Audit and Assurance (AA) Flashcards
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(QUESTION BANK)
There are several benefits to a company and its auditors of establishing an audit committee,
which include:
1. Contribution of independent judgement to the Board
2. Improvement in financial reporting due to scrutiny of audit committee
3. Provides a point of liaison between company and external auditors
4. Independent point of reference for finance director
Which of the following options correctly allocates these advantages to the appropriate party?
Company– External auditors
(a) 1, 2, 3– 4
(b) 1, 2, 4– 2, 3
(c) 2, 3, 4– 3
(d) 1, 2, 3, 4– 2, 3
(d) 1, 2, 3, 4– 2, 3
(QUESTION BANK)
In relation to corporate governance provisions:
Which of the following is not a requirement of most corporate governance provisions?
(a) The board should have a combination of executive and non‐executive directors such that
no one group can dominate the board.
(b) Shareholders should be represented on the board by a dedicated director.
(c) The roles of the Chairman and the Chief Executive should be distinct from each other.
(d) Remuneration of non‐executive directors should not include performance related
elements.
(b) Shareholders should be represented on the board by a dedicated director.
(QUESTION BANK)
~Bluebird Enterprises Co (Bluebird) is a retail company planning to list on a stock exchange within the
next six months, and management has been advised by the company’s auditors about the need for
compliance with corporate governance provisions. In particular, the finance director is looking to
recruit non-executive directors as he understands that Bluebird will need to establish an audit
committee.
The finance director has two potential non-executive directors whom he is considering approaching to
join the board of Bluebird. Antony Goldfinch is currently an executive sales director of a listed multinational
banking company; he sits on an audit committee of another company as a non-executive
director and is agreeable to being paid a fixed fee which is not related to profits. Jacob Mallard is
currently a finance director of a small retail company, which does not compete with Bluebird; he has
expressed an interest in a fixed seven-year contract and he is the brother of Bluebird’s chief executive.~~
From a review of Jacob Mallard’s details, your audit assistant has identified the following
factors:
1. He has financial knowledge.
2. He has retail experience.
3. He has a close family relationship with the chief executive.
4. He is open to maintaining a lengthy relationship with Bluebird.
Which of the following options correctly identifies the above factors as advantages and
disadvantages to Bluebird?
Advantage– Disadvantage
(a) 1, 2, 3– 4
(b) 2, 3, 4– X
(c) 1, 4– 2, 3
(d) 1, 2– 3, 4
(d) 1, 2– 3, 4
(QUESTION BANK)
~Salt & Pepper & Co (Salt & Pepper) is a firm of Chartered Certified Accountants which has seen its
revenue decline steadily over the past few years. The firm is looking to increase its revenue and client
base and so has developed a new advertising strategy where it has guaranteed that its audits will
minimise disruption to companies as they will not last longer than two weeks. In addition, Salt &
Pepper has offered all new audit clients a free accounts preparation service for the first year of the
engagement, as it is believed that time spent on the audit will be reduced if the firm has produced the
financial statements.
The firm is seeking to reduce audit costs and has therefore decided not to update the engagement
letters of existing clients, on the basis that these letters do not tend to change much on a yearly basis.
One of Salt & Pepper’s existing clients has proposed that this year’s audit fee should be based on a
percentage of their final pre-tax profit. The partners are excited about this option as they believe it will
increase the overall audit fee.~~
From a review of the information above, your audit assistant has highlighted issues she feels
represent potential risks to independence in respect of the new strategies.
1. Salt & Pepper is advertising its services
2. Salt & Pepper is offering free services
3. Salt & Pepper will prepare financial statements for clients
4. Salt & Pepper has been offered a contingent fee
Which of the following options correctly identifies the valid threats to independence and
allocates the threat to the appropriate category?
Self-interest/ Self-review/ Familiarity
(a) (1), (2)/ (3)/ (4)
(b) (2), (4)/ (3)/ –
(c) –/ (2)/ (3), (4)
(d) (1), (3)/ –/ (2)
Self-interest/ Self-review/ Familiarity
(b) (2), (4)/ (3)/ –
(QUESTION BANK)
In relation to the updating of the engagement letter:
Which of the following statements is valid?
(a) Engagement letters should be reissued annually in accordance with ISA 210 Terms of
Audit Engagements
(b) It is appropriate to draft a general engagement letter to cover future changing
circumstances
(c) Engagement letters are only required if the auditor assesses it will facilitate
understanding of the agreement between auditor and client
(d) Engagement letter should be reissued when the auditor assesses that it is necessary to
reflect changing circumstances or re-emphasise the terms of the engagement with the
client
(d) Engagement letter should be reissued when the auditor assesses that it is necessary to
reflect changing circumstances or re-emphasise the terms of the engagement with the
client
(QUESTION BANK)
~Salt & Pepper & Co (Salt & Pepper) is a firm of Chartered Certified Accountants which has seen its
revenue decline steadily over the past few years. The firm is looking to increase its revenue and client
base and so has developed a new advertising strategy where it has guaranteed that its audits will
minimise disruption to companies as they will not last longer than two weeks. In addition, Salt &
Pepper has offered all new audit clients a free accounts preparation service for the first year of the
engagement, as it is believed that time spent on the audit will be reduced if the firm has produced the
financial statements.
The firm is seeking to reduce audit costs and has therefore decided not to update the engagement
letters of existing clients, on the basis that these letters do not tend to change much on a yearly basis.
One of Salt & Pepper’s existing clients has proposed that this year’s audit fee should be based on a
percentage of their final pre-tax profit. The partners are excited about this option as they believe it will
increase the overall audit fee.~~
In relation to the provision of accounts preparation services, which of the following would be
appropriate safeguards to independence?
1 Using separate engagement teams for the accounts preparation and the audit
2 Charging an appropriate fee for the accounts preparation service
3 Ensuring that the audit engagement partner reviews the accounts preparation work
4 Reducing the associated audit fee rather than providing the accounts preparation free
(a) 1, 2 and 3
(b) 1 and 2 only
(c) 3 and 4 only
(d) 1, 3 and 4
(b) 1 and 2 only
(QUESTION BANK)
From a review of the information above, your audit assistant has highlighted some of the
potential risks to independence in respect of the audit of Orange.
1. Engagement partner to attend meetings with investors
2. Currant & Co to prepare financial statements
3. Possibility of multiple services
4. Requirement to finish external audit quickly
Which of the following options correctly identifies the valid threats to independence and
allocates the threat to the appropriate category?
Self-interest/ Self-review/ Advocacy/ Intimidation
(A) 1/ 2/ 3/ 4
(B) 1, 4/ 2, 3/ –/ –
(C) 3/ 2/ 3/ 1
(D) 3/ 2, 3/ 1/ 4
Self-interest/ Self-review/ Advocacy/ Intimidation
(D) 3/ 2, 3/ 1/ 4
