Deck 3: Professional Ethics, Independence and Audit Quality

Question 1

The conceptual approach to independence requires that there is:

A) independence in mind and appearance.
B) independence in actions and appearance.
C) independence in fact and appearance.
D) independence in mind and actions.

Answer 1

A

Question 2

John resigned from an assurance engagement because his independence was impaired. He was concerned that if he did not resign then ASIC would have a case against the firm and its reputation would suffer as a result. This is an example of:
A) consequentialism.

A) non-consequentialism.
B) virtue ethics.
C) ethical relativism.

Answer 2

A

Question 3

Using the same senior personnel on an assurance engagement over a long period of time may create what type of threat to audit independence?

A) self-interest.
B) familiarity.
C) advocacy.
D) intimidation.

Answer 3

B

Question 4

The word 'ethics' is derived from the Greek word ethos, meaning character. Which of these is not a doctrine or theory of ethics?

A) consequentialism.
B) theology.
C) utilitarianism.
D) deontology.

Question 5

The purpose of ethical decision making models is to:

A) direct the auditor on which action to take.
B) help the auditor arrive at a well-informed and ethical decision.
C) supplement the code of ethics.
D) identify the appropriate standard to use.

Question 6

The fundamental ethical characteristics required of professional accountants are:

A) professionalism, experience and expertise.
B) competence, objectivity and integrity.
C) authority, community sanction and knowledge.
D) self-interest, self-review and familiarity.

Question 7

Which of the following is an example of an engagement-specific safeguard?

A) a proper corporate governance structure within the client firm.
B) involving another firm to perform or re-perform part of the engagement.
C) audit firm leadership that emphasises compliance and ethics
D) all of the above are examples of engagement-specific safeguards.

Question 8

The view that ethics is not just a matter of what people do but what people are, is known as:

A) teleology.
B) consequentialism.
C) virtue ethics.
D) ethical relativism.

Question 9

Which of these views consider moral values to be relative in regard to a particular environment?

A) virtue ethics
B) ethical relativism
C) deontology
D) teleology

Question 10

The main area of practice covered in the IFAC Code of Ethics for Professional Accountants is:

A) fundamental principles applicable to all professional accountants.
B) fundamental principles applicable to professional accountants in public practice.
C) fundamental principles applicable to professional accountants in business.
D) all the above.

Question 11

The term 'Expectation Gap' refers to differences in expectations between:

A) auditors and users of audited financial reports.
B) auditors and their clients.
C) CPA Australia/ICAA and the ASIC.
D) auditors and the ASIC.

Question 12

Which of these jeopardises audit independence?

A) extensive educational requirements for entry into the profession.
B) monitoring and disciplinary procedures
C) familiarity with a client and their systems.
D) none of the above would jeopardise audit independence

Question 13

Threats to auditor independence can come from various sources. Which of these is referred to in the Code of Ethics as self-review threat?

A) the possibility of potential employment with the audit client
B) preparation of original data used to generate a financial statement that is the subject matter of the audit engagement
C) concern on the part of the auditor about the possibility of losing the engagement.
D) pressure to reduce inappropriately the extent of work performed in order to reduce fees.

Question 14

What is not a category of safeguards that can be used by professional accountants?

A) safeguards created by the profession, by legislation or by regulation.
B) safeguards developed by CALDB.
C) safeguards which are engagement specific.
D) safeguards within the client's systems.

Question 15

The significance of economic, financial or other relationships in determining independence in appearance is evaluated by:

A) what a reasonable and informed third party would conclude as unacceptable.
B) what the auditor general decides is significant.
C) what the auditor believes is unacceptable.
D) what the company deems to be unacceptable.

Question 16

Accepting a gift with the possibility of the acceptance subsequently being made public is a form of what type of threat?

A) self-interest.
B) self-review.
C) familiarity.
D) intimidation.

Question 17

Which of these is not identified as a type of threat to compliance with the fundamental principles in the IFAC Code applicable to professional accountants in public practice?

A) self-interest.
B) advertising.
C) self-review.
D) all are identified as a threat to compliance

Question 18

The correct statement regarding the regulation of professional ethics for accountants is:

A) The government is the regulator.
B) CPA Australia and the ICAA are the regulators.
C) There is co-regulation between the professional bodies and the government.
D) There is no current regulation.

Question 19

The statement about auditor independence that is true is:

A) statutory law does not recognise the need for audit independence.
B) statutory law recognises the need for audit independence.
C) all auditor appointments must be made by the shareholders in the AGM.
D) the auditor has no right to be heard at the AGM.

Question 20

Which of these is a type of safeguard against threats to auditor independence?

A) safeguards created by the profession
B) safeguards within the audit firm's own systems
C) safeguards within the assurance client's own firm
D) all of the above.

Question 21

Describe three different ethical theories.

Question 22

Enron went into liquidation in the USA in:

A) October 2001
B) June 2005
C) May 2006
D) January 2000

Question 23

It is true that:

A) Centro Properties group is suing its auditor Pricewaterhouse Coopers
B) KPMG is suing OZ minerals
C) Storm Financial Services is suing its auditors
D) all of the above are true

Question 24

Following the corporate collapses of the early 2000s, firms are:

A) implementing more complicated modern audit techniques in order to minimise audit risks.
B) implementing simplified modern audit techniques in order to minimise audit risks.
C) reverting to complicated audit techniques such as substantive testing in order to minimise audit risks.
D) reverting to basic audit techniques such as substantive testing in order to minimise audit risks

Question 25

Under the provisions in the Code of Ethics the statement that is not true in relation to the technical competence of auditors is:

A) members have a duty to maintain their level of competence throughout their professional career.
B) public accountants should undertake only work in which they are competent.
C) maximum annual hours of continuing professional education are prescribed for all members, affiliates and members holding a certificate of public practice.
D) none of the statements is untrue

Question 26

Describe the components of the audit expectation gap.

Question 27

Katie is part of an audit team who have been sent to Eastern Europe to conduct an audit of one of their client's subsidiary companies. During the audit Katie uncovers a series of bribes that the company has paid to local authorities. Bribes are considered a normal part of business in this particular city so the subsidiary company feels as though they have done nothing wrong. It is likely that the bribes will not be uncovered but there is a chance that they will be, and that the parent company, the audit firm, and Katie personally will all suffer negative consequences if they are. If Katie does report the bribes then the subsidiary company will suffer and there will be a scandal for the parent company. However, the impact of reporting the bribes is likely to be less than if they are discovered at a later date by other authorities. Katie thinks of herself as an honest person and is trying to decide what the ethically 'right' thing to do is.
Try to determine what decision Katie will make regarding whether or not she will report the bribes by applying the ethical theories of teleology, deontology, virtue ethics, and ethical relativism.

Question 28

Classify each of the following threats as either; self-interest, self-review, advocacy, familiarity or intimidation.
1.The CEO threatens to change auditors unless an unqualified opinion is issued
2.Each member of the audit team received a holiday cruise as a gift from the client
3.The audit partner owns a significant amount of shares in the client company
4.The audit partner is the brother-in-law of the client company's director
5.The audit firm is promoting a new issue of shares from the client company
6.The audit firm is acting as an advocate on behalf of the client in a dispute with a third party
7.Management is pressuring the firm to reduce its audit hours in order to reduce the fees
8.The audit partner has been approached about becoming a board member with the client company next year
9.A member of the audit team was recently a director of the client company
10 .The audit must cover an inventory valuation system which was implemented by the audit firm after last year's audit

Question 29

Which of these would not be a basis for disciplinary action by the National Council of the CPA Australia?

A) an auditor failed to observe a proper standard of professional care and skill.
B) an auditor has become insolvent under administration.
C) an auditor has breached the By-Laws of the CPA Australia.
D) an auditor has resigned due to a dispute with a client over accounting policies.

Question 30

Name the five attributes of a profession outlined by Greenwood and briefly describe each.

Question 31

Which of these changes was not one made by CLERP 9.in relation to auditors and annual general meetings?
A) a reasonable opportunity must be allowed for members to ask questions of the auditor at the AGM

A) the auditors can submit written questions to the managers before the AGM to be answered at the AGM
B) the lead auditor must attend the AGM
C) all are changes made by CLERP 9 in relation to auditors and AGMs

Question 32

Read the following scenario and identify any threats to compliance with the IFAC Code.
ABC firm is the auditor of Company Ltd and has been for 10 years. During this time, the audit partner responsible has always been John. The other partner in the firm, Robert, has been the review auditor for this assurance engagement. Robert has not been the lead audit partner as his wife's father is the CEO of Company Ltd.
Every year Company Ltd celebrates the end of the audit by throwing an all expenses paid weekend away for their staff that worked on the audit and for the audit firm. This has led to a good relationship between the auditors and the company that makes the audit less formal. The staff all know each other well and the company believes it is money well spent.
Recently John was approached by the board of Company Ltd with an offer of employment as a director starting in two years time. The only condition was that the audit fees have to be reduced for the current and next year's audit.

Question 33

A possible form of discipline not found in CPA Australia's Articles of Association for members failing to meet required standards is:

A) forfeiture of membership.
B) fines.
C) imprisonment.
D) all are possible forms of discipline found in CPA Australia's Articles of Association

Question 34

Independence is made up of independence in mind and independence in appearance. Describe these two aspects of independence.

Question 35

Identify the six threats to compliance with the IFAC code by professional accountants in public practice and give an example of each.

Question 36

Amendments to the Corporations Act state that auditor independence may be compromised if an individual auditor or a professional member of the audit team:

A) has ever been an officer or audit critical employee of the client
B) has ever provided non-audit services to the client
C) is currently employed by the client as an officer or an audit critical employee
D) all of the above

Question 37

In relation to specific threats to auditor independence, taxation services supplied to audit clients are:

A) generally not seen to create a threat.
B) create a threat.
C) create a threat if they are performed by a subsidiary.
D) create a threat only in public practice.

Question 38

An analysis carried out by Huron Consulting in January 2003.in the USA showed that the main accounting issue leading to restatement of profits over the Global Financial Crisis was:

A) equity accounting
B) revenue recognition
C) capitalisation and expensing of assets
D) reserves, accruals and contingencies