Textbook Notes (368,544)
Canada (161,960)
Accounting (51)
ACCTG456 (8)
Chapter 2

Chapter 2 in class Questions_solutions.pdf

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Trish Stringer

In Class # 2.1 Linda is the managing partner of a small CA audit firm. Linda’s role includes managing the business affairs of the firm, and she is very worried about the amount of fees outstanding from audit clients. One client, Dreamers Ltd. has not paid its audit fees for two years despite numerous discussions between Linda, the audit partner, Bill, and the management of Dreamers Ltd. Dreamers Ltd.’s management promised the fees would be paid before the audit report for this year was issued. Linda called Bill this morning to ensure that the audit report was not issued because Dreamers Ltd. had paid only 10 percent of the outstanding account. She discovers that Bill is about to sign the audit report. Required: Is there an ethical problem in this case? Explain If fees are outstanding the audito r could be perceived to have a conflict of interest because the auditor is more likely to be pa id if the client surv ives and is happy with the auditor. In these cases, the auditor could be perceived as being more interested in the client’s survival than an accurate audit report. The auditor should take steps to have the fees paid before the next audit or remove itself from the audit. ICAO Council Interpretations to Rules 204.1 to 204.6 – Independence in Assurance and Specified Auditing Procedures Engagements, para. 191 states that a self-interest threat may be created if fees due from an Assurance Client remain unpaid for a long time, especially if a significant part is not paid be fore the issue of the assurance report for the following year. Generally the payment of such fees should be required before the report is issued. The following safeguards may be applicable: • Discussing the level of outstanding fees with the audit comm ittee or others charged with governance. • Involving an additional professional accountant who did not take part in the Assurance Engagement to provide advice or review the work performed. The Firm should also consider whether the overdue fees might be regarded as being equivalent to a loan to the Client and whether, because of the significance of the overdue fees, it is appropriate for the Firm to be re-appointed. In Class # 2.2 – Principles and rules of the code of professional conduct (a) Adnan is a certified general accountant 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 larges audit client is about to release the company’s 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. (b) 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. (c) Sue Chen, CA, is working on the audit engagement for Jones Construction, a reporting issuer (note: a reporting issuer is a public company with a market capitalization and a book value of total assets greater than $10 million). Jose, the accountant at Jones Construction, is unsure how to calculate the tax provision. Sue has advised Jose 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 a clean audit opinion. (d) Sue Chen, CA, is working on the audit engagement for Jones Construction, a private entity. During the course of the audit, she prepares a number of routine journal entries. She makes the required adjustments before she releases the financial statements. (e) Sue Chen, CA, is working on the compilation engagement for Jones Construction. The bookkeeper, Luc, processes the day-to-day transactions, but he does not prepare any closing adjusting entries. Sue prepares the year-end amortization entry and the adjustment to the shareholder account. She then reviews the financial statements with Wade Jones, the owner, and releases the financial statements. (f) 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. (g) Jack Bond is a partner in a national firm. The firm is the auditor for Canada Bank. Jack’s father-in-law is the chief operating officer for Canada Bank. (h) James Let, CA is reviewing his firm’s accounts receivables. He notices that one of his largest audit clients has not paid its fees for the last t
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