Deck 3: Audit Quality and Ethics

Question 1

Which one of the following would most likely be a breach of the ethical rules?

A) Auditing Telstra while owning $250 of Telstra shares
B) Auditing the bank from which you have a home mortgage
C) Purchasing a motor vehicle from an audit client at a substantial discount
D) All would be equally likely to breach the ethical rules.

Answer 1

C

Question 2

Which one of the following statements is NOT correct? Expulsion from CPA Australia or the ICAA for disciplinary reasons:

A) should be seen as a weighty economic sanction.
B) should be seen as a weighty social sanction.
C) might provide a basis for the Companies Auditors and Liquidators Disciplinary Board to suspend or cancel registration.
D) prevents an individual from practising as a public accountant.

Answer 2

D

Question 3

A public accounting firm should decline an offer to perform management advisory services if:

A) the proposed engagement is not accounting- related.
B) recommendations to be made by the firm are to be subject to review by the client.
C) the firm audits the financial statements of a subsidiary of the prospective client.
D) acceptance would require the firm to make management decisions for an audit client.

Answer 3

D

Question 4

The auditor's relationship with financial statement users is different from the relationship that most professionals have with the users of their services because:

A) higher standards of professionalism apply.
B) the users directly remunerate the auditor.
C) the primary beneficiaries of the audit do not engage the auditor.
D) of the confidentiality aspects involved.

Question 5

The audit expectations gap refers to:

A) differences between the views of auditors and the expectations of other stakeholders regarding the appropriate roles and responsibilities of management, and the audit performance.
B) differences between what clients expect to pay and what the auditor charges.
C) differences between the views of auditors and the expectations of other stakeholders regarding the appropriate roles and responsibilities of auditors, and their performance.
D) all of the above

Question 6

Which of the following is an example of audit failure?

A) There is business failure.
B) The client company is insolvent.
C) The auditor failed to use due care and skill in the conduct of the audit.
D) All of the above

Question 7

Most accounting and auditing professionals agree that when an audit has failed to uncover material misstatements, and the wrong type of audit opinion is issued, the audit firm:

A) has failed to follow auditing standards.
B) deserves to lose the lawsuit.
C) should be asked to defend the quality of the audit.
D) should not be held responsible for the financial loss suffered by others.

Question 8

The first step of the six- step process for resolving ethical dilemmas is:

A) obtain the relevant facts.
B) identify the parties involved.
C) identify all parties potentially affected by the outcomes.
D) identify the ethical issues.

Question 9

Ethics can be defined as:

A) adhering to society's norms and laws.
B) a set of moral principles or values.
C) adhering to a code of professional conduct.
D) integrity, loyalty and the pursuit of excellence.

Question 10

ASCQC1 requires:

A) the audit firm to establish procedures to assess the integrity of the audit client.
B) the audit team to be independent.
C) the audit firm to establish policies and procedures to provide reasonable assurance to maintain an appropriate level of independence.
D) the audit firm to not receive fees totalling more than 15% of total fees from one audit client.

Question 11

When there are substantial unpaid fees outstanding from previous audit work:

A) independence can be compromised if the unpaid fees take on the character of a loan.
B) the audit opinion should be withheld.
C) the auditor should seek removal from office.
D) a fee premium can be applied to the current audit.

Question 12

Society has attached a special meaning to the term 'professional.' A professional is:

A) a person expected to conduct himself or herself at a higher level than most other members of society.
B) any person who receives pay for services performed.
C) a person who has both on- the- job experience received under an experienced supervisor and specific education relevant to the trade.
D) a person who has attained tertiary qualifications as a prerequisite to joining the job market.

Question 13

Which one of the following statements is correct? ASA 220 Quality Control for an Audit of a Financial Report and Other Historical Financial Information requires audit firms to adopt policies which address:

A) ethical requirements.
B) assignment of engagement teams.
C) engagement performance.
D) all of the above

Question 14

Which one of the following situations is most likely to impair independence?

A) Legal action taken by a third party against both the auditee and the audit firm
B) Legal action taken by the auditee against the audit firm in relation to taxation services provided
C) Legal action taken by the auditee against the audit firm in relation to management consulting advice
D) Legal action taken by the auditee against the audit firm claiming deficiencies in the prior year's audit

Question 15

The reasons for the resignation of an incumbent auditor must be reported to the:

A) client.
B) AARF.
C) ASX.
D) ASIC.

Question 16

One of the fundamental principles of the Code of Ethics for Professional Accountants deals with professional behaviour. This requires accountants to:

A) be straightforward and honest.
B) maintain their knowledge and skill at an appropriately high level.
C) refrain from any conduct that may bring discredit to their profession.
D) all of the above

Question 17

ASA 220 Quality Control for an Audit of a Financial Report and Other Historical Financial Information requires policies and procedures including:

A) ethical requirements (including independence).
B) acceptance and continuance of client relationships and specific engagements.
C) leadership responsibilities for quality on audits.
D) all of the above

Question 18

The Corporations Act independence requirements are expressed in terms of:

A) circumstances that might impair an auditor's objectivity and impartial judgement.
B) threats to independence and safeguards that should be applied.
C) fundamental principles of professional ethics.
D) rules that apply only to specific situations.

Question 19

The Code of Ethics for Professional Accountants (APES 110) is issued by:

A) AARF.
B) ASIC and the ICAA.
C) APESB.
D) ASIC.

Question 20

Which of the following is NOT a reason often given for acting unethically?

A) All legal behaviour is ethical.
B) It was not known that the action was unethical.
C) It is a course of action undertaken by everyone else.
D) There is a reduced likelihood of being discovered.

Question 21

Which one of the following would represent an ethical dilemma for an auditor?

A) Being treated with cancellation of the audit by a client for not agreeing with management's treatment of an accounting issue
B) Being approached to tender for the audit of a newly formed company
C) Being asked to complete the audit for a nonprofit organisation for no fee
D) Being asked to undertake a non- assurance service for an audit client

Question 22

The value of the audit report and the demand for audit services depends on:

A) the fees paid for audits.
B) public confidence in the regulators.
C) public confidence in the independence and integrity of CPAs and chartered accountants.
D) all of the above

Question 23

Fees for audit engagements should take into account:

A) the degree of responsibility the work entails.
B) independence.
C) other services provided.
D) fee dependence.

Question 24

In determining independence with respect of any audit engagement, the ultimate decision as to whether independence has been achieved is made by the:

A) audit committee.
B) client.
C) auditor.
D) users.

Question 25

Which one of the following is NOT one of the five fundamental principles of professional conduct set out in the Code of Ethics for Professional Accountants?

A) Continuing education
B) Confidentiality
C) Objectivity
D) Integrity

Question 26

The Code of Ethics for Professional Accountants is issued by the:

A) Australian Securities Exchange.
B) Australian Professional Ethics Standards Board.
C) Australian Accounting Standards Board.
D) Corporations Act.

Question 27

An ethical dilemma arises:

A) when a person is faced with a situation that requires a decision about the most appropriate behaviour when there is a range of options available.
B) when a person is faced with a situation that requires a decision about the most appropriate behaviour, but they have very few options available.
C) when a person is faced with a situation that requires a decision about the least appropriate behaviour, but the available options require a trade- off of interests or ideals.
D) when a person is faced with a situation that requires a decision about the most appropriate behaviour, but the available options require a trade- off of interests or ideals.

Question 28

An example of a self- interest threat is:

A) the auditor will promote a client's position.
B) the auditor not appropriately evaluating the results of an associate auditor.
C) a financial interest influencing the auditor's judgement.
D) the auditor being influenced by undue pressure from the audit client.

Question 29

The material financial interests rule means that:

A) an auditor cannot be assigned to the audit of a bank with which that auditor has a home mortgage.
B) an auditor should be involved in the executive function of a client to maximise the benefits achieved from the engagement.
C) a public accounting firm cannot accept an audit client if anyone in the practice has a material shareholding in the potential client.
D) an auditor cannot accept payment from the auditee.

Question 30

If the outgoing auditor refuses to communicate with the successor auditor:

A) this is a breach of the ethical rules.
B) ASIC should be informed so that action can be instigated against the outgoing auditor.
C) the client should withhold payment of the audit fee.
D) all of the above

Question 31

According to the profession's ethical standards, an auditor would be considered independent in which one of the following instances?

A) The auditor is also a solicitor advising the client.
B) The client owes the auditor fees for the last two annual audits.
C) An employee of the audit firm acts as the honorary treasurer for a charity that is an audit client.
D) The auditor's main bank account is held at a client financial institution.

Question 32

Audit quality means:

A) how competent the auditor is.
B) how well an audit detects and reports material misstatements and fraud in financial statements.
C) how well an audit detects and reports material misstatements in financial statements.
D) how independent the auditor is.

Question 33

Where the fees from an audit client are more than 15% of total fees, the public accounting firm should:

A) ensure that adequate quality control procedures are in place.
B) ensure that the audit work is reviewed by an accountant, not a member of the audit team.
C) ensure that all members of the audit team are independent, both in fact and in appearance.
D) ensure adequate quality control procedures are in place and that the audit work is reviewed by an accountant, not a member of the audit team.

Question 34

Which one of the following statements about audit committees is NOT correct?

A) Ideally, members should be actively involved in company management.
B) They help to keep auditors independent of management.
C) Members are selected from a company's board of directors.
D) Most have 3- 5 members.

Question 35

Which one of the following is NOT listed as a factor that may influence the effectiveness of an audit committee?

A) Its interaction with internal audit
B) The experience of its members
C) The appropriateness of its actions
D) The personality of the chairperson

Question 36

The underlying reason for a high level of professional conduct by any profession is the need:

A) to create barriers to entry.
B) to create an appropriate level of professional esteem.
C) for public confidence in the quality of service provided.
D) to justify self- regulation.

Question 37

Part B of the Code of Professional Ethics identifies specific guidance on professional conduct in the following area(s):

A) fees and other types of remuneration.
B) gifts and hospitality.
C) professional appointments.
D) all of the above

Question 38

Part B of the Code of Ethics identifies threats to independence from the following sources:

A) familiarity and intimidation.
B) self- interest, self- review and advocacy.
C) both A and B
D) the work environment

Question 39

The audit expectations gap can be attributed to:

A) audit failure.
B) business failure.
C) the limitation to the role of the independent audit.
D) all of the above

Question 40

To emphasise auditor independence from management, many companies:

A) establish a policy of discouraging social conduct between company employees and the staff of the audit firm.
B) have the independent auditor report to an audit committee of outside members of the board of directors.
C) request that a representative of the auditor be present at the annual general meeting.
D) appoint a member of the audit firm to the company's audit committee.

Question 41

One primary reason why people act unethically is:

A) selfishness.
B) the effect of the media.
C) poor education.
D) their political values.

Question 42

What percentage of listed Australian companies have an audit committee?

A) 90%
B) 50%
C) 75%
D) 10%

Question 43

The provision of internal audit services to an auditee:

A) creates a self- review threat to independence.
B) should improve the efficiency of the financial statement audit.
C) is prohibited by Corporations legislation.
D) is best done by subcontracting staff from the public accounting firm to the auditee.

Question 44

Audit committees' responsibilities include:

A) considering the scope and quality of the external audit.
B) controlling the progress of the audit.
C) assessing the independence and objectivity of the audit team.
D) all of the above

Question 45

The ASX Corporate Governance Principles do NOT include:

A) respecting the rights of shareholders.
B) remunerating fairly and responsibly.
C) safeguarding integrity in financial reporting.
D) maximising the profits of shareholders.

Question 46

Independence in fact is where:

A) the audit firm does not provide any non- assurance services to the audit client.
B) the general public considers that the auditor has acted objectively.
C) the audit firm has an effective quality control system in place in the conduct of an audit.
D) the auditor maintains an unbiased attitude during the audit.

Question 47

The ASX Corporate Governance Principles do NOT include:

A) structuring the board to add value.
B) remunerating the auditor fairly and responsibly.
C) recognising and managing risk.
D) making timely and balanced disclosure.

Question 48

Which one of the following is incorrect with respect to working papers?

A) Ordinarily they can only be provided to a third party with the express permission of the auditee.
B) They are the property of the client and can be accessed by the client at the conclusion of the audit.
C) They can be viewed by another member of the professional bodies during a peer review.
D) Information contained in them is legally not viewed as privileged information.

Question 49

Subsection 290.176 of the Code of Ethics for Professional Accountants prohibits the provision of which one of the following to an audit client?

A) Attestation services
B) Management consulting services
C) Other assurance services
D) Independent valuation services

Question 50

Auditors may disclose confidential information to a third party if:

A) they have specific authority to do so.
B) there is a professional duty to do so.
C) there is a legal duty to do so.
D) all of the above

Question 51

Corporate governance can be described as:

A) how stakeholders and agencies external to a corporation control or influence those responsible for directing and managing the affairs of the corporation.
B) the internal controls of corporations.
C) the processes, structures and mechanisms that control and direct corporations.
D) provisions of the Corporations Act 2001.

Question 52

Which statement about the Code of Ethics for Professional Accountants is NOT true?

A) The Code of Ethics for Professional Accountants has the force of law applicable to auditing standards
B) The Code of Ethics for Professional Accountants includes specific rules defining unacceptable behaviours
C) The Code of Ethics for Professional Accountants outlines a six- step model for resolving ethical dilemmas
D) The Code of Ethics for Professional Accountants contains a section of quality control ideals

Question 53

When a firm undertakes both internal and external auditing services for the same entity, which of the following must be applied for the external auditor to demonstrate independence?

A) The external auditor should gather sufficient appropriate audit and rely no more than usual on internal audit work.
B) The external auditor should not assume the role of management when undertaking internal audit services.
C) Any recommendations made by auditors are for implementation by management rather than the auditor.
D) All of the above

Question 54

Auditors should NOT use confidential auditee information for personal gain:

A) under any circumstances.
B) without the permission of the client and the audit engagement partner.
C) without the permission of the client.
D) unless requested to do so by the client.

Question 55

The regulatory mechanisms addressing corporate governance in Australia emphasise:

A) the Australian Securities Exchange's Corporate Governance Council Principles of Good Governance and Best Practice Recommendations.
B) accountability and transparency through the auditor.
C) accountability and transparency through required disclosures.
D) all of the above

Question 56

The Code of Ethics for Professional Accountants states that a public accountant should maintain integrity and objectivity. The term 'objectivity' refers to the ability:

A) to be unyielding in all matters dealing with auditing procedures.
B) to choose independently between alternative accounting treatments.
C) to distinguish independently between accounting practices that are acceptable and those which are not.
D) to maintain an impartial attitude on all matters that come under the accountant's review.

Question 57

Section 290 in Part B of the Code sets minimum standards of conduct regarding:

A) independence.
B) auditor switching.
C) fees and other types of remuneration.
D) gifts and hospitality.

Question 58

APES 110 Code of Professional Conduct considers a material direct financial interest in an audit client to be:

A) the auditor having a loan from an audit client who is a financial institution.
B) charging a fee contingent upon an outcome.
C) accepting commissions from an audit client.
D) providing taxation services to a client.

Question 59

The provision of internal audit services to an audit client may place at risk which of the following ethical attributes?

A) Competence and due care
B) Confidentiality
C) Independence
D) All of the above

Question 60

Circumstances when working papers may be given to a third party are:

A) when requested by a successor auditor.
B) when permission is granted by the client.
C) when there is a legal requirement to do so.
D) both B and C

Question 61

What is auditor independence and why is it so important?

Question 62

Can a public accounting firm accept an audit client if a principal within the firm has a direct shareholding in the prospective client?

Question 63

A familiarity threat can be reduced by:

A) rotation of the lead auditor and review partner.
B) rotation of the senior partner.
C) rotation of the audit team.
D) rotation of audit firms.

Question 64

Which one of the following policies and procedures is NOT required by ASA 220 Quality Control for an Audit of a Financial Report and Other Historical Financial Information?

A) Remunerating the auditor fairly and responsibly
B) Acceptance and continuance of client relationships and specific engagements
C) Ethical requirements (including independence)
D) Leadership responsibilities for quality on audits

Question 65

The auditor's ultimate defence where conflicts are sufficiently great so as to compromise objectivity is:

A) APES 110.
B) the working papers.
C) whistle blowing.
D) resignation.

Question 66

Which of the following is NOT a concern that may arise from an audit firm completing an audit for a substantially reduced fee?

A) The audit firm is allocating sufficient time and qualified staff to the audit.
B) A lower quality of auditing
C) A more efficient audit can be conducted as the audit is completed within a budgeted time frame.
D) Compliance with applicable standards and quality control procedures

Question 67

A public accounting firm currently audits XYZ Co., a publicly listed company. The firm has been approached by XYZ Co. to also provide valuation services on all its Property, Plant and Equipment. Can the firm provide these services?

Question 68

'Independence' in auditing means:

A) not being financially dependent on the client.
B) not being an advocate for the client.
C) remaining aloof from the client.
D) taking an unbiased viewpoint.

Question 69

The audit expectation gap is attributed to which of the following causes?

A) Auditors' self- interest in protecting their profits
B) Changes in social expectations
C) Complainants' self- interest seeking compensation
D) All of the above

Question 70

Many of the ethical values of society are NOT incorporated into laws because:

A) it is not cost- beneficial to do so.
B) of the judgemental nature of particular values.
C) of enforcement difficulties.
D) of cultural differences in society.

Question 71

Which one of the following is incorrect in relation to setting fees?

A) Fees based on the achievement of certain outcomes are prohibited.
B) The basis for agreed fees should be documented.
C) The time of all people engaged in the work should be taken into account.
D) Fixed fees are less likely to result in compromised independence.

Question 72

The disadvantage of including general statements in a code of professional ethics is:

A) there are usually too many to remember.
B) the difficulty of enforcing general ideals without minimum standards of ideal behaviour.
C) that they identify ideal conduct.
D) the emphasis on positive activities.

Question 73

The agency view of the corporation emphasises:

A) a control- oriented approach to governance.
B) issues associated with the potential conflicts of interest of management (as the agents of the owners) in serving the interests of shareholders (as the owners of the corporation).
C) mechanisms designed to curb managerial self- serving decisions and actions.
D) all of the above

Question 74

In the Code of Ethics for Professional Accountants, the advantage of general statements of ideal conduct, as opposed to specific rules of behaviour, is:

A) the ability to enforce the ideals.
B) the emphasis on positive activities.
C) the enforceability of minimum behaviour and performance standards.
D) the tendency to define the rules as maximum rather than minimum standards.

Question 75

If a public accounting firm is requested by a client of another audit firm to provide an opinion on the application of an accounting principle, the public accounting firm should:

A) refuse to give an opinion.
B) inform ASIC.
C) advise the existing auditor.
D) all of the above

Question 76

Section 324CH lists 19 relationships that establish a conflict of interest. Which relationship that the auditor may have with the client is NOT included?

A) Owes an amount of more than $5000 to the audited body
B) Has an asset that is an immaterial investment in an entity that has a controlling interest in the audited body
C) Has an asset that is a material investment in an entity that has a controlling interest in the audited body
D) Has an asset that is an investment in the audited body

Question 77

Discuss the ways in which both the accounting profession and society itself encourages public accountants to conduct themselves in a professional manner, i.e. the factors that influence the ethical conduct of audit practitioners.

Question 78

Many accounting firms have adopted policies known as improved business practices. Which of the following is NOT one of the above?

A) Improved recruiting practices
B) Developing more sophisticated use of technology
C) More effective advertising
D) Increased professional indemnity insurance cover

Question 79

The main reason for communication between the predecessor and successor auditor is to:

A) determine any implications for the independence of the successor.
B) establish the likelihood that fees will be paid.
C) satisfy ASIC requirements.
D) pass on working papers.

Question 80

The Code of Ethics for Professional Accountants adopts a conceptual framework that involves:

A) a system of safeguards that reduce threats to an acceptable level.
B) a framework for identifying, evaluating and resolving threats to the fundamental principles.
C) principles approach because it is impossible to anticipate every situation that might generate an ethical problem for a professional accountant.
D) all of the above