3) When the users of financial statements have confidence in the independence of the public
accountant, it is referred to as independence in
A) fact.
B) appearance.
C) conduct.
D) total.
4) When should a PA assess the five threats to independence with respect to an audit
engagement?
A) When deciding to accept a client or whether to continue an existing engagement
B) After signing the engagement letter and before commencing field work
C) After the completion of this year’s audit, before starting the next engagement
D) After a discussion with the Board of Directors
5) Which of the following situations would be an example of a self-interest threat that would
prevent a PA from auditing the client?
A) The PA’s uncle owns the business that the PA is auditing.
B) For the last two years, the client could not pay their fees, so the PA created a loan agreement
covering the fees, with the client paying 10% interest on the fees.
C) The PA has a small bank loan at normal business interest rates with the bank that his firm is
auditing.
D) The PA has purchased a used car from one of the employees of the client.
6) Which of the following situations best describes an advocacy threat? PA has been hired to
A) consult with the corporate controller and the bank manager about the conditions for financing
a loan.
B) manage the accounting department for three weeks while the corporate controller is on
vacation.
C) complete the personal tax returns of all executive management.
D) prepare the year end journal entries for a subsidiary company.
7) Which of the following situations would be an example a of self-review threat? Prior to
commencing the audit engagement, PA has completed
A) personal and corporate tax returns.
B) audit of a company where the client owns a minority interest.
C) purchase price allocation calculation for a company that the client purchased during the year.
D) audit of the non-for profit organization of the client.
8) Why does a self-review threat pose a problem when conducting an audit engagement?
A) The audit can be conducted more efficiently.
B) You are auditing your own work, and may not detect inadequacies.
C) The audit is more expensive, as you have to provide clear documentation.
D) The auditor may not have the expertise to complete the special work.
9) According to the profession’s ethical standards, an auditor would be considered independent in
which of the following instances? The
A) auditor’s chequing account, which is fully insured by CDIC, is held at a client financial
institution.
B) client comprises 75% of the auditor’s fees.
C) auditor does not have enough employees to meet the client’s reporting deadline.
D) client owes the auditor fees for two consecutive annual audits.
10) Which of the following situations best describes a familiarity threat?
A) Design and implementation of a new payroll system
B) Preparation and entry of bookkeeping transactions
C) Completion of corporate transactions for subsidiary companies
D) PA has been working with this client for ten years, first as a manager, now as a partner
11) A familiarity threat at an audit engagement occurs when
A) the member has a financial interest in the client.
B) it is difficult to behave with professional skepticism.
C) PA promotes the client’s position to third parties.
D) the member discloses financial information about the client.
12) Which of the following is the best example of an intimidation threat? Management
A) has decided to sue you because the audit fee was twice as high as they expected.
B) has changed auditors of all of its subsidiary companies as they can get the audit done for a
lower cost.
C) threatens to change auditors if you do not let them overstate accounts receivable by $100,000
(the bad debt allowance is too low).
D) threatens to resign from the company if the board of directors does not give them a 15% raise.
13) An intimidation threat occurs when
A) it is difficult to believe the actions of management because there is a suspicion of irregular
activity with respect to the recording of transaction activity.
B) the auditor suspects that fraud has occurred at the middle management level of the
organization.
C) the auditor has been working on a client engagement for many years and has trouble believing
that management would deceive the auditors.
D) a client threatens the firm or its staff with respect to the content of the financial statements or
with respect to the conduct of the audit.
14) If a PA firm provided corporate finance services to a company during the year, which of the
following engagements could the PA firm accept to provide to the same company?
A) Non-assurance services
B) Audit of listed entity
C) Audit of non-listed entity
D) Other assurance engagement
15) Some independence rules apply to all assurance engagements, while others apply only to a
listed entity. For the purposes of assessing the independence rules, a listed entity is defined as
A) an organization with share capital exceeding $10 million that has public accountability.
B) an entity whose debt or shares is listed on a stock exchange, with market capitalization and
total assets greater than $10 million.
C) any organization that has shares or debt listed on a stock exchange.
D) an organization that has shares or debt listed on a stock exchange, and that has redeemed
shares.
16) Where an independence threat occurs, it may be that only the person affected needs to be
removed from the engagement. In this case, other members of the firm can complete the
engagement. An example of a situation where only the student or member would be excluded
from the engagement is where PA
A) has a significant financial interest in the client, such that influence could be exerted.
B) used to be a controller at the client, but now works for the PA firm.
C) owns ten percent of the shares of the client.
D) is a board member of the client with signing authority for cheques.
17) At a small practice where the bulk of the work is accounting, bookkeeping, and review
engagements, what is an important procedure that should be followed by the PA to help ensure
independence?
A) Management should be trained in accounting principles so that they can adequately assess the
PAs work.
B) All transactions should be prepared and processed by client personnel.
C) Transactions and journal entries should be discussed with and approved by the client.
D) The accountant should avoid doing bookkeeping for review engagements, and restrict this to
compilation engagements only.
18) To ensure that employees remain independent, an audit firm should
A) ask employees to sign a form confirming that they do not have an investment in a company
that they are auditing.
B) prohibit an employee from the Toronto office to have an investment in a company audited by
the Hong Kong branch of the PA firm.
C) include a section in the code of conduct indicating that the employees should not invite their
client to dinner.
D) refuse an audit mandate where the cousin of a staff member works in the marketing
department.
19) For listed clients, the audit committee should approve both the appointment of the auditor
and
A) all services that the PA firm provides to the client.
B) an engagement that might affect the appearance of independence, such as design of control
systems.
C) any services that are provided for senior management.
D) the material that is included in the management letter by the PA firm.
20) In which of the following circumstances would a public accountant be bound by ethics to
refrain from disclosing any confidential information obtained during the course of a professional
engagement?
A) The public accountant is issued a subpoena that orders the public accountant to present
confidential information.
B) A major shareholder of a client company seeks accounting information from the public
accountant after management declined to disclose the requested information.
C) Confidential client information is made available as part of a practice inspection of the public
accountant’s practice.
D) An inquiry by a disciplinary body of a provincial institute requests confidential client
information.
21) The confidential relationship will be violated if, without the client’s permission, the public
accountant provides working papers about a client to
A) a court of law which subpoenas them.
B) the relevant provincial institute as part of a practice inspection.
C) another public accounting firm which has just purchased the public accountant’s entire
practice.
D) an investigative or disciplinary body of the relevant provincial institute which is conducting a
review of the public accountant’s practice.
22) The rules of accounting bodies in Canada require their members to behave in the best interest
of the profession and the public. Identify the situation where the accountant is acting in the best
interest of the profession. An accountant
A) reports a fellow accountant after noticing that the accountant helped a client with tax evasion.
B) openly criticizes a fellow accountant’s competencies after having lost a bid for a new client.
C) brags about his competence and professional title, and encourages clients to invest in a new
venture he is starting.
D) refuses to cooperate with the new auditor after having lost a client.
23) The provincial institutes’ Rules of Professional Conduct state, in part, that a public
accountant should maintain integrity and due care. Integrity in the Rules refers to a public
accountant’s
A) ability to maintain an impartial attitude on all matters that come under the public accountant’s
review.
B) ability to distinguish independently between accounting practices that are acceptable and
those that are not.
C) ability to be unyielding in all matters dealing with auditing procedures.
D) reputation for honesty and fair dealing.
24) What should a PA do if approached by a client where he and his firm lack or do not have
access to the technical knowledge required to complete the audit?
A) Subcontract the audit to another firm
B) Indicate that they can do a review engagement, not an audit
C) Decline the new audit engagement
D) Conduct the engagement, but prepare a qualified audit report
25) How is use of an applicable accounting framework enforced via legislation?
A) The Canada Business Corporations Act and many provincial incorporating acts require that
financial statements be prepared in accordance with the CICA Handbook.
B) PAs who do not prepare financial statements in accordance with such frameworks are
expelled from their professional association.
C) Tax authorities may sue corporations who do not prepare their financial statements in
accordance with such frameworks.
D) Financial executives may be sued if the financial statements prepared by their company are
not in conformance with such frameworks.
26) Which one of the following forms of advertisement would violate solicitation rules? PA
A) placed an advertisement in a newspaper indicating the opening of a new office.
B) conducted a cold-calling campaign where companies were asked if they would like to change
PA firms.
C) placed a media advertisement listing the different types of expertise available at the firm’s
major office locations.
D) conducted a survey asking companies about the types of services that are provided by their
accounting firms.
27) Which one of the following situations is a violation of the professional rules of conduct? PA
A) looked the other way when he noticed that one of his firm’s accounting staff accepted money
from client management.
B) resigned so that he could accept a position on the Board of Directors at a major client.
C) prepared personal and corporate tax returns for a client and all of its executive officers.
D) placed an advertisement in the local paper indicating that she conducted audit engagements
for five major insurance companies.
28) For which of the following engagements is a contingent fee permitted?
A) An audit engagement of a large listed corporation
B) A tax consulting assignment assessing the excise tax payment processes
C) A review engagement of a small manufacturing corporation
D) An assurance engagement of leasehold payments for a rental agreement
29) PA has been asked to accept the audit engagement of BarneyBlues Corporation. PA sent a
letter to the predecessor auditor asking whether there was any reason why he should not accept
the engagement. Assuming that the prior year audit went smoothly, what would be an
appropriate response by the predecessor auditor?
A) Provide a brief statement that there is no reason of which he or she is aware that would
prevent accepting the engagement.
B) Send a copy of the entire working paper file to PA.
C) Telephone PA and say that PA should not take the engagement because the fee charged was
too large.
D) Send a copy of the tax returns and tax assessments to PA.
30) The Rules of Professional Conduct require a successor auditor to communicate with the
previous auditor. The primary concern in this communication is
A) to acquire information which will help the successor auditor determine whether the client
management has integrity.
B) to learn about the client by examining the predecessor’s working papers.
C) to enable the successor to perform a more efficient audit.
D) to save the successor auditor time and money in gathering data.
31) Many PAs prepare tax returns for individuals and for corporations. Under what
circumstances is liability insurance required to cover the preparation of tax returns? When
A) the PA is a member of a professional accounting association.
B) any number of tax returns are prepared, including no charge tax returns.
C) fees are being charged and more than a handful of returns are being prepared.
D) the bulk of the PA’s income comes from preparing tax returns.
32) 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) Johnny Line has a successful dentistry practice in Calgary. Johnny has recommended one of
his patients to Leslie King, public accountant. To show gratitude for the referral, Leslie has
agreed to pay Johnny 5% of the fee for audit services rendered by Leslie to Johnny’s patient.
Leslie discloses the payment agreement to her new client.
Violation? Yes No
Explanation:
B) The accounting firm of Bayer & Peng, public accountants, is negotiating a fee with a new
audit client. They agree the client will pay $75,000 if Bayer & Peng issues a clean, unqualified
opinion, $50,000 if a qualified opinion is issued, $40,000 if an adverse opinion is issued, and
$10,000 if a denial of opinion is issued.
Violation? Yes No
Explanation:
C) Don Smith, public accountant, takes part in the audit of Shaw Corporation. Don is not a
partner or a manager in the public accounting firm, and does not own any stock in Shaw
Corporation. Don’s five year-old daughter, Betty Lou, received one share of Shaw Corporation’s
common stock for her fifth birthday. The stock was a gift from Betty Lou’s grandmother. Betty
Lou treasures that share of stock and is absolutely unwilling to part with it.
Violation? Yes No
Explanation:
D) On August 5, 2012, Page Dane, public accountant, issued the audit report on Borhut
Corporation’s June 30, 2012 financial statements. On August 30, 2012, Borhut paid Page’s audit
fee with stock rather than cash. Page sold the stock on September 15, 2012, two months prior to
the beginning of the planning phase for the audit of the June 30, 2013, financial statements.
Violation? Yes No
Explanation:
33) You are the senior in charge of the accounts receivable section of the audit of a large clothing
manufacturer downtown in the clothing district. The client sells to local clothing stores as well as
to other retailers in the province.
Accounts receivables seem to be deteriorating, with many more accounts in the over 90 days
column than in the past. You sent out twenty accounts receivable confirmations, but only six
were returned. Of these six, only three confirmed the balance as in agreement with the client,
while the others indicated that they kept their records on an open item basis (rather than a
balance forward basis) and were unable to respond to the confirmation request. When you looked
at the prior year’s file, it seemed that the same thing had happened last year.
When you phoned the supervisor in charge of the audit engagement, she told you to not bother
with follow up, as the engagement was already over budget and costs need to be kept down. You
were concerned that you would be unable to state a conclusion with respect to the fairness of the
accounts receivable balance and she was really angry with you, saying that she would have to
sign off for you then.
Required:
Discuss the ethical and quality issues raised by this audit engagement.
34) Kimora is a senior manager at a public accounting firm. Kimora was assigned to the audit of
Toble Corp. Upon arriving at the client, Kimora met with the controller, Brad, who was a
classmate in college, 20 years ago. She had not been in contact with Brad since college, but they
realized that they still had many friends in common. Brad invited Kimora to go to the company
box to watch a hockey game and catch up.
Discuss the issue of independence between Kimora and Toble Corp.
35) Xiao, PA, is the audior of Minkle Credit Union, a medium-sized credit union. Xiao has
prepared a management letter with several serious control weaknesses. Management agrees with
the facts, but does not want to present the letter with the weaknesses to the audit committee or
the board of directors. Management has implied that they will request a change of auditors if
your firm presents the management letter to the board.
Required: Discuss the actions that Xiao should take. Justify your response.