Question

For each of the following independent situations, state whether the CPA has violated generally accepted auditing standards and/or the CPA Ontario Professional Code of Ethics. Explain your reasoning. (That is, violated/not violated and then explain why?)

a. Emily, CPA, completed an audit of the financial statements of Major Breakthrough Inc. (MBI), a public company. During the audit, she became privy to information that MBI’s most recent major breakthrough was falsified and the information was going to made public in the near future. Emily advised her friend who held MBI’s stock to sell before the announcement, which was sure to cause a decline in the stock value. (2 marks)

b. Martha, CPA, a partner in a growing CPA firm, is eager to develop her public practice. She is approached by the president of XYX Corporation, a large public company, who asks her to submit a bid to perform next year’s audit. The president assures her that if the client accepts her bid and likes her work, she will be asked to perform a significant amount of tax services in the future. After some preliminary investigation to gain an understanding of the client and the work that will be needed, she offers to perform the audit for $40,000, which is considerably less than the costs that she expects to incur on the initial engagement. (2 marks)

c. In an effort to expand his business, Mathew, CPA, places an advertisement in the business section of the local newspaper listing specific services he performs and his Page 2 of 2 rate for performing each type of service, some of which are available for a fixed fee and others for an hourly fee, which was also stated in the advertisement. (2 marks)

d. Howard, CPA, discovered, during the audit of his client Ignoble Enterprises Inc., that the company had failed to include a significant amount of income on last year’s corporate income tax return. Howard suggested to the controller that he submit an amended return. When the controller refused, Howard resigned from the engagement. Howard later received a letter from the successor auditor asking if Howard was aware of any circumstances that they should be aware of prior to accepting Ignoble as a client. Howard replied by letter and informed the successor auditor that Ignoble’s management failed to adjust income tax returns containing significant material errors. (2 marks)

e. Emma, CPA and auditor for Nestco, is contacted by a taxation officer from the Canada Revenue Agency requesting information regarding the client’s GST account. She provides the requested information and says to the client: “I figured we might as well give them whatever they need. They’ll ultimately compel you to release the information and it will just cost you extra time and money in legal fees.” (2 marks)

f. Harry, a CPA student, is currently employed by a CPA firm in public practice. He accepts a 15% discount on purchases from an audit client. Harry believes that he has not violated the Rules of Conduct because he is not yet a CPA member and the discount is at the same percentage that is available to the client’s own staff members. (2 marks)

Answer 1

Since, there are multiple parts to the question, I have answered the first four.

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Part a)

The CPA (Emily) has violated the code of professional conduct. It is because the accountant is required to protect the information that he/she has procured/obtained as a result of his/her assignment with the client. He/she should not use/share such information for his/her own benefit or for the benefit of any third party. As Emily has shared the information (which she was supposed to protect) with her friend, she has not acted as per the established code of conduct/auditing standards. [Refer to Rule 208 of CPA Rules of Professional Conduct]

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Part b)

The CPA (Martha) has not violated the code of professional conduct. It is because, as per the applicable rules, the accountant should not provide his/her services at a fees which he/she knows is significantly lower than what was charged by the predecessor accountant or is offered by others. However, quoting a lower fees after the accountant has understood the scope of engagement is not considered unethical. Further, the accountant should also ensure that there will no impairment to his/her independence and the quality of work after accepting the assignment. [Refer to Rule 214 of CPA Rules of Professional Conduct]

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Part c)

The CPA (Mathew) has violated the code of professional conduct. It is because, as per the applicable rules, the fees should be determined by the accountant only after he/she has obtained an understanding of the scope of work he/she would be expected to do after the acceptance of assignment. Giving an advertisement in order to obtain new engagements/assignments, by itself, is not unethical. However, disclosure of fees may result in violation of applicable rules of code of conduct. [Refer to Rule 214 and 217.1 of CPA Rules of Professional Conduct]

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Part d)

The CPA (Howard) has not violated the code of professional conduct. It is because, as per the applicable rules, the successor accountant is required to communicate with the predecessor accountant (before undertaking new engagement) and obtain necessary information which is relevant to the acceptance of the engagement. The predecessor accountant (here, Howard) is required to co-operate with the new accountant and provide him/her with the all the facts and information available to him/her. [Refer to Rule 302 and 303 of CPA Rules of Professional Conduct]