Auditing Theory Part 4

AUDITING THEORY PART 4
31. The retirement benefit plan of a firm, or a network firm, has a financial interest in a
financial statement audit client. If the self-interest threat that is created by the financial
interest is significant, the firm that intends to continue the engagement should:
A. Reduce the financial interest so that the remaining interest is no longer material.
B. Discuss the matter with the audit committee of the financial statement audit client.
C. Refer the audit of the stockholders‟ equity of the financial statement audit client to
other CPA.
D. Either dispose of the financial interest in total or a sufficient amount so that the
remaining amount is no longer material.
32. The following loans and guarantees would not create a threat to independence, except:
A. A loan from, or a guarantee thereof by, an assurance client that is a bank or a similar
institution, to the firm, provided the loan is made under normal lending procedures,
terms and requirements and the loan is immaterial to both the firm and the assurance
client.
B. A loan from, or a guarantee thereof by, an assurance client that is a bank or a similar
institution, to a member of the assurance team or their immediate family, provided the
loan is made under normal lending procedures, terms and requirements.
C. Deposits made by, or brokerage accounts of, a firm or a member of the assurance team
with an assurance client that is a bank, broker or similar institution, provided the
deposit or account is held under normal commercial terms.
D. If the firm, or a member of the assurance team, makes a loan to an assurance client that
is not a bank or similar institution, or guarantees such an assurance client's borrowing.
33. Examples of close business relationships that may create self-interest and intimidation
threat least likely include:

A. Having a material financial interest in a joint venture with the assurance client or a
controlling owner, director, officer or other individual who performs senior managerial
functions for that client.
B. Arrangements to combine one or more services or products of the firm with one or
more services or products of the assurance client and to market the package with
reference to both parties.
C. Distribution or marketing arrangements under which the firm acts as a distributor or
marketer of the assurance client‟s products or services, or the assurance client acts as
the distributor or marketer of the products or services of the firm.
D. The purchase of goods and services from an assurance client by the firm (or from an
audit client by a network firm) or a member of the assurance team, provided the
transaction is in the normal course of business and on an arm‟s length basis.
34. When a firm or a member of the assurance team and the audit client or one of its officers
hold interest in a closely-held entity, a threat to independence is not created, except:
A. The relationship is clearly insignificant to the firm or a member of the assurance team
and the audit client.
B. The relationship is other than insignificant which is acceptable for indirect financial
interest.
C. The interest held is immaterial to the investor or group of investors.
D. The interest does not give the investor, or group of investors, the ability to control the
closely-held entity.
35. When an immediate family member of a member of the assurance team is a director or an
officer of the assurance client in a position to exert direct and significant influence over the
subject matter information of the engagement, the threat to independence can only be
reduced to an acceptable level, aside from withdrawing from the engagement, by:
A. Removing the individual from the assurance team.
B. Reduce the participation of the professional.
C. Discuss the matter with the audit committee of the client entity.
D. Request the audit client management to require the immediate family member of the
professional to go on forced vacation leave.
36. Which of the following relationships is most likely to impair a CPA‟s independence with
respect to a particular audit client on which the CPA works as a member of the engagement
team?
A. A close relative has a material investment in that client of which the CPA is not aware.
B. A cousin has an immaterial investment in that client of which the CPA is not aware.
C. The CPA‟s father is the president of the audit client.
D. The CPA‟s spouse participates in a savings plan sponsored by the client.
37. An inadvertent violation of the rules on family and personal relationships would not impair
the independence of a firm or a member of the assurance team when:
A. The firm has established policies and procedures that require all professionals to report
promptly to the firm any breaches resulting from changes in the employment status of
their immediate or close family members or other personal relationships that create
threats to independence.
B. Either the responsibilities of the assurance team are re-structured so that the
professional does not deal with matters that are within the responsibility of the person
with whom he or she is related or has a personal relationship, or, if this is not possible,
the firm promptly removes the professional from the assurance engagement.
C. Additional care is given to reviewing the work of the professional.
D. All of the given choices.
38. If a member of the assurance team, partner or former partner of the firm has joined the
assurance client, the significance of the self-interest, familiarity or intimidation threats
created is least likely affected by
A. The position the individual has taken at the assurance client.
B. The amount of any involvement the individual will have with the assurance team.
C. The length of time that the individual was a member of the assurance team or firm.
D. The former position of the individual within the assurance team or firm.
39. Using the same senior personnel on an assurance engagement over a long period of time
may create a familiarity threat. The significance of the threat will least likely depend upon
A. The length of time that the individual has been a member of the assurance team.
B. The role of the individual on the assurance team.
C. The structure of the client.
D. The nature of the assurance engagement.
40. A small CPA firm provides audit services to a large local company. Almost 80 percent of
the CPA firm‟s revenues come from this client. Which statement is most likely to be true?
A. Appearance of independence may be lacking.
B. The small CPA firm does not have proficiency to perform a larger audit.
C. The situation is satisfactory if the auditor exercises due skeptical negative assurance
care in the audit.
D. The auditor should provide an “emphasis of a matter paragraph‟ to his audit report
adequately disclosing this information and then it may issue an unqualified opinion.

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AUDITING THEORY PART 4

remaining amount is no longer material.

loan is made under normal lending procedures, terms and requirements.

deposit or account is held under normal commercial terms.

is not a bank or similar institution, or guarantees such an assurance client's borrowing.

threat least likely include:

functions for that client.

reference to both parties.

C. Distribution or marketing arrangements under which the firm acts as a distributor or

the distributor or marketer of the products or services of the firm.

transaction is in the normal course of business and on an arm‟s length basis.

hold interest in a closely-held entity, a threat to independence is not created, except:

and the audit client.

C. The interest held is immaterial to the investor or group of investors.

B. Reduce the participation of the professional.

professional to go on forced vacation leave.

C. The CPA‟s father is the president of the audit client.

D. The CPA‟s spouse participates in a savings plan sponsored by the client.

the independence of a firm or a member of the assurance team when:

C. Additional care is given to reviewing the work of the professional.

D. All of the given choices.

created is least likely affected by

A. The position the individual has taken at the assurance client.

B. The role of the individual on the assurance team.

C. The structure of the client.

D. The nature of the assurance engagement.

A. Appearance of independence may be lacking.

care in the audit.

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