Compliance and Auditing Ethics and Professional Standards 2 — Questions and Answers
Question 1: Which type of auditor independence threat arises when an auditor has an excessive degree of familiarity or sympathy with a client due to a long-standing relationship?
- Self-interest threat
- Advocacy threat
- Familiarity threat (Correct answer)
- Intimidation threat
Correct answer: Familiarity threat
A familiarity threat occurs when an auditor becomes too sympathetic to a client's interests due to a close or long relationship, potentially compromising their ability to act with objectivity.
Question 2: An auditor who accepts a contingent fee based on the outcome of their engagement faces which type of independence threat?
- Intimidation threat
- Self-interest threat (Correct answer)
- Advocacy threat
- Self-review threat
Correct answer: Self-interest threat
Contingent fees create a self-interest threat because the auditor's financial benefit is tied to the outcome of their work, which could bias their professional judgment.
Question 3: Under SEC auditor independence rules, which family relationship would most clearly impair independence when the family member holds a financial reporting oversight role at the audit client?
- A distant cousin who lives in another state
- A spouse (Correct answer)
- An in-law who lives in a separate household
- A former college roommate
Correct answer: A spouse
SEC rules specify that a spouse or equivalent occupying a financial reporting oversight role at a client would impair auditor independence due to the closeness of the relationship.
Question 4: The 'cooling-off period' requirement in audit regulations refers to:
- A mandatory break between successive audit sessions to reduce fatigue
- A waiting period before a former auditor can join a client in a key management position (Correct answer)
- The time required by standards to review and finalize audit workpapers
- A mandatory vacation period for audit staff after a stressful engagement
Correct answer: A waiting period before a former auditor can join a client in a key management position
Cooling-off periods require that a specified time (typically one year) pass before a senior auditor can accept a key management position at a client they recently audited, protecting independence.
Question 5: Which of the following best describes 'objectivity' in the context of internal auditing per IIA standards?
- The complete absence of any professional or personal relationship with the organization
- An unbiased mental attitude that allows internal auditors to perform engagements without compromising quality (Correct answer)
- Freedom from any financial compensation tied to the organization's performance
- External auditor independence from the board and audit committee
Correct answer: An unbiased mental attitude that allows internal auditors to perform engagements without compromising quality
Objectivity per IIA standards is an unbiased mental attitude that allows internal auditors to perform engagements and report results without quality compromises, believing in their own work product.
Question 6: When an auditor is asked to serve as an expert witness in litigation directly involving a client they currently audit, what type of independence threat does this create?
- Self-interest threat
- Familiarity threat
- Advocacy threat (Correct answer)
- Self-review threat
Correct answer: Advocacy threat
Serving as an expert witness for a client creates an advocacy threat because the auditor would be championing the client's legal position, potentially compromising their independence and objectivity.
Question 7: According to AICPA standards, which of the following is a recognized safeguard that can mitigate threats to an auditor's independence?
- Increasing the audit fee to compensate for added risk
- Having an independent engagement quality reviewer examine the work performed (Correct answer)
- Limiting the scope of the audit to reduce exposure
- Deferring issuance of the audit report while threats persist
Correct answer: Having an independent engagement quality reviewer examine the work performed
An independent engagement quality review by a second partner provides an objective check on the engagement team's work, reducing the impact of threats to independence.
Compliance and Auditing Ethics and Professional Standards 2
Which type of auditor independence threat arises when an auditor has an excessive degree of familiarity or sympathy with a client due to a long-standing relationship?