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Comment on the basis of the possible claim(s) against the auditors by the bank and briefly
comment on what would have to be proven, and your assessment of the likely outcome.
33 SECTION C - RULES OF PROFESSIONAL CONDUCT
Question 10 (23 marks) (41 minutes) Required:
In each of the following unrelated situations breaches or possible breaches of professional ethics
have occurred or may occur or Rules of Professional Conduct may have been inappropriately
In each situation, Part A, B, C and D identify and discuss the relevant Rule(s) of Professional
Conduct (and Council Interpretations (related guidelines)) which should have guided the actions
of the chartered accountant(s) (CA) involved and/or CA firm.
Part A (8 marks)
Franken Sense, CA, is employed as a strategic and budgetary analyst with the Big City School
Board. Franken, although a chartered accountant, has not remained current in Canadian income
tax law and accordingly has for several years utilized the services of Lawn & Chare, (“LC”)
Chartered Accountants to prepare his and his spouse’s T1 Individual Income Tax Returns. Over
the years Franken has developed a friendship with Mandy Chare, a partner of LC.
Big City School Board is about to run a budgetary deficit for the next school year. A deficit is
contrary to provincial legislation. The provincial government has retained LC “to investigate
and validate the sources and use of funds, identify factors which caused the deficit and to make
recommendations to reduce it.” LC is to report directly to the Provincial Education Minister. LC
negotiated with the province a compensation arrangement for services rendered equal to ½ of 1%
of any savings.
During the investigation, Mandy Chare met several times with Franken. Franken told Mandy at
one point (and what he thought was in confidence) that he had deliberately overstated expenses
by $5 million on the annual budgets as his experience has shown “if you make it look bad – you
will get way more from the government.”
The LC report to the government highlighted this $5 million overstatement and other
misstatements in the annual budget. A recommendation made to the government to reduce costs
was to eliminate car allowances made to senior Board staff. Mandy had recalled that included in
Franken’s employment income was $4,800 for automobile allowances. 34 Part B (8 marks)
In mid 2000, Belinda Sosf, a real estate broker, purchased a 2 acre parcel of land which, in
accordance with her plan, she immediately split into 1/3 acre lots and sold. In filing her 2000 T1
Individual Tax Return Belinda claimed the sale of five of the lots as “capital gains” and for the
6th lot she claimed a principal residence exemption. Apparently for two weeks Belinda parked a
tent trailer on one of the lots and now claims this was her primary residence.
Teresa Oh, CA prepared Belinda’s tax return. Ms. Oh initially advised Belinda on the real estate
transaction and had prepared a cash flow projection on the subdivision proposal prior to the land
being purchased. Ms. Oh had a 5% “indirect ownership interest” in the lots. Canada Customs
and Revenue Agency (CCRA) have recently re-assessed Belinda’s tax return, treating all the lot
sales as business income. Ms. Oh will be representing Belinda at a tax board hearing. Ms. Oh
and Belinda have met several times to review the facts of the situation and to develop
documentation. For example, Ms. Oh has recently drafted several letters and backdated them to
1999, showing that the primary intention of Belinda was capital in nature. 35 Part C (3 marks)
Jesse James, CA, Mary Richards, CA and Dowting Thomas, CA each operated as sole
proprietorships in small towns located approximately 20 km. apart. In 2000, the three decided to
form a partnership (“James, Richards & Thomas, Public Accountants”) as they felt it would be
beneficial from a marketing perspective. The three new partners only met to discuss marketing
tactics. To facilitate their overall marketing penetration, the three retained the services of a
telemarketing firm to call all businesses in the tri-town area. They also developed marketing
brochures which stated, “James, Richards & Thomas – the oldest, largest and most professional
firm in the tri-town area.” A national accounting firm has an office in one the towns to service
A medical doctor that is a client of the firm has recently been quoted in the local newspaper
stating that small town doctors have low incomes. A reporter for the MilkyWay Daily
newspaper asked the receptionist at the office of James, Richards & Thomas if he could have a
copy of the medical doctor’s practice financial statements. The receptionist thought that all
financial statements were a matter of public record and provided the reporter with a copy of the
statements. 36 Part D (4 marks)
Jack Box was a senior partner with Box & Co., Chartered Accountants. Box & Co. has four
partners and a p...
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