Chapter 2 (UG)

1.  The so-called 'deep-pockets' theory in relation to alleged audit failures, refers to: 

• the auditor being the only party left with sufficient funds to indemnify the plaintiff's losses
•  the requirement to hold a public practice certificate
•  several widely reported business failures that resulted in significant loss to investors.
•  the gap between the potential liability and the available insurance cover.

1.  Auditors are accountable in law for their professional conduct. This accountability arises under: 

• Tort law
•  Common law. 
•   Statute law.
•   Statute law.

1.  In respect of the provision of auditing services, the auditor will be liable to compensate the plaintiff if: 

•  a duty of care is owed to the plaintiff
• the audit is negligently performed or the opinion negligently given
• the plaintiff has suffered a quantifiable loss as a result of the auditor's negligence
• all of the above.

1.  The term 'privity of contract' refers to: 

•   the contractual relationship that exists between two or more contracting parties.
• the fact that an audit is to be performed in accordance with professional standards.
•  the fact that an auditor appointed to conduct a statutory audit cannot reduce their liability by contract (s. 241).
•  the mandatory requirement that there must be an engagement letter setting out the terms of the audit contract.

1.  The two cases that formed the basis for most subsequent decisions as to the determination of auditor negligence were:

• JEB Fasteners and Twomax
•   Caparo Industries and Esanda.
•  Hedley Byrne and AWA.
•  Kingston Cotton Mill and London and General Bank.

1.  Which of these is not identified as a type of threat to compliance with the fundamental principles in the IFAC Code applicable to professional accountants in public practice  

•  Advertising
• Self-review. 
•  Self-interest.
• All are identified as a threat to compliance. 

1.  What is not a category of safeguards that can be used by professional accountants?

• Safeguards created by the profession, by legislation or by regulation
• Safeguards developed by CALDB
• Safeguards which are engagement specific
• Safeguards within the client’s systems.

1.  The purpose of ethical decision making models is to: 

•  direct the auditor on which action to take.
• help the auditor arrive at a well-informed and ethical decision.
• supplement the code of ethics
• identify the appropriate standard to use.

The conceptual approach to independence requires that there is

•  independence in mind and actions
• independence in fact and appearance.
• independence in mind and appearance
• independence in actions and appearance

1.  Using the same senior personnel on an assurance engagement over a long period of time may create what type of threat to audit independence? 

•  Advocacy
• Intimidation.
•  Familiarity
• Self-interest