Topic 2 – Governance

THE FOLLOWING SCENARIO RELATES TO QUESTIONS 2-6 18 mins

You are an audit manager of Satsuma & Co and have been assigned to the audit of Tangerine Tech Co (Tangerine),
a company which is planning to list on a stock exchange within six months. The listing rules of the stock exchange
require compliance with corporate governance principles, and the directors are unsure whether they are following
best practice in relation to this. They have asked the audit engagement partner for their view on this matter.
Tangerine’s board is comprised of six executive directors, a non-executive chairman and three other non-executive
directors (NEDs). The chairman and one of the NEDS are former directors of Tangerine and on reaching retirement
age were asked to take on non-executive roles. The company has established an audit committee, and all NEDs
are members including the chairman who chairs the committee. All four members of the audit committee were
previously involved in sales or production related roles.
All of the directors have been members of the board for at least four years. As the chairman does not have an
executive role, he has sole responsibility for liaising with the shareholders and answering their questions. The
company has not established an internal audit function to monitor internal controls.

QUESTION 2
Which of the following features are corporate governance weaknesses which Tangerine Co would need to
address prior to their listing?
(1) The chairman has sole responsibility for liaising with shareholders
(2) The company has not established an internal audit function
(3) The chairman and one of the NEDs are former executive directors of Tangerine Co

1 and 2 only

1 and 3 only
2 and 3 only
1, 2 and 3

QUESTION 3
The audit engagement partner’s review has identified the following additional corporate governance weaknesses:
(1) All the directors have been members of the board for at least four years
(2) The board is comprised of six executive and four non-executive directors
Which of the following would the engagement partner recommend to address these weaknesses to ensure
compliance with corporate governance principles?
Weakness 1 Weakness 2
The directors should be subject to At least 50% of the board must be
re-election at regular intervals not comprised of non-executive directors
exceeding three years
The directors must be re-appointed At least 75% of the board must be
annually by the chairman comprised of executive directors.
The directors should be subject to At least 75% of the board must be
re-election at regular intervals not comprised of executive directors
exceeding three years
The directors must be re-appointed At least 50% of the board must be
annually by the chairman comprised of non-executive directors

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QUESTION 4
The engagement partner has assessed the make-up of the audit committee.
Which of the following would be valid conclusions from this assessment?
(1) It is acceptable for the chairman to chair the audit committee
(2) A new member of the audit committee with relevant financial experience must be recruited

1 only
2 only
1 and 2
Neither 1 nor 2

QUESTION 5
The directors are aware that in accordance with corporate governance provisions they have responsibilities for
internal control but are unclear as to the extent of these responsibilities.
Which of the following correctly describes their responsibilities?
To review internal To report on internal
controls annually controls to shareholders
No No
Yes No
No Yes
Yes Yes

QUESTION 6
The board of Tangerine is considering establishing an internal audit function.
Which of the following factors would be relevant in making this decision?
(1) It would help the audit committee to discharge its responsibilities for monitoring internal control
(2) The board would no longer need to take responsibility for the prevention and detection of fraud and error
(3) The costs of establishing an internal audit function should be considered against the benefits gained

1 and 2 only

1 and 3 only
2 and 3 only
1, 2 and 3

(TOTAL: 10 marks)

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Topic 3 – Ethics

THE FOLLOWING SCENARIO RELATES TO QUESTIONS 7-11

Stark 18 mins
You are an audit manager of Ali & Co and have just been assigned the audit of Stark Co (Stark). Stark, a listed
company, provides investment advice to individuals, and is regulated by the relevant financial conduct authority.
Mr Day, a partner in Ali & Co, has been the audit engagement partner for Stark for the previous nine years and has
excellent knowledge of the client. Mr Day has informed you that he would like his daughter Zoe to be part of the
audit team this year; Zoe is currently studying for her first set of fundamentals papers for her ACCA qualification.
In an initial meeting with the finance director of Stark, you learn that the audit team will not be entertained on
Stark’s yacht this year, instead, he has arranged a balloon flight costing less than one-tenth of the expense of using
the yacht and hopes this will be acceptable.
Ali & Co has always carried out tax advisory work for Stark. The tax advisory services do not have an impact on the
figures reported in the financial statements. The finance director has stated that he feels strongly that the firm that
offers taxation services this year should charge a fee which is based on a percentage of tax saved. He also trusts
that your firm will accept a fixed fee for representing Stark in a dispute regarding the amount of sales tax payable
to the taxation authorities.

QUESTION 7
From a review of the information above, your audit assistant has highlighted some of the potential risks to
independence in respect of the audit of Stark.
(1) Mr Day would like his daughter Zoe to be part of the audit team
(2) Audit team to be offered a balloon flight
(3) Tax fee to be based on a percentage of tax saved
(4) Firm to represent Stark in a dispute with the tax authorities
Which of the following options best identifies the valid threats to independence and allocates the threat to
the most appropriate category?
Advocacy Intimidation Self-interest
(3) and (4) (3) only (1) and (2)
(4) only (3) only (2) and (3)
(3) only (3) and (4) (2)
(3) and (4) (1) and (4) (1) and (2)

QUESTION 8
In relation to the audit team being offered a balloon ride:
Which of the following actions should be taken to ensure the firm complies with ACCA’s Code of Ethics
and Conduct?
The gift may be accepted as Stark has taken appropriate measures to reduce the value of the gift compared to
previous years.
The value of the gift should be assessed to determine whether it is of material value to the financial statements.
The gift should only be accepted if its value is trivial and inconsequential to the recipients.
Only the audit partner and audit manager should accept the gift.

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QUESTION 9
In relation to the audit engagement partner holding the role for nine years:
Which of the following safeguards should be implemented in order to comply with ACCA’s Code of Ethics
and Conduct?
An independent review partner should be appointed to the audit.
The audit engagement partner should be removed from the audit team but may serve as a quality
control reviewer.
Ali & Co should not audit Stark for a two year period.
The audit engagement partner should be removed from the audit team.

QUESTION 10
Mr Day’s daughter, Zoe, is currently learning about International Standards on Auditing (ISAs) in her studies. She
has asked you for clarification of the following.
Which is the correct order of the following stages involved in the development of an ISA?
(1) Distribution of exposure draft for public comment
(2) Consideration of comments received from the public
(3) Approval by IAASB members
(4) Establishment of task force to develop draft standard
(5) Discussion of proposed standard at a public meeting

1, 5, 4, 3, 2
2, 4, 1, 3, 5
4, 5, 1, 2, 3
5, 4, 2, 1, 3

QUESTION 11
Zoe is also concerned that Ali & Co might breach confidentiality were the audit firm to represent Stark in its dispute
with the tax authorities.
Which of the following statements best reflects the auditor’s duty of confidentiality?
Auditors must never, under any circumstances, disclose any matters of which they become aware during
the course of the audit to third parties, without the permission of the client.
Auditors may disclose any matters in relation to criminal activities to the police or taxation authorities,
if requested to do so by the police or a tax inspector.
Auditors may disclose matters to third parties without their client’s consent if it is in the public interest,
and they must do so if there is a statutory duty to do so.
Auditors may only disclose matters to third parties without their client’s consent if the public interest
or national security is involved.

(TOTAL: 10 marks)