are the five threats to independence? Describe them (Q3.7 of textbook):
- Self-interest threat: is when an auditor could benefit financially via the client.
- Self-review threat: is when an auditor has to re-evaluate their own work.
- Advocacy threat: is when an auditor could promote the client’s point of view and compromise their objectivity.
- Familiarity threat: is when an auditor may know and become to sympathetic to the client’s interest.
- Intimidation threat: an auditor may be deterred from acting objectively due to actual or perceived threats by the client.
What are the major factors that influence the determination of an audit fee? (Q3.11 of textbook)
First off, an audit fee should always reflect the value of an audit being performed. Factors like time spent by each audit member, their experience, their skills, their qualifications, etc. all influence the cost of an audit fee.
What are contingency fees and how do they affect the auditor’s independence?
Contingency fees are fees based on the outcome of the work performed. The APES prohibits contingency fees for assurance engagements as they create self-interest threats and may also lead to advocacy threats.
