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CA ANZ Assurance practice questions

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Question 1The Assurance Framework and Regulatory Environment

Which body issues Australian Auditing Standards that apply to audits of financial statements in Australia?

  1. The Financial Reporting Council
  2. The Australian Auditing and Assurance Standards Board Correct answer.
  3. The Australian Securities and Investments Commission
  4. The Clean Energy Regulator

Explanation

The Auditing and Assurance Standards Board (AUASB) is the statutory body that formulates auditing and assurance standards, which are legislative instruments under the Corporations Act 2001. ASIC enforces and administers the law and registers auditors, but it does not write the standards.

Question 2The Assurance Framework and Regulatory Environment

An auditor is engaged to audit the financial report of a listed company. Which framework gives the auditor the authority to obtain access to the entity's records?

  1. The entity's constitution
  2. The Corporations Act 2001 Correct answer.
  3. The ASX Listing Rules
  4. The auditor's engagement letter

Explanation

The Corporations Act 2001 confers on the auditor a statutory right of access to the books and records of the company at all reasonable times and a right to require information from officers. An engagement letter documents the terms of the engagement but does not itself create those statutory powers.

Question 3The Assurance Framework and Regulatory Environment

Which of the following best describes the purpose of an assurance engagement?

  1. To advise management on how to improve its internal controls
  2. To guarantee that the subject matter is free of all error
  3. To prepare the financial statements on behalf of the entity
  4. To reduce information risk for intended users by evaluating a subject matter against suitable criteria Correct answer.

Explanation

An assurance engagement involves an independent practitioner obtaining evidence to express a conclusion designed to enhance the confidence of intended users, thereby reducing information risk. It provides reasonable or limited assurance, not an absolute guarantee, and the practitioner must remain independent of management.

Question 4The Assurance Framework and Regulatory Environment

Which element is required for an assurance engagement to exist?

  1. A written management representation letter
  2. A statutory appointment under the Corporations Act
  3. An internal audit function within the entity
  4. A three-party relationship involving the practitioner, the responsible party and intended users Correct answer.

Explanation

Every assurance engagement requires three separate parties: the practitioner, the responsible party who measures the subject matter, and the intended users. The other items may be present in particular engagements but are not defining elements of the engagement.

Question 5The Assurance Framework and Regulatory Environment

Which of the following is a fundamental ethical principle that applies to all assurance practitioners?

  1. Confidentiality of the client's tax position only
  2. Commerciality
  3. Advocacy for the client's position
  4. Objectivity Correct answer.

Explanation

Objectivity requires the practitioner to not compromise professional or business judgement because of bias, conflict of interest or undue influence of others. Advocacy for a client and prioritising commercial outcomes are threats to, rather than expressions of, ethical behaviour.

Question 6The Assurance Framework and Regulatory Environment

What is the primary purpose of the auditor's report?

  1. To provide investment advice to shareholders
  2. To certify that the entity is financially sound and will continue as a going concern
  3. To identify every fraud that occurred during the period
  4. To communicate the auditor's opinion on the financial report to the shareholders and other users Correct answer.

Explanation

The auditor's report conveys the auditor's opinion on whether the financial report is prepared, in all material respects, in accordance with the applicable financial reporting framework. It is addressed primarily to shareholders and communicates the basis and scope of the opinion.

Question 7The Assurance Framework and Regulatory Environment

Which of these is a limitation inherent in an audit that prevents an auditor from providing absolute assurance?

  1. The requirement to comply with auditing standards
  2. The need to issue a written report
  3. The use of professional judgement and selective testing Correct answer.
  4. The obligation to maintain independence

Explanation

Because audits rely on judgement, sampling and selective testing, and because of the inherent limitations of accounting systems and evidence, the auditor obtains reasonable rather than absolute assurance. The other items are requirements of an audit, not limitations on the assurance obtained.

Question 8The Assurance Framework and Regulatory Environment

A practitioner is engaged to review a company's half-year financial report and expresses limited assurance. Which statement correctly describes the level of assurance obtained?

  1. A moderate level of assurance, lower than that obtained in an audit Correct answer.
  2. The same level of assurance as an audit but reported differently
  3. No assurance, because a review is only a compilation
  4. A high level of assurance because the report is shorter

Explanation

A review provides a moderate level of assurance, which is lower than the reasonable assurance obtained in an audit, because procedures are primarily inquiry and analytical review rather than substantive testing. The conclusion is expressed in the negative form, stating that nothing has come to the practitioner's attention.

Question 9The Assurance Framework and Regulatory Environment

An audit firm has provided bookkeeping services to a client for several years and now accepts an appointment as its statutory auditor. Which threat to independence is most directly created?

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

Explanation

The self-review threat arises when a practitioner evaluates the results of previous work performed by the firm, such as records prepared through bookkeeping. Because the auditor would be auditing figures it helped create, safeguards or safeguards plus prohibition of certain services may be required.

Question 10The Assurance Framework and Regulatory Environment

An auditor of a public company discovers a contravention of the Corporations Act and believes it will not be adequately addressed. Which party must the auditor report the matter to?

  1. The Financial Reporting Council
  2. ASIC Correct answer.
  3. The entity's external legal counsel
  4. The Australian Taxation Office

Explanation

Under the Corporations Act 2001, an auditor who becomes aware of a contravention and believes it has not been adequately dealt with must report the matter in writing to ASIC. This statutory reporting obligation overrides client confidentiality in that circumstance.

Question 11The Assurance Framework and Regulatory Environment

A listed entity's auditor resigns before completing the audit. Which statement about the auditor's obligations is correct?

  1. The auditor may resign without any notification because the engagement is contractual
  2. The auditor must lodge a written statement of reasons with ASIC and notify the entity Correct answer.
  3. The auditor must obtain the board's consent before resigning
  4. The auditor must complete the audit regardless of resignation

Explanation

The Corporations Act requires an auditor who resigns to lodge a written statement of the circumstances and reasons for resignation with ASIC, and to notify the entity. This protects users by making the reasons for departure transparent.

Question 12The Assurance Framework and Regulatory Environment

A small charity is required by a government funding agreement to have its acquittal statement examined to a specified standard. Which body's standards would the practitioner ordinarily apply?

  1. The AUASB standards on assurance engagements Correct answer.
  2. The entity's own internal audit charter
  3. The International Ethics Standards Board only
  4. The Australian Accounting Standards Board standards

Explanation

Assurance engagements in Australia are conducted under AUASB standards, including the framework for assurance engagements and specific standards for assurance on non-financial information. The AASB issues accounting standards, not assurance standards.

Question 13The Assurance Framework and Regulatory Environment

An auditor is offered a significant bonus by the audit firm's partners that depends on retaining a major audit client. Which threat to independence does this most directly create?

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

Explanation

A self-interest threat arises when a financial or other interest, such as a bonus tied to client retention, improperly influences the practitioner's judgement. Safeguards could include removing the bonus arrangement or rotating the engagement partner.

Question 14The Assurance Framework and Regulatory Environment

Which statement best explains why the auditor's report is addressed to shareholders rather than to management?

  1. Shareholders pay the audit fee directly to the auditor
  2. Management already knows the entity's financial position and does not need the report
  3. The Corporations Act prohibits reports addressed to management
  4. The auditor is appointed by and reports to the members as a check on management's stewardship Correct answer.

Explanation

The auditor is appointed by the members to provide independent assurance on management's financial reporting, so the report is addressed to those who rely on that accountability. This structure reflects the separation of ownership and control in companies.

Question 15The Assurance Framework and Regulatory Environment

A practitioner is asked to perform an engagement where the responsible party and the intended users are the same person. Which conclusion is correct?

  1. The engagement qualifies if the practitioner issues a written report
  2. The engagement does not meet the definition of an assurance engagement Correct answer.
  3. The engagement qualifies as a limited assurance engagement
  4. The engagement qualifies as an audit if the practitioner is independent

Explanation

An assurance engagement requires three separate parties; where the responsible party and intended users are the same, there is no three-party relationship and the engagement is not an assurance engagement. It may instead be a consulting or agreed-upon procedures engagement.

Question 16The Assurance Framework and Regulatory Environment

Which of the following engagements provides no assurance to users?

  1. An agreed-upon procedures engagement Correct answer.
  2. A limited assurance engagement
  3. An audit of a financial report
  4. A reasonable assurance engagement

Explanation

In an agreed-upon procedures engagement the practitioner reports factual findings based on specified procedures and expresses no assurance; users draw their own conclusions. Audits and reviews provide reasonable and limited assurance respectively.

Question 17The Assurance Framework and Regulatory Environment

Which of the following is a responsibility of the entity's directors rather than of the auditor?

  1. Designing audit procedures to detect material misstatement
  2. Maintaining adequate accounting records and preparing the financial report Correct answer.
  3. Forming an opinion on whether the financial report is materially misstated
  4. Obtaining sufficient appropriate audit evidence

Explanation

Management and those charged with governance are responsible for preparing the financial report and maintaining accounting records and internal controls. The auditor is responsible for forming an opinion and for planning and performing the audit to obtain evidence.

Question 18The Assurance Framework and Regulatory Environment

An audit firm is engaged by a company whose chief financial officer previously worked as the engagement partner on the same audit. Which threat to independence is most relevant?

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

Explanation

A familiarity threat arises when a close relationship with the client, including a former engagement partner now in a key management role, causes the firm to be too sympathetic to the client's interests. Safeguards may include rotating the engagement team and independent quality review.

Question 19The Assurance Framework and Regulatory Environment

Which statement about the auditor's responsibility for detecting fraud is correct?

  1. The auditor is responsible for obtaining reasonable assurance that the financial report is free of material misstatement, whether caused by fraud or error Correct answer.
  2. The auditor is responsible only for fraud committed by management
  3. The auditor has no responsibility for fraud because it is a legal matter
  4. The auditor guarantees detection of all fraud

Explanation

Auditing standards require the auditor to obtain reasonable assurance that the financial report as a whole is free from material misstatement, whether due to fraud or error. The auditor considers fraud risk and designs procedures accordingly, but does not guarantee detection of all fraud.

Question 20The Assurance Framework and Regulatory Environment

A company's audit committee proposes to engage the audit firm to design and implement a new financial reporting system. Which statement best reflects the independence implications?

  1. The work is acceptable because it is not an audit service
  2. The work is acceptable if the fee is disclosed to shareholders
  3. The work is acceptable because the audit committee approved it
  4. Accepting the work creates a self-review threat because the firm would later audit the system it designed Correct answer.

Explanation

Designing and implementing a financial reporting system is a management responsibility; performing it creates a self-review threat because the auditor would subsequently evaluate the system's outputs. For public interest entities such services are generally prohibited, and audit committee approval alone does not remove the threat.

Question 21The Assurance Framework and Regulatory Environment

Which of the following best describes the role of the Financial Reporting Council in the Australian standard-setting framework?

  1. It issues and amends auditing standards directly
  2. It investigates and disciplines registered company auditors
  3. It oversees the effectiveness of the standard-setting process and advises on the broad strategic direction of the boards Correct answer.
  4. It sets the accounting standards that the AASB must adopt without amendment

Explanation

The Financial Reporting Council is an oversight body that monitors and advises on the standard-setting process and appoints members of the AASB and AUASB, but it does not issue standards itself. Standard-setting remains with the AASB and AUASB.

Question 22The Assurance Framework and Regulatory Environment

An auditor concludes that a material uncertainty related to going concern exists but that the disclosures are adequate. Which reporting outcome is appropriate?

  1. An unmodified opinion with a separate going concern material uncertainty section in the auditor's report Correct answer.
  2. An adverse opinion because the entity's future is uncertain
  3. A disclaimer of opinion because the auditor cannot predict the future
  4. A qualified opinion because a material uncertainty always requires modification

Explanation

Where the going concern basis is appropriate and the disclosures are adequate, the auditor issues an unmodified opinion but includes a separate section headed material uncertainty related to going concern. Modification is only required where the disclosures are inadequate or the going concern basis is inappropriate.

Question 23The Assurance Framework and Regulatory Environment

A practitioner is offered a contingent fee for an assurance engagement, payable only if the engagement results in an unmodified conclusion. Which statement is correct?

  1. Contingent fees are permitted if disclosed in the engagement letter
  2. Contingent fees are permitted for listed entity audits only
  3. Contingent fees are prohibited for assurance engagements because they create a self-interest threat and may compromise objectivity Correct answer.
  4. Contingent fees are permitted if the amount is immaterial to the practitioner

Explanation

Contingent fees that depend on the outcome of an assurance engagement create a self-interest threat and are prohibited because they may cause the practitioner to compromise objectivity. Disclosure or immateriality does not cure the fundamental threat for assurance work.

Question 24The Assurance Framework and Regulatory Environment

Which statement accurately distinguishes the roles of ASIC and the AUASB in the Australian regulatory environment?

  1. Both bodies jointly issue auditing standards and share enforcement responsibility
  2. ASIC administers and enforces the Corporations Act, while the AUASB formulates auditing and assurance standards Correct answer.
  3. ASIC formulates auditing standards, while the AUASB enforces the Corporations Act
  4. ASIC issues accounting standards, while the AUASB registers company auditors

Explanation

ASIC is the regulator that administers and enforces the Corporations Act, including auditor registration and inspection. The AUASB is the independent standard-setter that develops auditing and assurance standards for legislative endorsement.

Question 25Professional Ethics, Independence and Legal Liability

Which fundamental ethical principle requires an assurance practitioner to be straightforward and honest in all professional and business relationships?

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

Explanation

Integrity obliges a member to be straightforward and honest in all professional and business relationships, and it underlies the credibility of any assurance conclusion. Objectivity concerns freedom from bias and conflict, confidentiality concerns information use, and competence concerns skill and diligence, so none of those captures honesty itself.

Question 26Professional Ethics, Independence and Legal Liability

An auditor is offered a significant discount on a holiday by a client's travel business shortly before the audit report is signed. Which threat does this most directly create?

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

Explanation

A self-interest threat arises when a financial or other interest of the member or their firm improperly influences judgement, and a valuable personal benefit from the client is such an interest. The key point is that the benefit accrues to the auditor personally, so it is not primarily pressure, promotion of the client or long association.

Question 27Professional Ethics, Independence and Legal Liability

Under the conceptual framework, what is the primary purpose of identifying, evaluating and addressing threats to independence?

  1. To satisfy the firm's marketing and client-relations objectives
  2. To support the conclusion that independence is maintained Correct answer.
  3. To transfer responsibility for independence to the audit committee
  4. To eliminate every possible threat before accepting any engagement

Explanation

The conceptual framework requires the member to identify threats, evaluate their significance and respond with safeguards or other actions so that independence is not compromised. Its purpose is to support an objective conclusion about independence, not to achieve an impossible standard of zero threats or to shift accountability to others.

Question 28Professional Ethics, Independence and Legal Liability

A member's spouse holds a direct financial interest in an audit client that is material to the spouse's personal wealth. Which statement best reflects the independence requirement?

  1. A familiarity threat arises that is addressed by disclosing the interest to the board
  2. A self-interest threat arises that safeguards cannot reduce to an acceptable level Correct answer.
  3. No issue arises because the interest belongs to the spouse
  4. An advocacy threat arises that is addressed by rotating the engagement partner

Explanation

A financial interest held by an immediate family member is treated as creating a self-interest threat equivalent in significance to one held by the member. Where the interest is material, no safeguard can reduce the threat to an acceptable level, so the interest must be disposed of or the individual removed from the engagement.

Question 29Professional Ethics, Independence and Legal Liability

Which of the following is generally regarded as an acceptable safeguard when a close family member of an audit team member is employed by the client in a role that does not significantly influence the financial statements?

  1. Reducing the extent of audit testing on the affected area
  2. Obtaining a written representation from management
  3. Relying on the client's internal controls over payroll
  4. Removing the team member from the audit engagement Correct answer.

Explanation

Removing the individual from the engagement team eliminates the source of the familiarity or self-interest threat, which is the most reliable response where a close personal relationship exists. Reducing testing, relying on controls or obtaining representations does not address the relationship itself and may also impair audit quality.

Question 30Professional Ethics, Independence and Legal Liability

A firm provides bookkeeping services to a listed audit client and the client's management does not have the skills to review the work. Which outcome is most consistent with independence requirements?

  1. The services may continue because bookkeeping is a routine mechanical task
  2. The services create an advocacy threat that is addressed by a second partner review
  3. The services may continue if the fee is disclosed in the financial statements
  4. The services create a self-review threat that cannot be reduced to an acceptable level for a listed client Correct answer.

Explanation

Preparing accounting records and financial statements for an audit client creates a self-review threat because the firm would later audit its own output. For a listed entity, where the client lacks the competence to take responsibility for the work, no safeguard can reduce that threat to an acceptable level, so the service should not be provided.

Question 31Professional Ethics, Independence and Legal Liability

Which of the following best describes the purpose of the auditor's report under the Corporations Act 2001 (Cth)?

  1. To express an opinion on whether the financial report is prepared in accordance with the applicable framework Correct answer.
  2. To guarantee that the financial report is free from all error
  3. To confirm that the entity will remain a going concern for the next year
  4. To provide investment advice to shareholders

Explanation

The auditor expresses an opinion on whether the financial report is prepared, in all material respects, in accordance with the applicable financial reporting framework. An audit provides reasonable, not absolute, assurance and does not guarantee accuracy, give investment advice or guarantee future solvency.

Question 32Professional Ethics, Independence and Legal Liability

Which party is primarily responsible for the preparation of a company's financial report?

  1. The directors Correct answer.
  2. The Australian Securities and Investments Commission
  3. The audit committee chair
  4. The external auditor

Explanation

Directors are responsible for preparing the financial report and for the systems and controls that support it; the auditor's role is to form and express an opinion on that report. This division of responsibility is fundamental to the audit function and is stated in the auditor's report.

Question 33Professional Ethics, Independence and Legal Liability

An auditor fails to detect a material fraud because the audit was performed without adequate professional scepticism. Which element of a negligence claim is most likely to be contested by the auditor?

  1. That the auditor breached the standard of care Correct answer.
  2. That the loss was caused by the breach
  3. That the company suffered loss
  4. That a duty of care was owed to the company

Explanation

In a negligence action the plaintiff must establish a duty of care, a breach of the standard of care, loss and causation. Where the audit was performed carelessly, the auditor is most likely to argue that the work met the standard expected of a reasonably competent auditor rather than denying the existence of the duty.

Question 34Professional Ethics, Independence and Legal Liability

To whom does an auditor generally owe a duty of care in the performance of a statutory audit?

  1. Only the bank that provides the company's loan facility
  2. The company as a whole, including its shareholders as a body Correct answer.
  3. Only the Australian Taxation Office
  4. Any member of the public who relies on the audited financial report

Explanation

The auditor owes a duty of care to the company, which is treated as including the shareholders as a body, and this is reflected in the statutory duty to report to members. A duty is not owed to the public at large, and third parties such as lenders must establish a sufficiently proximate relationship before any duty arises.

Question 35Professional Ethics, Independence and Legal Liability

Which statement best describes the auditor's legal position where a third party suffers loss after relying on audited financial statements containing an undetected material misstatement?

  1. The auditor is automatically liable to any third party who relied on the report
  2. The auditor is liable only if the third party is a shareholder of the company
  3. The auditor may be liable only if the third party can establish a sufficiently proximate relationship and reasonable reliance Correct answer.
  4. The auditor can never be liable to a third party because of privity of contract

Explanation

Liability to third parties depends on establishing proximity, reasonable reliance and the other elements of negligence, and courts have been reluctant to extend duties to unforeseen users. Privity of contract is not an absolute bar, and liability is not automatic merely because reliance occurred.

Question 36Professional Ethics, Independence and Legal Liability

A member in public practice is asked to disclose confidential client information to a court under a valid subpoena. How should the member respond?

  1. Disclose the information to the client's competitors instead
  2. Refuse to disclose on the basis of confidentiality in all circumstances
  3. Disclose only after obtaining the client's written consent
  4. Disclose the information as required by law, having considered legal advice Correct answer.

Explanation

The confidentiality principle is subject to legal and regulatory obligations, and disclosure is permitted where required by law, such as under a subpoena. The member should consider obtaining legal advice and should disclose no more than is necessary, but client consent is not required where disclosure is legally compelled.

Question 37Professional Ethics, Independence and Legal Liability

Which situation most clearly creates an intimidation threat to an auditor's objectivity?

  1. The audit partner owns shares in a diversified managed fund that holds client shares
  2. The audit partner has audited the client for seven consecutive years
  3. The audit firm provides tax compliance services to the client
  4. The client's finance director hints that the audit firm will be replaced if it insists on a material adjustment Correct answer.

Explanation

An intimidation threat arises when a member is deterred from acting objectively by actual or perceived pressure, and a hint that the engagement will be lost unless the auditor concedes is a classic example. The other options describe familiarity, a non-assurance service or a self-interest threat from an indirect interest.

Question 38Professional Ethics, Independence and Legal Liability

Which of the following best reflects the requirement of professional scepticism in an audit?

  1. Extending audit procedures until every misstatement is detected
  2. Assuming management is dishonest until evidence proves otherwise
  3. Accepting management explanations where they are provided in writing
  4. Maintaining a questioning mind and being alert to conditions suggesting misstatement or fraud Correct answer.

Explanation

Professional scepticism means maintaining a questioning mind, being alert to possible misstatement due to error or fraud, and critically assessing evidence rather than accepting it at face value. It does not require a presumption of dishonesty, and it operates alongside the recognition that an audit provides reasonable rather than absolute assurance.

Question 39Professional Ethics, Independence and Legal Liability

An audit partner has been the engagement partner on a listed client for eight years. Which independence issue is most directly raised?

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

Explanation

Long association with a client can create a familiarity threat because the auditor may become too sympathetic to the client's views or too accepting of its representations. For listed entities, mandatory partner rotation and other safeguards are used to address this threat.

Question 40Professional Ethics, Independence and Legal Liability

A firm's total fees from one audit client represent a large proportion of the firm's total revenue, and the relationship is expected to continue. Which threat arises and what is an appropriate response?

  1. A familiarity threat, which may be addressed by increasing the audit fee
  2. An advocacy threat, which may be addressed by disclosing the fee to the client's bank
  3. A self-interest threat, which may be addressed by external quality control review of the engagement Correct answer.
  4. An intimidation threat, which may be addressed by reducing the audit scope

Explanation

Dependence on fees from a single client creates a self-interest threat because the firm may be reluctant to take action that jeopardises the relationship. Safeguards include independent quality control review of the engagement, and for listed entities disclosure to those charged with governance is also relevant.

Question 41Professional Ethics, Independence and Legal Liability

Which of the following arrangements would ordinarily be prohibited because it creates a mutual interest between the auditor and the client?

  1. The audit firm lending a small amount to a client's employee at commercial rates
  2. The audit firm renting office space from an unrelated landlord
  3. The audit firm and the client jointly owning a significant business venture Correct answer.
  4. The audit firm paying its staff a salary based on hours worked

Explanation

A close business relationship involving a material joint interest creates a self-interest and familiarity threat that cannot be reduced to an acceptable level, so such a relationship with an audit client is prohibited. Ordinary commercial transactions on arm's-length terms, such as standard employment arrangements, are not prohibited.

Question 42Professional Ethics, Independence and Legal Liability

Which of the following is the most accurate description of the liability of auditors under the Corporations Act 2001 (Cth) for a misleading auditor's report?

  1. Auditors are liable only to the company's directors personally
  2. Auditors face no statutory liability because liability arises only in contract
  3. Auditors are liable only if the Australian Securities and Investments Commission approves a prosecution
  4. Auditors may face civil liability, and knowingly or recklessly false statements may attract criminal liability Correct answer.

Explanation

The Corporations Act imposes both civil and criminal consequences for conduct such as knowingly or recklessly making a false or misleading statement in an auditor's report. Liability is not confined to contract, does not run only to directors and does not depend on ASIC authorising a prosecution.

Question 43Professional Ethics, Independence and Legal Liability

Which of the following is an example of a self-review threat?

  1. An auditor having a long-standing friendship with the client's chief executive
  2. An auditor being threatened with litigation by the client
  3. An auditor being offered a substantial gift by a client
  4. An auditor auditing a system that the same firm designed and implemented Correct answer.

Explanation

A self-review threat arises when a member evaluates the results of previous judgements or activities performed by the member or the firm, such as auditing a system the firm implemented. Gifts, friendships and threats instead illustrate self-interest, familiarity and intimidation threats respectively.

Question 44Professional Ethics, Independence and Legal Liability

An audit client asks the engagement partner to act as an expert witness in support of the client's claim against a supplier. What is the most appropriate response?

  1. Accept, provided the fee is contingent on the outcome
  2. Accept, because the engagement is unrelated to the audit
  3. Accept, provided the partner does not sign the audit report that year
  4. Decline, because acting as an advocate for the client creates an advocacy threat to objectivity Correct answer.

Explanation

Acting as an advocate in a dispute promotes the client's position, which creates an advocacy threat that impairs objectivity and independence. The threat cannot be adequately safeguarded while the firm continues to audit the client, and a contingent fee would compound the problem.

Question 45Professional Ethics, Independence and Legal Liability

Under the Corporations Act 2001 (Cth), which body is responsible for appointing the auditor of a public company at the annual general meeting?

  1. The chief financial officer
  2. The members of the company Correct answer.
  3. The Australian Securities and Investments Commission
  4. The directors alone

Explanation

The auditor of a public company is appointed by the members at the annual general meeting, which supports the auditor's independence from management. Directors may fill a casual vacancy in certain circumstances, but the general appointment power rests with the members.

Question 46Professional Ethics, Independence and Legal Liability

Which of the following best describes the auditor's responsibility for detecting fraud in an audit conducted under Australian auditing standards?

  1. The auditor has no responsibility for fraud because it is a management matter
  2. The auditor is responsible for obtaining reasonable assurance that the financial report is free from material misstatement, whether due to fraud or error Correct answer.
  3. The auditor must detect all fraud regardless of materiality
  4. The auditor must report every suspected fraud directly to the police

Explanation

The auditor's objective is to obtain reasonable assurance that the financial report as a whole is free from material misstatement, whether caused by fraud or error, and to report accordingly. Management retains primary responsibility for prevention and detection of fraud, and the auditor does not guarantee detection of all fraud.

Question 47Professional Ethics, Independence and Legal Liability

A member resigns from a firm and joins a client as its financial controller. Which consideration is most relevant to the firm's independence on the current audit?

  1. The length of time the former member worked at the firm
  2. The former member's knowledge of the audit methodology
  3. Whether the former member was a member of the audit team and the significance of their role at the client Correct answer.
  4. The former member's salary at the client

Explanation

When a former member of the audit team joins a client, a familiarity or self-interest threat may arise, particularly if the individual was a senior member of the team and now holds a position that significantly influences the financial statements. The firm should evaluate the threat and apply safeguards such as removing remaining team members with close ties.

Question 48Professional Ethics, Independence and Legal Liability

Which statement about contingent fees for an assurance engagement is correct?

  1. Contingent fees are permitted provided they are disclosed in the engagement letter
  2. Contingent fees are permitted only where the amount is immaterial to the firm
  3. Contingent fees are permitted if approved by the client's audit committee
  4. Contingent fees are generally prohibited for assurance engagements because they create a self-interest threat Correct answer.

Explanation

A fee calculated on a contingent basis, such as a percentage of a transaction or a result, creates a self-interest threat because the auditor's reward depends on the outcome of the work. For assurance engagements such arrangements are generally prohibited, and disclosure or committee approval does not cure the threat.

Question 49Professional Ethics, Independence and Legal Liability

An auditor identifies a suspected instance of money laundering by a client. Which course of action is most consistent with the auditor's legal and ethical obligations?

  1. Comply with the applicable anti-money-laundering reporting obligations, which may override confidentiality Correct answer.
  2. Disclose the suspicion to the client's major customers
  3. Resign immediately without any disclosure to anyone
  4. Report the suspicion to the client's board and take no further action

Explanation

Where legislation imposes reporting obligations, such as suspicious matter reporting under anti-money-laundering laws, those obligations override the duty of confidentiality and the auditor must report to the appropriate authority. Informing the client may itself be restricted by tipping-off provisions, so disclosure to customers would be improper.

Question 50Professional Ethics, Independence and Legal Liability

An audit partner is offered an all-expenses-paid holiday by an audit client as a gesture of appreciation for the smooth completion of the audit. Which threat to independence does accepting this offer most directly create?

  1. A self-interest threat arising from the personal financial benefit obtained from the client Correct answer.
  2. An advocacy threat arising from promoting the client's shares to investors
  3. A familiarity threat arising from a long-standing close relationship with client staff
  4. A self-review threat arising from reviewing work the partner previously performed

Explanation

Accepting a gift or hospitality of significant value creates a self-interest threat because the auditor gains a personal benefit that may improperly influence judgement. The Code requires members to evaluate the significance of such benefits and apply safeguards or decline them where the threat is not at an acceptable level.