External Auditing Module 2 Past Paper - Ethics and Independence

**Let's talk about course assessments:** 1. 2. 3. 4. 5. **Module 2 -- Professional Standards, Ethics, and Independence** Let's talk about professional and ethical conduct and the day the audit partner returned to work. **Role of the Auditor** **[[https://www.youtube.com/watch?v=9167PAbO6T...

**Let's talk about course assessments:** 1. 2. 3. 4. 5. **Module 2 -- Professional Standards, Ethics, and Independence** Let's talk about professional and ethical conduct and the day the audit partner returned to work. **Role of the Auditor** **[[https://www.youtube.com/watch?v=9167PAbO6T8]](https://www.youtube.com/watch?v=9167PAbO6T8) -** *manipulative and unethical approach (overload, social engineering, and providing misleading information)**\ *****[[Relate]](https://docs.google.com/document/d/1-RmHlaPyFcJxZkzODfkEDLu2dwJwH1e62FXvhiMrxfE/edit) -** *prioritize professionalism, independence, and the integrity of the audit process* 1. 2. 3. 4. 5. 6. **Rules of Professional Conduct (Ethical Principles)** **Principle** **Description** **Actions** -------------------------------------- ------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Professional Behaviour Members should behave in the best interest of their profession and the public. Members must adhere to accounting standards (IFRS, ASPE, PSAS and auditing standards (CAS), etc). To avoid any actions that would discredit the profession. Integrity Members act ethically and honestly. Do not associate with false and misleading information. (No member can sign or associate with false, fraudulent, or misleading information) Professional Competence and Due Care Members should be technically competent. Maintain their knowledge and skill at the appropriate level. Comply with technical and professional standards. Members are required to attend ongoing professional education and stay up to date with accounting/auditing standards. Confidentiality Members shall not share confidential information outside of the workplace. Members shall not disclose any confidential client information. Objectivity Members retain professional judgement regardless of personal feelings or prejudices. Members shall remain unbiased. Not be influenced by others or have conflict of interest. These 5 principles are outlined in the *Handbook of the Code of Ethics for Professional Accountants* prepared by the International Federation of Accountants (IFAC). **Other Ethical Considerations** - Retrieved June 21, 2019 at [[https://www.cpaalberta.ca/About-Us/Whistleblower-Policy]](https://www.cpaalberta.ca/About-Us/Whistleblower-Policy) **Independence** Independence is the ability to act with integrity and objectivity. Auditors must be independent of the clients they are auditing. Why? - - - - **Auditors and their work must be credible in the eyes of the public, otherwise, users won't rely on the audited financial statements. Credibility involves having competence, independence, integrity, and ethics.** **Question: Is there any harm in auditors holding shares in the companies they audit? After all, their firm is signing off on the audit report. What would be the perceived bias?** - There are two forms of independence. 1. - - - - 2. - Independence in fact and in appearance are important on every assurance engagement. An auditor has the responsibility to be aware of potential threats to independence and to determine what safeguards are needed to mitigate those threats. **If the threats cannot be mitigated, then the auditor should consider resigning from the engagement.** **Threats to Independence -- Table 2.2 p.2-15** 1\) **Self-Interest Threat** - When the auditor has a financial interest in the client or in the financial results of the client. i. ii. 2\) **Self-Review Threat** -- Auditor faces the risk of reviewing their own work. i. ii. 3. **Advocacy Threat** -- When the auditor is perceived to promote the client's position. i. ii. 4. **Familiarity Threat** -- Occurs when a member is too sympathetic to client's interests or too accepting of client\'s work because of a long or close relationship. The auditor is familiar with the client due to a long association with the client. 5. **Intimidation Threat** -- When the client intimidates the auditor with respect to the content of the financial statements. Occurs when a member is deterred from acting objectively because of actual or perceived pressures. i. ii. **How to Mitigate Threats to Independence** 1. 2. 3. 4. 5. Independence needs to be present in appearance and in fact. That means, even if you are independent from your client (in fact), you may take actions that others perceive (appearance) as not independent. If so, you cannot accept that company as a client. Scenario -- Your dad is the CFO of Cooper's Corporation. You work for the audit firm that audits Cooper's Corporation. Even though you know you will do your work without any bias, the public will perceive that you lack independence. Can you be on the audit team for this audit engagement? Identify and discuss any professional conduct and independence issues in the following independent scenarios. Adnan Hussein is a CPA working for a national firm. He is at his desk when he overhears his colleague Joan having a phone conversation. She is telling the person on the other end of the call that Gupta Co., the firm's largest audit client, is about to release its audited annual financial statements and the results are spectacular. Joan says she just bought some shares as she expects that the share price will go up. **Professional Conduct and Independence Issues** - - **To address these issues** - - John Drake, a partner at Drake and Buetz, is meeting with a potential new client. The client recently saw the firm's TV advertisement claiming that the firm was "the premier accounting firm in western Canada." The client requires a review engagement report with its financial statements to obtain a bank loan. John advises that his fee will be 10 percent of any bank loan granted. - - **To address these issues** - Sue Chen, CPA, is working on the audit engagement for Jones Construction, a reporting issuer. José, the accountant at Jones Construction, is unsure how to calculate the tax provision. Sue has advised José not to worry. She will prepare the tax provision and ensure that the disclosures are in accordance with generally accepted accounting principles (GAAP) so that she can issue an unmodified audit opinion. - - - - **To address these issues** - - - - Sue Chen is working on the audit engagement for Clara's Cleaning Services, a private entity. During the course of the engagement, she prepares a number of routine journal entries. She makes the required adjustments and reviews them with Clara, who signs off on them, before she releases the financial statements. ***Issues*** - - - - **Address** - - - - Sue Chen is working on the compilation engagement for Franks Foods, a private entity. During the course of the engagement, she prepares a number of routine journal entries. She makes the required adjustments before she releases the financial statements. ***Issues*** - - - *\ **Address*** - - - - Jack Bond is a partner in a national firm. He is responsible for the audit for Canada Bank. He recently purchased a car for his daughter and took out a car loan with Canada Bank. ***Issues*** - - - ***Address*** - - - Philip Monroe is a partner in a national firm. The firm is the auditor for Canada Bank. Philip's father-in-law is the chief operating officer for Canada Bank. ***Issues*** - - - ***Address*** - - James Lei, CPA, is reviewing his firm's accounts receivable. He notices that one of his largest audit clients has not paid its fees for the past two years. ***Issues*** ***Address*** Alison Kotecha, CPA, is meeting with a potential new audit client, Klein Advertising. She paid Johan Smit, a former colleague, \$1,000 for the referral. Although she hasn't performed any audit engagements for the past four years, she did recently take a GAAP course. During the meeting, she reads over the prior year's financial statements and tells the client she will accept the engagement. After reading the financial statements, she is certain that the fee will be less than the fee charged by the previous auditor. ***Issues*** - - - - ***Address*** - - - - Matt Green, CPA, is married to Jennifer Green, who owns Muffins to Go, a small private entity. Jennifer is a baker and not an accountant. However, she needs a set of financial statements prepared to attach to her tax return. Her husband Matt tells her that he will prepare them. - **Auditor Responsibility and Fraud, Errors, and Illegal Acts** CAS 240, *The Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements* What is the difference between fraud and an error? Go to *CAS 240.* *Auditors should always have a professionally skepticism about the occurrence of fraud.* Basically, maintain professional skepticism, while remaining alert to the possibility of fraud. It is hard to detect fraud, but it is important to always keep it at the back of your mind. You would be considered negligent if you didn't detect fraud that could otherwise be detected by a questioning mind. Don't take management\'s word for it - always corroborate their responses. If you understand the Fraud Triangle as an auditor, it may be easier to detect fraud. [Three Elements of the Fraud Triangle:] 1. 2. 3. When you are at the client site and interview/get to know the client and its personnel, consider if fraud triangle could be present. **Corporate Governance** Corporate Governance Structure of a Pubco: - - - - - Auditors are working for the shareholders. The Board of Directors is appointed to represent the shareholders. The Audit Committee is a subcommittee of the Board of Directors which appoints the external auditors. Thus, the Audit Committee is a subgroup to those charged with governance. Auditors must adhere to CAS 260 and determine with whom to communicate within the corporate governance structure. CAS 260 *Communication with those Charged with Governance* **Matters to Be Communicated** *The Auditor\'s Responsibilities in Relation to the Financial Statement Audit* *Planned Scope and Timing of the Audit* *Significant Findings from the Audit* **Legal Liability** Besides adhering to the laws of the profession, accountants need to adhere to the laws of the country as well. Auditors can be sued for breach of contract (contract law) or for not maintaining duty to care while performing the audit (tort of negligence). If a client files a lawsuit under tort law, the client needs to prove that: 1. 2. 3. In the event of a lawsuit, the legal system will determine if an auditor is negligent. Contributory negligence occurs when the client contributed to the negligence, thus both parties, the client (plaintiff) and auditor are both negligent in causing the loss to the client. Auditors are not looking for fraud but they need to use their \"Spidey Senses\", be aware of irregularities and risks. - - - - ***MedicateRecommendations*** - - - - - Source: Adapted from the Institute of Chartered Accountants Australia's CA Program's Audit and Assurance Exam, May 2008. Provided courtesy of Chartered Accountants Australia and New Zealand. - - - - - - Source: Adapted from ACCA Audit Framework, Paper 6, June 2013 exam. - - - - - - - - Factors Affecting Liability: - - - - - Source: © CGA-Canada, now CPA Canada. Reproduced with permission.