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ACCT3014 - Auditing and Assurance
Semester 1, 2013
Multiple Choice
1. Which body has a mission to develop, in the public interest, high-quality auditing and assurance standards and related guidance to enhance the relevance, reliability and timeliness of information provided to users of audit and assurance services? a. the IAASB. b. the AASB. c. the AUASB. d. the FRC.
2. The term audit expectation gap refers primarily to differences in expectations between: a. auditors and users of audited financial reports. b. auditors and their clients. c. CPA Australia/ICAA and the ASIC. d. auditors and the ASIC. 3. Investors shift financial responsibility for audited financial information to the auditor in order to lower the expected loss from litigation or related settlements. This describes which theory of auditing? a. explanatory. b. agency. c. information hypothesis. d. insurance hypothesis. 4. The a. b. c. best test to decide if audits provide good value is: by examining how often audits are associated with company failure by examining whether the audit report is correct by examining the premium the market places on a share price for independently audited information d. it is not possible to designate any one test as being the best to decide if audits provide good value
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Lecture Outline
Purpose of the Code of Ethics
makes explicit the values implicitly required indicates how members should act toward one another provides basis for sanctions
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Mandatory for all members and failure to observe code can result in disciplinary procedures.
Members are expected to comply with the spirit as well as the letter of the code. General Application of the Ethics Code:
Section 100 Introduction and Fundamental Principles Section 110 Integrity Section 120 Objectivity Section 130 Professional Competence and Due Care Section 140 Confidentiality Section 150 Professional Behaviour
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Professional competence and due care to maintain professional knowledge and skill at the level required to ensure that a client or employer Confidentiality to respect the receives competent Professional Services based confidentiality of information acquired on current developments in practice, legislation and techniques and act diligently and in accordance with applicable technical and professional standards.
Professional behaviour to comply with relevant laws and regulations and avoid any action that discredits the profession.
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Terminology
What is a tort? What is reasonable care and skill?
Auditor must exercise reasonable care and skill expected of a professional. Requires adherence to professional standards in all aspects of an audit. The professional man owes a duty to exercise that standard of skill and care appropriate to his professional status (Caparo, 1990) p217.
"It is the duty of an auditor to bring to bear on the work he has to perform that skill, care and caution which a reasonably careful, cautious auditor would use. What is reasonable skill, care and caution must depend on the particular circumstances of each case. An auditor is not bound to be a detective, or, as was said to approach his work with suspicion, or with a forgone conclusion that there is something wrong. He is a watchdog, not a bloodhound. He is justified in believing tried servants of the company in whom confidence is placed by the company. He is entitled to assume that they are honest and rely upon their representations, provided he takes reasonable care. Kingston Cotton Mill Case
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Negligence
Any conduct which is careless or unintentional in nature and entails a breach of any contractual duty or duty of care in tort owed to another person or persons. Elements the plaintiff must prove: duty was owed to plaintiff by defendant; a breach of the duty of care (negligent conduct occurred); loss or damage was suffered by plaintiff and links to the breach of duty of care; and that a causal relationship existed between breach of duty by defendant and harm suffered by plaintiff.
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Auditors Liability
Two broad categories - Liability to clients
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Liability to Clients
Auditors liability to clients arises generally from failing to perform their duties with due care - Difficulty in establishing appropriate level of due care (reasonable person test?) - Failure to follow prevailing auditing standards has often served as conclusive evidence that level of care is deficient Liability to clients arises both in contract and in the tort of negligence. - Distinction between the type of action brought is related to the type of remedy sought
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duty to use reasonable care and skill; duty to check and see for themselves; ASA 500 appropriately supervise and review; ASA 220 properly document procedures; ASA 230 reliance can be placed on internal controls ASA 315; ASA 330
duty to take further action where suspicion is aroused; ASA 240 expectation of discovering material error or fraud; ASA 240 professional auditing standards provide a guide. (from 1/7/06
have force of law status)
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Auditors duties extended: Thomas Gerrard & Son (1967) standards of reasonable care and skill more exacting in 1967 compared to KCM (1896) auditors have special skills change in audit standards may add to the auditors legal liability Pacific Acceptance ( see earlier slide No. 18)
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AWA losses suffered by company due to internal control weaknesses over foreign exchange. Auditor liable for failure to report to board of directors. Company contributed to loss by officers not reporting to board of directors, and failure to put in place adequate internal control system. Contributory negligence established.
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Special relationships
A duty is owed to any third party to whom the auditor shows accounts, or to whom the auditor knows the client is going to show accounts, so as to induce some action.
- Hedley Byrne (1963) p213; established special relationship (not audit case) - MLC v Evatt (1971) p214; audit case confirmed special relationship experts duty of care to those third parties is not to cause economic loss by careless words - Shaddock & Associates (1979) p214; confirmed reasonable forseeability
- JEB Fasteners v Marks Bloom & Co (1981) p215; confirmed auditors have a liability to third parties, but circumstances in which it applies are not clear cut
- Twomax Ltd v Dickson, MacFarlane & Robinson (1983) p215 confirmed liability on the basis of reasonable forseeability
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- Caparo also established that the auditors duty of care is owed to a general body of shareholders (not individual)
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Other Considerations
Consideration needs to be given to the provisions of the Commonwealth Trade Practices Act and state Fair Trading Acts:
Recent changes
Recent changes now allow: - Imposition of a statutory cap on liability (10 times fee up to max of $75 million) - auditors to incorporate and form authorised audit companies with adequate and appropriate professional indemnity insurance. - apportionment between plaintiff and defendant according to blame, and proportionate liability if there are two or more defendants (contributory negligence and proportionate liability).
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