Q1. Overdue fees at 20% of annual audit fee for 2 years. What should the firm do? Correct

A) Write off the debt now
B) Ignore the overdue fees
C) Increase the audit fee
D) Consider safeguards

Your answer: D  |  Correct answer: D

Long-overdue fees resemble a loan to the client and the firm should consider safeguards or whether to resign.

IESBA Code 410

Q2. A listed company, a public interest entity, asks its auditor to prepare its financial statements and to audit them, as it does not think the two services can be divided. How should the firm respond? Correct

A) Accept with no safeguards, since preparing financial statements is a recognised service
B) Accept with safeguards such as using different staff for the preparation and the audit
C) Decline, because the self-review threat for a listed company is too great
D) Accept if the client signs a letter taking responsibility for the financial statements

Your answer: C  |  Correct answer: C

There is a significant self-review threat if a firm prepares accounting records and financial statements and then audits them. For a listed company the threat is considered too great to be reduced by safeguards, so the firm should not accept. The Bangladesh SEC notification also prohibits an issuer from engaging its statutory auditor for book-keeping or other services related to the accounting records or financial statements.

ICAB Code of Ethics

Q3. A close friend of the audit partner is the client's finance director. Which threat? Correct

A) Advocacy
B) Intimidation
C) Familiarity
D) Management

Your answer: C  |  Correct answer: C

A close relationship can make the partner too sympathetic to the client, a familiarity threat.

IESBA Code 521

Q4. A trainee at Harris Brothers LLP, newly started and untrained, is asked to attend the inventory count of Brox Bros alone. Inventory is highly material and controls are few. What is the best course? Correct

A) Do the work, since the manager has asked
B) Contact ICAB and wait for its decision
C) Refer the matter to the training partner
D) Do the work and tell the manager afterwards

Your answer: C  |  Correct answer: C

The trainee has no experience or training for this work and the risks are high. The work was probably allocated in error, so the matter should be referred to the training partner. External referral is a last option.

ICAB Code

Q5. An audit firm helps its client recruit a senior manager. What is acceptable? Correct

A) Deciding who to hire, since the firm knows the client best
B) Setting the criteria and choosing the final candidate
C) A shortlist, if the client sets criteria and decides
D) Negotiating the pay and conditions on the client's behalf

Your answer: C  |  Correct answer: C

Recruiting senior management creates management, familiarity, self-interest and intimidation threats. Involvement may be limited to a shortlist, provided the client draws up the selection criteria and makes the final decision.

ICAB Code

Q6. 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? Incorrect

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

Your answer: A  |  Correct answer: C

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.

IESBA Code Section 420

Q7. The audit firm of Dhaka Pharma Ltd learns that a trust of which it is a beneficiary holds a material number of shares in the audit client. What is the position? Correct

A) Self-interest; remove the interest
B) No threat arises, as the interest is only indirect
C) Only a disclosure to the client is required
D) The audit report must be qualified in all cases

Your answer: A  |  Correct answer: A

A material indirect financial interest creates a self-interest threat that cannot be reduced except by removing the interest or the person.

IESBA Code

Q8. Katie is invited to buy CU30 of goods at cost from a client, a benefit of about CU90. What should she do? Correct

A) Accept without telling anyone
B) Decline or ask the partner
C) Take extra goods at the same cost
D) Ask for a bigger discount on goods

Your answer: B  |  Correct answer: B

The benefit of CU90 is not clearly insignificant, so she should decline, or at least confirm with her engagement partner before accepting. The practice may also be an audit risk because of movements after the count.

IESBA Code 420

Q9. For the audit of a listed company, how often should the firm communicate its independence to those charged with governance? Correct

A) Never, as it is not required at all
B) Only on request of the shareholders
C) Only once the report has been issued
D) Regularly, in writing

Your answer: D  |  Correct answer: D

For listed entities the firm communicates on independence matters in writing, including threats and safeguards.

IESBA Code

Q10. A firm audits the same client Gazipur Metals Ltd and also acts as its lawyer in a major dispute. What threat arises? Correct

A) Self-review only
B) Advocacy
C) None
D) Familiarity only

Your answer: B  |  Correct answer: B

Acting as an advocate for an audit client in litigation creates an advocacy threat.

IESBA Code