ICAEW ARF · Chapter 10
Professional ethics: principles, threats and safeguards MCQs with Answers
12 multiple-choice questions on Professional ethics: principles, threats and safeguards for ICAEW ARF Assurance and Risk Fundamentals. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Which of the following is NOT one of the five fundamental principles set out in the ICAEW Code of Ethics?
- A) Integrity
- B) Objectivity
- C) Professional behaviour
- D) Independence
Show answer & explanation
Answer: D) Independence
The five fundamental principles in the ICAEW Code of Ethics are integrity, objectivity, professional competence and due care, confidentiality, and professional behaviour. Independence is closely linked to objectivity and is required of auditors and other assurance providers under the Code's independence requirements and, for UK audits, the FRC Ethical Standard, but it is not itself one of the five fundamental principles. Integrity, objectivity and professional behaviour are all fundamental principles.
Question 2
Which fundamental principle requires a professional accountant to be straightforward and honest in all professional and business relationships?
- A) Integrity
- B) Objectivity
- C) Professional behaviour
- D) Professional competence and due care
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Answer: A) Integrity
Integrity means being straightforward and honest, so an accountant should not knowingly be associated with misleading information. Objectivity concerns not allowing bias, conflicts of interest or undue influence to override judgement. Professional behaviour involves complying with laws and avoiding conduct that discredits the profession.
Question 3
An audit firm prepares a client's financial statements and then audits them. Which threat to objectivity does this create?
- A) Advocacy
- B) Intimidation
- C) Familiarity
- D) Self-review
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Answer: D) Self-review
A self-review threat arises when the firm evaluates its own previous work, as the audit team may fail to identify, or be reluctant to report, errors in statements their firm prepared. Advocacy involves promoting the client's position, intimidation involves pressure on the auditor, and familiarity arises from close relationships.
Question 4
A senior partner has acted as audit engagement partner for the same client for many years and has developed close friendships with its directors. Which threat does this create?
- A) Self-interest
- B) Familiarity
- C) Self-review
- D) Advocacy
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Answer: B) Familiarity
Long association with a client can create a familiarity threat because the partner may become too sympathetic to the directors and less sceptical. A common safeguard is rotating senior personnel off the engagement. Self-interest involves financial or other personal interests, and self-review involves checking the firm's own work.
Question 5
The finance director of an audit client tells the audit partner that the company will change auditors unless the partner agrees to a favourable accounting treatment. Which threat does this create?
- A) Familiarity
- B) Intimidation
- C) Self-review
- D) Advocacy
Show answer & explanation
Answer: B) Intimidation
An intimidation threat arises when the auditor is deterred from acting objectively by actual or perceived pressure, such as a threat of dismissal. The partner should not give in to the pressure and should consider discussing the matter with those charged with governance and others within the firm.
Question 6
An audit firm promotes the shares of an audit client to potential investors. Which threat does this create?
- A) Intimidation
- B) Familiarity
- C) Self-review
- D) Advocacy
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Answer: D) Advocacy
An advocacy threat arises when the firm promotes a client's position to the point that its objectivity may be compromised. Promoting the client's shares aligns the firm with the client's interests, which is incompatible with the independent role of the auditor.
Question 7
An audit manager has inherited shares in a company that the firm audits. What is the appropriate action?
- A) The manager can stay on the audit provided the shareholding is disclosed in the auditor's report
- B) The manager should dispose of the shares as soon as practicable or be removed from the audit team
- C) No action is needed because the shares were inherited rather than purchased
- D) The manager should buy more shares so that the holding is clearly disclosed to the board
Show answer & explanation
Answer: B) The manager should dispose of the shares as soon as practicable or be removed from the audit team
A direct financial interest in an audit client creates a self-interest threat so significant that no safeguard other than disposal or removal from the team is adequate. The way the shares were acquired does not change the threat, although it allows a short period to dispose of them. Disclosure in the auditor's report is not an acceptable safeguard.
Question 8
Fees from one audit client form a large and growing proportion of an audit firm's total fee income. Which threat arises and which safeguard is most appropriate?
- A) A self-interest threat; disclose the position to those charged with governance and arrange an independent review of the audit work
- B) A self-review threat; ask the client to prepare its own financial statements
- C) A familiarity threat; rotate the junior staff on the audit
- D) An advocacy threat; decline to represent the client in disputes with HM Revenue & Customs
Show answer & explanation
Answer: A) A self-interest threat; disclose the position to those charged with governance and arrange an independent review of the audit work
Fee dependence creates a self-interest threat, because the firm may be reluctant to upset a client whose fees it cannot afford to lose. Appropriate safeguards include disclosure to those charged with governance and an engagement quality review by someone outside the team, or reducing the work for the client. The other threats and safeguards do not address economic dependence.
Question 9
An audit client offers the audit team free tickets to a major sporting event as thanks for their work. What should the audit team do?
- A) Decline the tickets unless their value is trivial and inconsequential
- B) Accept the tickets because the audit has already been completed
- C) Accept the tickets provided the audit partner attends as well
- D) Accept the tickets and disclose them in the auditor's report
Show answer & explanation
Answer: A) Decline the tickets unless their value is trivial and inconsequential
Gifts and hospitality from an audit client create self-interest and familiarity threats. They should be accepted only if a reasonable and informed third party would consider them trivial and inconsequential. Valuable tickets to a major event are unlikely to meet this test, and disclosure in the report is not an acceptable safeguard.
Question 10
Which of the following fee arrangements for a statutory audit would be unacceptable?
- A) A fee based on the time spent by staff at agreed hourly rates
- B) A fee calculated as a percentage of the client's reported profit before tax
- C) A fixed fee agreed in advance, reflecting the expected work
- D) A fee that increases because the client's business has grown and the audit involves more work
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Answer: B) A fee calculated as a percentage of the client's reported profit before tax
A contingent fee, where the fee depends on the outcome of the work or a result such as reported profit, creates a self-interest threat so significant that it is not permitted for an audit. Time-based fees, fixed fees and fees reflecting the work required are all acceptable, provided the fee is sufficient to allow a proper audit.
Question 11
An accountant's advertising claims that the firm 'guarantees to cut your tax bill by half'. Which fundamental principle is most likely to be breached?
- A) Confidentiality
- B) Objectivity
- C) Professional competence and due care
- D) Professional behaviour
Show answer & explanation
Answer: D) Professional behaviour
Professional behaviour requires accountants to avoid conduct that discredits the profession, including making exaggerated claims about the services they can offer. A guarantee of a particular tax saving cannot be honestly given. Confidentiality and objectivity are not directly affected by the advertising claim.
Question 12
Which of the following best describes the conceptual framework approach to ethics in the ICAEW Code?
- A) Follow a complete list of prohibited activities, as anything not listed is permitted
- B) Identify threats to compliance with the fundamental principles, evaluate their significance, and eliminate them or reduce them to an acceptable level, declining or ending the work if this is not possible
- C) Accept all threats, provided they are disclosed to the client in the engagement letter
- D) Refer every ethical issue to the client's audit committee for a decision
Show answer & explanation
Answer: B) Identify threats to compliance with the fundamental principles, evaluate their significance, and eliminate them or reduce them to an acceptable level, declining or ending the work if this is not possible
The Code uses a principles-based conceptual framework rather than a complete set of rules. Accountants identify threats, evaluate them using the reasonable and informed third party test, and address them by eliminating the circumstances, applying safeguards or declining the engagement. Disclosure alone, or passing decisions to the client, does not meet these requirements.