Auditing, 12e (Arens)
Chapter 3 Professional Relationships: The Role of Ethics and Independence
3.1 Describe ethics and their relevance
1) Ethical behaviour is considered to be a cornerstone for trust in everyday life as well as in
business practices. Ethics are
A) beliefs that we have about our own behaviour.
B) a set of moral principles or values.
C) rules in society that help us to do the right thing.
D) laws that govern how businesses should behave.
2) Ethical dilemmas occur when
A) you know what you want to do but the rules say otherwise.
B) businesses disregard the laws and engage in illegal behaviour.
C) a person chooses to act in his/her own interest.
D) a choice must be taken about appropriate behaviour.
3) A public accountant would be facing an ethical dilemma when deciding whether or not to
A) overlook a material overstatement of revenues to maintain a good client relationship.
B) overlook a non material error in the financial statements.
C) accept an invitation from the client to go golfing in order to maintain a good client
relationship.
D) participate in a charitable activity organized by the client.
4) Formal frameworks have been developed to help people resolve ethical dilemmas. After
obtaining the relevant facts and identifying the ethical issues from the facts, what is the next step
in the six-step ethical framework?
A) Decide on the appropriate action to be taken in resolving the ethical dilemma.
B) Identify the likely consequences of actions that will be taken.
C) Determine who is affected by the outcome of the dilemma and how they are affected.
D) Identify the alternatives available to the person who must resolve the dilemma.
5) Frank has discovered that his employer is part of a group of banks that is manipulating interest
rates. He would like to stop this practice at his employer, and is not sure how best to talk to his
boss. He has heard of the GVV (Giving Voice to Values) approach, and thinks he may be able to
use it successfully because his company has recently implemented new initiatives to empower
employees to speak of improvements to business practices. The first step of the GVV approach
includes
A) identifying the stakeholders, what is at stake for them, and how to connect with them.
B) identifying the values underpinning the different positions in the conflict and the possibilities
for action.
C) considering Frank’s personal and professional purpose and choices in this situation.
D) development and practice of a powerful response that Frank can use with his boss.
6) Frank has discovered that his employer is part of a group of banks that is manipulating interest
rates. He would like to stop this practice at his employer, and is not sure how best to talk to his
boss. He has heard of the GVV (Giving Voice to Values) approach, and thinks he may be able to
use it successfully because his company has recently implemented new initiatives to empower
employees to speak of improvements to business practices. After identifying and clarifying the
ethical issue, what should Frank do next?
A) identify the stakeholders, what is at stake for them, and how to connect with them
B) identify the values underpinning the different positions in the conflict and the possibilities for
action
C) consider his personal and professional purpose and choices in this situation
D) develop and practice a powerful response that he can use with his boss
7) Frank has discovered that his employer is part of a group of banks that is manipulating interest
rates. He would like to stop this practice at his employer, and is not sure how best to talk to his
boss. He has heard of the GVV (Giving Voice to Values) approach, and thinks he may be able to
use it successfully because his company has recently implemented new initiatives to empower
employees to speak of improvements to business practices. After considering his personal and
professional purpose and choices, what should Frank do next?
A) identify the stakeholders, what is at stake for them, and how to connect with them
B) identify the values underpinning the different positions in the conflict and the possibilities for
action
C) practice what he is going to say, with help from a mentor or coach
D) develop a powerful response that he can use with his boss, using external research or
resources
8) Frank has discovered that his employer is part of a group of banks that is manipulating interest
rates. He would like to stop this practice at his employer, and is not sure how best to talk to his
boss. He has heard of the GVV (Giving Voice to Values) approach, and thinks he may be able to
use it successfully because his company has recently implemented new initiatives to empower
employees to speak of improvements to business practices Frank has identified who is affected,
what is at stake for them, and how to connect with them. What is his next step, using the GVV
analysis framework?
A) list the values underpinning the different positions in the conflict
B) consider his personal and professional purpose and choice in this situation
C) practice what he is going to say, with help from a mentor or coach
D) craft a useful, powerful response that he could use, taking into account multiple options
9) Frank has discovered that his employer is part of a group of banks that is manipulating interest
rates. He would like to stop this practice at his employer, and is not sure how best to talk to his
boss. He has heard of the GVV (Giving Voice to Values) approach, and thinks he may be able to
use it successfully because his company has recently implemented new initiatives to empower
employees to speak of improvements to business practices. Frank has crafted a useful, powerful
response that he could use, taking into account multiple options. He has conducted research to
make him more informed on the issue, and has consulted a friend who is expert in this area.
What should is the next thing he should do before talking to his boss?
A) review the values underpinning the different positions in the value conflict
B) further develop and practice his response (scripting) and get help (coaching)
C) review the different possibilities for action to make sure that he has considered enough
D) check his stakeholder analysis to make sure that it is thorough and complete
10) Describe an ethical dilemma that an auditor or an accountant might face in his or her
business career, then illustrate how the auditor or accountant might use the six-step approach
presented in Chapter 3 to resolve that dilemma. Be specific.
3.2 Explain how PAs are different from other professionals
1) Society has attached a special meaning to the term professional. A professional is
A) someone who has passed a qualifying exam to enter the job market.
B) any person who receives pay for the services performed.
C) a person who is expected to conduct himself or herself at a higher level than the requirements
of society’s laws or regulations.
D) someone who has both an education in the trade and on-the-job experience received under an
experienced supervisor.
2) The underlying reason for a high level of professional conduct, such as exemplified in a code
of conduct, for any profession is
A) the need for public confidence in the quality of service of the profession.
B) that it provides a safeguard to keep unscrupulous people out.
C) that it is required by federal legislation.
D) that it allows licensing agencies to have a yardstick to measure deficient performance.
3) It is not practical for users to evaluate the quality of the performance of most professional
services because of their
A) complexity.
B) legal standing.
C) veracity.
D) salaries and working conditions.
4) Financial statement users cannot be expected to evaluate audit performance because they will
not have the time or the competence to do so. In such a situation, how is public confidence in the
quality of professional services enhanced? When there are
A) only business majors hired to work as auditing students with public accounting firms.
B) adequate controls at the public accounting firm to limit the amount of overtime worked.
C) high standards of performance and conduct on the part of all practitioners.
D) strict rules about the type of work that employees should complete on a daily basis.
5) The need to implement philosophies and practices commonly referred to as “improved
business practices” comes from
A) increased competition resulting in public accounting firms being concerned about keeping
clients and maintaining a reasonable profit.
B) a CAS pronouncement.
C) a GAAP pronouncement.
D) a need to increase profitability on assurance type mandates.
6) In a code of conduct, the advantage of general statements of ideal conduct, as opposed to
specific rules of behaviour, is
A) the emphasis on positive activities that encourage a high level of performance.
B) the ability to enforce the ideals.
C) the enforceability of minimum behaviour and performance standards.
D) the tendency to define the rules as maximum rather than minimum standards.
7) PAs are members of a professional association that can impose sanctions for violations of the
professional code of conduct. What is an example of a severe penalty that can be imposed by a
professional association?
A) Publication of information about the offence in a newsletter
B) Requirement of the completion of training courses
C) Requirement to have another peer review conducted within one year
D) Expulsion from the professional association
8) The disadvantage of general statements in codes of professional conduct is
A) the emphasis on positive activities.
B) that they identify ideal conduct.
C) the difficulty of enforcing general ideals without minimum standards of behaviour.
D) that there are too many to remember.
9) A code of professional conduct typically includes principles, rules of conduct, and
interpretations or examples. What is the purpose of the principles?
A) state what a practitioner must do for each audit engagement conducted
B) provide discussions of the rules of conduct and how they relate to practical situations
C) provide minimum standards of ethical conduct stated specifically
D) provide ideal standards of ethical conduct stated in philosophical terms
10) Which portions of the code of professional conduct are enforceable?
A) Principles and rules
B) The rules of conduct
C) Interpretations
D) Rules and interpretations
11) One difference between auditors and other professionals is that most professionals
A) need not be concerned about maintaining independence.
B) don’t have requirements for continuing education beyond university.
C) don’t have to pass a rigorous examination.
D) aren’t expected to act in the public interest.
12) Generally, all of the rules of professional conduct for CAs apply to
A) students in public practice.
B) students and members.
C) all members.
D) members in public practice.
13) As a member of a professional accounting association, when considering the applicability of
the rules of professional conduct, a PA would be responsible for compliance by
A) themselves only.
B) their partners in the practice and themselves.
C) their employees.
D) themselves, their employees, and partners.
14) Discuss the ways the accounting profession and society encourage public accountants to
conduct themselves in a professional manner; i.e., the factors that influence the ethical conduct
of audit practitioners.
15) Identify and describe each of the three parts to the Code of Professional Conduct. Also
discuss which parts are officially enforceable and which are not.
16) Each of the following situations involves a possible violation of the independence
requirements of the provincial institutes’ Rules of Professional Conduct. For each situation, (1)
decide whether the Rules have been violated, and (2) briefly explain how the situation violates
(or does not violate) the Rules.
A) Mike Lednicky, public accountant, is a partner in the Oshawa office of Arthur & Thompson,
public accountants. Mike’s brother is employed as an inventory warehouse supervisor (an audit–
sensitive position) by Sweeny Appliances, a publicly-held company in Manitoba. Sweeny
Appliances is one of Arthur & Thompson’s audit clients. Neither Mike nor the Oshawa office of
Arthur & Thompson is involved in the audit of Sweeny Appliances.
Violation? Yes No
Explanation:
B) The accounting firm of Finke & Hersley, public accountants, provides bookkeeping and tax
services for Hendershot Corporation. Finke & Hersley also performs the annual audit of
Hendershot Corporation.
Violation? Yes No
Explanation:
C) Brent Shaw, public accountant, is the auditor of Cafe Eccel. A couple of weeks ago, Cafe
Eccel’s management expressed an intention to commence litigation against Brent, alleging he
was negligent in last year’s audit. Brent believes there is a strong possibility that management
will proceed with the litigation. However, Cafe Eccel has not fired Brent as its auditor, and he is
now working on the current year’s audit of Cafe Eccel.
Violation? Yes No
Explanation:
D) Melissa Barry, public accountant, is the auditor of Audio Video Inc. Audio Video has not
paid Melissa’s audit fee for the past two years. Melissa is working on the current year’s audit of
Audio Video.
Violation? Yes No
Explanation:
17) Each of the following situations involves a possible violation of the provincial institutes’
Rules of Professional Conduct. For each situation (1) decide whether or not the rules have been
violated, and (2) briefly explain how the situation violates (or does not violate) the rules.
A) Carla is the CFO of Xenon Company. Carla was very happy after her husband Dwayne, a
partner at a large PA firm was assigned as the new auditor of the company. Carla is confident
that this will be helpful to Xenon since Dwayne already knows so much about the business.
Violation? Yes No
Explanation:
B) Jeremy accepted a summer internship at a PA firm. Jeremy’s parents own 0.1% of Raven Inc,
a large public company in Austria. Raven Inc. is a client of the Austrian branch of the PA firm.
Jeremy reported this to the partner of his office.
Violation? Yes No
Explanation:
C) Ken Burns is a partner at Burns and Fields LLP, a PA firm. Ken was approached by a friend
who asked him to invest in Safran Group Inc., a growing high tech company. The proposal
would be for Ken to invest $650,000 to obtain 1% of the company. Ken decided to go ahead with
the investment because Safran is a client from their Seattle office and he has never provided any
services to Safran Inc. Ken indicates that he will ensure that he does not work on the audit of
Safran.
Violation? Yes No
Explanation:
D) Sintron Inc. is a payroll processing company. Over the past 5 years, Clarkson Coppers LLP, a
PA firm, has outsourced its payroll processing and other human resources tasks to Sintron.
Clarkson Coopers LLP is happy to outsource more functions to Sintron as Sintron has asked
Clarkson for additional consulting services with regards to system implementation and
application of new accounting policies.
Violation? Yes No
Explanation:
18) Raul, PA, received a call from his friend Cristobal Franco. He needed an audit urgently,
because the bank might call his loan for his computer store CF Ltd. Since Cristobal had been his
high school friend and they still played soccer together every two weeks, Raul agreed. Raul and
Cristobal had a quick meeting, where Raul fixed the audit fee at $10,000. Cristobal stressed the
importance of an unqualified opinion for the bank.
Raul sent two available junior staff to CF’s offices. The junior staff were experienced in review
engagements, and had been working for Raul for about six months. The two staff had a quick
look around the store, noting the documents strewn everywhere. The accounting staff came in
and chatted briefly after their smoke break. They were about a month behind on recording
transactions, because Cristobal had laid off one sales person. The accounting staff also helped
out with providing sales quotes and Cristobal did all of the technical work.
At the end of the day, the junior staff were each given a $250 gift certificate to be used in the
computer store. This was great, because CF also sold MP3 players and supplies such as CDs and
DVDs.
At dinner that night, the junior staff told their family that it would probably be a great idea to
hold off on any computer supplies or equipment purchases that they needed, since CF would
likely hold a sale in the next month or two to improve cash flow.
Required:
Identify and discuss the violations in the rules of conduct with respect to CF.
19) You are having lunch with a former employee of your firm, a friend of yours. Gino had been
laid off last year when he had failed to pass his professional examinations for the third year in a
row. Gino told you that he managed to obtain a CMA designation in the past year, and has
started his public practice.
He has been circulating flyers and electronic email announcements with fixed rates: $400 for a
compilation engagement, $1,000 for a review, and $5,000 for an audit where revenues are less
than $1 million, $15,000 for an audit for a client with revenues up to $5 million. He already has
clients to keep him busy for the next three months. He even has some feelers for clients that he
personally handled while he was working for your firm – there were a lot of contacts developed
during the five years that he was working there! To help attract some of the larger clients, he is
considering not charging any fee for the first ten hours spent on tax-related services.
Gino ended the conversation by asking you if you would like to join him in his new firm,
because at this rate he’ll need a second person real soon!
Required:
Identify the violations in the professional rules of conduct and explain why they are violations.
3.3 Examine the threats to independence and explain how the threats can be mitigated
1) “Independence” in auditing means
A) remaining aloof from the client.
B) not being financially dependent on the client.
C) impartiality in performing professional services.
D) being an advocate for the client.
2) When public accountants are able to maintain an independent attitude in fulfilling their
responsibility, it is referred to as independence in
A) fact.
B) appearance.
C) conduct.
D) total.