CA Inter P5 · Chapter 11
Ethics and Terms of Audit Engagements MCQs with Answers
13 multiple-choice questions on Ethics and Terms of Audit Engagements for CA Inter P5 Auditing and Ethics. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Which of the following is NOT one of the fundamental principles of the ICAI Code of Ethics?
- A) Integrity
- B) Profitability
- C) Objectivity
- D) Confidentiality
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Answer: B) Profitability
The fundamental principles are integrity, objectivity, professional competence and due care, confidentiality and professional behaviour. Profitability is a business goal, not an ethical principle, and must never compromise the fundamental principles.
Question 2
Navya & Associates maintains the books of account of a client and then audits the financial statements prepared from those books. The main threat to independence created is:
- A) Familiarity threat
- B) Self-review threat
- C) Intimidation threat
- D) Advocacy threat
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Answer: B) Self-review threat
A self-review threat arises when the auditor evaluates results of a service previously performed by the auditor's own firm, such as financial statements prepared from records it maintained. The firm may not appropriately evaluate its own work. For company audits, section 144 of the Companies Act, 2013 also prohibits the auditor from rendering accounting and book-keeping services.
Question 3
CA Mohit has been the engagement partner on the audit of Sundaram Textiles Ltd. for twelve years and regularly holidays with its finance director. The principal threat to his independence is:
- A) Advocacy threat
- B) Self-interest threat
- C) Self-review threat
- D) Familiarity threat
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Answer: D) Familiarity threat
A familiarity threat arises when, due to a long or close relationship with a client, the auditor becomes too sympathetic to their interests or too accepting of their work. Long association with a senior client official and close personal relations are classic examples. Safeguards include rotation of the engagement partner.
Question 4
Under Clause (8) of Part I of the First Schedule to the Chartered Accountants Act, 1949, a member in practice is guilty of professional misconduct if he:
- A) Accepts an audit of a company where the previous auditor has died
- B) Accepts a position as auditor previously held by another chartered accountant without first communicating with him in writing
- C) Charges a fee that is lower than the previous auditor's fee
- D) Accepts an audit of a newly incorporated company
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Answer: B) Accepts a position as auditor previously held by another chartered accountant without first communicating with him in writing
Clause (8) requires that before accepting a position as auditor previously held by another chartered accountant, the incoming auditor must first communicate with the previous auditor in writing. The purpose is to learn whether there are professional reasons why the appointment should not be accepted. A first audit of a new company has no previous auditor.
Question 5
CA Pooja agrees to audit a company for a fee equal to 2% of its net profit for the year. This is professional misconduct under the Chartered Accountants Act, 1949 because:
- A) It results in sharing of fees with a non-member
- B) It amounts to charging fees based on a percentage of profits, which Clause (10) of Part I of the First Schedule prohibits except as permitted by the Council's regulations
- C) The fee is lower than the minimum scale prescribed for audits
- D) Audit fees can only be fixed by the Central Government
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Answer: B) It amounts to charging fees based on a percentage of profits, which Clause (10) of Part I of the First Schedule prohibits except as permitted by the Council's regulations
Clause (10) of Part I of the First Schedule treats it as misconduct if a member in practice charges or offers to charge fees based on a percentage of profits or contingent upon findings or results, except as permitted under regulations (for example, certain receivership or liquidation roles). Fees linked to profits create a self-interest threat to independence.
Question 6
A practising chartered accountant discloses information about a client's business acquired in the course of an audit to a competitor, without the client's consent and without any legal requirement. This is misconduct under:
- A) Clause (6) of Part I of the First Schedule
- B) Clause (8) of Part I of the First Schedule
- C) Clause (10) of Part I of the Second Schedule
- D) Clause (1) of Part I of the Second Schedule
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Answer: D) Clause (1) of Part I of the Second Schedule
Clause (1) of Part I of the Second Schedule makes it misconduct for a member in practice to disclose information acquired in the course of professional engagement to any person other than the client, without the client's consent or otherwise than as required by law. Clause (6) of the First Schedule concerns solicitation, Clause (8) communication with the previous auditor, and Clause (10) of the Second Schedule client monies.
Question 7
CA Vikram signs the audit report of a company relying entirely on a working paper prepared by an article assistant on a material inventory balance, without any review. The inventory is later found to be grossly overstated. He is most likely to be held guilty under:
- A) Clause (12) of Part I of the First Schedule, for allowing a non-member to sign on his behalf
- B) Clause (2) of Part I of the First Schedule, for sharing fees with a non-member
- C) Clause (7) of Part I of the Second Schedule, for not exercising due diligence or being grossly negligent in the conduct of professional duties
- D) Clause (1) of Part I of the Second Schedule, for disclosing client information
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Answer: C) Clause (7) of Part I of the Second Schedule, for not exercising due diligence or being grossly negligent in the conduct of professional duties
Clause (7) of Part I of the Second Schedule covers a member who does not exercise due diligence or is grossly negligent in conducting professional duties. Signing a report on a material area without reviewing the assistant's work reflects lack of due diligence. Here CA Vikram signed the report himself, so Clause (12) on allowing others to sign does not apply.
Question 8
Under SA 210, which of the following is a precondition for an audit?
- A) Payment of the full audit fee in advance
- B) The absence of any internal control deficiencies
- C) An undertaking by management that the auditor will issue an unmodified opinion
- D) The use by management of an acceptable financial reporting framework and management's agreement that it acknowledges its responsibilities
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Answer: D) The use by management of an acceptable financial reporting framework and management's agreement that it acknowledges its responsibilities
SA 210 requires the auditor to determine that the financial reporting framework is acceptable and to obtain management's agreement that it acknowledges and understands its responsibility for preparing the financial statements, for internal control and for providing the auditor with access and information. If the preconditions are not present, the auditor shall not accept the engagement unless required by law.
Question 9
Which of the following persons is disqualified from appointment as auditor of a company under section 141(3) of the Companies Act, 2013?
- A) A firm whose partners are all practising chartered accountants
- B) A chartered accountant who is auditor of ten other companies
- C) A chartered accountant holding one share of an unrelated company
- D) An officer or employee of the company
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Answer: D) An officer or employee of the company
Section 141(3) disqualifies, among others, a body corporate (other than an LLP), an officer or employee of the company, a partner or employee of an officer or employee, persons with certain financial interests or business relationships, and a person in full-time employment elsewhere, or a person who already holds appointment as auditor of more than twenty companies (with certain companies, such as one person companies, dormant companies and small companies, excluded from the count). A firm of practising chartered accountants can be appointed.
Question 10
Rathi & Co., an audit firm, has completed two consecutive terms of five years each as auditor of a listed company. Under section 139(2) of the Companies Act, 2013, the firm:
- A) May be re-appointed for a third term of five years with a special resolution
- B) May continue indefinitely if the audit committee recommends it
- C) Cannot be re-appointed as auditor of that company for five years from the completion of its second term
- D) Cannot be re-appointed as auditor of that company ever again
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Answer: C) Cannot be re-appointed as auditor of that company for five years from the completion of its second term
Under section 139(2), applicable to listed companies and prescribed classes, an individual cannot be appointed for more than one term of five consecutive years and an audit firm for more than two terms of five consecutive years. After this, they are not eligible for re-appointment in that company for five years (the cooling-off period).
Question 11
The members of Dhara Polymers Ltd. wish to remove the statutory auditor before the expiry of the term. Under section 140(1) of the Companies Act, 2013, this requires:
- A) A resolution of the board of directors with the auditor's written consent
- B) A special resolution only, without any government approval
- C) A special resolution of the company after obtaining the previous approval of the Central Government, and giving the auditor a reasonable opportunity of being heard
- D) An ordinary resolution passed at a board meeting
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Answer: C) A special resolution of the company after obtaining the previous approval of the Central Government, and giving the auditor a reasonable opportunity of being heard
Section 140(1) provides that an auditor appointed under section 139 may be removed before expiry of the term only by a special resolution of the company, after obtaining the previous approval of the Central Government. The auditor concerned must be given a reasonable opportunity of being heard before removal.
Question 12
The board of Ekta Pharma Ltd. requests its statutory auditor, Sinha & Co., to also conduct its internal audit. Under section 144 of the Companies Act, 2013:
- A) Sinha & Co. may provide internal audit if approved by the board
- B) Sinha & Co. may provide internal audit only through a separate firm in which its partners are partners
- C) Sinha & Co. cannot provide internal audit services to the company, whether directly or indirectly
- D) Sinha & Co. may provide internal audit if the fee is less than the audit fee
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Answer: C) Sinha & Co. cannot provide internal audit services to the company, whether directly or indirectly
Section 144 prohibits an auditor from rendering certain services to the company, its holding or subsidiary, directly or indirectly, including accounting and book-keeping, internal audit, design and implementation of financial information systems, actuarial, investment advisory, investment banking, outsourced financial services and management services. Providing them through an associated firm is also covered as 'indirectly'.
Question 13
The statutory auditor of Gaurav Industries Ltd., a non-government company, resigns mid-term. Under section 139(8) of the Companies Act, 2013, the resulting casual vacancy:
- A) Is filled by the board alone, with no need for shareholders' approval
- B) Is filled by the Comptroller and Auditor General within 30 days
- C) Cannot be filled until the next annual general meeting
- D) Is filled by the board within 30 days, and the appointment must be approved by the company at a general meeting convened within three months of the board's recommendation
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Answer: D) Is filled by the board within 30 days, and the appointment must be approved by the company at a general meeting convened within three months of the board's recommendation
Section 139(8)(i) provides that a casual vacancy in a non-government company is filled by the board within 30 days. Where the vacancy is caused by resignation, the appointment must also be approved by the company at a general meeting convened within three months of the board's recommendation, and the auditor holds office till the conclusion of the next AGM.