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ICAEW ACA (Associate Chartered Accountant), Next Generation syllabus · Sustainability and Ethics

ICAEW SE Threats and safeguards: practice questions with answers

6 free exam-style questions on Threats and safeguards for ICAEW SE Sustainability and Ethics. Try each one, then open the answer to read the explanation. Fincora has 12 original questions on this syllabus area.

Question 1

Pembury Stoke LLP valued the brand intangible assets of its client Lumley Cosmetics Ltd for inclusion in Lumley's financial statements. Pembury Stoke is also Lumley's auditor and will audit those financial statements. Which threat to the fundamental principles does this situation most clearly create?

  1. A Self-review
  2. B Advocacy
  3. C Familiarity
  4. D Intimidation
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Answer: A. The Code (section 120 and Part 4A) defines five categories of threat: self-interest, self-review, advocacy, familiarity and intimidation.

A self-review threat is the threat that an accountant will not appropriately evaluate the results of a previous judgement made, or an activity performed, by the accountant or another individual in the firm, and will rely on it when forming a judgement as part of a current activity. Auditing financial statements that include a valuation the firm prepared is a classic example, especially where the valuation is material and involves significant judgement.

Question 2

Nkechi Obi, an accountant in practice, has identified a threat to her objectivity on an engagement and must evaluate whether it is at an acceptable level. Which test should she apply?

  1. A Whether the client's audit committee, once told about the threat, would be content for her to carry on with the engagement
  2. B Whether a regulator reviewing her file at a later date, with the benefit of hindsight, would criticise the decision she made
  3. C Whether a reasonable and informed third party, weighing the facts she knows or should know at the time, would likely reach the same conclusion
  4. D Whether she is personally satisfied that the threat will not have any effect on the judgements she makes on the work
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Answer: C. Under the conceptual framework (Code section 120) the accountant identifies threats, evaluates them and addresses them. Evaluation asks whether a threat is at an acceptable level: one at which a reasonable and informed third party would be likely to conclude that the accountant complies with the fundamental principles.

The reasonable and informed third party test considers whether the same conclusions would likely be reached by another party who weighs all the relevant facts and circumstances that the accountant knows, or could reasonably be expected to know, at the time. That party need not be an accountant but has the relevant knowledge and experience to understand and evaluate the conclusions impartially.

Question 3

Copperfield & Partners is asked to prepare the accounting records of Willowby Crafts Ltd, a small private company that is not a public interest entity and that the firm also audits. The engagement partner concludes that a self-review threat arises. Which of the following is an action that could be a safeguard capable of reducing the threat?

  1. A Telling Willowby's directors that the firm will also audit the records it prepares
  2. B Asking the audit team to take extra care when it audits the records the firm has prepared
  3. C Billing the bookkeeping work under a separate engagement letter and invoice
  4. D Having the records prepared by staff who are not members of the audit team
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Answer: D. A safeguard is an action, individually or in combination, that the accountant takes and that effectively reduces threats to an acceptable level (Code section 120). Many actions sound helpful but are not safeguards because they do not change the circumstances creating the threat, for example simply informing the client, recording the threat, or relying on staff to be careful.

For accounting and bookkeeping services to an audit client that is not a public interest entity, an example of a safeguard given in Part 4A is using professionals who are not audit team members to perform the service. The client's management must still take responsibility for the records. For public interest entities such services are generally prohibited. In the UK the FRC Ethical Standard also applies to audits.

Question 4

Grayling Frost LLP is invited to become auditor of Pellow Haulage Ltd. Pellow's chief executive says the appointment will go ahead only if the firm agrees in advance not to modify its audit opinion, whatever the audit finds. What should the firm do?

  1. A Accept, and arrange for an engagement quality reviewer to review the final opinion
  2. B Accept, and record the chief executive's condition clearly in the audit file
  3. C Decline the appointment, as no safeguard can reduce the threat to an acceptable level
  4. D Accept, provided the audit fee is fixed and does not depend on the opinion issued
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Answer: C. Under the conceptual framework, where threats cannot be eliminated and no safeguards are available or capable of reducing them to an acceptable level, the accountant must decline or end the specific professional activity (Code section 120).

A prospective client making the appointment conditional on an unmodified opinion creates intimidation and self-interest threats so severe that a reasonable and informed third party would conclude that objectivity and integrity were compromised. Agreeing to such a condition would also be incompatible with auditing standards. The firm should decline.

Question 5

Chloe Ansah, an assistant accountant at Fernhill Furniture Ltd, is told by the sales director, who is not her line manager, to record a large order as revenue this month, although the goods will not be delivered until next quarter. He says the sales team's bonuses depend on it. What is the most appropriate initial response?

  1. A Record the revenue as instructed, as the sales director is more senior than she is
  2. B Raise her concerns with the director and, if he persists, escalate to her line manager
  3. C Record the revenue, but keep a file note showing that she was instructed to do so
  4. D Resign immediately, because she has been asked by a director to act unethically
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Answer: B. Section 270 (pressure to breach the fundamental principles) requires that an accountant shall not allow pressure from others to result in a breach of the principles, and shall not place pressure on others that would lead them to breach them.

Possible responses the Code mentions include:

- discussing the circumstances with the individual exerting the pressure;
- discussing with a superior, if the superior is not the source of the pressure, and escalating within the organisation;
- using the organisation's ethics or whistleblowing policies;
- consulting a colleague, the professional body (such as ICAEW's ethics advisory service) or a lawyer.

Recording revenue before delivery would misstate the results and breach integrity, so Chloe should resist and escalate rather than comply.

Question 6

Dev Malhotra, a payroll accountant at Gorsedale Care Ltd, reasonably believes that the company is deliberately paying its care workers less than the national minimum wage. His internal complaints have been ignored, so he reports the matter to HMRC, which is a prescribed person for this subject. Which statement about Dev's legal position is correct?

  1. A He may be protected under the Public Interest Disclosure Act 1998 against dismissal or other detriment
  2. B He will be protected only if HMRC later proves that the underpayments actually took place
  3. C He would have been protected only if he had taken his concerns to a national newspaper
  4. D His protection depends on his being a member of a professional accountancy body
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Answer: A. The Public Interest Disclosure Act 1998 (which inserted provisions into the Employment Rights Act 1996) protects workers who make a protected disclosure. That is information which they reasonably believe is in the public interest and tends to show wrongdoing, such as a criminal offence or a breach of a legal obligation.

Protected routes include disclosure to the employer and to a prescribed person, such as HMRC for national minimum wage matters. Wider disclosures have stricter conditions. Protection is against detriment and unfair dismissal. It does not depend on the allegation being proved, or on membership of a professional body.

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