Chapter 15: : Integrity, objectivity and independence

Which three of the following should an auditor consider if there is a threat to independence?

• Withdrawing from the engagement

• Applying specific safeguards

• Making disclosures to the client

• Making disclosures to ICAEW

Which three of the following should not own a material financial interest in an audit client?

• A member of the audit team

• A minor child of a member of the audit team

• A parent of a member of the audit team

• A spouse of a member of the audit team

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?

• Self-interest

• Self-review

• Intimidation

• Familiarity

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. The audit of Nationally plc, the leading building society in the UK. 40% of staff members of (1)Allisons LLP who have mortgages have mortgaged their home with Nationally. The audit of Cash It Ltd, a large business which banks cheques and cash items for the general (2)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?

• Nationally plc and Cash It Ltd

• Cash It Ltd only

• Nationally plc only

• Neither Nationally plc nor Cash It Ltd

Which one of the following is correct in relation to the presumption of dependence for a non-listed client?

• There is a presumption of dependence when annual fee income from all services to the client will regularly exceed 15% of gross practice income.

• There is a presumption of dependence when annual fee income from all services to the client will regularly exceed 5% of gross practice income.

• here is a presumption of dependence when annual assurance fee income from all services to the client will regularly exceed 15% of gross practice income.

• 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.

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?

• Preparing the financial statements for Power Group plc, a listed company, on a regular basis

• Carrying out valuations of various non-current property assets for Tower Investments Ltd, a property investment company

• 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

• Helping Craven plc in defining its corporate strategies and identifying possible sources of finance for a potential new venture

In accordance with FRC’s EthicalStandard , in which three of the following engagements is there a significant threat to independence?

• Alan Johnson has been the audit engagement partner of Domino Ltd for 11 years.

• Barry Thomson has been the audit engagement partner of Beetle Group plc, a listed company, for seven years.

• 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.

• 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.

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?

• Do nothing because the situation is likely to resolve itself over time

• Refer the matter to the management board of partners because he cannot determine a solution himself

• Solicit advice from the ICAEW ethics helpline

• Seek the opinion of an ethics partner at a different firm

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?

• Report her concerns to the audit committee

• Resign

• Take legal advice

• Obtain advice from the human resources department at KiwiCorp plc

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.

• Self-interest

• Management

• Advocacy