Deck 3: Audit quality and ethics

Question 1

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

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

Answer 1

D

Question 2

Differences between the views of auditors and the expectations of other stakeholders regarding the appropriate roles and responsibilities of auditors and their performance is known as:

A) corporate governance.
B) audit exceptions.
C) the audit expectations gap.
D) cognitive dissonance.

Answer 2

C

Question 3

An example of a self-interest threat is:

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

Answer 3

C

Question 4

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

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

Question 5

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 6

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

Question 7

Reasons people act unethically include:

A) selfishness and the current political climate.
B) having different ethical standards as the society as a whole and poor education.
C) poor education and media influence.
D) selfishness and having different ethical standards than the society as a whole.

Question 8

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 judgmental nature of particular values.
C) of enforcement difficulties.
D) of cultural differences in society.

Question 9

Changes in social expectations and auditors' self-interest in protecting their profits are characteristics of:

A) independence.
B) the audit expectations gap.
C) unethical auditor behaviour.
D) client acceptance.

Question 10

The agency view of the corporation emphasises:

A) a control-oriented approach to governance.
B) mechanisms designed to curb managerial self-serving decisions and actions.
C) 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).
D) all of the above

Question 11

How stakeholders and agencies external to a corporation control or influence those responsible for directing and managing the affairs of the corporation is best described as:

A) internal control.
B) internal auditing.
C) external auditing.
D) corporate governance.

Question 12

The regulatory mechanisms addressing corporate governance in Australia emphasise:

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

Question 13

Which of the following is an example of audit failure?

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

Question 14

A set of moral principles or values is known as:

A) ethics.
B) independence in fact.
C) independence in appearance.
D) auditor competence.

Question 15

The audit expectations gap can be attributed to:

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

Question 16

How well an audit detects and reports material misstatements in financial statements is a measure of:

A) auditor competence.
B) audit completeness.
C) audit quality.
D) independence.

Question 17

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

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

Question 18

The ASX Corporate Governance Principles do NOT include:

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

Question 19

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) leadership responsibilities for quality on audits
B) remunerating the auditor fairly and responsibly
C) ethical requirements (including independence)
D) acceptance and continuance of client relationships and specific engagements

Question 20

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

Question 21

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

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

Question 22

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

A) prevents an individual from practising as a public accountant.
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) should be seen as a weighty economic sanction.

Question 23

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

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

Question 24

Which section in Part B of the Code of Ethics for Professional Accountants addresses conflicts of interest?

A) 240
B) 220
C) 270
D) 291

Question 25

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

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

Question 26

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) objectivity
B) continuing education
C) confidentiality
D) integrity

Question 27

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) a 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

Question 28

Part B of the Code of Ethics for Professional Accountants 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 29

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

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

Question 30

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) more effective advertising
C) developing more sophisticated use of technology
D) increased professional indemnity insurance cover

Question 31

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) the emphasis on positive activities.
D) that they identify ideal conduct.

Question 32

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 AACSB at an appropriately high level.
C) refrain from any conduct that may bring discredit to their profession.
D) all of the above

Question 33

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

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

Question 34

An ethical dilemma arises when a person is faced with a situation that requires a decision about the:

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

Question 35

Part B of the Code of Ethics for Professional Accountants 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 36

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

A) any person who receives pay for services performed.
B) a person who has attained tertiary qualifications as a prerequisite to joining the job market.
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 expected to conduct himself or herself at a higher level than most other members of society.

Question 37

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

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

Question 38

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) of the confidentiality aspects involved.
D) the primary beneficiaries of the audit do not engage the auditor.

Question 39

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

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

Question 40

Maintaining an impartial attitude on all matters that come under the accountant's review is known as:

A) professional scepticism.
B) auditor independence.
C) ethics.
D) objectivity.

Question 41

The material financial interests rule means that:

A) an auditor cannot accept payment from the auditee.
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 be assigned to the audit of a bank with which that auditor has a home mortgage.

Question 42

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

A) confidentiality
B) independence
C) competence and due care
D) all of the above

Question 43

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

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

Question 44

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

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

Question 45

What percentage of listed Australian companies have an audit committee?

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

Question 46

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) independent valuation services
B) other assurance services
C) management consulting services
D) attestation services

Question 47

To emphasise auditor independence from management, many companies:

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

Question 48

Maintaining an unbiased attitude during the audit illustrates:

A) client confidentiality.
B) independence in fact.
C) independence in appearance.
D) professional scepticism.

Question 49

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

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

Question 50

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

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

Question 51

Having an unbiased viewpoint is a characteristic of which auditing concept?

A) professional scepticism
B) independence
C) assurance
D) client acceptance

Question 52

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

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

Question 53

Which of the following is a concern that may arise from an audit firm completing an audit for a substantially reduced fee?

A) a more efficient audit being conducted because the audit is completed within a budgeted time frame
B) auditor independence
C) increased staffing to complete the audit
D) consistent applications of client accounting principles

Question 54

Which is NOT a valid circumstance where working papers may be given to a third party?

A) when requested by a successor auditor
B) when permission is granted by the client
C) when required by law
D) both A and B

Question 55

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

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

Question 56

A factor to consider when setting fees for an engagement is the:

A) personal opinion of the lead auditor on the engagement.
B) time of all people engaged in the work.
C) opinion to be rendered as a result of the audit findings.
D) use of internal auditors.

Question 57

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

Question 58

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

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

Question 59

A self-review threat to independence occurs when:

A) a provision of internal audit services to an auditee has been made.
B) the auditor renders an unmodified opinion on the financial statements.
C) the client employs internal auditors.
D) all of the above

Question 60

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) auditor.
C) client.
D) users.

Question 61

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

Question 62

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 63

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

A) Fixed fees are less likely to result in compromised independence.
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) Fees based on the achievement of certain outcomes are prohibited.

Question 64

Auditors may disclose confidential information to a third party if:

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

Question 65

Corporate failures are signals of failures in audit quality in the conduct of an audit.

Question 66

Which one of the following situations is most likely to impair independence? Legal action is taken by

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

Question 67

The annual audit is the cornerstone of corporate governance.

Question 68

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) has an asset that is an investment in 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) owes an amount of more than $5 000 to the audited body
D) has an asset that is a material investment in an entity that has a controlling interest in the audited body

Question 69

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

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

Question 70

ASCQC1 requires the audit:

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

Question 71

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

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

Question 72

The Corporations Act independence requirements are expressed in terms of:

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

Question 73

An advantage of specific rules in the Code of Ethics for Professional Accountants is the enforceability of minimum behaviour and performance standards.

Question 74

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

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

Question 75

An advantage of general statements (principles of professional conduct)in the Code of Ethics for Professional Accountants is the emphasis on positive activities that encourage a high level of performance.

Question 76

What is a factor that may influence the effectiveness of an audit committee?

A) the leadership style of the chairperson
B) auditor rotation
C) number of auditors on the audit team
D) experience of its members

Question 77

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

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

Question 78

Audit committees' responsibilities include:

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

Question 79

Auditors should NOT use confidential auditee information for personal gain:

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

Question 80

Which of the following would be a breach of the ethical rules?

A) auditing the bank from which you have a home mortgage
B) auditing Telstra while owning $250 of Telstra shares
C) purchasing a motor vehicle from an audit client at a substantial discount
D) all of the above