QB Chapter 16 Confidentialty Flashcards
Which two of the following are the principal reasons why confidentiality is so important to
accountants?
A It is a fundamental principle of all the major ethical codes
B Failure to keep information confidential reflects badly on the accountant
C Accountants need their clients to be comfortable to make full disclosure of company
affairs to them
D It means that accountants can work for competitors
A,C Options B and D are not the principal reasons for the importance of confidentiality
Which three of the following should an accountant take care not to do, in order to
safeguard confidentiality?
A Discuss client matters with third parties
B Discuss client matters with colleagues in public places
C Discuss client matters with colleagues in non-public places
D Leave working papers in the car
A,B,D
Option C does not apply as accountants may discuss client matters with colleagues in
non-public places.`
In which three of the following situations is it appropriate to disclose confidential
information?
A When the client has granted permission
B In order to obtain audit evidence about an amount in the financial statements
C When there is a public duty to make disclosure
D When there is a legal duty to make disclosure
A,C,D
Option B is not correct as it is not acceptable to disclose confidential information in a
bid to secure further audit evidence.
Which three of the following are situations where there is a legal duty to disclose
confidential information?
A When a fraud has taken place, it should be reported to the police
B When terrorist activity has taken place, it should be reported to the police
C When regulatory breaches have taken place at a charity, it should be reported to the
Charities Commission
D When money laundering is suspected, it should be reported to the National Crime
Agency (NCA)
B,C,D
Where a fraud has been identified, this is usually reported to the client unless the fraud
has been carried out by senior management/directors, in which case, great care should
be taken in the steps taken.
Emma is faced with the following situations as part of her work.
For each situation, select the action Emma should take.
As part of her routine assurance work on revenue at Dodgy Ltd, Emma discovers that the
company accepts cash payments for sales that are never recorded in the accounting
records.
A Make no external report
B Report to the police
C Report to the firm’s money laundering nominated officer
As part of her routine payables testing at Risky Ltd, Emma discovers that controls are
deficient and some payments have been made to suppliers twice in error.
D Make no external report
E Report to the police
F Report to the firm’s money laundering nominated officer
C,D In the first case, report to the firm’s money laundering nominated officer as the case is
suspicious. In the second case, make no external report as there is no public or legal
duty to disclose an internal control deficiency.
For each of the following situations, select whether the assurance provider may disclose
confidential information or must disclose confidential information.
The assurance provider is being sued for negligence and is trying to establish a defence.
A May make disclosure
B Must make disclosure
The assurance provider has discovered a fraud at the client, which the client has agreed
should be referred to the police.
C May make disclosure
D Must make disclosure
The assurance provider believes that the client is saving money by breaching environmental
clean up requirements.
E May make disclosure
F Must make disclosure
A,C,F
In the first case the assurance provider may make disclosure. In case 2, he may make
disclosure if the client does not. In the final case, the auditor has a duty to make
disclosure as this constitutes money laundering
In which one of the following instances would the client’s permission be required before
disclosure is made to a third party?
A The client is involved in tax evasion
B The receivables ledger clerk at a client has committed a theft by teeming and lading
C An employee of a client is involved in terrorist activities
D There has been an industrial accident at one of the client’s factories which has not been
reported to the relevant licensing authorities
D Terrorist activities should be reported to the police. Tax evasion should be reported to
the National Crime Agency (NCA). The theft involves money laundering and should be
reported to the money laundering nominated officer, who would report it onto the
NCA.
Where a licence is required but is not applied for, disclosure is not required unless
there is a legal requirement to do so. Since this does not appear to be the case here,
the client’s permission is required
If an assurance provider suspects that money laundering is taking place, to which one of the
following should the details be reported in the first instance?
A The police
B The Department of Trade and Industry
C The board of directors
D The firm’s money laundering nominated officer
D The money laundering nominated officer will then decide on the appropriate course of
action.
In respect of conflicts of interest, select whether each of the following statements is true or
false.
Where a conflict of interest exists between two audit clients, the auditor must cease to act
for one party.
A True
B False
If the effects of a conflict of interest can be mitigated by safeguards these should be
recorded.
C True
D False
Where adequate safeguards are available the parties involved do not need to be informed
of the conflict of interest.
E True
F False
B,C,F
If the audit firm believes that the conflict of interest can be managed through
safeguards the firm can continue to act for both parties (option B). The clients involved,
however, should be informed of the situation (option F).
Which two of the following would be an appropriate use of confidential information?
A On a change of employment, using experience gained in a previous position
B Encouraging others to buy shares in a company on the basis of information obtained
during the course of the audit
C Providing a prospective auditor with information required by him in order for him to
decide whether or not to accept the appointment
D Using information obtained on the audit of one client to influence the audit opinion
given in respect of another client
A,C Encouraging others to buy shares in a company on the basis of information obtained
during the course of the audit is known as insider dealing and is a criminal offence.
Where audit evidence obtained in the audit of one client affects the audit of another
client, procedures must be performed so that the same evidence is obtained from
another source.
In which one of the following situations may confidential information in respect of a client
only be disclosed if the permission of the client has first been granted?
A As a defence in a negligence claim
B In order to avoid giving an incorrect auditor’s report to another client
C Where money laundering is suspected
D Where terrorism is suspected
B In order to avoid giving an incorrect auditor’s report to another client is the only option
where permission must first be granted (otherwise the assurance provider will be
breaking his duty of confidentiality to that client). For the other options, client
permission is not required (and indeed to seek this could be regarded as ‘tipping off’
the client) but disclosure is necessary by law or the auditor is protected by the court
(eg, in a negligence claim). SAMPLE PAPE
During the course of an assurance engagement, a member of the assurance team from
Endeavour LLP discovers that the owner of the business regularly collects cash received
from customers and does not include any details relating to the transaction in the
accounting records of the business.
Which one of the following is the most appropriate action for him to take in respect of this
matter?
A Discuss the matter with the client and advise him of the legal position
B Report the matter to the manager of the assurance engagement so that she can discuss
it with the client
C Obtain the client’s permission to report the matter to a designated officer within your
firm
D Report the matter to a designated officer within your firm without the client’s
permission
D Report the matter to a designated officer within your firm without the client’s permission.
Discussing or mentioning the matter with the client would only serve to tip him off
about the transactions identified. SAMPLE PAPER
Lilac Ltd is currently in a dispute with the tax authorities, and ask asked Lilly LLP to represent
it. Lilly LLP is concerned that doing so may breach its duty of confidentiality.
Which of the following statements best reflects the auditor’s duty of confidentiality?
A Auditors must never, under any circumstances, disclose any matters of which they
become aware during the course of the audit to third parties, without the permission of
the client.
B Auditors may disclose any matters in relation to criminal activities to the police or
taxation authorities, if requested to do so by the police or a tax inspector.
C Auditors may disclose matters to third parties without their client’s consent if it is in the
public interest, and they must do so if there is a statutory duty to do so.
D Auditors may only disclose matters to third parties without their client’s consent if the
public interest or national security is involved
C There is no blanket prohibition on disclosure, nor is there any general right of the
police or taxation authorities to demand information. Auditors have an implied
contractual duty of confidentiality. There is no statutory duty of confidentiality.
You are an audit manager in Leaf LLP, a large audit firm which specialises in the audit of
insurance companies. The firm currently audits Caterpillar Ltd, a car insurer, but
Caterpillar’s main competitor, Snail Ltd, has approached the audit firm to act as auditors.
Caterpillar is concerned that if Leaf LLP audits both companies then confidential
information could pass across to Snail.
Which two of the following actions should Leaf LLP take regarding the potential
confidentiality issue?
A Inform the audit committees of both Caterpillar and Snail of the potential conflict of
interest and obtain their consent to act for both parties
B Use separate audit teams for each audit with a common independent review partner to
determine whether confidentiality has been maintained
C Draw up confidentiality agreements to be signed by the board of directors of
Caterpillar and Snail
D Prevent unauthorised physical access to the information relating to both company
audits LO 4
A,D Separate audit teams should be used including audit partners and independent review
partners.
Confidentiality agreements should be signed by Leaf LLP’s staff, not by the client
For each of the following statements about the principle of confidentiality, select whether
the statement is true or false.
It is appropriate for a member of the audit team to discuss a client’s financial statements
with a member of the tax team in the firm’s reception area.
A True
B False
The auditor must disclose a client’s breach of environmental law as soon as is practicable
after it is discovered.
C True
D False
B,D The reception area is likely to be open to the public, so to discuss a client’s affairs there
would be to breach the duty of confidentiality.
Where an auditor discovers non-compliance with laws and regulations, they must first
inform the client’s management (or the directors) of the breach and ask them to report
it. The auditor would only report the breach to the authorities if the client refuses to do
so, and if there is either a legal obligation to report it, or the auditor considers it to be
in the public interest to do so.
