Reference no: EM132368724

Topic - Ethics, Legal Liability and client acceptance

On completing the learning activities associated with this topic, you should be able to

1. Explain the fundamental principles of professional ethics.

2. Define and assess auditor independence.

3. Illustrate the auditor's legal liability to their client, contributory negligence and the extent to which an auditor is liable to third parties.

4. Categorise the factors to consider in the client acceptance or continuance.

Reading guide - References: Moroney, Campbell and Hamilton, Chapter 2.

Standards:

APES 110: Code of Ethics for Professional Accountants.

ASA 210: Agreeing the Terms of Audit Engagement.

ASA 610: Using the work of Internal Auditors.

ASQC1: Quality Control for Firms that Perform Audits and Reviews of Financial Reports and Other Financial Information, and Other Assurance Engagements.

Review questions:

1. What are the FIVE fundamental principles in APES 110? Who must comply with them?

2. What is more important, independence of mind or independence in appearance? Explain.

3. Explain how an auditor would use auditing standards to avoid legal liability.

4. What are the three conditions that must be proven for an auditor to be found negligent under tort law? Which conditions appears to be most difficult to prove?

5. Why is it so important that an audit committee not have any executive directors as members?

6. What is the purpose of an engagement letter? Are all engagement letters the same? Explain.

7. Discuss the procedures governing the client acceptance or continuance decision. Explain why auditors do not accept every client.

8. Some companies outsource their internal audit function to a public accounting firm. Explain how this would affect the external auditor's evaluation of the reliability of the internal audit function.

9. What are the threats to compliance with the fundamental principles? Explain the FIVE categories of threats identified in APES 110, and include examples.