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ICAEW ACA (Associate Chartered Accountant), Next Generation syllabus · Assurance and Risk Fundamentals

ICAEW ARF Professional ethics and regulatory issues: practice questions with answers

6 free exam-style questions on Professional ethics and regulatory issues for ICAEW ARF Assurance and Risk Fundamentals. Try each one, then open the answer to read the explanation. Fincora has 30 original questions on this syllabus area.

Question 1

Which of the following describes ICAEW's role in the regulation of UK statutory audit?

  1. A It sets the auditing standards and the Ethical Standard that all UK statutory auditors are required to apply.
  2. B It inspects the audits of UK public interest entities and reports its findings on audit quality to the government.
  3. C It registers and monitors audit firms as a Recognised Supervisory Body, and is an anti-money laundering supervisor.
  4. D It is the UK competent authority for audit, with ultimate responsibility for the regulation of statutory auditors.
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Answer: C. The FRC is the UK competent authority for statutory audit. It sets auditing and ethical standards and inspects the audits of public interest entities. Certain tasks are delegated to Recognised Supervisory Bodies (RSBs) such as ICAEW, which registers audit firms, monitors their audit work through its Quality Assurance Department and disciplines members. ICAEW is also a professional body supervisor for anti-money laundering under the Money Laundering Regulations 2017. (Companies Act 2006, Part 42; Statutory Auditors and Third Country Auditors Regulations 2016.)

Question 2

The ICAEW Code of Ethics is principles-based rather than rules-based. Which of the following is the main advantage of this approach?

  1. A It gives a precise list of prohibited relationships, so compliance is easy to check.
  2. B It removes the need for members to use professional judgement in ethical matters.
  3. C It ensures the same answer is reached in every situation, whoever applies the code.
  4. D It can be applied to new situations that the code's authors did not foresee.
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Answer: D. A rules-based code lists what is prohibited. It is easy to apply and enforce, but it cannot anticipate every situation and invites 'loophole' behaviour (anything not banned is treated as allowed). A principles-based code, such as the ICAEW Code and the IESBA Code, sets fundamental principles and a conceptual framework for identifying, evaluating and addressing threats. Its main advantage is flexibility: it applies to new and unusual situations. The cost is that it relies on professional judgement and is less certain in outcome.

Question 3

Laura, an audit manager at Tennant Moss LLP, works on the audit of Brightwell Foods Ltd. She has just inherited 2,000 shares in Brightwell from her aunt. The shares are worth about £3,000, which is not material to Laura's personal wealth. Under the ICAEW Code of Ethics, what must happen?

  1. A Laura may keep the shares, because they were inherited rather than purchased.
  2. B Laura must dispose of the shares immediately (as soon as she has the right to sell them), or else be removed from the audit team.
  3. C Laura may keep the shares, because their value is not material to her personal wealth.
  4. D Laura may keep the shares if the holding is disclosed to Brightwell's board.
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Answer: B. A direct financial interest in an audit client creates a self-interest threat so significant that no safeguard can reduce it. Under the ICAEW Code (following the IESBA Code, section 510), a direct financial interest in an audit client must not be held by an audit team member or their immediate family, whatever its size. Where such an interest is received unintentionally, for example by inheritance or gift, it must be disposed of immediately (IESBA Code R510.5). The FRC Ethical Standard (section 2) similarly requires disposal immediately, or as soon as possible once the person has actual knowledge of, and the right to dispose of, the interest, with safeguards such as excluding her from the engagement in the meantime. If Laura does not dispose of the shares, she must be removed from the audit team.

Question 4

Callum, an audit senior at Gilmour Reade LLP, is working on the audit of Sable Print Ltd, which is over its time budget. The audit manager tells him to sign off the receivables circularisation section as complete, although three large confirmation replies have not been received and no alternative procedures have been done. What is the most appropriate course of action for Callum?

  1. A Raise his concerns with the manager and, if not resolved, escalate them to the engagement partner or the firm's Ethics Partner.
  2. B Sign off the section as instructed, since the audit manager is responsible for the quality of the work on the audit file.
  3. C Contact the chair of Sable's audit committee directly to explain that the audit is being rushed to meet the time budget.
  4. D Resign from Gilmour Reade immediately to avoid being personally associated with an audit file that contains incomplete work.
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Answer: A. Signing a section as complete when key procedures have not been done would breach integrity (being associated with misleading information) and professional competence and due care. Under the ICAEW Code's ethical conflict resolution process, Callum should establish the facts, identify the principles involved and use the firm's internal procedures: discuss the matter with the manager and, if not resolved, escalate it to the engagement partner or the Ethics Partner. He should document the matter. External advice and resignation are considered only if internal routes fail.

Question 5

Under the ICAEW Code of Ethics, a member may disclose confidential information when required by law, when permitted by law and authorised by the client, or where there is a professional duty or right to disclose. Which of the following is a disclosure made under a professional duty or right?

  1. A Producing a client's working papers in response to a court order
  2. B Providing audit files to ICAEW's Quality Assurance Department during a monitoring visit
  3. C Giving a client's bank a reference on its trading history after the client agreed in writing
  4. D Reporting a suspicion of money laundering to the firm's money laundering reporting officer
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Answer: B. The ICAEW Code (section 114) recognises three circumstances in which confidential information may or must be disclosed: (a) required by law, such as producing documents under a court order or reporting money laundering under the Proceeds of Crime Act 2002; (b) permitted by law and authorised by the client or employer; and (c) a professional duty or right, such as complying with the quality review of a member body, responding to an inquiry or investigation by ICAEW or a regulator, protecting the member's interests in legal proceedings, or complying with technical and ethical standards. A monitoring visit by ICAEW's Quality Assurance Department falls under (c).

Question 6

Westcott Ince LLP audits Arden Turf Ltd, an unlisted company that is not a public interest entity. Arden's finance director has been on long-term sick leave, and Westcott's staff have been choosing which suppliers to pay each week and approving the payment runs. Under the FRC Ethical Standard, which threat to the firm's independence does this most directly create?

  1. A Management threat
  2. B Advocacy threat
  3. C Familiarity threat
  4. D Intimidation threat
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Answer: A. The FRC Ethical Standard adds the management threat to the five threats in the IESBA and ICAEW Codes. It arises when the audit firm makes judgements or takes decisions that are the responsibility of the entity's management, for example authorising transactions or deciding which suppliers to pay. The firm may then become too closely aligned with management's views and interests, which undermines its objectivity. The FRC Ethical Standard requires the firm not to take on management responsibilities for an audited entity; the firm should stop making these decisions and ensure that Arden's own management takes them.

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