AAA1-Chapter 2

You are senior auditor of Smartwear Ltd. The director of Smartwear have requested you to assist them with the preparation of the statutory financial statements.

Which of the following threats does this situation create

• A.   Self-interest

• A.   Self-review

• A.   Familiarity

• Advocacy

Your firm has been the external auditor of Dulce Ltd (Dulce) for a number of years. Lois Janson has been the engagement partner for approximately 6 years. Dulce is in the process of becoming a listed company and its director have requested that Lois Janson continue as the engagement partner once the company listed.

Which ethical issues arising when your firm accept the director’s request?

• A.   Self-interest

• A.   Self-review

• A.   Integrity

• A.   Familiarity

During the external audit of Yummee Ltd you discover that the director has accounted for research costs inappropriately resulting in a material misstatement in Yummee’s financial statements. Your firm plans to issue a modified audit opinion if the misstatement is not corrected. During a conversation with your firm’s audit partner, Yummee’s managing director, Java Peraya, indicated that it is the directors’ intention to seek the removal of your firm as external auditors if your firm issues a modified audit opinion in respect of this matter.

Which of the following is an appropriate action that your firm should consider taking in response to the conversation between Java Peraya and your firm’s audit partner.

• Discuss the issue with the director but don’t request them to correct the accounting treatment

• Provide an unmodified audit opinion to retain the audit contract.

• Provide unmodified audit opinion with an Emphasis of matters paragraph describing the material misstatement

• Consider resignation as the director’s action represents an intimidating threat and breakdown of trust as well as raising doubts about management’s integrity

Your firm is Yexmarine’s external auditor. Yexmarine’s director has suggested that the external audit fee should be renegotiated with at least 22% of the fee being based on the profit after tax of the company as they feel this will align the interests of your firm and Yexmarine.

Fees based on the outcome or results of work performed are known as …?

• A.   Self-interest

• A.   Contingent fees

• Awards

• A.   Bonus

Your firm’s largest client in the term of fee income is Yexmarine plc. Your firm has acted for this client for 16 years and, in addition to the statutory audit, provides a range of non-audit services, including tax planning (for the company and its individual directors) and consultancy work in respect of Yexmarine’s acquisition policy. The finance director of Yexmarine plc retired in May this year and was succeeded by a former member of your firm’s staff who had managed the audit of Yexmarine plc for the preceding four year.

Which of the followings is not the ethical and professional issues raised by the situation described above?

• A.   Self-interest

• A.   Self-review

• A.   Advocacy

• A.   Familiarity

Your firm’s largest client in the term of fee income is Yexmarine plc. Your firm has acted for this client for 16 years and, in addition to the statutory audit, provides a range of non-audit services, including tax planning (for the company and its individual directors) and consultancy work in respect of Yexmarine’s acquisition policy. The finance director of Yexmarine plc retired in May this year and was succeeded by a former member of your firm’s staff who had managed the audit of Yexmarine plc for the preceding four year.

Which of the following are the measures which should be implemented by your firm in order to mitigate any threats to objectivity which might arise?

• Regular review should be performed to ensure that regular fees are below recommended threshold

• (1)  Assess the composition of the audit team in the light if this (may need to remove team members who have a close associated with this ex-employee).

• Quality control procedures should be in place to ensure a healthy professional scepticism at all times

• (1)  The use of different teams with separate reporting lines

• All above measures

You have been invited to tender for the audit of Dulce plc, a company that owns and operates 40 hotels in the south west of England. You have not previously acted for Dulce, but you are the current auditors of Yexmarine Ltd, a company that owns and operates hotels in 30 out of 35 towns in which Dulce operates. The hotels operated by each company offer similar facilities to each other at a similar price.

Which of the following is the principal ethical issue that you may need to consider when deciding whether or not to tender for the audit of Dulce

• Professional competence and due care

• Objectivity

• Honestly

• Conflict of interest

From a review of the information in audit planning, your audit assistant has highlighted some of the potential risks to independence in respect of the audit an client: “Tax fee of taxation service to be based on a percentage of tax saved”. Which of the following options best identifies the valid threats to independence?

• Advocacy

• Intimidation

• Self review

• Self-interest

From a review of the information in audit planning, your audit assistant has highlighted some of the potential risks to independence in respect of the audit an client: “Firm to represent the client in a dispute with the tax authorities”.

Which of the following options best identifies the valid threats to independence?

• Advocacy

• Intimidation

• Self review

• Self-interest

Which of the following statements best reflects the auditor's duty of confidentiality

• Auditors must never, under any circumstances, disclose any matters of which they become aware during the course of the audit to third parties, without the permission of the client.

• Auditors may disclose any matters in relation to criminal activities to the police or taxation authorities, if requested to do so by the police or a tax inspector

• Auditors may disclose matters to third parties without their client's consent if it is in the public interest, and they must do so if there is a statutory duty to do so.

• Auditors may only disclose matters to third parties without their client's consent if the public interest or national security is involved.