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Lecture #4 Sept 25 2013.docx

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Chris Liboiron

Lecture #4: Auditor Independence & Legal Liability Last Class • Mid-term questions o What is assurance engagement o Prerequisite  What is an accountability relationship • When someone is responsible about someone for something o Attest engagement  Written assurances • E.g. Financial statement o Direct reporting engagement o Criteria  5 types o Why do you do a limited procedure  Do what you are responsible for. Don’t have to everything o Alternative theorise of role of auditor o Compare and contrast certain cases with each other American Fuel & Supply Company Inc • What is the responsibility of auditors when they found a mistake on the audit they just did o You have to inform everyone that used your report (creditor of the company u did the audit on) • There is disagreement within the audit world o Certain people only wanted to disclose the new information to the secured creditors • Client pressure that prolong the problem o Client wanted to sue the auditor • Question 1 o Quantify the impact  Determine the seriousness of the impact  If impact can’t be determined, notify all third party user o If client will not cooperate  Notify each member of the board of director of the company  Notify each person of people that are relying on the report o Revise the f/s • Question 2 o Contact and ensure all users • Question 3 o No because you found new information • Question 4 o Yes because when they resigned, they still know of the information • Responsibility when they switch auditor o Any knowledge of irregular information o Any information on aggressive accounting practices o Issues that would suggest business lacks integrity o You reason on why you were dismissed Objectivity • Is an independent mental attitude which requires auditors to perform audits in such a manner that they have an honest belief in their work product and that no significant quality compromises are made • Being unbiased • Ways to lack independent o Financial ties o Familiarity  Close relationship o Intimidation  Any threat to the audit  Dispute with the client o Self-reviewed  Is the auditor related to the firm  Did you prepare o Self-interest o Can you do the work o Acting in emotion o Acted in advocacy  If you’re on the BOD of a company, you shouldn’t be auditing it o • Objectivity requires auditors not to subordinate their judgment on audit matters to that of others • The ability to view something without influence of feelings or emotions • Unbiased Examples of Breaches of Auditor Independence • D • Five Independence Threats (midterm) • 1. Self Interest • 2. Self-Review • 3. Advocacy • 4. Familiarity • 5. Intimidation • Refer to “A Framework for Auditor Independence ” How to Avoid Breaches of Auditor Independence • Maintain auditor skepticism • Maintain safeguards o Do regular checks on your auditor to see if they have any tie with the client • Long-standing relationship with client o Potential lack of independence • Fee adequacy • Report to a level that can affect change Scenario • Should she accept the mgmt opinion without individual evaluation. o no • Thoughts? • What if you disagree with your audit superior? • Isn’t judgment subordinated? • Disassociate yourself through concise documentation Question • ID and list recommendations to strengthen the independent audit function. o Sarbanes Oxley o Partner rotation o Mandatory firm review o Need a senior partner in audit Why we need to be independent • What is unique about the auditing profession? • Independence is a distinguishing feature of the profession Ethics and Independence – Praise The Lord (lectured) PTL, Independence and Risky Audits • What procedures & considerations should an audit firm perform before accepting a risky audit client? o Talk to the previous firm that had audit it o Background check with key executives and individual o Know the clients business o Talk to their business associates o What is the audit fee going to be for the audit risk o Do other business want to work with you after doing this risky audit Risky Audits • Briefly describe deep pocket theory, as it relates to the litigation problems of large accounting firms in recent years. o Deep pocket theory – anyone that has suffered losses will go to any means to recover their loss from anyone and everyone • Is it wrong to take on high risk clients? o No but you need to have the right resources, and if you are able to handle it • Briefly describe deep pocket theory as it relates to litigation problems of large accounting firms Sarbanes Oxley – Basic Overview pertaining to Auditors Canadian Sarbox • In Canada, Bill 198 is an Ontario legislative bill effective April 7, 2003, which provides for regulation of securities issued in the province of Ontario. • The legislation encompasses many areas. It is perhaps best known for clauses that provide equivalent legislation to the U.S. Sarbanes-Oxley Act to protect investors by improving the accuracy and reliability of corporate disclosures. Q 1.2 from Enron Case • List three types of services that audit firms had provided their clients in the past that they typically no longer provide. For each service, indicate the specific threats, if any that the provision of the given service can pose for a firm’s independence. o Bookkeeping o Internal auditing o Creating controls o Anything other than an audit Independence - Break down of fees for SEC clients • Disclosed what the audit fee is • Disclose any other fees • Disclose any unpaid fees Non Audit Services • The standard for nonaudit services is based on two principles: • Auditors should not perform management functions or make management decisions, and • Auditors should not audit their own work or provide nonaudit services in situations where the amounts or services involved are material to the subject matter of the audit. INDEP- Audit Committees • All independent • Disclose whether or not one financial expert • Approve all work of auditors including all appointments • Auditor communicate to the audit committees • Makes A/C client of audit instead of mgm
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