Audit Assignment 1

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School

Nipissing University *

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4866

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Accounting

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Jan 9, 2024

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docx

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Uploaded by ProfessorKingfisherMaster569

ACCT 4827 Auditing Assignment One By: Hamid Karim Date: Sept 19, 2023 ID# 0649214

1. Explain how CPA Ontario enforces the "fundamental statements of accepted conduct" and the "Rules of Professional Conduct." In order for CPA to represent an ideal image of a conduct, CPA uses fundamental statements of accepted conduct. These fundamental statements of conduct are positive principals that’s demonstrate the ideal image of a conduct. These fundamental statements of conduct however are not enforceable, but they are there to represent what a proper conduct may look like. Rules of professional conduct are the specific rules that portray the minimum acceptable behaviour required in a professional conduct. These rules of professional conduct are enforced. These rules of professional conducts are enforced by the Provincial institutes through disciplinary and professional conduct committees. 2. Explain the difference among integrity, independence, and objectivity. Provide a specific example for each. Integrity – Integrity is the duty and responsibility of a person to be completely honest and diligent in performing professional services. Example of integrity may include keeping your commitments, being honest, someone that behaves ethically and always does the right thing. Independence – A person with the quality of independence is free from bias and any conflict of interest. They conduct their work with professionalism without any interference or influence by any individual or groups including political authorities. An example of independence is performing professional work for a client without thinking about one’s own self interest. Objectivity – CPA defines objectivity as being free from bias, free from influence, interest, and any situation that may impair a member’s professional judgement or objectivity. Objectivity is similar to independence as it implies freedom from bias and conflict of interest. An example of objectivity is when a professional member conducts an audit on a company using objective facts that are not influenced by any influence or bias. The difference between integrity, independence, and objectivity is being able to distinct between fact and appearance. While integrity is an overriding principle that requires a professional to conduct business in an honest and conscientious way, Integrity and independence are qualities a person has during professional conduct that requires being unbiased and free of conflict of interest. 3. Distinguish between a business failure and an audit failure. Provide a specific example of each. Business failure occurs when a company is unable to pay its liabilities and claims bankruptcy or is very close to going out of business. Business failures may occur because of multiple reasons, some examples of reasons a business failure may occur are recession, intense competition, wrong decision making, and engaging in high-risk financial transactions. Audit failure occurs when auditors are not performing on accordance to the auditing standards. When an auditor fails to uncover a material misstatement in the financial statement, it leads to an audit failure. Audit failures may occur due to multiple reasons including auditors’ inexperience, inadequate audit procedure, lack of understanding of the business, and fraudulent financial reporting. An example that an audit failure may occur is when an auditor fails to detect stocks that have been overvalued when conducting an audit.

Jack, a CPA, meets up with Diane, an old girlfriend from high school, tells Jack her company, which manufactures specialty aviation equipment, needs a new auditor right away. Although Jack has no experience auditing companies in the aviation industry, he agrees to do the audit after quickly quoting a $25,000 fee. Furthermore, Jack agrees to promote the sale of Diane's company's stock to his other clients, in exchange for a commission of 10%. 4. Outline and describe any violations of the rules of professional conduct perpetrated by Jack. Jack has violated several rules:  Jack has agreed to do an audit for an industry that he has no knowledge of, therefore his audit may result in an audit failure.  Jack did not communicate with the previous auditor. Jack is required to communicate with previous auditor to find out of any reasons why the audit may not be accepted.  Rule 214 of the CPA Ontario’s Rules of Professional Conduct dictates that Jack should have obtained enough information about the audit before providing fee quotation to perform the audit.  Jack asked for $25,000 before understanding the audit and collecting enough information in order to make sure weather the fee asked is fair or not.  Rule 216 prohibits auditors to charge commissions on promoting a client’s product or business, therefore Jack’s deal with Diane violates this rule.  Jack is also breaching the general rules of GAAS that requires auditors to be objective and independent. Since Jack accepted a commission on sale of Diane’s company’s stocks, it creates conflict of self interest for Jack.  Jack’s personal relationship with Diane is also impairing his objectivity and independence when conducting the audit. 5. A. Would Knox recover from Garson for fraud? Knox would recover from Garson for fraud. Knox’s loss was due to its dependability on materially misstated financial statements. Knox would have to prove that Garson was fully aware of the embezzlement and the insider transactions. Since Garson was aware of the embezzlement and insider transaction, has in fact committed fraud, therefore the auditors are liable and responsible for the fraud. Below are reasons why Knox may have a case for fraud:  Material Misrepresentation: Garson Associates presented an unqualified audit opinion without including the embezzlement and insider training information on Sleek’s financial statements. Since material information was omitted, it could be considered misrepresentation.  Reasonable Reliance: Knox reliance on the information was reasonable since Sleek loan request for $2,000,000 was reliant on the audited financial statements provided and Garson’s opinion.

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 Causation: Knox’s decision to lend money to Knox was based on financial statements provided by Garson. If Knox can demonstrate that they would not have lend the money if they had known about the embezzlement and insider trading. In this case a connection can be made between Knox’s decision to lend the money which caused their financial loss and Garson’s actions.  Damages: Due to Sleek’s default on the loan, Knox bank incurred financial damages because of the fraudulent misrepresentation on the financial statements. B. Would the general public purchasers of Sleek's stock offerings recover from Garson? The general public purchasers of Sleek’s stock offerings will recover from Garson because since the auditors owe all parties responsibility for fraud. Since the auditors allowed material misstatements on the financial reporting, they will be held liable for the misrepresentation and hence liable for the fraud committed. Section 11 of the Securities Act, “the accountant is considered the expert on the financial statements that are covered by the audit; therefore, the accountant must perform a reasonable investigation” (Auditing). This Act imposes liability on the auditors for providing financial statements that contained material omissions related to embezzlement and fraud. In conclusion, Knox bank and the purchasers of Sleek’s stock offerings have reasonable claim against Garson and may recover their losses based on different legal provisions such as Section 11 of the Securities Act. The results of the claim would be reliant on facts and arguments presented during the legal trial. References: Smeilialuskas & Bewley. Auditing. Auditing: An International Approach. 8 th Canadian Edition. McGraw Hill.