Chapter 1 & 2 Flashcards
[RC 1-1]
Using the example of a business with an owner, a hired manager, and an independent financial statement auditor, apply the three party accountability structure.
(Hint: which party would be the first, the second, and the third-party in the model? For what is each party accountable?)
The owner is the third-party, the hiring manager is the first party and the auditor is the second party.
The owner is looking out for his own economic interest but has to rely on the actions and information provided by the hiring manager who may have shorter term concerns and thus may act in self interest.
The owner is accountable for financing the business and treating the manager fairly. The manager is accountable for giving reliable and fair reports of the business profit performance to the owner. There are potential conflicts of interest between the first and third party and therefore a higher chance of information risk.
The auditor is accountable for objectively verifying the fairness and reliability of the information and providing an independent opinion on how well the information reflects the underlying realities of the entity’s operations.
The auditors opinion can benefit both the first and third parties however for it to have value in giving the owner some comfort that the managers information can be relied on, the auditor must have no personal interest in either side.
[RC 1-6]
What is the difference between a client and an auditee? What are the three parties in three party and accountability?
A client can be the company, Board of Directors, agency, or some other person or group who retains (hires) the auditor. Usually the party who pays the fee.
The auditee is the entity [for example business firm, hospital, city government] whose financial information is under audit.
The 2nd party in a three party accountability is the auditor. The auditors report TO the client ON the auditee’s financial or control information.
Three party accountability consist of the auditor, the accountable party of the auditee such as management of the auditee, and the users.
Users include the client.
[RC 1-8]
What conditions create demand for financial reports, and who produces financial reports for external users?
The conditions of complexity, remoteness, and consequences produce a demands by outside users for financial reports. They can’t produce the reports themselves because of these reasons. Company managers and accountants produce them.
[RC 1-11]
Distinguish between forensic accounting and fraud auditing.
Forensic accounting is the broader term that includes fraud auditing. Forensic accounting is the use of accounting for illegal or investigative purposes.
Fraud auditing is the use of forensic accounting and criminal investigations involving allegations of fraud. Frauds that public accountants are most interested in are misappropriation of assets and fraudulent financial reporting [misreporting].
[RC 1-13]
What is operational auditing?
Operational auditing is the study of business operations for the purpose of making recommendations about the economic and efficient use of resources, effective achievement of business objectives, and compliance with company policies.
CPA Canada views operational auditing as a type of management advisory service offered by public accounting firms.
[RC 1-15]
What is compliance auditing?
A compliance audit involves a study of an organization’s policies, procedures, and performance in following laws, rules, and regulations. An example is a companies compliance with environmental laws.
[RC 1-16]
Name some other types of auditors in addition to external, internal, and governmental auditors.
Revenue Canada agency/auditors, provincial and federal bank examiners, provincial insurance commissioner auditors.
[RC 1-18]
What is the IAASB, and how do its standards affect auditing standards in Canada?
IAASB stands for international auditing and assurance standards board. The ISA’s are the basis for Canada’s CAS’s.
Found under “assurance and guidance” in handbook.
[RC 2-1]
How is the accounting profession in Canada regulated?
The regulation of professional accountants and auditors is a provincial responsibility, and vary somewhat depending on the legislation in different provinces. The national umbrella organization is CPA Canada and there are counterpart CPA associations in each province and territory.
[RC 2-2]
What distinguishes public accounting from other types of work professional accountants might perform such as bookkeeping, financial statement preparation, or tax return preparation?
When an accountant provides auditing and assurance services for use by the general public, this is referred to as public accounting.
Sense a person from the general public may not be able to assess whether an accountant is properly qualified & regulated to act in their best interest, to practice public accounting a person must meet higher standards that are required to do other types of non-public accounting work.
Usually a CPA designation is required.
In the case of public accounting that involves auditing publicly traded company’s financial statements, security laws require the public accounting firm to be registered with the Canadian public accountability board. Inspections are done annually.
[RC 2-3]
Describe the five essential components of a professional ethics code for accountants.
1 - act with integrity
Members of the CPA association are required to comply with the professional ethics code provincial association. Every ethics code has the following five similar components. The member is required to:
[RC 2-4]
For what types of work does a professional accountant require Independence?
In public accounting engagements, CPAs must demonstrate they can be objective by remaining independent of any potentially conflicting interests, which includes being independent in fact and also independent as it would appear to an outsider.
[RC 2-5]
How does independence in fact differ from independence in appearance? Why, and to whom, doesn’t the distinction matter?
Independence in fact means the auditor maintains an objective perspective in doing his or her work – this frame of mind is essential to performing an assurance roll effectively, however it is not visible [or provable] to outsiders.
The auditors independence must also be apparent to outsiders for them to believe the auditors opinion is in fact independent.
Outsiders must see evidence that the CPA has no financial or other interest that would cause them to act in a biased way, rather than in the outside users best interest.
[RC 2-6]
What are five situations that can threaten an auditors Independence? Explain each situation in terms of the three party accountability model.
The professional ethics codes for accountants identify five situations that can arise in a three party accountability relationship. If they exist they can threaten and auditors independence.
Self review, self interest, advocacy, familiarity, and intimidation.
An important thing here is that even in their public interest role, and auditor is still just a human being, and vulnerable to the usual human weaknesses and failings.
A self-review threat means the auditor is checking his own work therefore he cannot provide the critical, independent perspective that a user would expect. With a self interest threat, the auditor has something personal to gain and so is not free to do what is in the user’s best interest.
With an advocacy threat the auditor has taken a personal stand in support of the first parties position, so they are invested in that and will have a hard time seeing objectively.
With the familiarity threat, the auditor is too friendly and close to the first party and that makes it more difficult for the auditor to suspect or believe that this well-known person would do anything wrong.
In the case of an intimidation threat, the auditor is facing personal risk and naturally must put their own critical interest first, before they can meet their professional responsibilities. In an intimidation threat situation, an auditor would need to seek legal advice on how best to protect himself without violating their professional duties.
[RC 2-8]
Why are professional accountants required to comply with GAAP and GAAS?
The professional ethics codes incorporate professional accounting and auditing standards, making compliance with the standards the bottom line professional responsibility of professional accountants.
CPA members meet the ethical requirements of professional competency and do Care and performing their work by complying with requirements of the CPA Canada standards for accounting and auditing.
+ ASPE and IFRS
