AA Assigned Task 1
Objective Test Questions (OTQs)
You are an audit senior of Bark & Co and have been allocated to the audit of Foliage
Co, a listed company which has been an audit client for eight years and specialises in
manufacturing musical instruments. Jane Leaf was the audit engagement partner for
Foliage Co and as she had completed seven years as the audit engagement partner,
she has recently been rotated off the audit engagement. The current audit partner has
suggested that in order to maintain a close relationship with Foliage Co, Jane Leaf
should undertake the role of Engagement Quality Control Reviewer this year. The total
fees received by Bark & Co for last year amounted to 16% of the firm’s total fee income.
The current year’s total fee income for audit, non-audit and tax services is
expected to be greater than last year. The audit manager for Foliage Co has just
announced that he is leaving Bark & Co to join Foliage Co as the financial controller.
1. What is the most appropriate response to the suggestion that Jane Leaf takes on the
role of Engagement Quality Control Reviewer?
A Jane Leaf could take the review role immediately
B Jane Leaf could take the review role immediately but additional safeguards will be
required
C Jane Leaf should not serve as the Engagement Quality Control Reviewer for a period
of at least two years
D Bark & Co will need to consider resigning as auditors of Foliage Co
2. Which is the LEAST appropriate response in relation to fee income received by Bark
& Co from Foliage Co?
A Bark & Co should assess whether audit and non-audit fees would represent more
than 15% of gross practice income for two consecutive years
B If the recurring fees are likely to exceed 15% of annual practice income this year Bark
will need to resign as auditors of Foliage Co
C If the recurring fees are likely to exceed 15% of annual practice income this year,
additional consideration should be given as to whether the taxation and non-audit
assignments should be undertaken by the firm
D If the fees do exceed 15% this should be disclosed to those charged with governance
at Foliage Co
3. Which ethical threat will be created when the audit manager commences employment
with the client and what action should be taken to manage the threat?
Threat Action
A Intimidation The manager should not be allowed to
take the role of financial controller
B Familiarity The composition of the audit team must
be reviewed and changed as appropriate
C Confidentiality The manager should not be allowed to
take the role of financial controller
D Self-review The composition of the audit team must
be reviewed and changed as appropriate
4. Select whether the following statements describe a rulebook approach or a
conceptual framework approach to ethics.
A Clearly defined laws for the auditor to follow
B Useful in a dynamic profession
C A set of guidelines with which the auditor uses judgment to apply to specific
circumstances
D Easy to know what is allowed and not allowed
5. Which TWO of the following are fundamental principles as stated in the ACCA’s Code
of Ethics and Conduct?
A Objectivity
B Professional scepticism
C Professional judgment
D Independence
E Confidentiality
You are the audit manager of Miranda & Co and you are planning the audit of Milberry
Co, which has been an audit client for four years and specialises in manufacturing
luxury handbags. The audit senior has recently resigned and is now employed as
financial controller of Milberry Co. During the planning stage of the audit you have
obtained the following information. The employees of Milberry Co are entitled to
purchase handbags at a discount of 40%. The audit team has been offered the same
level of staff discount.
From a review of the correspondence file you note that the partner and the finance
director have known each other socially for many years and in fact went on holiday
together last summer with their families. As a result of this friendship the partner has not
yet spoken to the client about the fee for last year’s audit, 20% of which is still
outstanding.
6. Which of the following statements in respect of the relationship between the new
financial controller and the audit firm are true?
A The audit approach should be revised to ensure procedures and items to be tested
are not predictable
B The audit team should comprise people who know the audit senior as this will make
the audit run more smoothly and increase efficiency
C The firm must resign as auditor as the threat to objectivity is too significant to
safeguard
D The audit senior should not be allowed to be the financial controller and should
resign
7. Which of the following threats to objectivity does the offer to purchase handbags at a
discount of 40% create?
A Advocacy
B Self-review
C Self-interest
D Intimidation
8. Which is the MOST appropriate response with respect to the discount offered by
Milberry Co to the audit team?
A The discount may be accepted as it is the same as that offered to the client’s
employees
B The discount should be rejected as it is unlikely to be a trivial monetary amount
C The discount should be rejected as gifts or hospitality are not acceptable per the
ACCA Code of Ethics
D Audit manager approval must be obtained before the discount is accepted (2 marks)
9. Select which threat to objectivity is created by the information obtained from the
review of the correspondence file.
Advocacy Familiarity Self-interest
A The partner and the finance director have
known each other socially for many years
B 20% of the fee for last year’s audit is still
Outstanding
10. Which is the most appropriate response to the outstanding fees from Milberry Co?
A The auditor should resign from the client
B The auditor should report the client to the ACCA
C The auditor can continue working for the client but should ensure that the audit
firm’s credit control department are informed of the outstanding fees
D No work should be performed until either payment is made or a repayment plan
Agreed
You are an audit manager in Tigger & Co, a large audit firm which specialises in the
audit of car manufacturers. The firm currently audits Winnie Co. Winnie Co’s main
competitor, Piglet Co, has approached Tigger & Co to act as auditor. The audit
engagement partner for Winnie Co has been in place for approximately six years.
Winnie Co has approached Tigger & Co to provide internal audit services as well as the
external audit. They have suggested that the external audit fee should be renegotiated
with at least 20% of the fee being based on the profit after tax of the company as
they feel that this will align the interests of Tigger & Co and Winnie Co.
11. Which of the following statements is FALSE in respect of the audits of Winnie Co
and Piglet Co?
A Tigger & Co will have a good understanding of the car manufacturing industry making
them a good choice of firm for both companies
B Winnie Co and Piglet Co may be concerned that commercially sensitive information
may be disclosed by Tigger & Co to their competitor
C Tigger & Co must ask permission of ACCA before accepting the audit of Piglet Co
D Tigger & Co must obtain consent of both clients before continuing with the
engagements
12. Which of the following is NOT an action that your firm should take to manage the
conflict of interest between Winnie Co and Piglet Co?
A Regular monitoring of safeguards by an engagement quality control reviewer
B Require every employee of Tigger & Co to sign a confidentiality agreement
C Use separate engagement teams with different engagement partners
D Operate secure data filing of all audit information (2 marks)
13. Select whether the following statements are true or false in respect of the audit of
Winnie Co.
True False
A The audit partner must be rotated
B The proposal of 20% of the audit fee being based on
profit is acceptable if appropriate safeguards are
implemented
C Being appointed as internal auditor as well as
external auditor for Winnie Co will create a
confidentiality threat
14. In relation to the proposal that 20% of the audit fee is based on the profit after tax of
the company, which of the following statements is TRUE?
A This will lead to fee-dependency which is a self-interest threat. The proposal should
be rejected.
B This is a contingent fee arrangement which creates an advocacy threat. The proposal
should only be accepted if no more than 15% of the audit fee is based on profit
before tax
C This is a contingent fee arrangement which creates a self-interest threat. The
proposal should be rejected.
D This will lead to fee-dependency which is a self-interest threat. The proposal should
only be accepted if no more than 15% of the audit fee is based on profit before tax
15. For which TWO of the following situations should an auditor make VOLUNTARY
disclosure of confidential information?
A If an auditor knows or suspects his client is engaged in money laundering
B Where disclosure is made to non-governmental bodies
C When the client has given permission
D If an auditor suspects his client has committed terrorist offences
Section B
1. The finance director of Recorder informed the audit partner that the reason for
appointing Piano & Co as auditors was because they audit other mobile phone
companies, including Recorder's main competitor. The finance director
has asked how Piano & Co keeps information obtained during the audit confidential.
Explain the safeguards which your firm should implement to ensure that this conflict of
interest is properly managed. (4 marks)
2. State Maple & Co's (As external auditors) responsibilities in relation to the prevention
and detection of fraud and error (6 marks)
3. The finance director of Centipede Co informed Ant & Co that one of the reasons they
were appointed as auditors was because of their knowledge of the industry. Ant & Co
audits a number of other consumer packaged goods companies, including Centipede
Co’s main rival. The finance director has enquired how Ant & Co will keep information
obtained during the audit confidential.
Explain the safeguards which Ant & Co should implement to ensure that this
conflict of interest is properly managed. (5 marks)
4. Differentiate between reasonable and absolute assurance, stating between this two
assurances that one that is used as per ISAs? (5 marks)