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4510 - 4
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4510 - 4
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  1. Companies Ordinance Requirements (3)

    • Section 394: An auditor must be appointed for each financial year of a company
    • Section 405: A company’s auditor must prepare a report for the members (shareholders) on any financial statements prepared by the directors
    • Section 406: An auditor’s report must state, in the auditor’s opinion, whether the financial statements have been prepared in a true and fair view

  2. Inland Revenue Ord Requirements (2)

    • Section 51C(1): The director of a company is responsible for maintaining records sufficiently for tax computation and tax assessment
    • To ensure the credibility of the information on the financial statements is presented fairly, the Inland Revenue Department requires the corporations to submit the audited financial statements together with the tax return

  3. Rights of the External Auditor (3)

    • Qualified privilege
    • Access to information
    • Attend and receive notices of general meeting

  4. The auditor have the rights related to resignation to the following:

    • Resignation notice
    • Make representation
    • Resigning auditor may requisition meeting
    • Attend general meeting

  5. Qualified privilege - The company …

    cannot sue the auditors for defamation if auditors issue qualified opinions unless there is malice

  6. Who Appoints the Auditor?

    • Appointment by shareholders - The directors sign the contract with auditors on behalf of the company
    • Appointment by directors - For the first auditors of a company
    • Appointment by the court -On the application of any member of the company OR When no auditor is appointed or reappointed at an AGM

  7. Removal Procedures of auditors - (3)

    • Special notice is required for a resolution at a general meeting of a company with 28 days of notice
    • On receipt of such notice, the company shall send a copy to the auditor proposed to be removed
    • Where a resolution removing an auditor is passed at a general meeting of a company, the company shall within 15 days give notice of that fact in the specific form to the Registrar

  8. Resignation of auditors

    • Upon resignation, the auditors must deposit a notice in writing to the registered office of the company
    • And send, within 15 days, a copy of the notice to the Registrar

  9. It is the duty of the resigning auditor and auditor who retires or is removed to give the company:

    • A statement of circumstances that should be noted by the members or creditors of the company, if the person considers that there are circumstances connected with his resignation or termination; or
    • A statement to the effect if the person considers that there are no such circumstances

  10. Auditors’ Liability to Client

    • Breach of contract - implied term that the auditors’ work will be up to standard
    • Negligence

  11. Auditors’ Liability to Third Parties

    • Fraud
    • Negligence

  12. Hedley Byrne v. Heller cases

    Pure economic loss

  13. Caparo Industries v. Dickman - Criteria to sue for negligence (5)

    • Defendant owes a duty of care to plaintiff
    • The auditor reasonably foresees that the statement will be relied on by the third party
    • Loss has been incurred by the plaintiff
    • There is proximity between the loss of the plaintiff and the defendant’s negligence in performing their duty
    • Auditors are liable to shareholders as a body (All shareholders must jointly sue auditors; individual shareholder cannot sue auditors)

  14. Auditors Defences Against Negligence

    • Lack of duty - NOT applicable to shareholders
    • Non-negligent performance
    • Absence of causal connection

  15. How to Minimise Auditors’ Liabilities (6)

    • Managing client acceptance and continuing decision
    • Quality control of the auditing profession
    • Quality control for firm and engagement
    • Actions to protect the auditing profession
    • Protecting individual CPA
    • User education

  16. How to Minimise Auditors’ Liabilities – Actions to protect the auditing profession (2)

    • Lobbying for changes in the law for auditor’s protection
    • Have professional indemnity insurance

  17. How to Minimise Auditors’ Liabilities - Protecting individual CPA (4)

    • Maintain independence
    • Exercising professional skepticism
    • Performing quality audit
    • Preparing sufficient appropriate documentation (working papers are evidences of quality audit)

  18. How to Minimise Auditors’ Liabilities - User education

    Users can have a better understanding about the objectives and limitations of audit

  19. CPA firm shall establish and maintain a system of quality control that includes policies and procedures that address each of the following elements: (7)

    • Leadership responsibilities for quality within the firm - internal culture
    • Relevant ethical requirements - independent, like independence declaration
    • Acceptance and continuance of client relationships and specific engagements - sufficient resources and is competent
    • Human resources - An audit partner should be appointed to take responsibility for each audit
    • Engagement performance - performed according to professional standards
    • Monitoring - QC policies/procedures are relevant, proper and effective
    • Documentation of the system of quality control

  20. quality control at engagement level involve the following: (7) + elab: partner is responsible for…

    • Leadership responsibilities for quality of an audit - The partner is responsible for the overall quality of the audit
    • Relevant ethical requirements - follow the ethic requirements
    • Acceptance and continuance of client relationships and audit engagements - appropriate client acceptance procedures have been followed, eg background check
    • Assignment of engagement teams - appropriate and competent
    • Engagement performance - direction, supervision and performance of the audit
    • Monitoring
    • Documentation

  21. Limited partnership (LP) – exists in HK; Partners can limit their liability; however, …

    At least 1 partner must be a general partner who has unlimited liability

  22. Limited liability partnership – does not exist in HK, Partners are only liable for…, Partners have unlimited liability on the …
    their own wrongdoing in the rendering of professional services ; general trading debts of the partnership

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