Question 2

Joseph an accountant prepared financial statements for Pentagon Ltd pursuant to a review engagement, which is an intermediate form of financial reporting, less onerous than an audit and more onerous than a compilation engagement, requiring the accountant to make inquiries of management and perform certain analytical procedures to determine if the financial information contained in the client's records is plausible. Pentagon Ltd. failed to remit over $1 million in provincial retail sales tax during the period December 1985 to December 1991. Notices of assessment were issued by the Ministry of Revenue demanding payment of the unremitted tax plus interest and a 25 per cent penalty. The unremitted sales tax was treated by Joseph as revenue of Pentagon Ltd, which resulted in an overpayment of income tax in the amount of approximately $220,000. Eighty per cent of that amount was eventually recovered.

Pentagon Ltd sued Joseph in court.

Note - "The Canadian Institute of Chartered Accountants ("CICA") Handbook requires that the accountant has sufficient knowledge of the business to make intelligent inquiries and that the accountant possess an appreciation of matters that could have a significant effect on the information being reported on"

The CICA Handbook sets out the professional standards that apply to accountants in conducting a review engagement. The CICA Handbook explains that a review engagement consists "primarily of enquiry, analytical procedures and discussion related to information supplied to the public accountant by the enterprise with the limited objective of assessing whether the information being reported on is plausible within the framework of appropriate criteria". "Plausible" is defined as "appearing to be worthy of belief based on the information obtained by the public accountant in connection with the review".

The CICA Handbook also stipulates that an accountant must apply "analytical procedures such as comparing the current and prior period information and considering the reasonableness of financial and other inter-relationship..."

Applying the relevant and correct principle(s) of law discuss the following questions:

a) Identify and explain the most applicable legal concept. With particular attention to the details of the scenario above, test the elements of the legal concept against the scenario above to determine whether an action in court is likely to succeed. Provide reasons for your answer, with proper reference to the fact situation and the law. (6 marks).

b) Discuss the remedy(s) if any, available to any of the parties. Ensure to name the party to whom the remedy outlined is available. (4 marks).