ACCA AA · Chapter 4
Professional ethics and the ACCA Code of Ethics MCQs with Answers
11 multiple-choice questions on Professional ethics and the ACCA Code of Ethics for ACCA AA Audit and Assurance. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Which fundamental principle of the ACCA Code of Ethics requires a professional accountant to be straightforward and honest in all professional and business relationships?
- A) Objectivity
- B) Integrity
- C) Professional competence and due care
- D) Professional behaviour
Show answer & explanation
Answer: B) Integrity
Integrity means being straightforward and honest. Objectivity is about not allowing bias, conflict of interest or undue influence to override professional judgement. Professional behaviour involves complying with laws and avoiding conduct that discredits the profession, and competence and due care relate to maintaining knowledge and acting diligently.
Question 2
An audit firm prepares the financial statements of Garnet Co, a private company, and also audits them. Which threat to independence is most clearly created?
- A) Intimidation threat
- B) Advocacy threat
- C) Self-review threat
- D) Familiarity threat
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Answer: C) Self-review threat
When the audit team evaluates financial statements prepared by its own firm, it is reviewing its own work and may not identify errors or may be reluctant to admit them. For a non-public interest entity this may be acceptable with safeguards, such as using separate staff for the accounting work; for a public interest entity it is generally prohibited.
Question 3
The audit engagement partner of Pellucid Co discovers that her brother has just been appointed as Pellucid Co's finance director. Which threat to independence does this create?
- A) Advocacy threat
- B) Self-interest threat
- C) Familiarity threat
- D) Self-review threat
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Answer: C) Familiarity threat
A close family member holding a position with significant influence over the financial statements creates a familiarity threat, because the partner may be too sympathetic to or trusting of his work. The threat is so significant that the partner should be removed from the engagement.
Question 4
The managing director of an audit client tells the audit engagement partner that the firm will be replaced next year unless it accepts management's preferred accounting treatment for a large provision. Which threat does this represent?
- A) Intimidation threat
- B) Self-interest threat
- C) Self-review threat
- D) Advocacy threat
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Answer: A) Intimidation threat
An intimidation threat arises when an accountant is deterred from acting objectively by actual or perceived pressures, including threats of dismissal. Appropriate responses include discussing the matter with the audit committee and, if necessary, considering whether the firm can continue in office.
Question 5
An audit firm is asked to represent an audit client in a public dispute with a tax authority and to promote the client's position in the media. Which threat to independence is most significant?
- A) Intimidation threat
- B) Self-review threat
- C) Familiarity threat
- D) Advocacy threat
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Answer: D) Advocacy threat
Promoting a client's position to the point that the firm's objectivity is compromised creates an advocacy threat. Acting as an advocate for a client in a contentious dispute is incompatible with being seen as an independent auditor of that client.
Question 6
During the audit of Truss Co, the client offers each member of the audit team a holiday voucher worth a significant amount as a thank you for their hard work. What should the team do?
- A) Accept the vouchers, but only after the auditor's report has been signed
- B) Decline the vouchers, because gifts may only be accepted if they are trivial and inconsequential
- C) Accept the vouchers, provided the audit partner approves them
- D) Accept the vouchers, provided they are disclosed in the audit file
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Answer: B) Decline the vouchers, because gifts may only be accepted if they are trivial and inconsequential
The ACCA Code states that gifts and hospitality from an audit client should not be accepted unless their value is trivial and inconsequential, because they create self-interest and familiarity threats. Disclosure, partner approval or timing do not reduce a significant threat to an acceptable level.
Question 7
The directors of Bramble Co propose that the audit fee should be set at 0.5% of the company's profit before tax for the year being audited. How should the audit firm respond?
- A) Accept the arrangement, provided the fee is disclosed in the financial statements
- B) Accept the arrangement, since it links the fee to the size of the client
- C) Accept the arrangement, provided the audit committee approves it
- D) Refuse the arrangement, because contingent fees for audit engagements are not permitted
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Answer: D) Refuse the arrangement, because contingent fees for audit engagements are not permitted
A fee that depends on the reported result is a contingent fee. It creates a self-interest threat so significant that no safeguard can reduce it to an acceptable level, so contingent fees are prohibited for audit engagements. The fee should be based on the skill, time and responsibility involved.
Question 8
An audit firm has total annual fee income of $8.0 million. It receives total fees of $1.4 million from Corvid Co, a listed audit client. What percentage of the firm's total fee income comes from Corvid Co, and which threat does this primarily create?
- A) 17.5%, self-interest threat
- B) 17.5%, advocacy threat
- C) 17.5%, self-review threat
- D) 21.2%, self-interest threat
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Answer: A) 17.5%, self-interest threat
Fee percentage = $1.4m / $8.0m x 100 = 17.5% (to one decimal place). The figure of 21.2% wrongly divides by the firm's other income ($1.4m / $6.6m). Heavy fee dependence creates a self-interest threat because the firm may fear losing the client. For a public interest entity, the Code's threshold is 15% of the firm's total fees: if exceeded for two consecutive years, the firm must disclose this to those charged with governance and arrange a pre-issuance review by a professional accountant outside the firm, and if it continues for five consecutive years the firm should generally cease to be the auditor.
Question 9
An audit junior on the audit of Lintel Co inherits shares in Lintel Co. What action is required under the ACCA Code?
- A) The junior may keep the shares provided the holding is not material to the junior's wealth
- B) The junior should dispose of the shares immediately
- C) The junior may keep the shares provided this is disclosed in the auditor's report
- D) The firm must resign as auditor of Lintel Co
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Answer: B) The junior should dispose of the shares immediately
Members of the audit team must not hold a direct financial interest in an audit client, however immaterial. Where an audit team member receives such an interest by inheritance or gift, the Code requires it to be disposed of immediately; if the junior is unwilling to do so, the junior must be removed from the audit team. Materiality of the holding is irrelevant for a direct interest, disclosure in the auditor's report is not a safeguard, and resignation by the whole firm is not required.
Question 10
In which of the following situations is an auditor required to disclose confidential client information without the client's consent?
- A) When a potential acquirer of the client asks for the audit working papers
- B) When a competitor of the client, which is also an audit client, requests pricing information
- C) When the auditor knows or suspects money laundering and the law requires a report to the relevant authority
- D) When the client's bank informally asks whether the client is likely to breach its loan covenants
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Answer: C) When the auditor knows or suspects money laundering and the law requires a report to the relevant authority
Confidential information may be disclosed without consent only where required or permitted by law or where there is a professional duty to do so. Anti-money laundering legislation commonly requires reporting of knowledge or suspicion. Disclosure to acquirers, competitors or banks requires the client's consent.
Question 11
Under the ACCA Code, for an audit client that is a public interest entity, for how many years may an individual act as the engagement partner before rotating off, and what is the cooling-off period?
- A) Ten years; cooling-off period of three years
- B) Seven years; cooling-off period of two years
- C) Seven years; cooling-off period of five years
- D) Five years; cooling-off period of two years
Show answer & explanation
Answer: C) Seven years; cooling-off period of five years
For public interest entities the ACCA Code (based on the IESBA Code) limits key audit partners to a time-on period of seven cumulative years to address familiarity and self-interest threats. The engagement partner must then serve a cooling-off period of five consecutive years. Shorter cooling-off periods apply to the engagement quality reviewer (three years) and other key audit partners (two years), which is why two years is a common mistake.