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ACCA AAA practice questions

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Question 1Regulatory environment

Which body is responsible for issuing International Standards on Auditing (ISAs)?

  1. The International Ethics Standards Board for Accountants (IESBA)
  2. The International Accounting Standards Board (IASB)
  3. The International Auditing and Assurance Standards Board (IAASB) Correct answer.
  4. The Financial Reporting Council (FRC)

Explanation

The IAASB develops and issues ISAs and other assurance pronouncements under the auspices of IFAC. The IESBA issues the Code of Ethics, while the IASB issues IFRS Accounting Standards.

Question 2Regulatory environment

Under the IESBA Code, which threat arises when an auditor has a close family member employed as a director of the audit client?

  1. Advocacy threat
  2. Self-review threat
  3. Kinship threat Correct answer.
  4. Intimidation threat

Explanation

A close family member in a position to influence the client creates a familiarity or kinship threat to independence. The Code identifies this as a relationship-based threat requiring safeguards or elimination.

Question 3Regulatory environment

Which of the following best describes the purpose of an audit under ISA 200?

  1. To prepare the financial statements on behalf of management
  2. To enable the auditor to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework Correct answer.
  3. To guarantee that the financial statements are free from all error
  4. To provide absolute assurance that fraud has not occurred

Explanation

ISA 200 states the purpose of an audit is to enhance the degree of confidence of intended users by expressing an opinion on the financial statements. Reasonable, not absolute, assurance is provided.

Question 4Regulatory environment

What is the primary objective of the International Ethics Standards Board for Accountants (IESBA)?

  1. To approve audit reports before issuance
  2. To license individual auditors
  3. To enforce national auditing regulations
  4. To set ethical standards for professional accountants worldwide Correct answer.

Explanation

The IESBA develops the International Code of Ethics for Professional Accountants, which establishes ethical requirements. It does not enforce, license, or approve reports.

Question 5Regulatory environment

Under ISA 700, when is an auditor required to modify the opinion in the auditor's report?

  1. When the client refuses to allow the auditor to attend the annual general meeting
  2. Whenever the auditor disagrees with a trivial matter
  3. When the auditor concludes the financial statements as a whole are not free from material misstatement, or is unable to obtain sufficient appropriate audit evidence Correct answer.
  4. Whenever the client changes its accounting policy

Explanation

ISA 705 requires a modified opinion when there is a material misstatement or an inability to obtain sufficient appropriate audit evidence. Trivial disagreements and procedural matters do not modify the opinion.

Question 6Regulatory environment

An audit firm provides tax advisory services to an audit client. Which safeguard is most appropriate to address the self-review threat when the advice is implemented by management?

  1. Relying on the client's internal controls
  2. Reducing the scope of the audit
  3. Increasing the audit fee to reflect added risk
  4. Using personnel who are independent of the audit team to provide the service Correct answer.

Explanation

The Code recommends using separate personnel not involved in the audit as a safeguard against self-review threats. Fee increases, scope reductions, and reliance on controls do not address the underlying threat.

Question 7Regulatory environment

Which of the following is an example of an advocacy threat to auditor independence?

  1. The audit partner promotes the client's shares to potential investors Correct answer.
  2. The auditor is threatened with removal by the client
  3. The auditor performs the client's bookkeeping
  4. The auditor relies on the client's internal controls

Explanation

An advocacy threat arises when the firm promotes or defends the client's position, for example by promoting its shares. Bookkeeping creates a self-review threat and threats of removal create an intimidation threat.

Question 8Regulatory environment

Under ISA 240, what is the auditor's primary responsibility in relation to fraud?

  1. To obtain reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error Correct answer.
  2. To detect all instances of fraud without exception
  3. To report all suspected fraud directly to the police
  4. To design and implement the entity's anti-fraud controls

Explanation

ISA 240 requires the auditor to obtain reasonable assurance about whether the financial statements are free from material misstatement, whether due to fraud or error. Preventing and detecting fraud is primarily management's responsibility.

Question 9Regulatory environment

Which of the following best describes the 'clarity' requirement for a modified audit opinion under ISA 705?

  1. The auditor must remove the basis for modification paragraph to keep the report concise
  2. The auditor must use a heading for the modified opinion and describe the basis for modification in a separate section Correct answer.
  3. The auditor must issue the report in plain language only
  4. The auditor must obtain client approval for the wording of the modification

Explanation

ISA 705 requires that a modified opinion be clearly identified with a heading and that the basis for modification be described in a separate section. Client approval is never required.

Question 10Regulatory environment

A company's audit committee questions why the external auditor also provides internal audit services. Which principle is most directly engaged?

  1. Confidentiality of the client
  2. Professional competence
  3. Professional behaviour
  4. Objectivity of the auditor Correct answer.

Explanation

Providing internal audit services to an audit client can create self-review and management threats that impair objectivity. Confidentiality, competence, and behaviour are less directly engaged.

Question 11Regulatory environment

Under ISA 315, what is the auditor's primary purpose in obtaining an understanding of the entity and its environment?

  1. To prepare the entity's tax returns
  2. To identify and assess risks of material misstatement Correct answer.
  3. To provide assurance on internal control effectiveness
  4. To recommend improvements to the entity's operations

Explanation

ISA 315 requires the auditor to understand the entity and its environment to identify and assess risks of material misstatement. Operational recommendations and tax work are outside the audit objective.

Question 12Regulatory environment

Which of the following is a fundamental principle of the IESBA Code of Ethics?

  1. Professional competence and due care Correct answer.
  2. Confidentiality of the auditor's own affairs
  3. Competitiveness
  4. Profitability

Explanation

The fundamental principles include integrity, objectivity, professional competence and due care, confidentiality, and professional behaviour. Profitability and competitiveness are commercial concepts, not ethical principles.

Question 13Regulatory environment

Which of the following describes a 'self-interest threat' to auditor independence?

  1. The auditor reviews work performed by the firm's own tax department
  2. The auditor is pressured by the client to reduce testing
  3. The auditor has a financial interest in the audit client Correct answer.
  4. The auditor acts as an advocate for the client in a legal dispute

Explanation

A self-interest threat arises when the firm has a financial or other interest that could inappropriately influence judgement, such as a financial interest in the client. Advocacy and intimidation are separate threat categories.

Question 14Regulatory environment

Which body within an entity is primarily responsible for overseeing the external audit and auditor independence?

  1. The external auditor
  2. The internal audit function
  3. The audit committee Correct answer.
  4. The finance department

Explanation

The audit committee, composed of independent non-executive directors, oversees the external audit and monitors auditor independence. Internal audit, finance, and the external auditor do not perform this governance oversight role.

Question 15Regulatory environment

Under ISA 570, when is there a material uncertainty related to going concern that requires disclosure in the auditor's report?

  1. When the entity has made a loss in the current year
  2. When the entity changes its year-end date
  3. When the auditor has a disagreement with management about inventory valuation
  4. When events or conditions exist that may cast significant doubt on the entity's ability to continue as a going concern, and adequate disclosure is made Correct answer.

Explanation

ISA 570 requires a separate 'Material Uncertainty Related to Going Concern' section when such uncertainty exists and adequate disclosure is made. A single loss or a change of year-end does not create a material uncertainty.

Question 16Regulatory environment

Which of the following best describes the role of the Financial Reporting Council (FRC) in the UK?

  1. It regulates auditors and corporate reporting in the UK Correct answer.
  2. It sets global auditing standards for all countries
  3. It provides tax advice to listed companies
  4. It issues IFRS Accounting Standards

Explanation

The FRC is the UK regulator responsible for auditing and corporate reporting standards and oversight. It does not set global standards or issue IFRS.

Question 17Regulatory environment

An auditor is offered a significant discount on a holiday by a client who is also a travel agent. How should the auditor respond under the IESBA Code?

  1. Accept the discount only if it is below a material threshold
  2. Accept the discount but disclose it to the audit committee
  3. Accept the discount because it is offered to all customers
  4. Decline the offer because it creates a self-interest threat to independence Correct answer.

Explanation

A gift or hospitality that is not trivial and proper can create a self-interest threat and may be seen as inducement. The auditor should decline it to preserve independence and objectivity.

Question 18Regulatory environment

Which of the following is a key element of an effective system of quality management under ISQM 1?

  1. Reducing audit fees to win tenders
  2. Maximising the number of engagements accepted
  3. Delegating all quality decisions to clients
  4. Governance and leadership that promotes a quality-oriented culture Correct answer.

Explanation

ISQM 1 requires a firm's system of quality management to include governance and leadership that establishes a quality-oriented culture. Fee-cutting, volume maximisation, and client delegation undermine quality.

Question 19Regulatory environment

Which of the following statements about professional scepticism is correct?

  1. It applies only to fraud investigations
  2. It is unnecessary when internal controls are strong
  3. It means the auditor should question information and be alert to conditions indicating possible misstatement Correct answer.
  4. It requires the auditor to assume management is dishonest

Explanation

Professional scepticism is an attitude of questioning and alertness to possible misstatement, including fraud. It does not presume dishonesty and remains necessary regardless of control strength.

Question 20Regulatory environment

Under the IESBA Code, which of the following is an example of an intimidation threat?

  1. The auditor has a loan from the client
  2. The client threatens to dismiss the auditor if a particular accounting treatment is not accepted Correct answer.
  3. The auditor promotes the client's products
  4. The auditor performs bookkeeping for the client

Explanation

An intimidation threat arises when the auditor is deterred from acting objectively by actual or perceived pressures, such as a threat of dismissal. Loans create self-interest threats, bookkeeping creates self-review threats, and promotion creates advocacy threats.

Question 21Regulatory environment

Which of the following is the most appropriate action for an auditor who discovers a suspected money laundering transaction during an audit?

  1. Include it in the management letter only
  2. Disclose it to the client's major shareholder
  3. Ignore it because it is outside the audit scope
  4. Report it to the appropriate authority in accordance with applicable anti-money laundering legislation Correct answer.

Explanation

Auditors are subject to anti-money laundering obligations, including reporting suspicious transactions to the relevant authority. Ignoring it, disclosing to shareholders, or only noting it in a management letter would breach those obligations.

Question 22Regulatory environment

Which of the following best describes the concept of 'reasonable assurance' in an audit?

  1. Assurance that the entity will remain a going concern
  2. A high, but not absolute, level of assurance Correct answer.
  3. A guarantee that no misstatements exist
  4. A low level of assurance suitable for agreed-upon procedures

Explanation

Reasonable assurance is a high but not absolute level of assurance, reflecting inherent limitations of an audit. It is not a guarantee, not a low level, and does not assure going concern.

Question 23Regulatory environment

An audit firm is asked to audit a client where a former partner of the firm is now the client's finance director. Which threat is most directly created?

  1. Familiarity threat Correct answer.
  2. Intimidation threat
  3. Advocacy threat
  4. Self-interest threat

Explanation

A former partner in a senior client role creates a familiarity threat because of the close relationship and prior association. Advocacy, self-interest, and intimidation are different threat categories.

Question 24Regulatory environment

Which of the following is required by ISA 260 in relation to communication with those charged with governance?

  1. The auditor must communicate all matters of a trivial nature
  2. The auditor must communicate only matters requested by management
  3. The auditor must communicate the auditor's views about significant qualitative aspects of the entity's accounting practices Correct answer.
  4. The auditor must obtain approval for the audit opinion

Explanation

ISA 260 requires communication of significant matters, including views on significant qualitative aspects of accounting practices. Trivial matters need not be communicated and approval for the opinion is never required.

Question 25Regulatory environment

Which of the following statements about the relationship between ISAs and national auditing standards is correct?

  1. ISAs apply only to listed companies worldwide
  2. ISAs automatically override all national standards in every jurisdiction
  3. National standards may be based on ISAs, and some jurisdictions adopt or adapt them Correct answer.
  4. National standards must be identical to ISAs without any adaptation

Explanation

ISAs are international benchmarks that jurisdictions may adopt or adapt into national standards. They do not automatically override national requirements and are not limited to listed companies.

Question 26Regulatory environment

Which of the following best describes the status of International Standards on Auditing (ISAs) issued by the IAASB?

  1. They apply only to audits of listed entities and never to private companies
  2. They are automatically binding law in every jurisdiction that is a member of IFAC
  3. They have no authority unless adopted into national law or regulation by a local body Correct answer.
  4. They are advisory guidance that auditors may follow at their own discretion

Explanation

ISAs are issued by the IAASB, a standard-setting board, and have no direct legal force of their own; they become binding through adoption by national regulators or professional bodies. This is why the preface to the ISAs explains that a jurisdiction may adopt them in full or with modifications.

Question 27Regulatory environment

Under the IESBA Code of Ethics, which of the following is the most accurate description of the 'public interest' rationale for the profession's ethical requirements?

  1. The Code applies only where a client has expressly agreed to follow it
  2. The Code recognises that users rely on audited information and that the profession must act in a way that maintains that trust Correct answer.
  3. The Code exists mainly to protect the commercial interests of audit firms
  4. The Code is designed to shield auditors from legal liability for their work

Explanation

The Code's conceptual framework rests on the idea that the accountancy profession serves the public interest because third parties rely on audited financial information. Ethical requirements therefore exist to sustain confidence in that information, not to protect the firm or limit liability.

Question 28Regulatory environment

A regulator is designing an oversight regime for the audit profession. Which of the following features is most consistent with the principle of independent oversight?

  1. The oversight body reports only to the firms' global network headquarters
  2. The oversight body delegates all inspection decisions to the firms being inspected
  3. The oversight body is independent of the profession and has powers to inspect and sanction auditors Correct answer.
  4. The oversight body is funded and staffed predominantly by the largest audit firms

Explanation

Independent oversight requires that the regulator be separate from the profession it oversees and have real powers of inspection and enforcement. This structure is intended to ensure that quality failures are detected and addressed without conflicts of interest.

Question 29Regulatory environment

Which of the following best explains why audit regulation typically includes a requirement for auditors of listed entities to rotate the engagement partner after a specified period?

  1. To allow the firm to transfer the engagement to a different office
  2. To reduce the cost of the audit by bringing in cheaper staff
  3. To ensure that the audit fee is renegotiated at regular intervals
  4. To limit the familiarity threat that can build up when the same individual leads the audit for many years Correct answer.

Explanation

Partner rotation is a structural safeguard against the familiarity and self-interest threats that grow when one individual is closely associated with a client for a long period. It is a regulatory response to a recognised threat to independence rather than a cost or pricing measure.

Question 30Regulatory environment

A national regulator introduces a requirement that audit firms publish an annual transparency report. Which of the following is the primary regulatory purpose of such a report?

  1. To provide the firm's clients with a marketing document to attract new business
  2. To disclose the personal tax affairs of the firm's partners
  3. To give stakeholders information about the firm's governance, quality control and independence practices Correct answer.
  4. To replace the need for external inspection of the firm's audits

Explanation

Transparency reports are intended to give the public and other stakeholders insight into how a firm safeguards audit quality and independence. They supplement, rather than replace, independent inspection.

Question 31Regulatory environment

An audit firm operates in a jurisdiction where the regulator has the power to impose sanctions for poor audit quality. Which of the following best describes the role of such sanctions within the regulatory framework?

  1. They act as a deterrent and incentive for firms to maintain quality, complementing preventive quality management requirements Correct answer.
  2. They are intended to compensate clients for losses caused by audit failure
  3. They apply only to individual engagement partners and never to firms
  4. They are the only mechanism by which audit quality is assured in the jurisdiction

Explanation

Sanctions are a deterrent and incentive that operate alongside preventive requirements such as ISQM 1 quality management systems. They are one part of a broader regulatory framework rather than a stand-alone assurance mechanism.

Question 32Regulatory environment

A regulator is considering whether to require audit firms to separate their audit and non-audit practices. Which of the following is the strongest argument in favour of such structural separation?

  1. It would eliminate the need for ethical codes of conduct
  2. It would increase the total fee income of the firm
  3. It would allow the audit practice to reduce the amount of audit evidence gathered
  4. It would remove the financial incentive for the audit practice to be influenced by the firm's desire to sell other services Correct answer.

Explanation

Structural separation targets the self-interest threat that arises when audit decisions could be influenced by the firm's interest in cross-selling other services. It addresses the incentive structure rather than relying solely on individual safeguards.

Question 33Regulatory environment

Under the IESBA Code, which of the following best describes the purpose of the 'conceptual framework' approach to independence?

  1. It provides a fixed list of prohibited services that applies identically to every client
  2. It allows the auditor to ignore threats if the client consents in writing
  3. It requires the auditor to identify, evaluate and address threats to compliance with fundamental principles Correct answer.
  4. It replaces the need for professional judgement with mechanical rules

Explanation

The conceptual framework requires auditors to identify threats, evaluate their significance and apply safeguards or decline the engagement where threats cannot be reduced to an acceptable level. It is a principles-based approach that relies on professional judgement rather than a fixed list.

Question 34Regulatory environment

A regulator requires audit firms to have a system of quality management. Which of the following best describes how such a system relates to the conduct of individual audits?

  1. It provides a framework within which individual engagements are performed, but engagement-level performance still depends on the engagement team Correct answer.
  2. It guarantees that every individual audit will be free of error
  3. It removes the need for engagement quality reviews
  4. It applies only to the firm's largest clients

Explanation

A quality management system establishes firm-level policies and procedures that support consistent quality, but individual audit quality still depends on how the engagement team applies them. The system and engagement-level work are complementary.

Question 35Regulatory environment

An audit firm discovers that a partner failed to comply with a regulatory requirement on independence. Which of the following responses is most consistent with a well-designed regulatory and quality framework?

  1. The firm investigates, remediates and reports the matter through its internal and, where required, external channels Correct answer.
  2. The firm waits until the next external inspection to disclose the matter
  3. The matter is ignored because the partner is senior
  4. The firm transfers the partner to a different client without further action

Explanation

A robust framework requires firms to investigate non-compliance, take remedial action and report through appropriate internal and external channels. Ignoring or deferring the matter undermines both the firm's quality system and the regulator's ability to oversee it.

Question 36Regulatory environment

Which of the following best explains why many regulatory regimes require auditors to be members of a recognised professional body as well as being subject to independent oversight?

  1. Professional bodies are responsible for appointing company directors
  2. Professional bodies set the audit fee scale for the whole market
  3. Professional bodies replace the need for any statutory regulation
  4. Professional bodies provide ethical guidance, discipline and continuing education that complement statutory oversight Correct answer.

Explanation

Professional bodies contribute ethical codes, disciplinary processes and continuing professional development, which operate alongside statutory oversight. The two layers are complementary rather than substitutes.

Question 37Regulatory environment

A regulator is reviewing whether an audit firm's governance structure supports audit quality. Which of the following features is most likely to be viewed positively?

  1. The firm's quality agenda is set solely by its marketing department
  2. The firm has clear lines of responsibility for audit quality at the most senior level and these are communicated throughout the firm Correct answer.
  3. Audit quality responsibilities are undocumented and left to individual discretion
  4. Ultimate responsibility for audit quality rests with a single engagement partner with no firm-level oversight

Explanation

Regulatory expectations, reflected in quality management standards, require clear assignment of responsibility for audit quality at senior levels and communication of that responsibility throughout the firm. This creates accountability and supports a quality-oriented culture.

Question 38Regulatory environment

A jurisdiction is considering adopting international auditing standards but wishes to add local requirements. Which of the following approaches is most consistent with the way international standards are designed to operate?

  1. Local additions must always be less stringent than the international standard
  2. Local additions are prohibited in all circumstances
  3. Local additions are permitted provided they do not conflict with or reduce the effectiveness of the international requirements Correct answer.
  4. Local additions automatically override the international standard

Explanation

International standards are designed to accommodate local additions that increase requirements or address local circumstances, provided they do not conflict with or weaken the international requirements. This allows global consistency while respecting local legal frameworks.

Question 39Regulatory environment

A regulator identifies a systemic weakness across several audit firms in the same market relating to the audit of complex financial instruments. Which of the following responses best reflects a proportionate regulatory approach?

  1. Sanction every individual engagement partner equally regardless of their involvement
  2. Issue thematic guidance and targeted inspections while requiring firms to review and strengthen their procedures in that area Correct answer.
  3. Immediately withdraw the licences of all firms in the market
  4. Take no action because the weakness is common across the market

Explanation

A proportionate response to a systemic, market-wide weakness is to combine thematic guidance and targeted inspection with firm-level remediation. This addresses the root cause without imposing blanket sanctions on individuals who may not be responsible.

Question 40Regulatory environment

An audit firm argues that because it complies fully with its national auditing standards, it need not consider the IESBA Code. Which of the following best explains why this argument is flawed?

  1. The IESBA Code is optional guidance that has no bearing on audit quality
  2. The IESBA Code applies only to non-audit services
  3. National auditing standards and ethical requirements address different aspects of an audit and both are necessary Correct answer.
  4. National auditing standards automatically incorporate the whole IESBA Code in every jurisdiction

Explanation

Auditing standards govern how an audit is performed, while ethical requirements govern the auditor's behaviour and independence; compliance with one does not ensure compliance with the other. A complete regulatory framework therefore relies on both.

Question 41Professional and ethical considerations

Under the IESBA Code, which threat arises when an audit partner has a close family member employed as the financial controller of the audit client?

  1. Self-interest threat
  2. Familiarity threat Correct answer.
  3. Advocacy threat
  4. Intimidation threat

Explanation

A close personal relationship with client personnel creates a familiarity threat because the auditor may become too sympathetic to the client's interests. The Code requires identification and evaluation of such relationships and safeguards or elimination of the threat.

Question 42Professional and ethical considerations

An audit firm provides valuation services to an audit client where the valuations are material to the financial statements and involve significant subjectivity. Which statement best reflects the IESBA Code position?

  1. The service is permitted if the client acknowledges responsibility for the valuation
  2. The service is permitted provided the fee is disclosed in the notes
  3. The service creates a self-review threat that cannot be reduced to an acceptable level, so it should not be provided Correct answer.
  4. The service is permitted if a separate engagement letter is signed

Explanation

Where an audit firm performs a valuation that is material and involves significant subjectivity, the resulting self-review threat cannot be eliminated or reduced to an acceptable level by safeguards. The firm should therefore decline or withdraw from the non-assurance service.

Question 43Professional and ethical considerations

Which of the following best describes the purpose of the IESBA Code's conceptual framework?

  1. To require accountants to identify, evaluate and address threats to compliance with fundamental principles Correct answer.
  2. To list every permissible and prohibited situation an accountant may face
  3. To prescribe the exact audit procedures for each engagement
  4. To set the maximum fees an audit firm may charge a client

Explanation

The conceptual framework requires accountants to identify threats to compliance with the fundamental principles, evaluate their significance and address them through safeguards or other actions. It is principles-based rather than a checklist of permitted situations.

Question 44Professional and ethical considerations

An audit senior is offered a substantial discount on a holiday by the client's managing director shortly before the audit fieldwork begins. Which fundamental principle is most directly threatened?

  1. Objectivity Correct answer.
  2. Professional behaviour
  3. Confidentiality
  4. Professional competence and due care

Explanation

Accepting a gift or favour from a client creates a self-interest threat to objectivity, as the auditor may be influenced by the benefit received. Firms typically have policies prohibiting acceptance of such gifts.

Question 45Professional and ethical considerations

A firm has audited a listed client for seven consecutive years and the engagement partner has led the audit throughout. Under independence requirements for listed entities, what is the primary concern?

  1. The partner may not have sufficient industry knowledge
  2. The client may be unable to pay increased fees
  3. The partner's familiarity with the client may impair objectivity Correct answer.
  4. The audit file may become too large to review

Explanation

Long association with a listed audit client creates familiarity and self-interest threats to objectivity, which is why partner rotation is required. Rotation acts as a safeguard by introducing fresh perspective.

Question 46Professional and ethical considerations

An accountant prepares a tax return for a client and discovers an error that understates tax payable. The client refuses to correct it. What is the most appropriate action under the Code?

  1. Discuss the matter with the client and consider whether to disclose the matter to the relevant authority where required Correct answer.
  2. Resign from the engagement and take no further action
  3. Inform the tax authority of the error without telling the client
  4. Adjust the return without the client's knowledge

Explanation

The accountant should first seek to resolve the matter with the client and, where the client refuses to correct a material misstatement, may need to consider disclosure to the relevant authority if permitted or required. Resignation alone does not necessarily discharge the obligation.

Question 47Professional and ethical considerations

Which situation is most likely to create an intimidation threat to an auditor's objectivity?

  1. The auditor has audited the client for three years
  2. The firm earns 5% of its total fees from the client
  3. The client's finance director threatens to replace the firm unless the audit opinion is unmodified Correct answer.
  4. The auditor owns a small number of shares in the client

Explanation

An intimidation threat arises when a client uses pressure, such as the threat of dismissal or litigation, to influence the auditor's judgement. The auditor must not allow such pressure to compromise professional judgement.

Question 48Professional and ethical considerations

A firm is asked to act as auditor of a company where a former partner of the firm is now the finance director. Which safeguard is most directly relevant?

  1. Extending the audit deadline by one month
  2. Ensuring the engagement team does not include anyone who worked closely with the former partner and reviewing the partner's influence Correct answer.
  3. Requiring the former partner to resign from the client
  4. Increasing the audit fee to reflect additional risk

Explanation

Where a former partner joins a client, familiarity and self-interest threats arise. Safeguards include excluding team members with close prior relationships and reviewing any involvement of the former partner in the client's affairs.

Question 49Professional and ethical considerations

Which of the following is a fundamental principle of professional ethics under the IESBA Code?

  1. Professional competence and due care Correct answer.
  2. Materiality
  3. Independence
  4. Professional scepticism

Explanation

The five fundamental principles are integrity, objectivity, professional competence and due care, confidentiality, and professional behaviour. Independence, scepticism and materiality are related concepts but not fundamental principles.

Question 50Professional and ethical considerations

An audit firm is offered a contingent fee arrangement where part of the fee depends on the outcome of a tax dispute for an audit client. Why is this generally prohibited?

  1. It prevents the firm from performing any non-audit work
  2. It creates a self-interest threat and may impair objectivity Correct answer.
  3. It exceeds the permitted fee cap under the Code
  4. It breaches the requirement for written engagement letters

Explanation

Contingent fees create a self-interest threat because the firm's income depends on a client outcome, which may impair objectivity. For audit clients, such arrangements are generally not permitted.