The rule I use, is if the circuit was installed in 1920 or 1998 the circuit needs to be checked to see if it has been modified from the original purpose and code. For example if I go into an old house and find 3 prong outlets connected to a 2 wire circuit without a bond wire I would make the contractor install GFCI outlets, a GFCI breaker or add a bonding conductor. If all the plugs were in good shape and still 2 wire plugs then the electrician could reconnect it with out upgrade.
I would suggest that installing AFCI breakers is a good move but the bedrooms probably were not wired with AFCI breakers in mind. I would ensure the Smoke alarm was not supplied from an AFCI or GFCI protected circuit.
We do not have an upgrade bylaw and the code does not have an upgrade rule, only a maintenance rule. Old K&T can be a huge mess especially if light fixtures got changed and the rubber dries up and falls off. You couldn't just reconnect that without repairs.
If you as a contractor find a circuit in need of repair because it has deteriorated or been modified incorrectly you have an obligation to not connect it and report it to the inspector. If the owner does not want to pay you to fix it there is no problem or obligation for you to fix it, only to not reconnect it and report it to the inspector so you don't get hung with the responsibility and no money to compensate for the extra work.
It would than fall upon the inspector to decide if he would authorize reconnection but the inspector would then be dealing with the owner and not the contractor because the contractor did not reconnect it.
Sometimes homeowners can expect you to fix everything that is wrong but think it is included in the service change and I have heard it from homeowners, irate that the electrician did not reconnect all the wiring that they expected it was included. Sometimes the contractor uses deficiencies to compensate for a low bid by demanding the owner pay to fix deficiencies because the inspector demanded it. I may demand a problem get fixed before it is reconnected but it could maybe be done later by the homeowner under a HO permit if the province allows HO to do their own work or another contractor.
If you bid on these service changes it is important to establish the limits of the contract to the owner. If I come to a house and the contractor connected everything without checking, all bets are off, as the contractor might get stuck with fixing it regardless of an agreement with the owner to pay for the corrections.
The advice I would give is define the scope and extent of every installation and document changes and extra costs.
There is case law that makes a contractor responsible to fix deficiencies including existing wiring if he connects it. If for example you wire a doctor's office in a private residence. The building permit said Doctor's office but the general contractor just told you an office. The electrical inspector reads the Sign at the door and inspects for patient care area but the electrician just wired for a general office. In a case like that the electrical contractor could get stuck fixing it for free. So know what you are wiring too.