1. Meghna Foods Ltd, an unlisted company, is audited by Rahman & Co. At planning, audit senior Nasrin discloses that her husband bought 300 shares in Meghna Foods Ltd for CU 9,000, under 0.01 percent of its equity and trivial to the couple. What is the correct position?

A) The threat is acceptable if her husband agrees not to vote or trade the shares, so Nasrin may stay with the partner's approval
B) The interest is clearly immaterial to both sides, so Nasrin may remain if an engagement quality reviewer examines her work
C) The shares belong to her husband rather than Nasrin, so this is a close family matter needing only disclosure to the board of directors
D) A direct interest held by an immediate family member is prohibited whatever its size, so it must be sold or Nasrin leaves the team

Correct: D difficult IESBA Code Section 510

A direct financial interest in an audit client held by a member of the audit team or by an immediate family member (spouse or dependant) creates a self-interest threat that no safeguard can reduce, however small the holding. The only effective actions under the IESBA Code are to dispose of the interest or to remove the individual from the team. Materiality is relevant to indirect interests, not to direct ones. Review of the work or an undertaking not to trade does not remove the interest and so cannot make the threat acceptable.

2. Rahman & Co. audits Surma Power Ltd, a listed company. Fees from Surma Power and its subsidiaries were CU 8.4 million of firm fees of CU 52.0 million in year 1. In year 2 they were audit CU 6.5 million, non-audit CU 1.9 million and subsidiary audits CU 1.5 million, against firm fees of CU 62.0 million. What must the firm do for the year 2 audit?

A) Fees exceeded 15 percent in two consecutive years, so disclose this to those charged with governance and arrange a review of year 2
B) The 15 percent limit was breached in both years, so the firm must resign now since no safeguard can reduce a fee dependency threat of this kind
C) The disclosure and review duty arises only after three consecutive years above 15 percent, so nothing is required for the year 2 audit
D) Only audit fees count, and CU 6.5 million is about 10.5 percent of firm fees, so the firm has no disclosure or review duty at all

Correct: A complex IESBA Code Section 410

For a public interest entity the fee test covers all fees from the client and its related entities, audit and non-audit. Year 1 is 8.4/52.0 = 16.2 percent and year 2 is (6.5 + 1.9 + 1.5)/62.0 = 9.9/62.0 = 16.0 percent, so 15 percent is exceeded for two consecutive years. The Code then requires disclosure to those charged with governance and a pre-issuance or post-issuance review of the second year engagement, not automatic resignation. Counting audit fees alone understates the dependency, and the trigger is two years, not three.

3. Kushtia Cement Ltd, an unlisted audit client of Rahman & Co., has recognised a CU 15 million income tax refund claim as a receivable, against audit materiality of CU 2 million. It proposes to pay the firm's tax team 8 percent of any refund recovered, being CU 1.2 million, against total firm fees of CU 90 million. Is the fee arrangement acceptable?

A) Yes; it is acceptable if the fee basis is fixed in the engagement letter before the work starts and disclosed to the board of directors
B) Yes; the ban on contingent fees covers the audit engagement itself, and this is a separate tax engagement with its own letter and fee basis
C) No; the fee depends on an outcome the audit must judge on a material receivable, so it is prohibited whatever its share of fees
D) Yes; CU 1.2 million is only about 1.3 percent of firm fees, so it is not material to the firm and a separate team and second review are enough

Correct: C complex IESBA Code Section 410

The fee is 8% x CU 15 million = CU 1.2 million, which is about 1.3 percent of CU 90 million of firm fees. A contingent fee for a non-assurance service to an audit client is prohibited, among other cases, where the outcome depends on a future or contemporary audit judgement on a material amount in the financial statements, and here the recoverability of the receivable is exactly that. The size relative to firm revenue is therefore not the test. Prior disclosure and a separate engagement letter do not remove the self-interest threat.

4. Rahim has been engagement partner of Karnaphuli Cement Ltd for 3 consecutive years when the company lists on the Dhaka Stock Exchange and becomes a public interest entity. Under the IESBA Code time-on rules, what is the maximum number of additional years he may continue as engagement partner?

A) Two more years, as a partner who served before listing gets a short fixed transition period before rotating off
B) Four more years, as the 7-year limit applies in total and the 3 years already served before listing count towards it
C) Three more years, as a partner may continue only for as long again as the period already served before listing
D) Seven more years, as the 7-year limit starts to run only from the date on which the client became listed

Correct: B complex IESBA Code Section 540

For a public interest entity the engagement partner may serve a maximum of seven years. When a client becomes a public interest entity, the years already served count: if four years or fewer had been served the permitted remainder is seven minus the years served, here 7 - 3 = 4. The two-year extension applies only where the individual had already served five or more years at the time of listing. The clock does not restart on listing, and no rule limits the remainder to the length of earlier service.

5. Farhana, a newly qualified audit senior, is told by the manager to lead the audit of the valuation of complex financial instruments at Meghna Bank Ltd. She has no training or experience in this area, and the manager says nobody else is available before Friday. What is the most appropriate response?

A) Refuse to work on the audit and report the manager to ICAB at once, since external referral is the first step in resolving a conflict
B) Accept the work and rely on the bank's own valuation reports, since management-prepared evidence meets the competence requirement
C) Accept the work because the manager assigned it and the manager, as reviewer, takes responsibility for her competence on the file
D) Explain the limits of her competence to the manager and ask for training, supervision or a specialist, escalating internally if needed

Correct: D difficult IESBA Code Section 113

Professional competence and due care require an accountant not to undertake work without the necessary competence or to ensure adequate help and supervision. The ethical conflict framework starts with the facts and internal procedures: raise the concern with the manager, seek training, supervision or a specialist, and refer to the training or engagement partner if it is not resolved. Review by a manager does not replace the preparer's own competence, and management's valuation is not a substitute for audit work. External referral to ICAB is a last resort after internal routes.

6. Padma Commercial Bank Ltd is a listed audit client. Audit team member Sabbir has a CU 4.5 million home mortgage at the bank's standard rate under normal lending procedures. Tania has a CU 1.2 million personal loan at 3 percentage points below standard rate, approved by the bank's chairman as a favour. Which statement is correct?

A) Sabbir's normal-terms mortgage creates no threat, but Tania's off-market loan is prohibited, so she must repay it or leave the team
B) Both loans are material to the individuals, so both need safeguards such as a review of their work by an engagement quality reviewer
C) Neither loan is a problem, as the bank is not their employer and a 3 point discount is too small to impair their independence
D) Sabbir's mortgage must be refinanced elsewhere because any loan from an audit client is banned, while Tania's needs only disclosure

Correct: A difficult IESBA Code Section 511

Team members may hold mortgages, overdrafts and similar loans from a bank audit client where they are made under normal lending procedures, terms and conditions, and these create no threat. Tania's loan is a favour on non-commercial terms, so it is a loan from an audit client other than under normal terms, and the self-interest threat cannot be reduced by safeguards. She must repay or restructure it on normal terms, or be removed from the team. A blanket ban on bank loans is wrong, and disclosure alone does not cure a preferential loan.

7. Dhaka Plastics Ltd, an unlisted audit client, still owes Rahman & Co. CU 2.4 million of last year's audit fees of CU 3.0 million, unpaid for over 12 months. This year's report is due for signing in three weeks. What is the correct approach?

A) Treat the arrears as a loan within the bank exception for normal commercial terms, so no action is needed from the firm
B) Treat the arrears as akin to a loan, raise them with governance, and expect payment before the report or consider resigning
C) Treat the arrears as an ordinary trade debt, so there is no independence issue, and sign the report on schedule as planned
D) Allow the balance to be paid from next year's fee, which lets the report be signed without any further consideration of the debt

Correct: B difficult IESBA Code Section 410

Unpaid fees of CU 2.4 million are 80 percent of last year's fee, so a significant part of the fee has stayed outstanding. The Code says overdue fees can in effect be a loan from the firm to the client, creating a self-interest threat, and payment is generally expected before the following year's report is issued. The firm discusses the matter with those charged with governance and considers whether it can continue, which may mean resigning. The bank exception applies only where the client is a bank, and deferring payment to next year's fee lengthens the dependency.

8. Surma Power Ltd, a listed audit client of Rahman & Co., asks the firm to value its investment property carried at CU 480 million, against audit materiality of CU 15 million. The valuation would use established methods, and management would approve the assumptions. How should the firm respond?

A) Accept if the audit committee rather than management commissions the work, which removes the management threat altogether
B) Accept with a separate valuation team, a second partner review and written management acknowledgement of the assumptions used
C) Decline: a valuation that has a material effect on the statements of a listed audit client is prohibited by the Code, whoever commissions it
D) Accept because established methods and little judgement mean there is no significant subjectivity, which removes the self-review threat

Correct: C difficult IESBA Code Section 603

For a public interest entity the Code prohibits a valuation service that would have a material effect on the financial statements the firm audits, because the self-review threat cannot be reduced. Here CU 480 million is far above materiality of CU 15 million. The subjectivity test and the safeguards of separate teams and second partner review belong to unlisted clients. The prohibition applies whoever commissions the work, so the identity of the commissioning body is irrelevant.

9. Karnaphuli Garments Ltd, an unlisted company, wants Rahman & Co., its auditor, to provide internal audit services. Which of the following proposed arrangements is acceptable, assuming appropriate safeguards are in place?

A) The firm's staff perform the monthly bank reconciliation as a control and test its operation as part of the internal audit work
B) The firm's internal audit manager decides which recommendations are implemented and directs the client's staff in doing so
C) The firm tests controls within a scope that management approves, and management decides which recommendations to implement
D) The firm designs, implements and maintains the revised internal control system and then tests that system in the audit

Correct: C difficult IESBA Code Section 605

An unlisted audit client may receive internal audit services if the firm does not assume a management responsibility and management designates a competent person to oversee the work. Management must approve scope, risk and frequency, and must decide which recommendations to implement. Deciding on implementation, performing procedures that form part of the control system, and designing or maintaining internal control are all management responsibilities. Those would create management and self-review threats that safeguards cannot reduce.

10. Dhaka Plastics Ltd, an unlisted audit client of Rahman & Co., has an NBR assessment of CU 38 million of extra tax for earlier years. Audit materiality is CU 5 million, and the firm did not advise on the original transactions. The client asks a tax partner outside the audit team to represent it before the Taxes Appellate Tribunal. What is the correct response?

A) Accept the role because the tax partner is outside the audit team and did not originate the transactions, which removes the advocacy threat
B) Decline the advocacy role because acting before a tribunal on a material amount is prohibited, though other assistance may be given
C) Decline all involvement, including technical advice on the dispute, as any help with tax disputes is banned for audit clients
D) Accept the role if the assessment is disclosed to the board of directors and an independent partner reviews the tax work performed

Correct: B difficult IESBA Code Section 604

A firm must not act as advocate for an audit client before a public tribunal or court in resolving a tax matter when the amounts are material to the financial statements; CU 38 million is more than seven times materiality of CU 5 million. Separate personnel and independent review are safeguards for other tax dispute assistance, but they cannot cure advocacy on a material matter. The prohibition is limited to advocacy, so technical advice and preparation of papers can still be considered with safeguards.

11. During the year-end inventory count at Padma Textiles Ltd, the finance director invites everyone present, including the audit team, to buy fabric at the client's staff rate, capped at CU 4,000 each. The fabric would retail at about CU 14,000. Junior auditor Imran asks if he may buy the maximum. What is the correct view?

A) There is no benefit because he pays the full staff price, so this is a commercial purchase and not a gift or hospitality
B) The benefit is about CU 10,000, but he may accept if the engagement partner approves and a quality reviewer examines his work
C) The benefit is about CU 10,000, which is not trivial or inconsequential, so he must decline and inform the engagement partner
D) The benefit is CU 4,000 and acceptable because the offer is open to all client staff and not to the audit team alone

Correct: C difficult IESBA Code Section 420

The benefit is measured by the value conferred: CU 14,000 retail less CU 4,000 paid = CU 10,000. Gifts and hospitality from an audit client may not be accepted unless a reasonable and informed third party would see them as trivial and inconsequential, and CU 10,000 is not. Approval by the partner or a later review cannot convert a non-trivial benefit into an acceptable one. A purchase below market price is not an arm's length transaction, and an offer made to all client staff does not remove the threat.

12. Zakir is audit senior on the audit of Meghna Foods Ltd for the year ended 31 December 2025. His wife Rina was the company's chief accountant until 30 September 2025 and then joined another employer. Zakir proposes to stay on the team. What is the correct position?

A) He cannot take part in this audit, as his wife held a role of significant influence over the records during the audit period
B) He may stay if the firm applies safeguards such as a quality review of his work and a discussion with the board of directors
C) He may stay but must be excluded from the audit of the accounting records and the payroll that his wife previously supervised
D) He may stay, since she left before the year end and has no connection with the client at the date the audit report is signed

Correct: A complex IESBA Code Section 521

An individual shall not participate in an audit if an immediate family member is, or was during any period covered by the engagement or the financial statements, an employee in a position to exert significant influence over the accounting records or the financial statements. Rina held that role for nine months of the year ended 31 December 2025, so Zakir is excluded from this audit. Her departure before year end and later safeguards do not change the prohibition. Restructuring responsibilities is a measure for close family members, not immediate family.

13. Audit senior Arif is completing fieldwork on Surma Textiles Ltd when its finance director informally offers him the post of financial controller at a 40 percent higher salary and asks for a reply within a week. Arif is interested. What should Arif do?

A) Finish the fieldwork first to avoid delay, and report the offer to the firm only after the audit report has been signed
B) Tell the finance director that he cannot discuss employment during the audit, then stay on the team without telling the firm
C) Keep working on the audit and notify the firm only if he accepts, since an offer alone creates no threat to objectivity
D) Tell the engagement partner at once; he is then removed from the audit and the firm reviews the judgements he made on it

Correct: D difficult IESBA Code Section 524

A team member who is in employment discussions with an audit client has a self-interest threat, because the wish to impress a future employer may weaken objectivity and scepticism. The Code requires the individual to notify the firm when involved in such discussions, and the firm removes the person from the engagement and reviews the significant judgements he made. Delaying disclosure until the report or until acceptance leaves the threat unaddressed during the audit. Declining the offer privately does not remove the need to tell the firm.

14. Rahman & Co. proposes to qualify the audit opinion on Karnaphuli Pharma Ltd for CU 18 million of unsupported receivables (materiality CU 4 million). The managing director says the board will replace the firm at the AGM and offer the audit at a fee 40 percent lower to a more cooperative auditor. What is the appropriate analysis and response?

A) An intimidation threat; the partner should resign at once because pressure from management makes any continued appointment impossible
B) A self-interest threat only; the partner should agree an emphasis of matter paragraph in place of the qualification to keep the client
C) An intimidation threat; the partner should refer it to a quality reviewer and then follow the managing director's request if the reviewer agrees
D) An intimidation threat; the partner should not yield, should inform those charged with governance and issue the opinion the evidence supports

Correct: D difficult IESBA Code Sections 120 and 270

Pressure from management to change an opinion by threatening loss of the engagement is an intimidation threat, with a self-interest element from the fee. Unsupported receivables of CU 18 million are 4.5 times materiality of CU 4 million, so the evidence requires a modified opinion. The partner must maintain objectivity, communicate the pressure to those charged with governance, document it and, if it continues, consider the position. An emphasis of matter is not a substitute for a qualification, resignation is not automatic, and a reviewer cannot authorise an opinion the evidence does not support.

15. Rahman & Co. is updating its policies under ISQM 1. The draft says engagement partners collect an independence declaration from each team member at the start of each audit, while partners and staff outside engagement teams are not asked and no confirmation is collected during the year. Which change is needed?

A) Obtain documented independence confirmation at least annually from all personnel required to be independent, not only from team members
B) Keep the declarations by engagement partners only, because they alone are responsible for the independence of their teams
C) Replace the per-audit declarations with a single declaration when each person joins the firm, since independence is a condition of employment
D) Require annual confirmations only from partners and managers, because only senior personnel are able to influence engagement outcomes

Correct: A difficult ISQM 1

ISQM 1 requires a firm to obtain, at least annually, documented confirmation of compliance with independence requirements from all personnel required by the relevant ethical requirements to be independent. This covers partners and staff outside engagement teams who may influence an engagement or hold interests that affect the firm. A one-time declaration on joining quickly becomes out of date, and limiting the group to seniors or engagement partners leaves gaps. Declarations at the start of an audit support the engagement partner's own conclusion but do not meet the firm-level duty.

16. Padma Bank plc, a public interest entity, and its related entities have paid fees of around 18% of the total fees of Dhaka Assurance LLP in each of the last two years. What does the Code of Ethics require?

A) Nothing, since the 15% threshold applies only to non-listed audit clients of the whole firm
B) Disclose it to those charged with governance and carry out an engagement quality review
C) Resign immediately, because the fees exceeded 15% of the total fees received in the first year
D) Reduce the fee for the third year so that it falls just below 15% of the total fees of the firm

Correct: B difficult ICAB Code of Ethics

Where the audit client is a public interest entity and, for two consecutive years, the total fees from the client and its related entities represent more than 15% of the total fees received by the firm, the firm discloses this to those charged with governance of the client and carries out an engagement quality review of the second year engagement, before or after the opinion is issued. Resignation is required only if total fees are expected regularly to exceed 15% of gross practice income.

17. Which one of the following is prohibited by the independence requirements of the ICAB Code of Ethics?

A) The firm holding a bank account on normal terms with a bank that it audits
B) An audit team member holding a home mortgage on normal terms with a bank audit client
C) The firm buying goods from the client in the ordinary course on arm's length terms
D) An audit senior holding a direct financial interest in shares of an audit client

Correct: D difficult ICAB Code of Ethics

A financial interest in a client is a substantial self-interest threat. The firm, partners, persons able to influence the engagement, such as audit team members, and their immediate family are not allowed to own a direct financial interest, or an indirect material one, in a client. A bank account or home mortgage with a bank audit client on normal terms is acceptable, and arm's length purchases in the ordinary course do not threaten independence.

18. Which of the following loan arrangements with an audit client is acceptable under the ICAB Code of Ethics?

A) A home loan from a bank audit client to a team member, on normal lending terms
B) A material loan from a manufacturing audit client to the audit firm itself, on its own terms
C) A guarantee given by the audit firm for a material loan taken by an audit client of the firm
D) A material loan made by the engagement partner spouse to an audit client of the firm

Correct: A difficult ICAB Code of Ethics

A loan made by a bank client to a member of the audit team under normal lending procedures, such as a home mortgage, bank overdraft, car loan or credit card, is acceptable and no safeguards are necessary. A loan or guarantee made by a client that is not a bank, or made or guaranteed by the firm, a team member or an immediate family member to a client, creates a self-interest threat so significant that no safeguards can reduce it unless it is immaterial to both parties.

19. Rajshahi Dyeing Ltd proposes that its auditor charge an audit fee of 0.5% of the company's audited profit before tax. How does the Code of Ethics treat this proposal?

A) It is acceptable if the arrangement is disclosed to the audit committee
B) It is acceptable for a non-listed client, as the contingent fee rule applies only to listed ones
C) It is prohibited, as the fee would depend on the result of the assurance work
D) It is acceptable if a second partner reviews the file before the report is signed

Correct: C difficult ICAB Code of Ethics

A firm shall not enter into any fee arrangement for an assurance engagement under which the amount of the fee is contingent on the result of the assurance work or on items that are the subject matter of the assurance engagement. A fee tied to audited profit is a contingent fee. Disclosure, the type of client and a second partner review do not remove the prohibition.

20. The audit of Savar Garments Ltd for the previous year was billed at CU 500,000, which is still unpaid as the current audit nears completion. What is the position under the Code?

A) There is no threat, because unpaid fees are a purely commercial matter between the two parties
B) It resembles a loan to the client; overdue fees should generally be paid before the next report
C) The firm must write the fee off immediately so that the threat to independence is then removed
D) The report may be issued if the client promises in writing to pay within six months of that date

Correct: B difficult ICAB Code of Ethics

Overdue fees mean the firm is in effect making a loan to the client, so the guidance on loans is relevant. The Code states that, generally, payment of overdue fees should be required before the assurance report for the following year can be issued. Firms should also discuss the matter with those charged with governance and consider resigning if the fees are not paid.

21. A firm wins the audit of Kushtia Foods Ltd by quoting a fee 40% below that of the predecessor firm. Which threat arises, and which safeguard is appropriate?

A) Familiarity; rotate the engagement partner every year without exception at that client
B) Intimidation; disclose the fee to the audit committee of the client at its next meeting
C) Advocacy; use a different team for the non-audit work that is carried out for the client
D) Self-interest; keep records that show appropriate staff and time are spent on the work

Correct: D difficult ICAB Code of Ethics

Quoting a significantly lower fee than the predecessor, known as lowballing, creates a significant self-interest threat. If the tender is successful, the firm must apply safeguards such as maintaining records to demonstrate that appropriate staff and time are spent on the engagement, and complying with all applicable assurance standards, guidelines and quality management procedures.

22. Petra has been engagement partner for Santa Ltd for many years. She plays golf with the finance director, and has dinner with him and his wife. What is the most appropriate response?

A) Monitor the relationship and request an engagement quality review, or rest Petra from the audit
B) No action, as the meetings take place outside normal working hours and are purely social in nature
C) Stop the audit at once and report the matter to ICAB as a clear breach of the Code of Ethics
D) Accept the hospitality, because the client pays for it and so the cost to the firm is lower

Correct: A difficult ICAB Code of Ethics

Long association and a growing personal relationship create a familiarity threat and a risk of losing professional scepticism. Petra should monitor the situation and request a review of the file by an engagement quality reviewer, or the firm might rest her from the engagement for a period. Hospitality should not be accepted unless it is trivial and inconsequential.

23. An audit engagement partner has held that role for a continuous period of 10 years for a non-public interest client. What does the Code require of the firm?

A) Resign immediately, as ten years is an absolute maximum for any engagement partner at a client
B) Do nothing, since rotation matters only for listed audit clients of the firm in the market
C) Consider a third-party view, then rotate or apply safeguards, document and tell governance
D) Rotate the partner but keep the same staff, which then removes all threats to independence

Correct: C difficult ICAB Code of Ethics

When an engagement partner has held the role for a continuous period of 10 years for a non-public interest client, careful consideration must be given to whether a reasonable and informed third party would consider the firm's objectivity and independence to be impaired. If the individual is not rotated, alternative safeguards should be put in place, the reason for lack of rotation should be documented and the facts communicated to those charged with governance.

24. A trainee at an audit firm is invited to buy goods from the audit client at cost, up to CU 40. The cost to the client is 20% of the selling price. What is the value of the benefit to the trainee?

A) CU 40
B) CU 160
C) CU 200
D) CU 8

Correct: B complex ICAB Code of Ethics

If CU 40 is 20% of the selling price, the selling price of the goods is CU 40 / 20% = CU 200. The trainee pays CU 40, so the benefit is CU 200 - CU 40 = CU 160. This is not clearly trivial and inconsequential, so the trainee should decline the offer or confirm with the engagement partner. CU 200 ignores the amount paid, and CU 8 applies the percentage the wrong way round.

25. Eight months after leaving the audit team of Gazipur Textiles Ltd, a senior joins the audit client as finance director. What should the firm consider?

A) Nothing, because the individual is no longer an employee of the firm and is now a client employee
B) Only whether the individual still owes any money to the firm for expenses claimed before leaving
C) Resigning immediately from the audit in all circumstances, whatever the facts of the case may be
D) Whether the team is still appropriate, and that only pre-determined payments continue

Correct: D difficult ICAB Code of Ethics

When a former member of the engagement team joins an audit client as director or key management within two years of being involved in the audit, the firm should consider whether the composition of the audit team is appropriate. The individual should not receive benefits or payments from the firm other than pre-determined arrangements, and should not continue to participate, or appear to participate, in the firm's activities. This creates self-review, familiarity and intimidation threats.