Workshop 2 - Ethical dilemmas

Question 1

What are the fundamental principles of ethics?

Answer 1

1. Integrity
2. Objectivity
3. Professional competence and due care
4. Confidentiality
5. Professional behaviour

Question 2

‘Members should be unbiased and not allow conflict of interest or the influence of others impair their decision process’ relates to which fundamental principle of ethics?

Answer 2

Objectivity

Question 3

How might an auditor exhibit professional competence and due care?

Answer 3

Maintain their knowledge and skills
Obtain a level of competence and keep-up-to-date with changes in regulations and standards
Act diligently, taking care to complete each task thoroughly, document all work and finish on a timely basis

Question 4

What is independence?

Answer 4

Acting with integrity, objectivity and professional scepticism.

Question 5

Describe the two forms of independence.

Answer 5

Independence of mind - Acting with integrity, objectivity and professional scepticism. Make a decision that id free from bias, personal beliefs and client pressures. (Actual independence)
Independence in appearance - belief that independence of mind has been achieved. Seen to be independent. (perceived independence)

Question 6

List the threats to independence

Answer 6

1. Self-interest threat
2. Self-review threat
3. Advocacy threat
4. Familiarity threat
5. Intimidation threat

Question 7

Where might an advocacy threat arise?

Answer 7

Acting or believed to act on behalf of its assurance client.

Question 8

What safeguards have been created by the profession, legislation or regulation?

Answer 8

Education about threats to independence
Establishment of a code of ethics
Legislation that requires an auditor to be independent and disclose their independence in the audit report.

Question 9

What safeguards have been created by clients?

Answer 9

Corporate governance mechanisms such as an audit committee.
Establish policies and procedures to ensure the financial report is true and fair.
Procedures to ensure that the assurance team has access to all the required documents and records when required.

Question 10

What safeguards have been created by the accounting firm?

Answer 10

Continuing education 
Policies and procedures
Client acceptance and continuance procedures 
Partner rotation
Peer review conducted by partners

Question 11

When can an audit be found negligent and liable for damages under tort law?

Answer 11

1. A duty of care was owed by the auditor
2. There was a breach to the duty of care
3. A loss was suffered as a consequence of that breach

Question 12

Is legal liability to client created under contract or tort law?

Answer 12

Either or both.

Question 13

What was found in the Kingston cotton mill case?

Answer 13

It is the duty of the auditor to use skill, care and caution, which a reasonable competent careful and cautious auditor would use. Reasonable will depend on the case.
Auditor must not assume that their client’s accounts are materially misstated.

Question 14

What was found in the Pacific acceptance case?

Answer 14

Recognised the standards of reasonable care and skill.

Question 15

What was found in the Centro properties case?

Answer 15

Companies directors must understand and monitor the financial position of their company.
Negligence must be proved to show that the auditor has breached their duty of care. Proving negligence must show that auditor has not complied with auditing standards and ethical guidelines, the Corporations Act or has failed to apply due care when conducting the audit.

Question 16

Is the legal liability to a third party created under contract or tort law?

Answer 16

No contract between auditor and third parties, they must use tort law.

Question 17

Which case found that ‘auditors owe a duty of care to parties they can reasonably foresee may rely on the financial report of their client?’

Answer 17

Scott group

Question 18

Which case introduced the concept of reasonable proximity between auditors and third parties?

Answer 18

Caparo

Question 19

What was established to show a duty of care in the Esanda case?

Answer 19

The report was prepared on the basis that it would be communicated to a third party
The report was likely to be relied upon by that third party
The third party ran the risk of suffering a loss if the report was negligently prepared.
The third party must show that the auditor ‘intended to induce them’ to act on the audit report.

Question 20

How might an audit/audit firm avoid litigation?

Answer 20

Hire competent staff, regular training
Comply with ethical and audit regulations
Meet with client’s audit committee to discuss significant issues
Follow up any significant weaknesses in client’s internal control procedures from previous year audit.
Deal with privity letter requests in accordance with guidance

Question 21

What are the steps in a client acceptance and continuation decision?

Answer 21

1. Assess client integrity
2. Assess audit firm’s ability to meet ethical requirement’s, service client
3. Prepare client engagement letter