Chapter 03 Test Bank: Student

Chapter 03 Test Bank
Student: ___________________________________________________________________________
1. Which of the following statements is correct?

A.
Ethics is concerned primarily with the
wellbeing of your client.
B.
Ethics is principally an
attitude of mind.
C.
Ethics is principally concerned with having a set of rules that
must be complied with.
D.
Ethics is concerned with creating an environment that allows entities
to make an equitable profit.

2. Ethics require:

A.
knowledge of moral
principles.
B.
skill in applying moral
principles.
C.
the development of virtues within
the individual.
D.
All of the given answers
are correct.

3. Which of the following is an example of deontological ethics?

A.
Egois
m.
B.
Utilitarian
ism.
C.
The principle of
beneficence.
D.
Virtu
es.

3-1
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
4. Which of the following is an example of utilitarianism?

A.
Greatest benefit for the
individual.
B.
Do unto others as you would have
them do unto you.
C.
Greatest benefit for the
greatest number.
D.
Equal rights
for all.

5. If an audit firm considers that it behaves ethically because it always follows the provisions of
APES 110, this is an example of:

A.
Teleological
ethics.
B.
Virtue
ethics.
C.
Deontological
ethics.
D.
None of the given answers
are correct.

6. Which of the following is an example of teleological ethics?

A.
The golden
rule.
B.
Utilitarian
ism.
C.
The principle of
beneficence.
D.
Virtu
es.

3-2
Education.
7. Which of the following is not an ethical attribute of an external auditor?

A.
Independe
nce.
B.
Client
advocacy.
C.
Objectiv
ity.
D.
Concern for the public
interest.

8. Competence as an independent auditor includes all of the following except:

A.
having the technical qualifications to
perform an engagement.
B.
possessing the ability to supervise and evaluate the
quality of staff work.
C.
guaranteeing the accuracy of the
work performed.
D.
doing additional research or
consulting others.

9. Which of the following is not a fundamental ethical principle as defined by APES 110?

A.
Professional
behaviour.
B.
True and fair
reporting.
C.
Integri
ty.
D.
Professional competence
and due care.

3-3
Education.

A.
Confidentia
lity.
B.
Familiar
ity.
C.
Objectiv
ity.
D.
Professional
behaviour.

11. APES 110:

A.
prohibits tendering for an audit currently done by
another audit firm.
B.
encourages but does not require auditors to refrain from
unwanted solicitation.
C.
requires auditors to act in the
public interest.
D.
prohibits offers of employment to employees of another
audit firm without notice.

12. Auditors are required to complete engagements competently. Competency embraces all of the
following except:

A.
an unbiased mental
attitude.
B.
the technical qualifications of
the audit staff.
C.
the capacity to exercise
judgment.
D.
the ability to research subject matter and
consult with others.

3-4
Education.
13. Which of the following situations would be a breach of confidentiality?

A.
Allowing a potential purchaser of your audit practice to review
your audit working papers.
B.
Allowing the Australian Securities and Investments Commission access to your audit
working papers to conduct a statutory investigation.
C.
Allowing the auditor of your client’s parent company access to
D.
are correct.


A.
Copies of client records incorporated into audit working papers must be
returned to the client upon request.
B.
Work sheets, in lieu of a general ledger, belong to the auditor and need not be
furnished to the client upon request.
C.
An extensive analysis of inventory prepared by the client at the auditor's request are work
papers which belong to the auditor and need not be furnished to the client upon request.
D.
The auditor who retains copies of client records must return the
original records upon request.

15. Vintage Ltd has a year-end of 30 June 20X0. The audit work was completed and the auditor’s
report signed on 3 September 20X0. On 1 October, the company requested the current auditor
to resign so that the auditor of their parent company could take over the audit. The current
auditors wrote a resignation letter dated 10 October 20X0 that was received by the company
on 15 October 20X0. This letter advised that the auditor’s resignation was effective from 3
September 20X0. The resignation letter was also forwarded to the Australian Securities and
Investments Commission (ASIC), requesting its confirmation of the resignation. ASIC approved
the resignation in a letter dated 31 October 20X0. The effective date of the resignation is:

A.
3 September
20X0.
B.
10 October
20X0.
C.
15 October
20X0.
D.
31 October
20X0.

3-5
Education.
16. Williams & Associates is a small firm with three partners. The audit partner, being the only
registered company auditor in the firm, retired from the firm on 31 August 20X0. On this date
the partner wrote a letter to the Australian Securities and Investments Commission (ASIC)
requesting permission to resign as auditor of all of his clients. ASIC gave its consent to the
resignation effective from 31 October 20X0. The auditor of the audit clients in the period from
31 August to 31 October 20X0 is:

A.
the retiring
partner.
B.
Williams &
Associates.
C.
Australian National Audit Office
as nominee.
D.
the next most senior partner of
Williams & Associates.

17. Which of the following is not an ethical decision-making model?

A.
Laura Nash
model.
B.
Spiral
model.
C.
Mary Guy
model.
D.
IFAC
model.

18. Which of the following is not a step in the American Accounting Association ethical decision-
making model?

A.
Define the ethical
issues.
B.
Identify the major principles,
rules and values.
C.
Assess the
consequences.
D.
Determine under what conditions you would allow
exceptions to your stand.

3-6
Education.
19. Which of the following is not a key factor to be considered in the framework for decision
making in APES 110?

A.
Fundamental ethical
principles.
B.
Established internal
procedures.
C.
Alternative courses
of action.
D.
Australian Auditing
Standards.

20. Independence means that the auditor:

A.
must be impartial with respect
to the client.
B.
must adopt the attitude of a detective
during the audit.
C.
has an obligation solely to
third parties.
D.
cannot provide any other professional services
to an audit client.

21. An auditor is independent if they are:

A.
intellig
ent.
B.
independent in fact and in
appearance.
C.
independent in fact
and honest.
D.
logical and
consistent.

3-7
Education.
22. Which of the following most completely describes auditor independence?

A.
Performing an audit from the viewpoint
of the public.
B.
Avoiding the appearance of an interest in the
affairs of an audit client.
C.
Performing the audit with integrity
and objectivity.
D.
Accepting the responsibility of acting
professionally.

23. Which of the following is a correct statement with respect to a listed company?

A.
The Australian Securities and Investments Commission does not have to be given
notice of the removal of an auditor.
B.
An auditor of a public company does not have to have the approval of the Australian
Securities and Investments Commission to resign.
C.
An auditor of a public company must be appointed within three
months of incorporation.
D.
The Australian Securities and Investments Commission will only allow the auditor to resign
other than at the annual general meeting if adequate disclosure of the resignation is made
to members.

24. Which of the following statements is not true?

A.
The auditor has a right of access to all books and records
at all reasonable times.
B.
The auditor must report all situations where inadequate
records are being kept.
C.
The auditor has a right to attend and be heard at
all board meetings.
D.
The auditor must review other information attached to the financial report to ensure
consistency with the financial report.

3-8
Education.
25. To emphasise auditor independence from management, many entities follow the practice of:

A.
appointing a partner of the audit firm conducting the audit to the
entity's audit committee.
B.
having the auditor report to the entity's
audit committee.
C.
requesting that a representative of the auditor is on hand at
the annual general meeting.
D.
establishing a policy of discouraging social contact between employees of
the entity and the audit staff.

26. Emma Jones is about to begin a recurring annual audit engagement. As the continuing
auditor, her independence would ordinarily be considered to be impaired if the previous year's
audit fee:

A.
was only partially paid and the balance is
being disputed.
B.
has not been paid and will not be paid for at
least 12 months.
C.
has not been paid and the client has filed
voluntary bankruptcy.
D.
was settled by
litigation.

27. It would not be appropriate for the auditor to initiate discussion with the audit committee
concerning:

A.
the extent to which the work of internal auditors will
influence the scope of the audit.
B.
details of the procedures that the auditor
intends to apply.
C.
the extent to which change in the company's organisation will
D.
details of potential problems that the auditor believes might
cause a modified opinion.

3-9
Education.
28. Rebecca Lane was offered the engagement to audit Beachside Ltd for the year ended 30 June
20X2. She had served as a director of Beachside Ltd until 30 June 20X0 and her spouse
currently owns 1000 of the 10 000 outstanding shares of Beachside Ltd. She should:

A.
accept the
engagement.
B.
let her partner accept and conduct
the engagement.
C.
refuse the engagement because she had
served as a director.
D.
refuse the engagement because of her
spouse’s share ownership.

29. Under APES 110, an auditor may not:

A.
be a member of the same club as any directors
of an audit client.
B.
perform bookkeeping services for
any audit client.
C.
perform advisory services for any
audit client.
D.
have any joint, closely held investment with any
director of an audit client.

30. The ethical rules state that independence of the external audit firm is considered to be
impaired if:

A.
the audit firm provides management advisory
services to the client.
B.
the audit partner purchases the client's product at
normal retail prices.
C.
the audit firm has served as the external
auditor for many years.
D.
an immediate relative of one of the partners is the beneficial owner of shares forming a
material part of the share capital of the client.

3-10
Education.
31. An auditor strives to achieve independence in appearance to:

A.
maintain public confidence in
the auditor.
B.
maintain an unbiased
mental attitude.
C.
comply with the
Corporations Act 2001.
D.
become
independent in fact.

32. One of the partners in your audit firm holds 1% of the shares in an audit client. This is not
material to the partner's wealth. This is a breach of:

A.
APES
110.
the Corporations
B.
Act 2001.
C.
both APES 110 and the
D.
neither APES 110 nor the

33. Which of the following disclosures to members would not be required by the Australian
Securities and Investments Commission (ASIC) for them to allow the auditor of a public
company to resign outside of the company’s annual general meeting?

A.
Details of the outgoing
auditor.
B.
Details of any unpaid audit fees of the
outgoing auditor.
C.
Details of the proposed
incoming auditor.
D.
Reasons for the change
of auditor.

3-11
Education.
34. Bernard & Associates has audited the financial report of Basset Pty Ltd (Basset) for several
years and had always been paid promptly for services rendered. Last year’s audit invoices
have not been paid because Basset is experiencing cash flow difficulties and the current
year’s audit is scheduled to commence in one week. With respect to the past due audit fees,
Bernard & Associates should:

A.
perform the scheduled audit and allow Basset to pay when the cash
flow difficulties are alleviated.
B.
perform the scheduled audit only after arranging a definite payment
schedule and securing notes
signed by Basset.
C.
inform Basset’s management that the past due audit fees may be
considered an impairment
of auditor independence.
D.
inform Basset’s management that the past due audit fees may be
considered a loan on which
interest must be imputed for financial report purposes.

35. In which of the following instances would the independence of the auditor most likely not be
considered to be impaired?

A.
They have been retained as the auditor of a charitable entity in which the spouse
of the auditor serves as treasurer.
B.
They have been retained as the auditor of a company in which the auditor's
investment club owns a 10% interest.
C.
They have been retained as the auditor of a large manufacturing company that
has loaned the auditor $6000.
D.
They have been retained as the auditor of a company from which the auditor purchased his
or her latest motor vehicle at normal list price.

3-12
Education.
36. You are the auditor of Express Travel Ltd, a large travel agent that also handles all your audit
firm’s travel arrangements on normal commercial rates and provides excellent service. The
chief financial officer of Express Travel Ltd has asked if you could help them overcome an
economic downturn by recommending their services to your other audit clients. However, he
has also said that he will understand if you are not able to do so. What type of threat to your
independence does this request constitute?

A.
Intimidat
ion.
B.
Self-
interest.
C.
Integri
ty.
D.
Advoca
cy.

37. You are the auditor of Blue Haze Ltd and are nearing the completion of the audit work for the
current year when the audit senior, Travis Dean, advises you that he has been offered a job at
Blue Haze Ltd as soon as the current audit is finished. What type of threat to the auditor's
independence does this situation constitute?

A.
Intimidat
ion.
B.
Self-
interest.
C.
Self-
review.
D.
Advoca
cy.

3-13
Education.
38. You are the auditor of Speed Ltd and the chief financial officer has stated that he is
concerned that you are taking up too much of his staff's time asking unnecessary questions
for the audit. Further, he has indicated that your chances of getting the engagement to review
the implementation of their new computer system engagement will be greatly improved if you
keep your questioning of staff to a minimum during the current audit. What type of threat to
your independence does this situation constitute?

A.
Intimidat
ion.
B.
Self-
interest.
C.
Self-
review.
D.
Advoca
cy.

39. Audit firm rotation has been introduced:

A.
in Europe by the European
Parliament.
B.
in the United States by the Public Company
Accounting Oversight Board.
C.
in Australia by the
D.
are correct.

40. APES 110 would be violated if an auditor accepted a fee for services and the fee was:

A.
fixed by a public
authority.
B.
based on a price quotation submitted in
competitive bidding.
C.
based on time spent at standard
charge rates.
D.
payable after a specified finding was attained in a
review of a financial report.

3-14
Education.
41. An acceptable audit fee arrangement is to:

A.
accept the client’s corporate bond as part
payment of an audit fee.
B.
quote a fixed fee for an audit, based on an estimate of the
total costs to be incurred.
C.
quote a discounted fee on the expectation of performing
other services for the client.
D.
accept a reduced audit fee because the audit firm already performs a wide
variety of other services for the client.


A.
Agreeing to a 50% higher fee for providing an unmodified auditor’s report by the date
required for an application for a bank loan is permissible provided the audit is reviewed by a
quality control partner.
B.
Agreeing to a 50% higher fee for a management consulting engagement on the condition
that you find cost savings is permissible for an audit client provided safeguards are in place.
C.
Auditors are entitled to reasonable fees
under APES 110.
D.
Audit fees may be disclosed in the financial report
on a voluntary basis.

43. When a bid price for audit services by an audit firm is quoted at an unreasonably low level to
win the tender, with any unrecovered audit costs recovered subsequently through other
services or by other means, it is called:

A.
opinion
shopping.
B.
low-
balling.
C.
tender
fixing.
D.
kick-
backs.

3-15
Education.
44. Which of the following best describes the role of corporate governance?

A.
Management decides which accounting principles are
the most appropriate.
B.
Shareholders vote to decide who should be members of
the board of directors.
C.
An independent board of directors holds the management team accountable to
shareholders and other constituents.
D.
Management is compensated based on the
company's profitability.

45. Corporate governance procedures generally involve policies concerning which of the following
matters?

A.
Compensation arrangements for senior management and
non-executive directors.
B.
Ensuring the board of directors is composed of persons with an appropriate
mix of skills and experience.
C.
Nomination of and communication with the
external auditors.
D.
are correct.

46. The audit committee of a publicly held company should be made up of:

A.
representatives of the major
shareholders.
B.
the audit partner, the chief financial officer, the legal counsel
and at least one outsider.
C.
representatives from the client's management, investors,
suppliers and customers.
D.
members of the board of directors who
are not employees.

3-16
Education.
47. Which of the following is not a requirement of the ASX Corporate Governance Council
Principles and Recommendations?

A.
The audit committee should consist only of non-
executive directors.
B.
The audit committee should consist of a majority of
independent directors.
C.
The audit committee should consist of at
least five members.
D.
The chair of the audit committee should not be
the chair of the board.

48. The external auditor will normally report to the audit committee on all the following matters
except:

A.
the responsibilities assumed
by the auditor.
B.
deficiencies in the entity's
internal control.
C.
the audit firm's staffing
of the job.
D.
potential problems that could give rise to a
modified auditor's report.

49. Which of the following is not one of the key areas covered by the OECD Principles of
Corporate Governance?

A.
Protection of
shareholder's rights.
B.
Responsibilities of
the board.
C.
Disclosure and
transparency.
D.
Responsibilities of the
auditor.

3-17
Education.
50. Which of the following situations may indicate that a non-executive director is not
independent?

A.
Having a substantial
shareholding.
B.
Having just retired as the chief
financial officer.
C.
Having served on the board of directors for a
long period of time.
D.
All the given answers
are correct.

3-18
Education.
Chapter 03 Test Bank Key


A. Ethics is concerned primarily with the

wellbeing of your client.
B. Ethics is principally an
attitude of mind.
C. Ethics is principally concerned with having a set of rules that
must be complied with.
D. Ethics is concerned with creating an environment that allows entities
to make an equitable profit.

AACSB: Ethics
Difficulty: Easy
Learning Objective: 03.01 Explain the nature and importance of professional ethics, and describe the three main
categories of ethical theory
Topic: Professional ethics and ethical theory

2. Ethics require:

A. knowledge of moral
principles.
B. skill in applying moral
principles.
C. the development of virtues within
the individual.
D. All of the given answers
are correct.

AACSB: Ethics
Difficulty: Easy

3-19
Education.
3. Which of the following is an example of deontological ethics?

A. Egois
m.
B. Utilitarian
ism.
C. The principle of
beneficence.
D. Virtu
es.

AACSB: Ethics
Difficulty: Medium

3-20
Education.
4. Which of the following is an example of utilitarianism?

A. Greatest benefit for the

individual.
B. Do unto others as you would have
them do unto you.
C. Greatest benefit for the
greatest number.
D. Equal rights
for all.

AACSB: Ethics
Difficulty: Easy

5. If an audit firm considers that it behaves ethically because it always follows the provisions
of APES 110, this is an example of:

A. Teleological
ethics.
B. Virtue
ethics.
C. Deontological
ethics.
D. None of the given answers
are correct.

AACSB: Ethics
Difficulty: Easy

3-21
Education.
6. Which of the following is an example of teleological ethics?

A. The golden
rule.
B. Utilitarian
ism.
C. The principle of
beneficence.
D. Virtu
es.

AACSB: Ethics
Difficulty: Medium

7. Which of the following is not an ethical attribute of an external auditor?

A. Independe
nce.
B. Client
advocacy.
C. Objectiv
ity.
D. Concern for the public
interest.

AACSB: Ethics
Difficulty: Easy
Learning Objective: 03.02 Outline the essence of the accounting bodies' code of ethics
Topic: Accounting bodies’ code of ethics

8. Competence as an independent auditor includes all of the following except:

A. having the technical qualifications to

perform an engagement.
B. possessing the ability to supervise and evaluate the
quality of staff work.
C. guaranteeing the accuracy of the
work performed.
D. doing additional research or
consulting others.

AACSB: Ethics
3-22
Education.
Difficulty: Easy


A. Professional
behaviour.
B. True and fair
reporting.
C. Integri
ty.
D. Professional competence
and due care.

AACSB: Ethics
Difficulty: Easy


A. Confidentia
lity.
B. Familiar
ity.
C. Objectiv
ity.
D. Professional
behaviour.

AACSB: Ethics
Difficulty: Easy

3-23
Education.
11. APES 110:

A. prohibits tendering for an audit currently done by

another audit firm.
B. encourages but does not require auditors to refrain from
unwanted solicitation.
C. requires auditors to act in the
public interest.
D. prohibits offers of employment to employees of another
audit firm without notice.

AACSB: Ethics
Difficulty: Medium

12. Auditors are required to complete engagements competently. Competency embraces all of
the following except:

A. an unbiased mental

attitude.
B. the technical qualifications of
the audit staff.
C. the capacity to exercise
judgment.
D. the ability to research subject matter and
consult with others.

AACSB: Ethics
Difficulty: Medium

13. Which of the following situations would be a breach of confidentiality?

A. Allowing a potential purchaser of your audit practice to review

B. Allowing the Australian Securities and Investments Commission access to your audit
working papers to conduct a statutory investigation.
C. Allowing the auditor of your client’s parent company access to
are correct.

AACSB: Ethics
3-24
Education.
Difficulty: Medium


A. Copies of client records incorporated into audit working papers must be

returned to the client upon request.
B. Work sheets, in lieu of a general ledger, belong to the auditor and need not be
furnished to the client upon request.
C. An extensive analysis of inventory prepared by the client at the auditor's request are
work papers which belong to the auditor and need not be furnished to the client upon
request.
D. The auditor who retains copies of client records must return the
original records upon request.

AACSB: Ethics
Difficulty: Medium

15. Vintage Ltd has a year-end of 30 June 20X0. The audit work was completed and the
auditor’s report signed on 3 September 20X0. On 1 October, the company requested the
current auditor to resign so that the auditor of their parent company could take over the
audit. The current auditors wrote a resignation letter dated 10 October 20X0 that was
received by the company on 15 October 20X0. This letter advised that the auditor’s
resignation was effective from 3 September 20X0. The resignation letter was also
forwarded to the Australian Securities and Investments Commission (ASIC), requesting its
confirmation of the resignation. ASIC approved the resignation in a letter dated 31 October
20X0. The effective date of the resignation is:

A. 3 September
20X0.
B. 10 October
20X0.
C. 15 October
20X0.
D. 31 October
20X0.

AACSB: Ethics
Difficulty: Medium

3-25
Education.
16. Williams & Associates is a small firm with three partners. The audit partner, being the only
registered company auditor in the firm, retired from the firm on 31 August 20X0. On this
date the partner wrote a letter to the Australian Securities and Investments Commission
(ASIC) requesting permission to resign as auditor of all of his clients. ASIC gave its consent
to the resignation effective from 31 October 20X0. The auditor of the audit clients in the
period from 31 August to 31 October 20X0 is:

A. the retiring
partner.
B. Williams &
Associates.
C. Australian National Audit Office
as nominee.
D. the next most senior partner of
Williams & Associates.

AACSB: Ethics
Difficulty: Hard

17. Which of the following is not an ethical decision-making model?

A. Laura Nash
model.
B. Spiral
model.
C. Mary Guy
model.
D. IFAC
model.

AACSB: Ethics
Difficulty: Easy
Learning Objective: 03.03 Apply sound ethical decision-making techniques
Topic: Applying ethics

3-26
Education.
18. Which of the following is not a step in the American Accounting Association ethical
decision-making model?

A. Define the ethical

issues.
B. Identify the major principles,
rules and values.
C. Assess the
consequences.
D. Determine under what conditions you would allow
exceptions to your stand.

AACSB: Ethics
Difficulty: Easy

19. Which of the following is not a key factor to be considered in the framework for decision
making in APES 110?

A. Fundamental ethical
principles.
B. Established internal
procedures.
C. Alternative courses
of action.
D. Australian Auditing
Standards.

AACSB: Ethics
Difficulty: Easy

3-27
Education.
20. Independence means that the auditor:

A. must be impartial with respect

to the client.
B. must adopt the attitude of a detective
during the audit.
C. has an obligation solely to
third parties.
D. cannot provide any other professional services
to an audit client.

AACSB: Ethics
Difficulty: Easy
Learning Objective: 03.04 Explain the concept and importance of auditor independence
Topic: Auditor independence

21. An auditor is independent if they are:

A. intellig
ent.
B. independent in fact and in
appearance.
C. independent in fact
and honest.
D. logical and
consistent.

AACSB: Ethics
Difficulty: Easy

22. Which of the following most completely describes auditor independence?

A. Performing an audit from the viewpoint

of the public.
B. Avoiding the appearance of an interest in the
affairs of an audit client.
C. Performing the audit with integrity
and objectivity.
D. Accepting the responsibility of acting
professionally.

AACSB: Ethics
Difficulty: Medium
3-28
Education.

23. Which of the following is a correct statement with respect to a listed company?

A. The Australian Securities and Investments Commission does not have to be given
notice of the removal of an auditor.
B. An auditor of a public company does not have to have the approval of the Australian
Securities and Investments Commission to resign.
C. An auditor of a public company must be appointed within three
months of incorporation.
D. The Australian Securities and Investments Commission will only allow the auditor to
resign other than at the annual general meeting if adequate disclosure of the resignation
is made to members.

AACSB: Ethics
Difficulty: Medium

24. Which of the following statements is not true?

A. The auditor has a right of access to all books and records

at all reasonable times.
B. The auditor must report all situations where inadequate
records are being kept.
C. The auditor has a right to attend and be heard at
all board meetings.
D. The auditor must review other information attached to the financial report to ensure
consistency with the financial report.

AACSB: Ethics
Difficulty: Medium

3-29
Education.
25. To emphasise auditor independence from management, many entities follow the practice
of:

A. appointing a partner of the audit firm conducting the audit to the

entity's audit committee.
B. having the auditor report to the entity's
audit committee.
C. requesting that a representative of the auditor is on hand at
the annual general meeting.
D. establishing a policy of discouraging social contact between employees of
the entity and the audit staff.

AACSB: Ethics
Difficulty: Medium

26. Emma Jones is about to begin a recurring annual audit engagement. As the continuing
auditor, her independence would ordinarily be considered to be impaired if the previous
year's audit fee:

A. was only partially paid and the balance is

being disputed.
B. has not been paid and will not be paid for at
least 12 months.
C. has not been paid and the client has filed
voluntary bankruptcy.
D. was settled by
litigation.

AACSB: Ethics
Difficulty: Medium

3-30
Education.
27. It would not be appropriate for the auditor to initiate discussion with the audit committee
concerning:

A. the extent to which the work of internal auditors will

B. details of the procedures that the auditor
intends to apply.
C. the extent to which change in the company's organisation will
D. details of potential problems that the auditor believes might
cause a modified opinion.

AACSB: Ethics
Difficulty: Medium

28. Rebecca Lane was offered the engagement to audit Beachside Ltd for the year ended 30
June 20X2. She had served as a director of Beachside Ltd until 30 June 20X0 and her
spouse currently owns 1000 of the 10 000 outstanding shares of Beachside Ltd. She
should:

A. accept the
engagement.
B. let her partner accept and conduct
the engagement.
C. refuse the engagement because she had
served as a director.
D. refuse the engagement because of her
spouse’s share ownership.

AACSB: Ethics
Difficulty: Medium

3-31
Education.
29. Under APES 110, an auditor may not:

A. be a member of the same club as any directors

of an audit client.
B. perform bookkeeping services for
any audit client.
C. perform advisory services for any
audit client.
D. have any joint, closely held investment with any
director of an audit client.

AACSB: Ethics
Difficulty: Hard

30. The ethical rules state that independence of the external audit firm is considered to be
impaired if:

A. the audit firm provides management advisory

services to the client.
B. the audit partner purchases the client's product at
normal retail prices.
C. the audit firm has served as the external
auditor for many years.
D. an immediate relative of one of the partners is the beneficial owner of shares forming a
material part of the share capital of the client.

AACSB: Ethics
Difficulty: Medium

31. An auditor strives to achieve independence in appearance to:

A. maintain public confidence in

the auditor.
B. maintain an unbiased
mental attitude.
C. comply with the
D. become
independent in fact.

AACSB: Ethics
3-32
Education.
Difficulty: Easy

32. One of the partners in your audit firm holds 1% of the shares in an audit client. This is not
material to the partner's wealth. This is a breach of:

A. APES
110.
B. the Corporations
Act 2001.
C. both APES 110 and the
D. neither APES 110 nor the

AACSB: Ethics
Difficulty: Easy

33. Which of the following disclosures to members would not be required by the Australian
Securities and Investments Commission (ASIC) for them to allow the auditor of a public
company to resign outside of the company’s annual general meeting?

A. Details of the outgoing

auditor.
B. Details of any unpaid audit fees of the
outgoing auditor.
C. Details of the proposed
incoming auditor.
D. Reasons for the change
of auditor.

AACSB: Ethics
Difficulty: Medium

3-33
Education.
34. Bernard & Associates has audited the financial report of Basset Pty Ltd (Basset) for
several years and had always been paid promptly for services rendered. Last year’s audit
invoices have not been paid because Basset is experiencing cash flow difficulties and the
current year’s audit is scheduled to commence in one week. With respect to the past due
audit fees, Bernard & Associates should:

A. perform the scheduled audit and allow Basset to pay when the cash
flow difficulties are alleviated.
B. perform the scheduled audit only after arranging a definite payment
schedule and securing notes
signed by Basset.
C. inform Basset’s management that the past due audit fees may be
considered an impairment
of auditor independence.
D. inform Basset’s management that the past due audit fees may be
considered a loan on which
interest must be imputed for financial report purposes.

AACSB: Ethics
Difficulty: Medium

35. In which of the following instances would the independence of the auditor most likely not
be considered to be impaired?

A. They have been retained as the auditor of a charitable entity in which the spouse
of the auditor serves as treasurer.
B. They have been retained as the auditor of a company in which the auditor's
investment club owns a 10% interest.
C. They have been retained as the auditor of a large manufacturing company that
has loaned the auditor $6000.
D. They have been retained as the auditor of a company from which the auditor purchased
his or her latest motor vehicle at normal list price.

AACSB: Ethics
Difficulty: Medium

3-34
Education.
36. You are the auditor of Express Travel Ltd, a large travel agent that also handles all your
audit firm’s travel arrangements on normal commercial rates and provides excellent
service. The chief financial officer of Express Travel Ltd has asked if you could help them
overcome an economic downturn by recommending their services to your other audit
clients. However, he has also said that he will understand if you are not able to do so. What
type of threat to your independence does this request constitute?

A. Intimidat
ion.
B. Self-
interest.
C. Integri
ty.
D. Advoca
cy.

AACSB: Ethics
Difficulty: Hard

37. You are the auditor of Blue Haze Ltd and are nearing the completion of the audit work for
the current year when the audit senior, Travis Dean, advises you that he has been offered a
job at Blue Haze Ltd as soon as the current audit is finished. What type of threat to the
auditor's independence does this situation constitute?

A. Intimidat
ion.
B. Self-
interest.
C. Self-
review.
D. Advoca
cy.

AACSB: Ethics
Difficulty: Hard

3-35
Education.
38. You are the auditor of Speed Ltd and the chief financial officer has stated that he is
concerned that you are taking up too much of his staff's time asking unnecessary
questions for the audit. Further, he has indicated that your chances of getting the
engagement to review the implementation of their new computer system engagement will
be greatly improved if you keep your questioning of staff to a minimum during the current
audit. What type of threat to your independence does this situation constitute?

A. Intimidat
ion.
B. Self-
interest.
C. Self-
review.
D. Advoca
cy.

AACSB: Ethics
Difficulty: Hard

39. Audit firm rotation has been introduced:

A. in Europe by the European

Parliament.
B. in the United States by the Public Company
Accounting Oversight Board.
C. in Australia by the
are correct.

AACSB: Ethics
Difficulty: Medium

3-36
Education.
40. APES 110 would be violated if an auditor accepted a fee for services and the fee was:

A. fixed by a public
authority.
B. based on a price quotation submitted in
competitive bidding.
C. based on time spent at standard
charge rates.
D. payable after a specified finding was attained in a
review of a financial report.

AACSB: Ethics
Difficulty: Easy
Learning Objective: 03.05 Explain fee determination
Topic: Fee determination

41. An acceptable audit fee arrangement is to:

A. accept the client’s corporate bond as part

payment of an audit fee.
B. quote a fixed fee for an audit, based on an estimate of the
total costs to be incurred.
C. quote a discounted fee on the expectation of performing
other services for the client.
D. accept a reduced audit fee because the audit firm already performs a wide
variety of other services for the client.

AACSB: Ethics
Difficulty: Easy

3-37
Education.

A. Agreeing to a 50% higher fee for providing an unmodified auditor’s report by the date
required for an application for a bank loan is permissible provided the audit is reviewed
by a quality control partner.
B. Agreeing to a 50% higher fee for a management consulting engagement on the condition
that you find cost savings is permissible for an audit client provided safeguards are in
place.
C. Auditors are entitled to reasonable fees
under APES 110.
D. Audit fees may be disclosed in the financial report
on a voluntary basis.

AACSB: Ethics
Difficulty: Medium

43. When a bid price for audit services by an audit firm is quoted at an unreasonably low level
to win the tender, with any unrecovered audit costs recovered subsequently through other
services or by other means, it is called:

A. opinion
shopping.
B. low-
balling.
C. tender
fixing.
D. kick-
backs.

AACSB: Ethics
Difficulty: Easy

3-38
Education.
44. Which of the following best describes the role of corporate governance?

A. Management decides which accounting principles are

the most appropriate.
B. Shareholders vote to decide who should be members of
the board of directors.
C. An independent board of directors holds the management team accountable to
shareholders and other constituents.
D. Management is compensated based on the
company's profitability.

AACSB: Analytic
Difficulty: Easy
Learning Objective: 03.06 Explain the concept of corporate governance
Topic: Corporate governance

45. Corporate governance procedures generally involve policies concerning which of the
following matters?

A. Compensation arrangements for senior management and

non-executive directors.
B. Ensuring the board of directors is composed of persons with an appropriate
mix of skills and experience.
C. Nomination of and communication with the
external auditors.
are correct.

AACSB: Analytic
Difficulty: Easy

46. The audit committee of a publicly held company should be made up of:

A. representatives of the major

shareholders.
B. the audit partner, the chief financial officer, the legal counsel
and at least one outsider.
C. representatives from the client's management, investors,
suppliers and customers.
D. members of the board of directors who
are not employees.

AACSB: Analytic
3-39
Education.
Difficulty: Medium

47. Which of the following is not a requirement of the ASX Corporate Governance Council
Principles and Recommendations?

A. The audit committee should consist only of non-

executive directors.
B. The audit committee should consist of a majority of
independent directors.
C. The audit committee should consist of at
least five members.
D. The chair of the audit committee should not be
the chair of the board.

AACSB: Analytic
Difficulty: Medium

48. The external auditor will normally report to the audit committee on all the following
matters except:

A. the responsibilities assumed

by the auditor.
B. deficiencies in the entity's
internal control.
C. the audit firm's staffing
of the job.
D. potential problems that could give rise to a
modified auditor's report.

AACSB: Analytic
Difficulty: Medium

3-40
Education.
49. Which of the following is not one of the key areas covered by the OECD Principles of
Corporate Governance?

A. Protection of
shareholder's rights.
B. Responsibilities of
the board.
C. Disclosure and
transparency.
D. Responsibilities of the
auditor.

AACSB: Analytic
Difficulty: Medium

50. Which of the following situations may indicate that a non-executive director is not
independent?

A. Having a substantial
shareholding.
B. Having just retired as the chief
financial officer.
C. Having served on the board of directors for a
long period of time.
D. All the given answers
are correct.

AACSB: Analytic
Difficulty: Easy

3-41
Education.
Chapter 03 Test Bank Summary

Category # of Que
stions
AACSB: Analytic 7
AACSB: Ethics 43
Difficulty: Easy 21
Difficulty: Hard 5
Difficulty: Medium 24
Learning Objective: 03.01 Explain the nature and importance of professional ethics, and de 6
scribe the three main categories of ethical theory
Learning Objective: 03.02 Outline the essence of the accounting bodies' code of ethics 10
Learning Objective: 03.03 Apply sound ethical decision-making techniques 3
Learning Objective: 03.04 Explain the concept and importance of auditor independence 20
Learning Objective: 03.05 Explain fee determination 4
Learning Objective: 03.06 Explain the concept of corporate governance 7
Topic: Accounting bodies’ code of ethics 10
Topic: Applying ethics 3
Topic: Auditor independence 20
Topic: Corporate governance 7
Topic: Fee determination 4
Topic: Professional ethics and ethical theory 6
3-42
Education.

Chapter 03 Test Bank: Student

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Chapter 03 Test Bank: Student

Uploaded by

Copyright:

Available Formats

Chapter 03 Test Bank

1. Which of the following statements is correct?

A. Ethics is concerned primarily with the

A. Greatest benefit for the

A. having the technical qualifications to

A. prohibits tendering for an audit currently done by

A. an unbiased mental

A. Allowing a potential purchaser of your audit practice to review

A. Copies of client records incorporated into audit working papers must be

A. Define the ethical

A. must be impartial with respect

A. Performing an audit from the viewpoint

A. The auditor has a right of access to all books and records

A. appointing a partner of the audit firm conducting the audit to the

A. was only partially paid and the balance is

A. the extent to which the work of internal auditors will

A. be a member of the same club as any directors

A. the audit firm provides management advisory

A. maintain public confidence in

A. Details of the outgoing

A. in Europe by the European

A. accept the client’s corporate bond as part

A. Management decides which accounting principles are

A. Compensation arrangements for senior management and

A. representatives of the major

A. The audit committee should consist only of non-

A. the responsibilities assumed

You might also like