Question

1. and how does materiality affect the type of report issued

2. The cases where qualified, adverse, or a disclaimer is issued

3. Independence

4. The difference between independent in fact (in mind) and in appearance

5. What are the factors that affect the CPA firm’s independence

6. The effect of the financial interests direct and indirect on the independence

7. The contingent fees

8. What is acceptable in terms of advertising

9. What are the services that can and con not be provided to a client public and a private client

10. What are the parts of the Code of Professional Conduct

11. The employment of a CPA and the independence

12. What is the effect of materiality of the investments on the independence

13. Interpretations of the rule that prohibits covered members from owning any stock or other direct investment in audit clients. Who are the covered members

14. The difference between audit risk, audit failure and business risk

15. How to demonstrate the lack of duty to perform certain service

16. Prudent person concept

17. Who is a third party beneficiary

18. What privity of contract is

19. The difference between separate and proportionate liability and joint and several liability

20. The difference between negligence, gross negligence, constructive fraud, and fraud

Answer 1

1

Misstatements are considered to be material if they could influence the decisions of users of the financial statements. Audit Judgements about materiality are based on surrounding circumstances, including the size and nature of the misstatement. and on the users' common needs as a group.

Information is material if its omission or misstatement could influence the economic decisions of users. Materiality therefore relates to the significance of transactions, balances and errors contained in the financial statements.

The concept of materiality is therefore fundamental to the audit..To establish a level of materiality, auditors rely on rules of thumb and professional judgment. They also consider the amount and type of misstatement.

2

A qualified opinion may be given when a company’s financial records have not followed GAAP in all financial transactions, but only if the deviation from GAAP is not pervasive. A qualified opinion is still acceptable to most lenders, creditors, and investors. A qualified opinion may also be given due to a limitation of scope in which the auditor was not able to gather sufficient evidence to support various aspects of the financial statements.

Adverse opinion is issued to the financial statements where auditors examined and concluded that those financial statements are materially misstated and pervasive. Compared to qualified opinion, adverse opinion is more serious

This opinion is a message to users of financial statements that they should not rely on these financial statements for their decision making. The adverse opinion results in the company needing to restate and complete another audit of its financial statements.

Disclaimer opinion issued by auditors when they could not obtain sufficient and appropriate financial statements to draw the conclusions. There could be many reasons why auditors may not obtain supporting documents during the audit process.

It can be because management does not have enough documents to support their accounting transactions or they do not have proper control to keep those supporting documents secured and are subsequently lost.

Managements intent of not providing the supporting documents due to a lack of trust in auditor independence or

lack of communication and clarification. These are some of the reasons for issue of a disclaimer opinion.

3

Independence in appearance is the avoidance of circumstances that would cause a reasonable and informed third party, who has knowledge of all relevant information, including safeguards applied, to reasonably conclude that the integrity, objectivity, or professional skepticism of a firm or member of the attest ...

Independence in fact indicates that the auditor possesses an independent mindset when planning and executing an audit, and that the resulting audit report is unbiased. Independence in appearance indicates whether the auditor appears to be independent.

4

Factors affecting CPA firm’s independence.

The provision of non audit services by auditors

Audit failures reported in the past have affected the profession of auditor worldwide because the interests of shareholders and stockholders have not been safeguarded. This problem has arisen as a result of the provision of non-audit services

Non- audit services can be any services other than audit that an auditor provides to an audit client. These non-audit services include: training, services for payroll, risk management advice, mergers and acquisition, taxation, public offering, portfolio monitoring, recruitment and human resources and corporate governance. An auditor needs to pay much attention when both audit and non-audit services are provided to the same client, because these non-audit services may threaten the independence of auditor.

Audit committee

An audit committee consists of a selected number of members of a company’s board of directors whose main duties are to help auditors remain independent of management that is, committee should support the auditor instead of management in different audit disputes.

Size of audit firm

The size of audit firm is an essential characteristic that reflects auditor independence. Auditor reputation is directly associated with audit quality. Large audit firms will make sure to provide an independent quality audit service as the larger audit firms tend to have better research facilities and efficient financial resources, more advanced technology and more skilled employees who will be able to undertake large company audits compare to smaller audit firms. Large audit firms have larger client portfolios which enable them to resist management pressures whereas small firms provide personalised services as their client portfolios are limited and they have to succumb to management requirements (Lys and Watts, 1994).

Level of competition in audit service industry

Competition [11] has been identified as an external factor affecting auditor independence (Shockley 1981). Many firms which operate in an intensely competitive environment may have difficulty remaining independent as the client can easily acquire services of another auditor. The [12] AICP Cohen Commission (1978) in its report affirms that there are excessive competitions among public accounting firms and this excessive competition among different firms has been consistently identified as a factor threatening auditor independence [13] (Farmer et al., 1987). .

Tenure of an audit firm serving the needs of a given client

An audit firm’s tenure refers to the length of time required to fill the audit needs of a given client. A lengthy association between a company and an accounting firm is likely to result a close identification of the firm with the interests of its clients, thus an independent action by the accounting firm become difficult.

Size of audit and non audit fees

In cases of accounting scandals, the audit firm appeared to be in collusion with the management in hiding fraudulent activities. The major factor being the amount that the auditors received as non-audit fees from these clients.

5

Contingent Fees

A contingent fee is a fee that is only paid when a specific objective has been achieved. For example, a contingent fee arrangement could pay an accountant $50,000 when the business plan he constructs is used in the successful sale of stock by a client. However, placing the accountant firmly in the camp of the client, so that they both win when an outcome is achieved does not give the accountant the appearance of independence. For example, if a client agrees to pay an fee that is contingent on a clean opinion being used to obtain a bank loan, it is entirely likely that the auditor will actively assist the client in the production of a set of overly optimistic financias that a more independent auditor would have rejected.

6

A statutory auditor appointed can provide to the company only services as are approved by the Board of Directors or the audit committee, as the case may be. Some of services that may be excluded from his scope

(a) accounting and book keeping services;

(b) internal audit;

(c) design and implementation of any financial information system;

(d) actuarial services;

(e) investment advisory services;

(f) investment banking services;

(g) rendering of outsourced financial services;

(h) management services; and

7

Parts of Code of professional conduct

· Principles of conduct

· Rules of conduct

· Interpretation of rules of conduct

· Ethical Rulings

8

Covered Member

A covered member is an individual on an attest engagement team, an individual in a position to influence an engagement team, a partner or manager who provides 10 or more hours of nonattest services to an attest client per year, a partner in the office in which the lead attest engagement partner practices in connection .

9

Audit risk is when the opinion is inappropriate on the financial statements.

Business risk, on the other hand, includes factors that could hinder the goals and objectives of the company during the course of an audit. ..

When an auditor deviates from the applicable professional standards in such a way that the opinion contained in his or her audit report is false.

10

The prudent person concept states that a person has a duty to exercise reasonable care and diligence in the performance of obligations to another. Therefore, the auditor is expected to conduct an audit using due care, but does not claim to be a guarantor or insurer of financial statements.

11

A person or business that benefits from the terms of a contract made between two parties. In law, a third-party beneficiary may have certain rights that can be enforced if the contract is not fulfilled.

12

Privity is a doctrine of contract law that says contracts are only binding on the parties to a contract and that no third party can enforce the contract or be sued under it.

It refers to relationship between the parties to a contract which allows them to sue each other but prevents a third party from doing so. ... As a general rule, a contract cannot confer rights or impose obligations arising under it on any person except the parties to it.

13

Where a person or entity gained an unfair advantage over another by deceitful or unfair methods is a constructive fraud. Intent does not need to be shown as in the case of actual fraud. The  actual fraud involves intentional conduct, while constructive fraud does not. Consequently, plaintiffs will be more likely to plead both actual fraud and constructive fraud as causes of action against a defendant

Negligence is the failure by a person or body to observe a legally recognized standard of care to another party resulting in material damage.The term "gross negligence" is often used to describe a higher degree of negligence than what is often called ordinary or "mere" negligence.

14

The term jointly and severally indicates that all parties are equally responsible for carrying out the full terms of an agreement. In a personal liability case, for example, each party named may be pursued for repayment of the entire amount due

Jointly means that both parties have joint liability, giving responsibility for the full amount of the obligation to each party. ... As such, one or both of the parties can be sued for the full obligation. In contrast, however, “severally" means that the parties are only responsible for their share of the obligation

Proportionte liabilit means that the defendant’s liability is limited to a percentage of a plaintiff’s notional damages that is fair and equitable having regard to the extent of the defendant’s responsibility for the plaintiff’s harm and the extent of the responsibility of other wrongdoers whose acts or omissions also caused or contributed to that harm.

Separate liability is a situation when a party is responsible for his or her own obligation so that the plaintiff may bring a separate action against that party without suing other responsible parties.