Chapter 3

Question 1

What in auditing is the application of relevant knowledge and​ experience, within the context provided by auditing and accounting standards and Rules of Professional​ Conduct, in reaching decisions where a choice must be made between possible alternative courses of​ action?

Answer 1

professional judgment

Question 2

In applying professional​ judgment, the auditor must be able to justify a decision on the basis that it

Answer 2

is carried out with truthfulness and forthrightness.

Question 3

What are the elements of an effective professional judgment​ process?

Answer 3

(1) Identify and Define the​ Issue; (2) Gather the Facts and Information and Identify the Relevant​ Literature; (3) Perform the Analysis and Evaluate​ Alternatives; (4) Reach​ Conclusions; and​ (5) Review and Complete the Documentation and Rationale for the Conclusion.

Question 4

Consulting with others can enhance ________ (a) and ________ (b) judgment traps because it brings in ________ (c) and a different way of framing the problem. This can reduce the effects of ________ (d) and help the decision maker see the wider implications of the problem at hand.​ Also, consultation can help overcome the effects of past experience with the client​ and, therefore, ________ (e).

Answer 4

a. objectivity
b. avoid
c. different perspectives
d. ethical blind spots
e. improve objectivity

Question 5

Chen Li worked on the audit of Diagnostic Imaging Services (DSI), which provides diagnostic imaging services to hospitals in Ontario. Chen was assigned responsibility to audit the allowance for hospital receivables. For the past several years, DSI’s accounting policy required that the recorded allowance for hospital receivables be set to equal the total amount of receivables over 180 days past due. Prior audit testing of the allowance in previous years has found that the subsequent write-offs of hospital receivables has closely approximated the amount included in the allowance. During the current year audit, Chen examined the amount recorded in the general ledger allowance account and reconciled that amount to the amount shown in DSI’s consolidated aged trial balance in the 180 days past-due amount. Given that the dollar amounts agreed, Chen concluded that the allowance was in accordance with DSI accounting policy and fairly stated. While media reports and other industry publications suggested that recent regulatory changes in hospital funding were affecting hospitals’ ability to pay, Chen concluded that DSI’s allowance was fairly stated given the amounts complied with DSI’s policy.

Answer 5

Anchoring

Question 6

Sherry Zipersky was assigned responsibility for evaluating the goodwill impairment testing process at Yukon Metals Inc. Because Yukon Metals’ growth strategy was based mostly on acquisitions, the company had experience in performing annual impairment tests of goodwill. The client provided Sherry extensive information along with detailed schedules that documented management’s testing approaches, and it provided her support for key assumptions made by management. Sherry reviewed the schedules in detail and tested the key calculations. While Sherry’s firm has a number of valuation specialists as part of its staff, Sherry decided not to request their assistance in making an independent assessment of goodwill impairment given that the client’s documentation was extensive and it would take too much time to have the firm’s valuation specialists complete an independent assessment.

Answer 6

Availability

Question 7

Jason Jackson was responsible for auditing the occurrence of sales transactions in the audit of Asheville Manufacturing. As part of his testing, he reviewed the contracts signed between Asheville Manufacturing and its customers to determine that the transaction terms justified the recording of sales for the year under audit. In addition, he examined documentation related to the sales transactions, including the customers’ purchase orders, shipping documents, and invoices generated by Asheville. The evidence examined supported the correct recording of sales in the current year. However, Jason also noticed in the customer files copies of email exchanges between Asheville Manufacturing sales agents and the customers suggesting that some of the terms of the sales agreements could be waived at the customers’ discretion. Jason decided to rely on the contracts and sales transactions documentation to conclude that the sales were properly stated, given that the other information was only included in emails.

Answer 7

Confirmation

Question 8

Allison Garrett works on a number of audits of technology equipment manufacturers and has developed extensive knowledge and experience in the industry. On the recent audit engagement of financial statements for Zurich Technologies, Allison was responsible for auditing the valuation of inventories, including the reserve for obsolescence. Given her familiarity with the industry, Allison decided to conduct a quick substantive analytical procedure regarding the days in inventory and determined that the reserve was fairly stated, given that it was in line with reserves established by some of her other clients. She determined that additional evidence was not necessary to be obtained because of her experience with other clients.

Answer 8

Overconfidence

Question 9

The requirement for an attitude of skepticism means that the auditor should

Answer 9

not be blind to evidence suggesting that the​ documents, books, or records have been altered or are incorrect.

Question 10

Society has attached a special meaning to the term professional. A professional is

Answer 10

a person who is expected to conduct himself or herself at a higher level than the requirements of​ society’s laws or regulations.

Question 11

The underlying reason for a high level of professional​ conduct, such as exemplified in a code of​ conduct, for any profession is

Answer 11

the need for public confidence in the quality of service of the profession.

Question 12

A code of professional conduct typically includes​ principles, rules of​ conduct, and interpretations or examples. What is the purpose of the​ principles?

Answer 12

to provide ideal standards of ethical conduct aimed to serve the public interest

Question 13

CPAs do not allow their professional or business judgment to be compromised by bias or the undue influence of others. Under the ethical principles of the relevant provincial CPA Code of Professional Conduct​,
this is an example of

Answer 13

objectivity.

Question 14

CPAs are required to maintain professional competence. Which of the following is a description of maintaining professional​ competence?

Answer 14

A CPA maintaining keeping abreast of developments in the professional standards.

Question 15

Ethical dilemmas occur when

Answer 15

a choice must be taken about appropriate behaviour.

Question 16

A public accountant would be facing an ethical dilemma when deciding whether or not to

Answer 16

overlook a material overstatement of revenues to maintain a good client relationship.

Question 17

An auditor for Grover​ & Oscar Studios Ltd. identifies an ethical dilemma. Which of the following is relevant to resolving the ethical​ issue?

Answer 17

Would the issue affect the public interest?

Question 18

Which portions of the code of professional conduct are​ enforceable?

Answer 18

the rules of conduct

Question 19

Generally, all of the rules of professional conduct for CPAs apply to

Answer 19

all members and firms.

Question 20

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

Answer 20

themselves, their​ employees, and partners.

Question 21

“Independence” in auditing means

Answer 21

impartiality in performing professional services

Question 22

When public accountants are able to maintain an independent attitude in fulfilling their​ responsibility, it is referred to as independence in

Answer 22

fact.

Question 23

When the users of financial statements have confidence in the independence of the public​ accountant, it is referred to as independence in

Answer 23

appearance.

Question 24

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

Answer 24

high standards of performance and conduct on the part of all practitioners.

Question 25

The confidential relationship will be violated​ if, without the​ client's permission, the public accountant provides working papers about a client to

Answer 25

another public accounting firm that has just purchased the public​ accountant's entire practice.

Question 26

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?

Answer 26

decline the new audit engagement

Question 27

Which one of the following situations is a violation of the professional rules of​ conduct?

Answer 27

PA looked the other way when he noticed that one of his​ firm's accounting staff accepted money from client management.

Question 28

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?

Answer 28

Provide a brief statement that there is no reason of which he or she is aware that would prevent accepting the engagement.

Question 29

The Rules of Professional Conduct require a successor auditor to communicate with the previous auditor. The primary concern in this communication is to

Answer 29

acquire information that will help the successor auditor determine whether the client management has integrity.

Question 30

Which of the following reasons is an insufficient reason for an auditor resigning from an engagement that is​ underway?

Answer 30

The auditor discovers that the time and scope of work required exceeds the​ auditor's planning estimates.

Question 31

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?

Answer 31

an independence threat analysis

Question 32

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?

Answer 32

advocacy

Question 33

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?

Answer 33

intimidation

Question 34

According to the​ profession's ethical​ standards, an auditor would be considered independent in which of the following​ instances?

Answer 34

The​ auditor's chequing​ account, which is fully insured by​ CDIC, is held at a client financial institution.

Question 35

Which of the following situations best describes a familiarity​ threat?

Answer 35

PA has been working with this client for ten​ years, first as a​ manager, now as a partner.

Question 36

A familiarity threat at an audit engagement occurs when

Answer 36

it is difficult to behave with professional skepticism.

Question 37

Which of the following is the best example of an intimidation​ threat?

Answer 37

Management threatens to change auditors if you do not let them overstate accounts receivable by $100,000 ​(the bad debt allowance is too​ low).

Question 38

An intimidation threat occurs when

Answer 38

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.

Question 39

To ensure that employees remain​ independent, an audit firm should

Answer 39

ask employees to sign a form confirming that they do not have an investment in a company that they are auditing.

Question 40

For listed​ clients, the audit committee should approve both the appointment of the auditor and

Answer 40

all services that the PA firm provides to the client.

Question 41

PAs are members of a professional association that can impose sanctions for violations of the professional code of conduct. What is an example of a severe penalty that a professional association can​ impose?

Answer 41

expulsion from the professional association

Question 42

Members conduct themselves at all times in a manner that maintains the good reputation of the profession and its ability to serve the public interest.

Answer 42

Professional behaviour

Question 43

Members are expected to be straightforward, honest, and fair dealing in all professional relationships. They are also expected to act diligently and in accordance with applicable technical and professional standards when providing professional services.

Answer 43

Integrity and due care

Question 44

The public expects the accounting profession to maintain a high level of competence. This underscores the need for maintaining individual professional skill and competence by keeping abreast of and complying with developments in the professional standards.

Answer 44

Professional competence

Question 45

Members have a duty of confidentiality in respect of information acquired as a result of professional, employment, and business relationships, and they will not disclose to any third party, without proper cause and specific authority, any information, nor will they exploit such information to their personal advantage or the advantage of a third party.

Answer 45

Confidentiality

Question 46

Members do not allow their professional or business judgment to be compromised by bias, conflict of interest, or the undue influence of others.

Answer 46

Objectivity

Question 47

How can those principles aid in analyzing an ethical​ dilemma?

Answer 47

At times personal values may collide with​ professional; however, the CPA must take into account the public interest and maintain the integrity of the profession. These principles help guide CPAs when attempting to solve an ethical dilemma and determining which values should take precedent.

Question 48

A number of CPA firms have willingly chosen to settle lawsuits out of court ________ (a). This has ________ (b) effect on the profession as it ________ (c). This, in​ essence, ________ (d) the​ auditor's liability because ________ (e).

Answer 48

a. in an attempt to minimize legal costs and avoid adverse publicity. b. a negative c. encourages others to sue CPA firms that otherwise would not. d. increases e. many firms will pay even though they do not believe they are liable.

Question 49

John Brown is a​ PA, but not a​ partner, with three years of professional experience with Lyle and​ Lyle, Public​ Accountants, a​ one-office public accounting firm. He owns 25 shares of stock in an audit client of the​ firm, but he does not take part in the audit of the​ client, and the amount of stock is not material in relation to his total wealth. Determine if this scenario is a violation of the rules of conduct and provide an explanation for your answer.

Answer 49

Likely not a violation. Ownership by staff members (other than partners) not involved in the audit is acceptable.

Question 50

In preparing the corporate tax returns for a​ client, Phyllis​ Allen, PA, observed that the deductions for contributions and interest were unusually large. When she asked the client for backup information to support the​ deductions, she was​ told, "Ask me no​ questions, and I will tell you no​ lies." Phyllis completed the return on the basis of the information acquired from the client. Determine if this scenario is a violation of the rules of conduct and provide an explanation for your answer.

Answer 50

Violation. PA is associating themselves with information that they believe to be false or at least questionable.

Question 51

A private entity audit client requested assistance of Kim​ Tanabe, PA, in the installation of a computer system for maintaining production records. Kim had no experience in this type of work and no knowledge of the​ client's production​ records, so she obtained assistance from a computer consultant. The consultant is not in the practice of public​ accounting, but Kim is confident in her professional skills. Because of the highly technical nature of the​ work, Kim is not able to review the​ consultant's work. Determine if this scenario is a violation of the rules of conduct and provide an explanation for your answer.

Answer 51

Violation. Acceptance of engagement implies PA has the competence to do the work, which is not the case here.

Question 52

Five small Moncton public accounting firms have become involved with an information project by taking part in an​ inter-firm working paper review program. Under the​ program, each firm designates two partners to review the working​ papers, including the tax returns and the financial​ statements, of another public accounting firm taking part in the program. At the end of each​ review, the auditors who prepared the working papers and the reviewers have a conference to discuss the strengths and weaknesses of the audit. They do not obtain the authorization from the audit client before the review takes place. Determine if this scenario is a violation of the rules of conduct and provide an explanation for your answer.

Answer 52

Violation. PA firm did not obtain consent from client and did not notify them of work being done.

Question 53

Bill​ Wendal, PA, set up a casualty and fire insurance agency to complement his auditing and tax services. He does not use his own name on anything pertaining to the insurance agency and has a highly competent​ manager, Renate​ Jones, who runs it. Bill frequently requests Renate to​ review, with the management of an audit​ client, the adequacy of the​ client's insurance and if it seems underinsured. He feels that he provides a valuable service to clients by informing them when they are underinsured. Determine if this scenario is a violation of the rules of conduct and provide an explanation for your answer.

Answer 53

Violation. Appearance of independence impaired by PA's financial dealing and involvement in a business that impairs objectivity.

Question 54

Michelle​ Rankin, PA, provides tax​ services, management advisory​ services, and bookkeeping​ services, and conducts audits for the same private company client. She requires management to​ approve, in​ writing, transactions and journal entries. Because her firm is​ small, the same person frequently provides all the services. Determine if this scenario is a violation of the rules of conduct and provide an explanation for your answer.

Answer 54

No violation of any rule as long as PA requires management approval and doesn't initiate transactions on their own.

Question 55

Gemi​ Tanjung, is a CPA​ student, enrolled in the CPA Professional Education Program​ (PEP). She is helping one of the senior managers at her firm to update the system of quality management. Part of the update involves developing standard​ templates, checklists, and forms. Gemi had worked at another firm and she had saved several of her former​ employer's standard Excel and Word​ templates, checklists, and forms. She used those and provided nearly identical versions for her senior manager. Determine if this scenario is a violation of the rules of conduct and provide an explanation for your answer.

Answer 55

Violation. Duty of confidentiality is being violated since consent was not obtained before using the documents.

Question 56

Toni Kowalsky, partner: Toni and Zaspa’s CEO, Roger, run a local summer tennis camp together. Toni and Roger became friends when they both worked at Zaspa. Toni left her role as finance VP at Zaspa 18 months ago.

Answer 56

Familiarity Yes; staff member may not be as objective as should be since due to friendship. Staff member should not be involved with the Zaspa audit.

Question 57

Patrick Sholer, senior manager: Patrick is a big tennis enthusiast and bought Zaspa tennis racquets for himself and his family.

Answer 57

Self-interest No; purchase of client's products do not appear to have a significant impact on independence.

Question 58

Chris Washolc, manager: Chris worked in Zaspa’s internal audit department on review of payroll system controls, but left Zaspa two years ago.

Answer 58

Familiarity No; did not hold a senior role at company and was not involved in controls over financial reporting.

Question 59

Sam Rivers, audit senior. Sam owns 1000 shares in Zaspa, inherited from his father’s estate.

Answer 59

Self-interest Yes; material investment in client could impact independence since staff could misstate financials. Staff member should not be involved with the Zaspa audit.

Question 60

Yolanda Ladna, audit senior. Yolanda plays on a semi-competitive volleyball team with four of Zaspa employees.

Answer 60

Familiarity No; relationship does not appear to be any overt familiarity.

Question 61

Anna Madras, audit junior. Anne’s father is a finance VP at Zaspa’s parent company, which is listed on the TSX.

Answer 61

Familiarity Yes; but level of staff member shouldn't threaten firm's independence with safeguards in place.