Auditor Independence and Ethical Issues

Confidentiality

To guide us on how we should act

The company that issues the financial statements pays the public accountant

Deep pockets theory

Both civil action and criminal charges

Deal only with clients possessing integrity

Educate investors about FS

Audit committee

All of the above

Firms cannot provide accounting and bookkeeping services to their assurance clients

All of the above

To ensure that accountants adhere to the rules as maximum standards

To maintain an unbiased attitude during the audit

Independence in fact refers to the unbiased attitude of the auditor, while independence in appearance refers to other people's interpretation of the auditor's unbiased attitude.

All of the above

They must report the breach to the profession's discipline committee after advising the member of the intent to make a report.

Audits, reviews, compilation engagements, and any other engagements that require the auditor to be objective.

For a reasonable period of time, and some documentation needs to be retained indefinitely.

The prior year's financial statement, tax returns, and working papers.

The audit firm's chief executive officer (CEO) must not be in a financial reporting oversight role of the entity being audited.

Key audit partners must leave the audit team after seven years.

If 15% of the firm's total revenue comes from a listed entity for two consecutive years.

Expectations gap

Professional behaviour, Integrity and due care, Objectivity, Professional competence, Confidentiality

A situation in which a decision must be made about the appropriate behaviour

A methodological approach to resolving an ethical dilemma

The four threats to auditor independence are self-review, advocacy, familiarity, and intimidation.

Some examples of safeguards that can be implemented to reduce threats to auditor independence include rotation of partners on the engagement, limits on percentage of firm revenue from one client, independent reviews provided by CPAB, and qualified independent audit committees.

The key responsibilities of an audit committee include providing oversight of the auditor (internal and external), serving as an objective and independent liaison between auditors, management, and the board of directors, and ensuring the auditor's independence.

Some of the prohibitions applicable to all assurance engagements include members of the engagement team not having a direct or material indirect financial interest in the entity subject to the assurance engagement, not having a loan from or a loan guaranteed by the entity, not having a close business relationship with the entity, and not accepting significant gifts or hospitality from the assurance client.

They have to report the breach to the profession's discipline committee after first advising the member of the intent to make a report and give them an opportunity to mitigate the circumstances.

Members must obtain adequate information, including an assessment of accounting policies and internal controls, to estimate a fee.

Documentation and working papers should be retained for a reasonable period of time, and some documentation needs to be retained indefinitely (permanent file) such as financial statements, contracts, leases, and tax returns.

A predecessor should supply reasonable information to the successor about the client, including prior year's financial statements and tax returns, and allow the successor to review the working papers and answer questions to meet the CPA Canada Handbook requirements.

The deep pockets theory suggests that auditors can become the target of lawsuits because they have the financial resources to pay damages, even if they are not primarily responsible for the financial loss.

Auditors can face criminal and quasi-criminal liability for breaches of securities legislation, such as making misleading or untrue statements or omissions in required documents. This can result in fines of up to $5 million and/or imprisonment for up to 5 years less 1 day.

Accountants can minimize their liability by dealing only with clients possessing integrity, maintaining independence, understanding the client's business, performing quality audits, and properly documenting their work. They should also exercise and maintain professional skepticism.

The profession's response to legal liability includes standard setting by organizations like the IAASB and CPA, opposing unwarranted lawsuits even if the cost is greater than settling, educating users about the auditor's responsibilities, and sanctioning members for improper conduct and performance.

Ethical blind spots refer to unconscious tendencies that can affect the ethical decision-making process or cause the decision maker to not recognize the ethical dimension of a choice. The purpose of identifying and understanding ethical blind spots is to eliminate ethics from the decision-making process.

Rule 201 of the CPA code requires accountants to behave in the best interests of their profession and the public interest. They should not publicly criticize a colleague without giving them the chance to explain first. They should also not voluntarily resign from an audit engagement without good and sufficient reason.

Independence is one of the hallmarks of the auditing profession. The value of auditing depends on the public's perception of the independence of auditors. Auditors must be free of any influence, interest, or relationship that impairs professional judgment or objectivity. Independence is not only a state of mind; it also includes the appearance of independence, in the view of a reasonable observer.

Professional accountants are required to attend a certain number of continuing professional education courses each year to maintain their professional competence. This ensures that they stay up-to-date with the latest developments and best practices in their field.

Audit failure refers to the situation when the auditor issues an erroneous audit opinion due to a failure to comply with auditing standards. Business failure, on the other hand, occurs when a business is unable to repay its lenders or meet investor expectations due to economic or business conditions.

Audit risk is the risk that the auditor will conclude that the financial statements are fairly stated and issue an unqualified opinion when, in fact, they are materially misstated. Audit risk is unavoidable because auditors gather evidence on a test basis and because well-concealed frauds are extremely difficult to detect.

The expectations gap refers to the difference between the public's expectations of the auditor's role and responsibilities and the auditor's actual responsibilities per auditing standards. This gap leads to conflict because statement users often have higher expectations of what auditors should detect and report, while auditors are limited by the scope and nature of their work.

The four main sources of auditor liability discussed in the text are: 1) Common law liability to clients, where auditors can be sued for negligence or breach of contract by their clients. 2) Common law liability to third parties, where auditors can be sued by potential shareholders, vendors, creditors, employees, and customers who rely on the auditor's work. 3) Liability under provincial securities law to third parties, where auditors can be sued by investors for misrepresentation in their audit reports. 4) Failure to meet generally accepted auditing standards (GAAS), which is often strong evidence of negligence and can lead to legal liability.