QB Chapter 15 integrity, objectivity and independence

Question 1

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

Answer 1

A,B,C

Making disclosures to ICAEW (option D) is no substitute to the other options A,B,C.

Question 2

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

Answer 2

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.

Question 3

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

Answer 3

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.

Question 4

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

Answer 4

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.

Question 5

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.

Answer 5

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.

Question 6

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

Answer 6

A,B,C
Option D is not correct as it is assistance that is provided as opposed to management
or operational decisions being taken.

Question 7

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.

Answer 7

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.

Question 8

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

Answer 8

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.

Question 9

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

Answer 9

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).

Question 10

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

Answer 10

A,C,E

All three cases are examples of the stated threats to auditor independence

Question 11

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

Answer 11

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

Question 12

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

Answer 12

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).

Question 13

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

Answer 13

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.

Question 14

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

Answer 14

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.

Question 15

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

Answer 15

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.

Question 16

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

Answer 16

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).

Question 17

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

Answer 17

A,C,D

Both B and E present a self-review threat as opposed to a self-interest threat.

Question 18

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

Answer 18

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.

Question 19

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

Answer 19

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

Question 20

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

Answer 20

B Resolving ethical conflicts should be kept in-house where possible

Question 21

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

Answer 21

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.

Question 22

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

Answer 22

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

Question 23

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

Answer 23

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

Question 24

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

Answer 24

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.

Question 25

Jane Stanley is a qualified accountant working for a small catering company. The directors
of the company are looking to expand and have approached a number of potential
investors. Jane has been asked to produce management accounts for the investors to
review. The managing director has specifically told her that they must show a gross profit
margin of 30% and he “doesn’t care how she achieves it.” The gross profit margin is
normally approximately 20%. There is no internal complaints procedure.
Which one of the following is the most appropriate initial course of action for Jane to take?
A Resign
B Seek legal advice
C Contact the ICAEW telephone helpline
D Comply with her employer’s request

Answer 25

C Jane should initially seek advice from ICAEW before deciding on her next steps. The
general approach to resolving conflicts should be firstly to resolve within the employer
if possible, then seek advice from ICAEW, then take legal advice, then resign (perhaps
on legal advice, but, in any case, as a last resort).

Question 26

Richard Richardson LLP is a multi-national audit firm responsible for the audit of a high
street bank, Barkers Bank.
For each example below of loans provided to members of the audit team by Barkers Bank,
select whether the loan gives rise to a threat to Richard Richardson LLP’s independence in
accordance with ethical standards.
The audit junior’s student loan
A Threat
B No threat
The audit partner’s mortgage, negotiated on normal commercial terms
C Threat
D No threat
The audit manager has recently taken out a car loan. He is being charged an interest rate of
2% below the standard rate applied to this product
E Threat
F No threat

Answer 26

B,D,E
The car loan has been given at a special rate and is likely to be material to the audit
manager. All other loans are in the normal course of business on commercial terms.

Question 27

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 illustrates.
The audit firm has been asked to underwrite its client’s shares in relation to a proposed
flotation.
A Self-review
B Advocacy
The board of directors does not contain a qualified finance professional and the company
has asked the audit firm to prepare the financial statements.
C Self-review
D Advocacy

Answer 27

B,C Advocacy threat as the auditor is taking the part of the client in underwriting the client’s
shares in a flotation.
Self-review threat as the audit firm will be preparing the financial statements and will
then review them (though the use of separate teams would reduce this threat).

Question 28

Talland LLP is the external auditor of Huntley Ltd, a retailer. The managing partner has been
called to a meeting with the board of directors of Huntley Ltd. At that meeting the firm has
been asked if it can provide the following non-audit services.
Huntley Ltd would like to implement a new sales system. They have asked Talland LLP to
take on a consultancy project whereby the firm will evaluate several possible systems,
advise on which system should be selected, and oversee the installation of the new system.
Which one of the following sets of threats would arise from the above scenario, if the
project was accepted by Talland LLP?
A Advocacy and management
B Management and familiarity
C Management and self-review
D Advocacy and familiarity

Answer 28

C Management threat – selection of systems should be carried out by management. If the
auditor undertakes this role he becomes too closely aligned with management and this
threatens his independence.
Self-review threat – the audit firm will audit the system it has implemented.
There are no indications of a familiarity threat, as no indication is given of the length of
the relationship nor of any family or close personal relationships between audit firm
and client. SAMPLE PAPER

Question 29

Hammers LLP is a firm of chartered accountants. It has been invited to accept engagements
by various institutions as follows.
(1) Advisers to New Generation Insurance and Co, a small group of insurers seeking to
buy out the home insurance business of Insurance Plus, a major UK insurer. The partner
in charge of the advice team has made certain guarantees to New Generation
Insurance and Co’s bank in respect of one of the members of New Generation
Insurance and Co, whom he knows personally. Hammers LLP has been promised the
audit of New Generation Insurance and Co if the buy out is successful.
(2) A review of banking procedures at NatEast plc, a major high street bank. Hammers LLP
has a modest business loan from NatEast plc.
Which, if any, of the above companies presents a major threat to the independence of
Hammers LLP, if the engagement were to be accepted?
A New Generation Insurance and Co and NatEast plc
B NatEast plc only
C New Generation Insurance and Co only
D Neither New Generation Insurance and Co nor NatEast plc

Answer 29

C New Generation Insurance is a threat as a personal guarantee appears to have been
given by the auditor in favour of the company, in return for the audit should the buy out
take place. Hence there is a dependency that threatens the independence of the
assurance provider.
NatEast plc is not a threat as the loan to Hammers LLP is modest and in the normal
course of business for a major high street bank.

Question 30

The following are examples of situations in which Bouldry LLP, an audit firm, might need to
implement safeguards to protect its independence. Bouldry LLP has 75 small, non-listed
audit clients and has been asked to provide additional services to three of these clients.
For each situation, select whether the additional services could be accepted with
appropriate safeguards, in accordance with Ethical Standards, or state that there are no
safeguards that could reduce the risk to an appropriate level.
Bouldry LLP has been asked to carry out a valuation service. The valuation is material to the
financial statements but does not involve a significant degree of subjectivity.
A Accept with safeguards
B No safeguards possible
Bouldry LLP has been asked to provide accounts preparation assistance.
C Accept with safeguards
D No safeguards possible
Bouldry LLP has been asked to design and implement an IT system which will significantly
impact on the accounting system. Historically, Bouldry LLP has placed reliance on the
accounting system as part of the audit.
E Accept with safeguards
F No safeguards possible

Answer 30

A,C,F
Valuations are only prohibited for non-listed companies where the item to be valued is
material to the financial statements and involves a significant degree of subjectivity (for
listed companies, any material valuation is prohibited). However, safeguards must be
implemented to minimise self-review (eg, the valuation should be carried out by a
different team). Helping a non-listed company with accounts preparation is acceptable
with safeguards to ensure that the role of management is not assumed by the audit
firm. No safeguards are possible with the design and implementation of the IT system
as the very same system is relied upon for the purposes of the external audit.

Question 31

Brown LLP has been invited by Alpha plc, a listed company, and Beta Ltd, a non-listed
company, to provide audit and non-audit services. If accepted, the fees for Alpha plc would
represent 11% of the firm’s gross fee income, and the fees for Beta Ltd would represent
12%.
Assuming Brown LLP would like to take on as many clients as is permitted by ethical
standards, which one of the following is the most appropriate course of action?
A Accept both Alpha plc and Beta Ltd as clients
B Accept Alpha plc as a client and refuse Beta Ltd
C Accept Beta Ltd as a client and refuse Alpha plc
D Refuse to take on either Alpha plc or Beta Ltd as clients

Answer 31

C Accept Beta Ltd as 12% is below the 15% threshold for private companies. Refuse
Alpha plc as 11% is above the 10% threshold for listed companies. SAMPLE PAPER

Question 32

Helena LLP is an eight-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.
For each of the following potential clients, select on what basis the engagement could be
accepted or state that the engagement should not be accepted, in accordance with the
FRC’s Ethical Standard.
Titania plc, a listed company, will also require Helena LLP to prepare the financial
statements.
A Do not accept
B Accept with safeguards
C Accept with no safeguards
Puck Ltd, whose finance director is the brother of one of the partners at the assurance firm
D Do not accept
E Accept with safeguards
F Accept with no safeguards

Answer 32

A,E Do not accept Titania plc as it is not acceptable to prepare and audit the financial
statements of a listed company.
The audit of Puck Ltd can be accepted with safeguards – such as not letting the FD’s
brother take any part in the audit. SAMPLE PAPE

Question 33

Two different audit juniors have been asked to carry out the following tasks. For each of the
tasks you should select the action that the audit junior should take.
An audit junior at Oberon LLP, a large assurance firm, has been asked to join the audit team
at a major client to carry out the receivables section of the audit. The junior has not carried
out this section of the audit before but has covered it in his training.
A Perform the work
B Refer to training partner
C Contact the ICAEW telephone helpline
An audit junior at Lear LLP, a sole practitioner audit firm, has been asked to commence the
audit of a small manufacturing client. The junior has expressed reservation about this but
the practitioner has insisted that he should go out to the client unsupervised at the
beginning of the following week.
D Perform the work
E Refer to training partner
F Contact the ICAEW telephone helpline

Answer 33

A,F At Oberon LLP, the junior can go ahead and perform the work, given the low risk
nature of the receivables balance, and the fact that the junior has covered this in his
training. The junior is also to join an audit team, where resources for guidance,
supervision and review will also be available.
With regards to Lear LLP, the junior should contact the ICAEW telephone helpline.
Commencing the audit of a client unsupervised, may lead to exposure of both the
junior and the firm to risks. In a larger firm the junior could refer to his training partner,
but since this is a sole practitioner firm the practitioner himself must also be the
training partner. SAMPLE PAPE

Question 34

David, a recently qualified ICAEW Chartered Accountant, is the newly-appointed financial
controller of Hartpury Ltd. Hartpury Ltd is a relatively small company, which is likely to be
taken over in the near future.
As one of his first assignments, David has been asked to prepare the financial statements
for the year ended 31 December 20X6. David has now been called into the last part of a
board meeting where the directors have given him a profit target which must be met in
those financial statements. They have stressed that this profit target must be met, even if it
means that accounting standards are not followed.
Which two of the following describe possible appropriate courses of action which David
could consider taking?
A Report his concerns to the audit committee
B Resign his post
C Report his concerns to the finance director
D Take legal advice
E Use Hartpury Ltd’s formal dispute resolution process to resolve the issue

Answer 34

B,D David has no other option in this case but to resign his post and take legal advice.
Given that these instructions have come from the board of directors, it would seem
fruitless to pursue this issue internally. SAMPLE PAPER

Question 35

The following are examples of situations in which an audit firm might be faced with a threat
to its independence.
For each example, select the main type of threat that situation illustrates.
The finance director has a very strong personality and insists on the audit team working in
his office.
A Familiarity
B Intimidation
C Management
The audit team and the management team at the client have remained unchanged for
several years.
D Familiarity
E Intimidation
F Management

Answer 35

B,D The FD having a very strong personality may lead to an intimidation threat.
The audit and client team remaining unchanged for many years is likely to lead to a
familiarity threat. SAMPLE PAPE

Question 36

Dudley & Partners is a large assurance firm. They have acted as the external auditors to
Birmingham Ltd, a small owner-managed company, for two years.
The managing director and major shareholder of Birmingham Ltd, Mr Black, has now asked
the firm to represent the company’s interests in a legal case which has been brought
against it. Mr Black has indicated that if the firm refuse to do this they will not be
reappointed as external auditor. He is also making matters difficult for those members of
the audit team carrying out the interim audit.
Which one of the following sets of threats arises from the above scenario?
A Intimidation, self-review and management
B Advocacy, self-interest and management
C Intimidation, advocacy and self-interest
D Intimidation, advocacy and management

Answer 36

C An intimidation threat arises because of Mr Black’s attitude. There is an advocacy threat
if the firm acts in the company’s defence. A self-interest threat arises because the firm
will be afraid of losing the audit fee

Question 37

Callinicos LLP is a 12-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.
Luxemburg Ltd, which will also require Callinicos LLP to provide a valuation service in
relation to some immaterial financial assets.
A Do not accept
B Accept with safeguards
C Accept with no safeguards
Cliff plc, a listed company which will also require you to provide routine bookkeeping work
D Do not accept
E Accept with safeguards
F Accept with no safeguards

Answer 37

B,D Since the assets of Luxemburg Ltd are immaterial, it is possible to accept both
engagements subject to safeguards (if Luxemburg Ltd had been a public interest entity
then the valuation service should have been declined).
Auditors are prohibited from providing bookkeeping services to listed clients, so the
work for Cliff plc may not be accepted.

Question 38

You are a trainee in the audit department of Termite LLP. You have been working in the
department for 18 months and have experience of completing audit testing under
supervision, but are yet to work independently.
Several months ago, you had worked on the audit of Cioran Ltd. You have just received a
call from the audit manager, asking you to address a review point in relation to some
accruals testing that you did. The manager said that the audit report is to be signed
tomorrow, and that you need to resolve the point immediately. You are finding it difficult to
understand what was wrong with your testing, and do not know how to resolve the review
point.
Which of the following is the most appropriate course of action for you to take?
A Perform the work
B Refer to training partner
C Contact ICAEW
You have also been assigned to the upcoming audit of Schopenhauer Ltd, in which you are
to be allocated the non-current assets section of the audit. You have not carried out this
section of the audit before, but you have covered it in his training.
Which of the following is the most appropriate course of action for you to take?
D Perform the work
E Refer to training partner
F Contact ICAEW

Answer 38

B,D In relation to Cioran Ltd, this point should be referred to the training partner. It appears
that the audit trainee in question does not have sufficient knowledge or experience to
perform the work being asked of them.
In relation to Schopenhauer Ltd, you can go ahead and perform the work, given the
low risk nature of the non-current assets balance, and the fact that you have covered
this in your training. You are also to join an audit team, where resources for guidance,
supervision and review will also be available.

Question 39

The following are examples of situations in which Habermas LLP, an audit firm, might need to
implement safeguards to protect its independence. Habermas LLP has 50 small, non-listed
audit clients and has been asked to provide additional services to three of these clients.
For each situation, select whether the additional services could be accepted with
appropriate safeguards, in accordance with the ICAEW Code of Ethics and the FRC’s Ethical
Standard, or state that there are no safeguards that could reduce the risk to an appropriate
level.
Habermas LLP has been asked to provide tax planning advice. The efficacy of the advice
depends on balances included within the financial statements, but the outcome of the
advice would not be material to them.
A Accept with safeguards
B No safeguards possible
Habermas LLP has been asked to draw up a shortlist of candidates for the position of
finance director, using criteria determined by the client in advance.
C Accept with safeguards
D No safeguards possible
Habermas LLP has been informed that an audit client to whom other assurance services
were provided last year, is bringing legal proceedings against Habermas LLP for
negligence in its performance of those services.
E Accept with safeguards
F No safeguards possible

Answer 39

B,C,F
Tax planning may only be provided where the advice is clearly supported by a tax
authority or other precedent, and where eg, the efficacy of the advice does not depend
on a particular accounting treatment or presentation in the financial statements.
Provided that the entity is not listed (as here), it is possible to provide recruitment
advice as long as the auditor does not take on a management role. Drawing up a
shortlist of candidates is acceptable if the client has drawn up the criteria by which they
are to be selected, and makes the final decision in respect of who to hire.
Given that the client is already bringing legal proceedings, this is actual litigation rather
than merely the threat of it. This creates an intimidation threat, whereby Habermas LLP
may be pressurised into inappropriately issuing an unmodified auditor’s report. In this
case, the proceedings are for negligence against Habermas LLP, so this is a serious
issue; the threat is therefore serious enough that Habermas LLP should resign from the
audit.