ACCA AA · Chapter 2

Statutory audit, regulation and corporate governance MCQs with Answers

10 multiple-choice questions on Statutory audit, regulation and corporate governance for ACCA AA Audit and Assurance. Try each one before revealing the answer and explanation.

1. Question 1

   Which body issues International Standards on Auditing (ISAs)?

   • A) The International Accounting Standards Board (IASB)
   • B) The International Auditing and Assurance Standards Board (IAASB)
   • C) The International Organization of Securities Commissions (IOSCO)
   • D) The International Ethics Standards Board for Accountants (IESBA)
   Show answer & explanation

   Answer: B) The International Auditing and Assurance Standards Board (IAASB)

   ISAs are developed and issued by the IAASB, which operates under the International Federation of Accountants. The IASB issues IFRS Accounting Standards, IESBA issues the international ethics code on which the ACCA Code is based, and IOSCO is a body of securities regulators.

2. Question 2

   In most jurisdictions, who normally appoints the external auditor of a company on a recurring basis?

   • A) The shareholders, by resolution at a general meeting
   • B) The national companies registrar
   • C) The audit committee
   • D) The board of directors
   Show answer & explanation

   Answer: A) The shareholders, by resolution at a general meeting

   The external auditor reports to the shareholders and is therefore normally appointed by them at a general meeting, often on the recommendation of the audit committee. Directors may appoint auditors only in limited circumstances, such as the first auditor or to fill a casual vacancy. Appointment by the shareholders supports the auditor's independence from management.

3. Question 3

   In which of the following situations may the directors of a company usually appoint the auditor themselves?

   • A) When the existing auditor has issued a modified opinion
   • B) When the shareholders disagree with the proposed audit fee
   • C) At every annual general meeting, to save time
   • D) To fill a casual vacancy that arises during the year
   Show answer & explanation

   Answer: D) To fill a casual vacancy that arises during the year

   Company law typically allows the directors to appoint the company's first auditor and to fill a casual vacancy, for example where an auditor resigns mid-year. Otherwise appointment is a matter for the shareholders. Allowing directors to replace an auditor because of a modified opinion would seriously undermine auditor independence.

4. Question 4

   Which of the following is NOT a right normally given to an external auditor by company law?

   • A) The right to require from officers of the company the information and explanations needed for the audit
   • B) The right of access at all times to the company's books, accounts and vouchers
   • C) The right to require the directors to correct any misstatement identified in the financial statements
   • D) The right to receive notice of, attend and speak at general meetings
   Show answer & explanation

   Answer: C) The right to require the directors to correct any misstatement identified in the financial statements

   Auditors have statutory rights of access to records, to information and explanations, and to attend and be heard at general meetings. They cannot force the directors to amend the financial statements; if a material misstatement remains uncorrected the auditor's remedy is to modify the audit opinion.

5. Question 5

   A firm has been invited to become auditor of Halberd Co. Halberd Co's directors refuse to give the firm permission to contact the outgoing auditor. What should the firm do?

   • A) Decline the appointment
   • B) Accept the appointment and ask the shareholders to approve it by special resolution
   • C) Accept the appointment but issue a modified opinion in the first year
   • D) Contact the outgoing auditor anyway, since the information is needed for the audit
   Show answer & explanation

   Answer: A) Decline the appointment

   Before accepting appointment, the proposed auditor should ask the client for permission to contact the outgoing auditor to establish whether there are professional reasons not to accept. If the client refuses permission, the proposed auditor should normally decline the appointment. Contacting the outgoing auditor without permission would breach confidentiality.

6. Question 6

   What is the main purpose of a proposed auditor communicating with the outgoing auditor before accepting an audit appointment?

   • A) To obtain the outgoing auditor's working papers as a substitute for current year audit evidence
   • B) To transfer responsibility for any errors in the prior year financial statements to the outgoing auditor
   • C) To find out whether there are any professional reasons why the appointment should not be accepted
   • D) To agree the level of audit fee that the client is willing to pay
   Show answer & explanation

   Answer: C) To find out whether there are any professional reasons why the appointment should not be accepted

   The communication, often called professional clearance, lets the proposed auditor learn of any matters such as disputes with management or suspected fraud that might affect the decision to accept. It does not replace the evidence needed for the current year audit, and fees are agreed with the client. Responsibility for the prior year opinion remains with the auditor who signed it.

7. Question 7

   Under typical company law, which of the following statements about the removal of an auditor is correct?

   • A) The directors can remove the auditor at any time by a resolution of the board
   • B) An auditor whose removal is proposed may make written representations to the shareholders and ask for them to be circulated
   • C) An auditor can only be removed by a special resolution passed by at least 75% of votes cast
   • D) An auditor who is removed loses all rights to attend the general meeting at which the removal is considered
   Show answer & explanation

   Answer: B) An auditor whose removal is proposed may make written representations to the shareholders and ask for them to be circulated

   Company law in most jurisdictions gives the power to remove an auditor to the shareholders, by resolution at a general meeting (often with extended notice), rather than to the board. To protect independence, the auditor whose removal is proposed is typically entitled to make written representations to be circulated to shareholders and to be heard at the meeting. A special (75%) majority is not usually required, and these rights exist precisely so that directors cannot quietly replace an auditor who disagrees with them.

8. Question 8

   Which of the following is NOT normally a responsibility of an audit committee?

   • A) Making recommendations on the appointment of the external auditor
   • B) Monitoring the integrity of the financial statements
   • C) Reviewing the effectiveness of the internal audit function
   • D) Preparing the annual financial statements
   Show answer & explanation

   Answer: D) Preparing the annual financial statements

   Preparing the financial statements is the responsibility of management and the board as a whole. The audit committee oversees financial reporting, internal control, internal audit and the relationship with the external auditor. If it prepared the financial statements it could not provide independent oversight of them.

9. Question 9

   Under good corporate governance practice, which of the following best describes the composition of an audit committee of a listed company?

   • A) Executive directors, chaired by the finance director
   • B) A majority of executive directors and one non-executive director
   • C) Independent non-executive directors, at least one of whom has recent and relevant financial experience
   • D) The chief executive and the head of internal audit
   Show answer & explanation

   Answer: C) Independent non-executive directors, at least one of whom has recent and relevant financial experience

   Governance codes recommend that audit committees consist of independent non-executive directors, with at least one member having recent and relevant financial experience. Executive directors such as the finance director are responsible for the figures being overseen, so their membership would undermine the committee's objectivity.

10. Question 10

    Why do corporate governance codes recommend that the roles of chair and chief executive should not be held by the same person?

    • A) Because the chair must also be the head of the audit committee
    • B) Because the chief executive must be a qualified accountant
    • C) To reduce the total remuneration paid to directors
    • D) To avoid one individual having unfettered powers of decision
    Show answer & explanation

    Answer: D) To avoid one individual having unfettered powers of decision

    Separating the running of the board (chair) from the running of the business (chief executive) provides a check and balance so that no single individual dominates decision-making. Governance codes do not require the chief executive to be an accountant, and the board chair should not chair the audit committee.