ACCA · Question 01 · Audit Framework and Regulation
SECTION A - CASE 1: QUANTUMLEAP AI
SCENARIO:
You are an audit manager at Sterling & Co. You are reviewing the client portfolio and ethical considerations for a prospective new client, QuantumLeap AI, a rapidly growing tech startup developing machine learning algorithms for healthcare. The CEO of QuantumLeap AI has offered Sterling & Co a 15% equity stake in the company in lieu of audit fees for the first three years, citing cash flow constraints. Furthermore, the audit partner's spouse recently purchased a small number of shares in QuantumLeap AI. QuantumLeap has also requested that Sterling & Co provide valuation services for their proprietary algorithms, which are highly subjective and material to the financial statements.
QUESTION:
Which of the following correctly identifies the ethical threat created by the CEO's offer of a 15% equity stake in lieu of audit fees, and the appropriate action Sterling & Co should take?
Answer options:
Familiarity threat; the firm should accept the shares but ensure a different partner signs the audit report.
Self-interest threat; the firm must decline the offer as holding a direct financial interest in an audit client is prohibited.
Self-review threat; the firm should accept the shares but disclose the arrangement in the auditor's report.
Advocacy threat; the firm must decline the offer unless the shares are held in a blind trust.
18 questions · hints · full answers · grading
Expert