Chapter 3 Auditor's Ethical and Legal Responsibilities

Question 1

What is ethics?

What are 3 key elements of ethics?
pg 80

Answer 1

According to Wheelwright: that branch of philosophy which is the systematic study of reflective choice, of the standards of right and wrong by which it is to be guided, and of the goods toward which it may ultimately be directed.

Three key elements:
1) It involves questions requiring reflective choice (decision problems), 2) it involves guides to distinguish right from wrong (moral principles), and 3) it is concerned with the consequences of decisions

Question 2

What is ethical behaviour?

Answer 2

There are two standard philosophical answers to this question:
1) it is behaviour that produces the greatest good, and 2) it is behaviour that conforms to moral rules and principles

Question 3

What is critical thinking framework?

Answer 3

one that consists of principles, concepts, and their application, and ethics is an important concept within the framework. The auditor must have good reasons other than that “it feels right” to support a position.

Question 4

What are the 5 threats to independence that the public accountant must examine before accepting an engagement? You should be able to identify when there is a threat or provide an example of each of the threats. Why or how is each of these a threat to independence? What is the responsibility of the public accountant if a threat exists?

Answer 4

1) Self review: providing assurance on his or her own work
2) Self-interest: for example, benefiting from a financial interest in a client
3) Advocacy: promoting a client’s position or opinion
4) Familiarity: Becoming too sympathetic to a client’s interests
5) Intimidation: being deterred from acting objectively by actual or perceived threats from a client

Under all independence standards, the PA must identify and evaluate the significance of any independence threat. If threats are other than clearly insignificant, the PA must apply safeguards to eliminate the threats or take action to reduce them to a level that would pose no real or perceived compromise.

Question 5

If a plaintiff is to successfully sue an auditor, what four elements of negligence, under the common law of torts for negligence, must be established?

Answer 5

1. There must be a legal duty of care to the plaintiff.
2. There must be a breach in that duty (e.g., failure to follow GAAS and GAAP).
3. There must be proof that damage resulted (otherwise the plaintiff is limited to the amount of the audit fee).
4. There must be a reasonably proximae connection betweent he breach of duty and the resulting damage (e.g., losses must occur subsequent to the firm’s audit.)