CODE OF ETHICS

Question 1

Which of the following situations creates a self-interest threat for an auditor?
A) The auditor holds shares in the audit client.
B) The auditor’s firm provides tax advisory services to a different client.
C) The auditor’s friend works at the audit client in a non-key role.
D) The audit firm has a written independence policy.

Answer 1

Answer: A) The auditor holds shares in the audit client.

Question 2

MCQs (Multiple Choice Questions)
1. Financial Interest
Which of the following situations creates a self-interest threat for an auditor?
A) The auditor holds shares in the audit client.
B) The auditor’s firm provides tax advisory services to a different client.
C) The auditor’s friend works at the audit client in a non-key role.
D) The audit firm has a written independence policy.

Answer 2

Answer: A) The auditor holds shares in the audit client.

Question 3

An audit firm may accept a loan from a client under which condition?
A) If the loan is given at preferential rates.
B) If it is a small loan, below a certain threshold.
C) If it is in the form of a regular banking transaction under normal terms.
D) If it is backed by a guarantee from a third party.

Answer 3

Answer: C) If it is in the form of a regular banking transaction under normal terms.

Question 4

Which of the following does NOT create a business relationship threat?
A) Joint ventures between the auditor and client.
B) The auditor purchasing office supplies from the client.
C) The audit firm receiving a significant commission from the client.
D) The audit firm providing management decision-making services.

Answer 4

Answer: B) The auditor purchasing office supplies from the client.

Question 5

senior audit partner’s brother has been appointed as the CFO of an audit client. What is the best course of action?
A) The auditor should disclose the relationship and continue the engagement.
B) The auditor should resign from the engagement.
C) The firm should replace the auditor with someone independent.
D) No action is required as the relationship is indirect.

Answer 5

Answer: C) The firm should replace the auditor with someone independent.

Question 6

Which type of non-audit service creates the highest risk of a self-review threat?
A) Tax compliance services.
B) Payroll processing.
C) Preparation of financial statements.
D) Corporate training for employees

Answer 6

Answer: C) Preparation of financial statements.

Question 7

A former audit engagement partner has recently joined an audit client as the Chief Financial Officer (CFO). What is the most appropriate action?
A) The audit firm should immediately resign from the engagement.
B) A cooling-off period should be applied before reappointing the audit firm.
C) The firm should assign a different engagement partner but continue the audit.
D) The firm should disclose the change but take no further action.

Answer 7

Answer: B) A cooling-off period should be applied before reappointing the audit firm.

Question 8

An auditor is temporarily assigned to work at an audit client. Which condition is necessary to maintain independence?
A) The assignment should be for a minimum of 6 months.
B) The auditor should not take on any management responsibilities.
C) The auditor should be involved in both management and audit duties.
D) The firm should resign from the audit engagement.

Answer 8

Answer: B) The auditor should not take on any management responsibilities.

Question 9

Which of the following is the best safeguard against a familiarity threat due to long association with an audit client?
A) Assigning the same engagement partner every year.
B) Conducting periodic quality control reviews.
C) Limiting the number of junior auditors on the engagement.
D) Allowing the audit client to participate in the auditor’s hiring decisions

Answer 9

Answer: B) Conducting periodic quality control reviews.

Question 10

ABC & Co. is appointed as the external auditor of XYZ Ltd. The audit partner owns 1,000 shares in XYZ Ltd. What should be done to maintain independence?

A) The auditor should sell the shares before accepting the engagement.
B) The auditor can keep the shares but should disclose them to the audit committee.
C) The auditor should resign from the engagement.
D) The audit firm should rotate partners instead of selling shares

Answer 10

Correct Answer: A) The auditor should sell the shares before accepting the engagement.

Question 11

Which of the following scenarios would create a self-interest threat for an audit firm?

A) The audit firm receives a loan from a client at normal commercial terms.
B) The audit firm receives a loan from a client at a preferential interest rate.
C) The audit firm provides consulting services to an audit client.
D) The audit firm accepts contingent fees based on the audit outcome.

Answer 11

Correct Answer: B) The audit firm receives a loan from a client at a preferential interest rate.

Question 12

An audit firm is engaged to audit a client, but at the same time, they also enter into a joint venture with the client’s management. What is the ethical concern?

A) Self-review threat
B) Familiarity threat
C) Business relationship threat
D) Advocacy threat

Answer 12

Correct Answer: C) Business relationship threat

Question 13

A senior auditor is assigned to audit a company where his brother is the Finance Director. What should the firm do?

A) Allow the auditor to continue but document the relationship.
B) Rotate the auditor with another team member.
C) Obtain the client’s consent and continue the engagement.
D) Assign an independent reviewer to approve all audit decisions.

Answer 13

Correct Answer: B) Rotate the auditor with another team member.

Question 14

A partner has been auditing the same client for 12 years. What should the audit firm do to reduce familiarity threats?

A) Continue the engagement as long as independence is maintained.
B) Appoint a new engagement partner.
C) Rotate the entire audit team.
D) Conduct additional training for the audit team.

Answer 14

Correct Answer: B) Appoint a new engagement partner

Question 15

Your audit firm is asked to audit a company with the condition that the fee will only be paid if the company secures a loan from a bank based on the audited financial statements. What is the best course of action?

A) Accept the engagement but disclose the contingency to stakeholders.
B) Accept the engagement but reduce audit procedures.
C) Reject the engagement as it creates a self-interest threat.
D) Accept only if a senior auditor is assigned.

Answer 15

Correct Answer: C) Reject the engagement as it creates a self-interest threat.

Question 16

An audit firm is auditing a client when the client initiates legal action against the firm for a previous audit report. How should the firm respond?

A) Continue the audit but increase professional skepticism.
B) Withdraw from the engagement due to potential objectivity threats.
C) Reduce the scope of the audit to avoid conflict.
D) Seek permission from the client before resigning

Answer 16

Correct Answer: B) Withdraw from the engagement due to potential objectivity threats.

Question 17

A former audit partner joins the audit client as CFO. How can the audit firm mitigate ethical threats?

A) Conduct an independent quality review of the audit.
B) Require a two-year cooling-off period before accepting the client.
C) Remove all former engagement team members from the audit.
D) All of the above.

Answer 17

Correct Answer: D) All of the above.

Question 18

Which of the following situations would create a financial interest threat for an auditor?

A) The auditor owns shares in the audit client.
B) The auditor’s spouse works in the audit client’s IT department.
C) The auditor has worked with the client for five years.
D) The auditor provides tax consultancy to the audit client

Answer 18

A) The auditor owns shares in the audit client.

Question 19

Under the ICAP Code of Ethics, when is it acceptable for an auditor to obtain a loan from an audit client?

A) When the loan is at market interest rates and under normal commercial terms.
B) When the loan is below market interest rates.
C) When the loan is given to an audit team member as a personal favor.
D) When the loan is interest-free.

Answer 19

A) When the loan is at market interest rates and under normal commercial terms.

Question 20

An audit firm enters into a joint venture with an audit client while conducting its audit. What type of ethical threat does this create?

A) Advocacy Threat
B) Self-Review Threat
C) Business Relationship Threat
D) Familiarity Threat

Answer 20

Correct Answer: C) Business Relationship Threat

Question 21

An audit team member is assigned to audit a company where his father is the CFO. What is the best course of action?

A) Continue the audit but document the relationship.
B) Disclose the relationship but remain on the engagement.
C) Remove the auditor from the engagement.
D) Rotate the audit partner instead.

Answer 21

Correct Answer: C) Remove the auditor from the engagement.

Question 22

Which of the following situations could create a self-interest or intimidation threat for an auditor?

A) The audit client invites the auditor for dinner at a fine dining restaurant.
B) The audit client offers a significant cash gift to the auditor.
C) The auditor receives a pen with the client’s logo as a gift.
D) The audit client sends an Eid greeting card to the auditor.

Answer 22

Correct Answer: B) The audit client offers a significant cash gift to the auditor.

Question 23

A client threatens to sue the auditor for issuing a qualified audit report. What should the auditor do?

A) Modify the audit report to avoid the lawsuit.
B) Seek legal advice and assess whether independence is compromised.
C) Continue the audit as usual and ignore the threat.
D) Withdraw from the engagement immediately.

Answer 23

Correct Answer: B) Seek legal advice and assess whether independence is compromised.

Question 24

A former audit team member joins the client as CFO and participates in financial reporting decisions. What should the audit firm do?

A) Immediately resign from the audit engagement.
B) Continue the audit but increase professional skepticism.
C) Apply a cooling-off period before continuing as the client’s auditor.
D) Require the former auditor to resign from the clienT

Answer 24

Correct Answer: C) Apply a cooling-off period before continuing as the client’s auditor.

Question 25

An auditor temporarily works for a client’s finance department before returning to their audit firm. What type of threat is created?

A) Self-Review Threat
B) Familiarity Threat
C) Advocacy Threat

Answer 25

Correct Answer: A) Self-Review Threat

Question 26

What is the best way to reduce the familiarity threat caused by a long association with an audit client?

A) Increase professional skepticism and continue.
B) Rotate the engagement partner periodically.
C) Reduce audit procedures due to familiarity.
D) Disclose the relationship but continue auditing.

Answer 26

Correct Answer: B) Rotate the engagement partner periodically.

Question 27

Which of the following best describes why contingent fees are not allowed in an audit engagement?

A) They increase the auditor’s work.
B) They create a self-interest threat as fees depend on the audit outcome.
C) They create a familiarity threat.
D) They allow for more flexibility in billing clients

Answer 27

Correct Answer: B) They create a self-interest threat as fees depend on the audit outcome.

Question 28

Which of the following actions should be taken when a former audit engagement partner joins the audit client as CFO?

A) The firm should immediately resign from the audit engagement.
B) The audit firm should apply a two-year cooling-off period before accepting or continuing the audit engagement.
C) The former partner should resign from the CFO position.
D) No action is required if the new CFO does not participate in audit matters.

Answer 28

✅ Correct Answer: B) The audit firm should apply a two-year cooling-off period before accepting or continuing the audit engagement.

Question 29

When can an auditor accept a referral fee from a third party related to an audit client?

A) Always, if disclosed to the audit client.
B) Only if the client provides advance agreement.
C) Never, as it creates a self-interest threat.
D) Only if the audit firm is a large firm with multiple clients.

Answer 29

✅ Correct Answer: B) Only if the client provides advance agreement.

Question 30

An audit firm is performing an external audit for a large client. The client’s CEO offers an all-expenses-paid trip to Dubai for the audit partner as a token of appreciation. What is the best course of action?

A) Accept the gift since it does not impact the audit opinion.
B) Politely decline the offer to maintain independence.
C) Accept the gift but disclose it to the audit committee.
D) Accept only if the audit partner donates the trip to charity.

Answer 30

✅ Correct Answer: B) Politely decline the offer to maintain independence.

Question 31

An audit client threatens legal action against an auditor due to a disagreement over revenue recognition policies. How should the auditor respond?

A) Issue an unqualified opinion to resolve the dispute.
B) Seek legal advice and assess whether independence is compromised.
C) Resign from the audit immediately.
D) Ignore the lawsuit and proceed with the audit.

Answer 31

Correct Answer: B) Seek legal advice and assess whether independence is compromised.

Question 32

ABC & Co., an audit firm, owns shares in a joint venture with its audit client. What is the best action to reduce threats to independence?

A) Withdraw from the joint venture before accepting the audit engagement.
B) Continue auditing while disclosing the business relationship.
C) Rotate the audit team members instead of leaving the joint venture.
D) Appoint an independent reviewer to oversee the audit work

Answer 32

Correct Answer: A) Withdraw from the joint venture before accepting the audit engagement