QB Chapter 15 integrity, objectivity and independence Flashcards
Which three of the following should an auditor consider if there is a threat to independence? A Withdrawing from the engagement B Applying specific safeguards C Making disclosures to the client D Making disclosures to ICAEW
A,B,C
Making disclosures to ICAEW (option D) is no substitute to the other options A,B,C.
Which three of the following should not own a material financial interest in an audit client?
A A member of the audit team
B A minor child of a member of the audit team
C A parent of a member of the audit team
D A spouse of a member of the audit team
A,B,D
Option C is not correct here as a parent of a member of an audit team may own a
material financial interest in an audit client – provided they are not a dependant, which
would not normally be assumed to be the case.
Which three of the following threats to independence might arise on the current audit when
an audit team member is involved in employment negotiations with an audit client during
the course of the audit?
A Self-interest
B Self-review
C Intimidation
D Familiarity
A,C,D
Option B does not apply as given the staff member does not yet work for the audit
client, there is no risk of self-review at this stage.
Allisons LLP is a firm of chartered accountants. It has a reputation for excellence in the
banking and insurance industry and has been invited to accept engagements by various
institutions as follows.
(1) The audit of Nationally plc, the leading building society in the UK. 40% of staff
members of Allisons LLP who have mortgages have mortgaged their home with
Nationally.
(2) The audit of Cash It Ltd, a large business which banks cheques and cash items for the
general public and also advances loans. A member of the proposed audit team was
impressed by the loan rate offered to the team during the tendering process and took
out a loan with Cash It Ltd to buy a car.
Which, if any, of the above companies present a major threat to the independence of
Allisons LLP, if the engagement were to be accepted?
A Nationally plc and Cash It Ltd
B Cash It Ltd only
C Nationally plc only
D Neither Nationally plc nor Cash It Ltd
B Cash It Ltd is a threat as it is implied that an audit team member took advantage of the
loan rate mentioned in the audit tendering process.
Nationally plc is not a threat as it is acceptable for staff to have mortgages on
commercial terms with an audit client who is a mortgage provider, especially if it is the
leading building society.
Which one of the following is correct in relation to the presumption of dependence for a
non-listed client?
A There is a presumption of dependence when annual fee income from all services to the
client will regularly exceed 15% of gross practice income.
B There is a presumption of dependence when annual fee income from all services to the
client will regularly exceed 5% of gross practice income.
C There is a presumption of dependence when annual assurance fee income from all
services to the client will regularly exceed 15% of gross practice income.
D There is a presumption of dependence when annual assurance fee income from all
services to the client will regularly exceed 5% of gross practice income.
A For non-listed companies, there is a presumption of dependence when annual fee
income from all services to the client will regularly exceed 15% of gross practice
income.
Majors LLP, a firm of chartered accountants, offers the following additional services to
various audit clients.
In which three of the following situations is an insurmountable self-review threat most likely
to arise?
A Preparing the financial statements for Power Group plc, a listed company, on a regular
basis
B Carrying out valuations of various non-current property assets for Tower Investments
Ltd, a property investment company
C Promoting tax structures to Haven Ltd, where there is scope for doubt about the
appropriateness of the accounting treatments involved to achieve the tax benefits
D Helping Craven plc in defining its corporate strategies and identifying possible sources
of finance for a potential new venture
A,B,C
Option D is not correct as it is assistance that is provided as opposed to management
or operational decisions being taken.
In accordance with FRC’s Ethical Standard, in which three of the following engagements is
there a significant threat to independence?
A Alan Johnson has been the audit engagement partner of Domino Ltd for 11 years.
B Barry Thomson has been the audit engagement partner of Beetle Group plc, a listed
company, for seven years.
C Having been the audit engagement partner of Risk Group plc, a listed company, for
five years, Colin Jackson resigned as audit engagement partner three years ago;
following a reshuffle in the firm, he has just been assigned as a key partner involved in
the audit of Risk Group plc.
D Don Matthewson has recently been appointed as the audit engagement partner of
Scrabble plc, a listed company; he previously held this position six years ago.
A,B,C
There is no significant threat to the independence of the audit engagement of
Scrabble plc, as the partner had previously rotated off the client six years ago and is
allowed to return to the same position after five years.
The ethics partner at Juleyson Co, a firm of chartered accountants, is trying to resolve an
ethical conflict in respect of two clients of the firm.
Which two of the following are appropriate actions for him to take?
A Do nothing because the situation is likely to resolve itself over time
B Refer the matter to the management board of partners because he cannot determine a
solution himself
C Solicit advice from the ICAEW ethics helpline
D Seek the opinion of an ethics partner at a different firm
B,C Doing nothing is not an option available to the ethics partner. It is best to seek to
resolve this matter internally by discussing it with the management board of partners
while at the same time, soliciting advice from ICAEW to ensure that an acceptable
resolution is reached. Seeking the opinion of another ethics partner would probably
not be deemed appropriate as the specifics of the case are probably confidential and
ICAEW would be the authority in this area as to the appropriate course of action to be
taken.
Julia is a member of ICAEW who works in industry at KiwiCorp plc, a listed company. The
company is experiencing difficulty meeting the expectations of the market, and Julia has
been told by the board of directors that the company must meet its optimistic profit targets
at the year end, regardless of what accounting is required to achieve this.
Which two of the following are the most appropriate initial courses of action for Julia to take
in these circumstances?
A Report her concerns to the audit committee
B Resign
C Take legal advice
D Obtain advice from the human resources department at KiwiCorp plc
A,D Before seeking legal advice or even resigning (options B and C), Julia should initially
try to resolve this issue internally by reporting concerns to the audit committee (which
will exist in a listed company) and by obtaining advice from the human resources
department at KiwiCorp plc (as to the official internal mechanisms that she can use to
make her complaint).
Threats to independence can be placed into six general categories of threat.
For each of the following statements, select whether they are true or false.
Having a close business relationship, including a common financial interest with an audit
client, can cause self-interest and intimidation threats.
A True
B False
A partner should not serve on an audit client’s board as this can constitute a management
threat.
C True
D False
Contingent fees for audit work cause a self-interest threat.
E True
F False
A,C,E
All three cases are examples of the stated threats to auditor independence
There are various general threats to independence recognised by ethical codes.
For the following two examples, select the type of threat which might arise in that situation.
The audit senior assigned to the audit of Loesdon Ltd has recently become engaged to the
finance director’s daughter.
A Self-interest
B Management
C Advocacy
The finance director of Litten Ltd has recently informed the audit engagement partner that
Litten Ltd will be seeking a stock exchange listing. The finance director has implied that
Litten Ltd will want to use the firm for significant amounts of advisory work in relation to the
listing, but joked at the same time that ‘clean bills of health’ would be crucial from now on.
D Self-interest
E Management
F Self-review
A,D Loesdon Ltd: Self-interest and intimidation threats arise, therefore select self-interest
(intimidation is not available as an option). Litten Ltd: Self-interest and intimidation
threats arise, therefore select self-interest (intimidation is not available as an option).
Management and self-review threats would only arise if the advisory work was
accepted
Estelle LLP is a 10-partner assurance firm which has been asked to consider taking on the
audit of the financial statements of two separate companies. The following potential issues
have been identified before acceptance of any such appointments.
For each of the following clients, select the basis on which the engagement could be
accepted, if at all.
Othello Ltd, which will also require you to provide routine tax compliance work and advice
A Do not accept
B Accept with safeguards
C Accept with no safeguards
Desdemona Ltd, the finance director of which worked at Estelle LLP four years ago, but who
does not know any of the members of the proposed audit team personally
D Do not accept
E Accept with safeguards
F Accept with no safeguards
B,E Othello Ltd: Accept with safeguards (as there are self-interest and self-review threats.
There may also be a management threat with regards to the advice provided, so care
must be taken not to take management decisions). Desdemona Ltd: Accept with
safeguards (despite the time lag, the finance director may have too good a knowledge
of the firm’s procedures).
Fagin LLP, a large assurance firm, has been asked to carry out recruitment services for its
client, Claret plc, by recruiting senior accounting staff.
Which two of the following threats to independence would arise if Fagin LLP agree to
provide such services?
A Self-review
B Management
C Advocacy
D Familiarity
B,D Per FRC’s Ethical Standard, familiarity and management are the main threats to
independence created by the provision of recruitment services. A familiarity threat
arises from a close long-standing relationship between the assurance provider and the
client (which may start at the point of recruitment). A management threat arises
because the assurance provider is acting in a management role. Option A, self-review,
is not correct as the assurance provider will not subsequently review the work from the
recruitment process. Option C, advocacy, is also incorrect as the assurance provider is
not representing the interests of the client in a bid to secure or protect a particular
interest.
The following are examples of situations in which an audit firm might be faced with threats
to its independence.
For each example, select the type of threat which that situation best illustrates.
The finance director of Fussy Ltd has requested that the audit team for the current year
audit be the same as the team which performed last year’s audit.
A Self-review
B Familiarity
C Intimidation
The finance director of Pernickety Ltd has told the audit manager that he is not happy with
the proposed audit opinion and is likely to seek a second opinion.
D Self-review
E Familiarity
F Intimidation
B,F Fussy Ltd: a familiarity threat is possibly present as the prior year audit team may have
developed personal relationships with client staff which may threaten their objectivity.
Pernickety Ltd: by expressing his dissatisfaction, the finance director is posing an
intimidation threat – effectively seeking a different audit opinion or threatening the
auditors with replacement.
The following are examples of situations in which Carnation LLP, an audit firm with 50
similar medium-sized audit clients, which are non-listed, might need to implement
safeguards in order to protect its independence.
For each situation, select the most appropriate safeguard in accordance with Ethical
Standards, or state that there are no safeguards that could reduce the risk to an appropriate
level.
Carnation LLP has been invited to accept the audit of a major listed company. The fee
income from this engagement would represent 5% of the gross fee income of the firm.
A Separate personnel
B Discuss the issues with the audit committee
C No safeguards possible
Carnation LLP has been invited to accept the audit of a major competitor of an existing
client and has obtained consent from both to act.
D Separate personnel
E Discuss the issues with the audit committee
F No safeguards possible
B,D Where there is a high proportion of fee income derived from a particular client (the 5%
and 10% rules), if the amount is not prohibitive (the 10% and 15% rules), then
safeguards should be put in place. One safeguard would be to discuss the issues with
the audit committee, if there is one (which there would be for a major listed company).Having separate personnel assigned where there are competing clients is the most
appropriate safeguard to protect independence.
Hermione LLP is a 12-partner assurance firm which has been asked to consider taking on
the statutory audit of two separate companies. The following potential issues have been
identified before acceptance of any such appointments.
For each of the following potential clients, select on what basis the engagement could be
accepted, if at all.
Snowman Ltd, which has just grown to the point where a statutory audit is required;
Snowman Ltd is already a client of Hermione LLP, which prepares the financial statements
for the company
A Do not accept
B Accept with safeguards
C Accept with no safeguards
Snowball Ltd, which is a competitor of an existing client of Hermione LLP
D Do not accept
E Accept with safeguards
F Accept with no safeguards
B,E Snowman Ltd: Assuming that this is not a listed company, then provided certain
safeguards are applied (such as different teams), the auditor can provide both
accounting and auditing services.
Snowball Ltd: Where a client’s competitor is also prospectively to be audited by the
same auditor, the auditor may accept the appointment with safeguards (such as
separate personnel).
Which three of the following are areas in which a self-interest threat might arise?
A Where there is a close business relationship between the auditor and the client
B Where the auditor prepares and audits the financial statements
C Where the auditor has a financial interest in the client
D Where there are a significant amount of overdue fees
E Where the audit firm provides internal audit services and significant reliance is to be
placed on the internal audit work for the purposes of the external audit
A,C,D
Both B and E present a self-review threat as opposed to a self-interest threat.
Monty LLP, an audit firm, has a number of medium-sized audit clients which are non-listed.
It has a current gross practice income of £500,000.
For each of the following prospective clients taken separately, select whether there are
safeguards which could reduce any risk to independence to an acceptable level in
accordance with Ethical Standards.
Marty Ltd has insisted that the audit fee be based on 5% of reported profit after tax.
A Safeguards possible
B No safeguards possible
Fee income in respect of Andrews Ltd is expected to be £95,000
C Safeguards possible
D No safeguards possible
Fee income in respect of Borne Ltd is expected to be £65,000
E Safeguards possible
F No safeguards possible
B,D,E
A firm should not accept a fee calculated on a contingency basis. Where total fees
exceed 15% (10% for a listed entity) of the annual fee income of the firm there is a
presumption of dependence and the firm should resign. Where total fees exceed 10%
(5% for a listed entity) safeguards should be applied as necessary.
Wright LLP, a firm of auditors, has the following employees who previously worked for
current audit clients.
Name Previous employer Position held Date of resignation
Sam Brown Hastle Ltd Finance director 31 January 20X6
James
Sanderson
Hastle Ltd Office junior 30 June 20X7
Sally Jones Morgan Ltd Chief accountant 1 June 20X4
For the audit of Hastle Ltd and Morgan Ltd for the year ended 31 December 20X7, for
which, if either, could all three members of staff be used on the audit team if the
engagement is to be conducted in accordance with Ethical Standards?
A Both Hastle Ltd and Morgan Ltd
B Hastle Ltd only
C Morgan Ltd only
D Neither Hastle Ltd nor Morgan Ltd
C Sam Brown has been a director of Hastle Ltd within the last two years and therefore
cannot be used on the audit. James Andersen had the role of office junior and as such
was not in a position to exert direct and significant influence over the subject matter of
the audit; therefore, he can be used on the audit of Hastle Ltd, even though it is only six
months since he resigned. Sally Jones’ position, while one where she would have been
able to exert direct and significant influence over the subject matter of the audit, falls
outside the two-year period, therefore she could be used on the audit of Morgan Ltd
Edward is an audit trainee working on the audit of Trekker Trailers Ltd. It is the day before
the audit manager is coming out to the client to review the files. Edward has been asked to
perform some additional tests on inventory valuation by his supervisor. These tests have
revealed a number of problems which Edward has highlighted to the supervisor. The
supervisor has told Edward that it is too late to deal with these and has asked him to falsify
the working papers.
Which one of the following is the most appropriate course of action for Edward to take?
A Falsify the results as instructed
B Inform the audit manager
C Seek legal advice
D Inform the client
B Resolving ethical conflicts should be kept in-house where possible
Morgan LLP, an audit firm, has a number of prospective clients: Masons Ltd, Burton Ltd and
Dewburry Ltd.
For each of these following prospective clients, select whether the holding of the stated
financial interest should result in the firm declining the engagement or the individual being
excluded from the audit team in accordance with Ethical Standards. (Assume that the
interests are not disposed of.)
Bill Brown, a partner in Morgan LLP, owns 10% of the shares in Masons Ltd.
A Firm must decline
B Individual excluded
Sam Larson’s wife owns 5% of the shares in Burton Ltd. Sam Larson is an audit manager at
Morgan LLP.
C Firm must decline
D Individual excluded
Jane Smith’s husband owns 15% of the shares in Dewburry Ltd. Jane Smith is a partner in
Morgan LLP.
E Firm must decline
F Individual excluded
A,D,E
If a partner, a person in a position to influence the outcome of that engagement (eg,
the audit manager), or an immediate family member of either of these (eg, spouse) has
a financial interest in a company the firm cannot accept appointment unless the
interest is disposed of. As long as Sam Larson is excluded from the audit of Burton Ltd,
the firm can accept the appointment.
Panama LLP is an audit firm with 30 similar, non-listed, medium-sized audit clients. The
following are examples of situations in which Panama LLP might need to implement
safeguards in order to protect its independence.
For each situation, select the most appropriate safeguard or state that there are no
safeguards which could reduce the risk to an acceptable level in accordance with the
FRC’s Ethical Standard.
One of Panama LLP’s clients is a competitor of one of its other clients.
A Separate personnel
B Fee threshold not exceeded
C No safeguards possible
Panama LLP has been asked to take on the role of internal auditor at one of its clients and
would be responsible for implementing its own recommendations.
D Separate personnel
E Fee threshold not exceeded
F No safeguards possible
A,F By assigning separate personnel to each assignment the confidentiality of each client
and hence the auditor’s independence will be protected.
An internal audit role cannot be taken on per FRC’s Ethical Standard where the audit
firm would need to rely on their own work (self-review threat) or where the audit firm
would take on part of the role of management (Panama LLP would be responsible for
implementing their own recommendations – a management threat). Hence there are
no safeguards possible. SAMPLE PAPE
Cairns LLP, a small assurance firm, has been asked to provide two of its audit clients with the
following additional services. For each of the companies, select on what basis the additional
services could be provided, if at all, in accordance with Ethical Standards.
Leyton Ltd has had to employ a new accountant who is unsure of the correct treatment of a
number of transactions. Cairns LLP has been asked to provide advice and help in the
preparation of the financial statements.
A Do not provide
B Provide with safeguards
C Provide with no safeguards
Blacks Ltd has asked Cairns LLP to provide some tax planning advice and has suggested
that the fee could be based on a percentage of the tax saving. The total fee from this client
is material to Cairns LLP.
D Do not provide
E Provide with safeguards
F Provide with no safeguards
B,D For non-listed companies, assurance providers can provide accounts preparation
assistance provided that adequate safeguards are in place (eg, the use of separate
teams). Tax advice may be provided but the fee charged cannot be calculated on a
contingency basis
In each of the following cases, select the principal threat that the audit firm is facing.
Polly Nunn, a partner in an audit firm, has just inherited some shares in an audit client.
A Self-interest
B Familiarity
Golf World Ltd is so pleased with the way that the audit has been conducted that it has
offered the members of the audit team two free golf lessons each.
C Self-interest
D Familiarity
Tobin LLP, an audit firm, has been asked to provide internal audit services to an audit client.
E Self-interest
F Self-review
A,C,F
Inheriting shares in an audit client immediately creates a financial interest on the part of
the auditor.
The audit client providing two free golf lessons to audit staff may create a self-interest
threat, as audit staff may be eager to please their client to gain such benefits, than be
truly objective in carrying out their audit.
The external auditor providing internal audit services to a client creates a self-review
threat, as the external auditor is then likely to review his own work.
