Week 2: Professional role of an auditor

Question 1

What is the principle that auditors need to follow?

Answer 1

APES 110 Public Interests principle

Question 2

What principles of public interest does the auditor follow

Answer 2

Integrity
Objectivity
Professional competence
Confidentiality
Professional behaviour

Question 3

Which public interest principle do you think is the most important to follow

Answer 3

All of the principles. However, integrity encompasses all of the other principles. Hence, fundamental principle.

Question 4

What are potential threats to each public interest principle

Answer 4

Integrity - self - interest
Confidentiality - Advocacy
Objectivity - self-review
Professional behaviour - familiarity
Professional competence - intimidation (actual/perceived)

Question 5

What is the difference between auditors in public practice and business

Answer 5

Independence

Question 6

How many levels of independence are there

Answer 6

Mind
Appearance - an objective person would still think the auditor is independent

Question 7

What are safeguards

Answer 7

Measures designed to eliminate or reduce threats to an auditor’s independence and objectivity

Question 8

Who can create and design safeguards?

Answer 8

Created:
- profession
- CPD requirements
- professional standards

Developed by the firm (general):
- quality controls
- procedures and policies

Developed by the firm (engagement specific):
- personnel rotation
- professional review

Question 9

What are some threats to independence

Answer 9

• financial interest
• loans and guarantees
• close business, family and personal relationships
• employment relationships
• long association
• gifts and hospitality

Question 10

Why are auditors blamed for corporate collapses and expectation gap

Answer 10

• deep pocket theory
• professional indemnity insurance

Question 11

What does the contract law state?

Answer 11

auditors owe a duty of care to their clients (privity of contract)

Question 12

What 3 elements are evident for the auditor to owe their client a duty of care

Answer 12

• offer
• acceptance
• consideration

Question 13

When has contract been breached?

Answer 13

If engagement letter is wrongly portrayed (contains parties, expectations and their roles)

Question 14

Under tort/negligence law, what is the proximity for duty of care to be owed

Answer 14

• auditor to client
• auditor to shareholder
• auditor to anyone specific that they will be relying on report

Question 15

Under tort law, what 3 elements are there for duty of care to be owed (what case did this come out of)

Answer 15

-Esanda:
- Report conveyed to 3rd party
- It would be relied on by third party
- they would act in reliance

Question 16

When is duty of care breached? Where do the principles come from?

Answer 16

Pacific acceptance:
- Promptly fraud/suspicion of fraud
- Supervise & review work of inexperienced staff
- Document audit procedure
- Audit the full year
- Carry out objective audit procedures
- Don’t shirk reporting to s/holders to avoid bad consequences

Question 17

What potential third parties do auditors owe duty of care to

Answer 17

• lenders (bank)
• shareholders
• creditor

Question 18

What cases highlight duty of care owed to third parties?

Answer 18

Donahue v Stevenson
Caparo
Esanda

Question 19

What does the causal relationship in tort of negligence highlight

Answer 19

Quantifiable loss or damage sustained due to breach

Causal relo:
- link between actions of person and damage sustained
- failure to show link will mean legal action will fail