I85PREP
⌘ K
CPA Ethics and Governance study materials
CPA Ethics and Governance study resources

CPA Ethics and Governance practice questions

One question at a time. Build your CPA Ethics and Governance understanding.

First 50 of 200 questions. Each one lists the choices, the correct answer, and an explanation. The checker at the top of this page saves progress in this browser when it is available.

Continue in the practice tool above to load more questions, 50 at a time.

Question 1The nature of ethics and the accounting profession

Which statement best describes ethics as a field of study?

  1. A set of personal preferences that vary from one individual to another.
  2. The collection of laws enacted by a parliament or regulator.
  3. The customs followed by a particular cultural group.
  4. A systematic study of principles of right and wrong conduct. Correct answer.

Explanation

Ethics is a normative inquiry into the principles that guide right and wrong conduct. It is broader than personal preference, law, or custom, although those can influence ethical reasoning.

Question 2The nature of ethics and the accounting profession

A researcher documents how accountants in a particular country actually make ethical decisions. This study is best classified as:

  1. meta-ethics, because it analyses the meaning of ethical terms
  2. normative ethics, because it prescribes how accountants should behave
  3. applied ethics, because it resolves a specific professional dilemma
  4. descriptive ethics, because it reports behaviour without prescribing it Correct answer.

Explanation

Descriptive ethics reports how people actually reason or behave. It does not prescribe what they ought to do, which is the task of normative ethics.

Question 3The nature of ethics and the accounting profession

An ethical theory that evaluates the rightness of an action by its consequences is called:

  1. ethical relativism
  2. deontological ethics
  3. teleological ethics Correct answer.
  4. virtue ethics

Explanation

Teleological ethics, including utilitarianism, judges actions by the ends or consequences they produce. Deontology focuses on duty, virtue ethics on character, and relativism on cultural or individual norms.

Question 4The nature of ethics and the accounting profession

Which feature is central to a deontological approach to ethics?

  1. Cultivating character traits through habitual practice
  2. Maximising total welfare across all affected parties
  3. Acting from duty under moral rules, regardless of outcome Correct answer.
  4. Following the customs of one's community

Explanation

Deontology holds that certain duties and rules bind us irrespective of the consequences. It evaluates the intention behind an action rather than its results.

Question 5The nature of ethics and the accounting profession

Virtue ethics primarily asks which question about an action?

  1. What are the likely costs and benefits of this action?
  2. What would a person of good character do in this situation? Correct answer.
  3. Does this action comply with a universal maxim?
  4. What punishment would follow if this action were discovered?

Explanation

Virtue ethics evaluates actions by asking whether they express good character traits such as honesty, courage, and integrity. It focuses on the agent rather than only on rules or outcomes.

Question 6The nature of ethics and the accounting profession

Ethical egoism holds that an action is morally right when it:

  1. respects the dignity of every rational being
  2. conforms to the traditional values of the profession
  3. best serves the agent's own long-term self-interest Correct answer.
  4. produces the greatest good for the greatest number

Explanation

Ethical egoism treats the agent's own self-interest as the standard of right action. It differs from utilitarianism, which seeks the greatest good for all affected parties.

Question 7The nature of ethics and the accounting profession

A utilitarian decision-maker would evaluate an accounting policy by asking whether it:

  1. preserves the decision-maker's reputation
  2. reflects the decision-maker's personal conscience
  3. maximises net welfare for all affected parties Correct answer.
  4. complies with the letter of the applicable standard

Explanation

Utilitarianism is a consequentialist theory that assesses actions by their overall welfare consequences. Legal compliance, personal conscience, and reputation are not the utilitarian test.

Question 8The nature of ethics and the accounting profession

The social contract view of the accounting profession suggests that the profession's authority depends on:

  1. the profitability of firms that employ accountants
  2. society granting privileges in return for public-interest service Correct answer.
  3. the size of the profession's membership base
  4. the profession's ability to lobby government for exclusive rights

Explanation

Under the social contract, a profession receives status, trust, and sometimes exclusive rights in exchange for serving the public interest. Authority therefore rests on public trust rather than lobbying or size alone.

Question 9The nature of ethics and the accounting profession

Independence in appearance means that:

  1. the client has confirmed in writing that it trusts the auditor
  2. the auditor personally believes they are unbiased
  3. a reasonable observer would see the auditor as independent Correct answer.
  4. the auditor has no financial interest in the client

Explanation

Independence in appearance is judged from the perspective of a reasonable and informed third party. Independence in fact concerns the auditor's actual state of mind.

Question 10The nature of ethics and the accounting profession

An accountant has been asked to value a subsidiary and will receive a bonus if the valuation exceeds a target. Which threat to objectivity is most directly created?

  1. intimidation threat
  2. self-review threat
  3. self-interest threat Correct answer.
  4. familiarity threat

Explanation

A financial incentive tied to the outcome creates a self-interest threat because the accountant benefits from a particular conclusion. Self-review involves evaluating one's own work, familiarity involves close relationships, and intimidation involves pressure.

Question 11The nature of ethics and the accounting profession

Under professional codes, confidential client information may generally be disclosed when:

  1. a colleague asks for the information informally
  2. the client has not paid the accountant's fees
  3. disclosure is required by law or permitted by the client Correct answer.
  4. the accountant believes disclosure would improve the client's reputation

Explanation

Confidentiality may be overridden where disclosure is required by law, permitted by the client, or necessary to comply with professional obligations. Unpaid fees or informal requests do not justify disclosure.

Question 12The nature of ethics and the accounting profession

Professional competence and due care requires a member to:

  1. guarantee that all advice will produce a favourable outcome
  2. accept every engagement offered by a client
  3. maintain the knowledge and skill needed for the work Correct answer.
  4. avoid all engagements involving complex judgements

Explanation

Competence and due care require members to develop and maintain the knowledge and skill necessary for professional work. They must act diligently but cannot guarantee outcomes or avoid all complexity.

Question 13The nature of ethics and the accounting profession

The principle of integrity requires a professional accountant to:

  1. always agree with the client's preferred accounting treatment
  2. avoid disclosing any information to third parties
  3. maximise the profitability of the engagement
  4. be honest and straightforward in professional relationships Correct answer.

Explanation

Integrity requires honesty and straightforward dealing in all professional relationships. It does not mean automatic agreement with clients, absolute non-disclosure, or profit maximisation.

Question 14The nature of ethics and the accounting profession

A CPA advertises services using exaggerated claims that are likely to mislead clients. This most directly breaches the principle of:

  1. integrity
  2. professional behaviour Correct answer.
  3. confidentiality
  4. due care

Explanation

Professional behaviour requires compliance with laws and avoidance of conduct that discredits the profession, including misleading advertising. Integrity is related, but misleading marketing is specifically addressed under professional behaviour.

Question 15The nature of ethics and the accounting profession

Which characteristic is most closely associated with a profession rather than an ordinary occupation?

  1. the routine use of information technology
  2. a primary focus on increasing shareholder wealth
  3. an ethical code and public-interest commitment Correct answer.
  4. payment received from clients for services rendered

Explanation

Professions are typically distinguished by specialised knowledge, self-regulation, a code of ethics, and a commitment to serve the public interest. Payment, technology, and shareholder wealth are common to many occupations.

Question 16The nature of ethics and the accounting profession

The 'expectations gap' in auditing refers to the difference between:

  1. the audit fee charged and the fee expected by the client
  2. the number of audit hours planned and actually worked
  3. the auditor's experience and the client's industry knowledge
  4. public expectations versus auditors' required duties Correct answer.

Explanation

The expectations gap describes the divergence between what the public believes auditors should do and what auditors are required or able to do. It is a matter of role and responsibility, not fees or hours.

Question 17The nature of ethics and the accounting profession

Kant's categorical imperative requires a person to act only according to a maxim that:

  1. is approved by the person's professional body
  2. produces the most favourable outcome for the agent
  3. maximises happiness for the greatest number
  4. could consistently be willed as a universal law Correct answer.

Explanation

The categorical imperative tests whether the maxim behind an action could be universalised without contradiction. It is a deontological test, not a welfare-maximising or self-interested one.

Question 18The nature of ethics and the accounting profession

APES 110 Code of Ethics for Professional Accountants applies to:

  1. only auditors of listed companies
  2. only accountants employed in public practice
  3. all employees of an organisation, regardless of role
  4. members of professional bodies performing professional services Correct answer.

Explanation

APES 110 applies to members of professional accounting bodies when they perform professional services, whether in public practice or business. It is not limited to listed-company auditors or employees in public practice.

Question 19The nature of ethics and the accounting profession

In ethical decision-making, whistleblowing is generally justified when:

  1. serious wrongdoing persists after internal channels fail Correct answer.
  2. the employee dislikes the manager's leadership style
  3. the employee wants to avoid personal responsibility
  4. the employee has not yet raised the concern internally

Explanation

Whistleblowing is typically justified by serious wrongdoing, exhaustion of internal channels, and proportionate disclosure to an appropriate external party. Dislike of management or avoiding responsibility is not a justification.

Question 20The nature of ethics and the accounting profession

A strict ethical relativist would claim that:

  1. moral truth can be discovered through rational analysis alone
  2. rightness depends on the norms of the relevant culture Correct answer.
  3. some moral standards apply to all cultures regardless of context
  4. ethical judgements should maximise overall welfare

Explanation

Ethical relativism denies universal moral standards and holds that rightness depends on cultural or individual norms. It contrasts with objectivist, rationalist, and utilitarian positions.

Question 21The nature of ethics and the accounting profession

An accounting firm prepares a client's financial statements and then audits those same statements. Which threat is most directly created?

  1. advocacy threat
  2. self-review threat Correct answer.
  3. familiarity threat
  4. intimidation threat

Explanation

A self-review threat arises when a professional evaluates or audits work they or their firm previously performed. Advocacy promotes a client's position, intimidation involves pressure, and familiarity involves closeness.

Question 22The nature of ethics and the accounting profession

Which of the following is an example of a safeguard that may reduce an ethical threat?

  1. increasing the fee to reflect the additional risk
  2. independent review of the engagement by another professional Correct answer.
  3. relying on the client's assurance that no problem exists
  4. keeping the threat confidential within the engagement team

Explanation

Safeguards are controls that reduce threats to an acceptable level, such as independent reviews, rotation, and quality control procedures. Higher fees, client assurances, or secrecy do not eliminate a threat.

Question 23The nature of ethics and the accounting profession

A structured ethical decision-making model typically begins by:

  1. consulting the client's lawyer
  2. resigning from the engagement
  3. identifying the ethical issue and relevant facts Correct answer.
  4. selecting the most profitable alternative

Explanation

Ethical decision models usually begin with recognising and defining the ethical issue and gathering the relevant facts. Alternative actions are evaluated only after the issue is understood.

Question 24The nature of ethics and the accounting profession

The concept of 'public interest' in accounting professional ethics is best understood as:

  1. society's well-being, including trust in financial reporting Correct answer.
  2. the interests of the client who pays the fee
  3. the aggregate interests of the profession's members
  4. whatever the majority of the public currently prefers

Explanation

The public interest refers to the collective well-being of society, including confidence in financial information and markets. It is broader than the interests of clients or the profession's members.

Question 25The nature of ethics and the accounting profession

A conflict of interest arises when:

  1. personal interests could improperly influence professional judgement Correct answer.
  2. an accountant works for two clients in the same industry
  3. a client disagrees with the accountant's recommended accounting treatment
  4. an auditor charges a fee that is lower than competitors

Explanation

A conflict of interest exists when a professional's personal, financial, or other interests could improperly influence the discharge of professional duties. Mere disagreement, industry overlap, or lower fees are not conflicts in themselves.

Question 26The nature of ethics and the accounting profession

Ethics is best described as:

  1. the customs and habits that a particular community happens to follow
  2. the body of rules enacted by government and enforced through the courts
  3. the systematic study of the principles that guide judgements about right and wrong conduct Correct answer.
  4. an individual's personal feelings about a particular decision

Explanation

Ethics is a branch of philosophy concerned with systematising and justifying standards of right and wrong conduct. It is normative: it asks what people ought to do and why, rather than merely describing what they do or feel. This distinguishes it from law, from mere custom, and from personal taste.

Question 27The nature of ethics and the accounting profession

Which branch of ethics examines the meaning of concepts such as 'right', 'good' and 'moral obligation'?

  1. Applied ethics
  2. Normative ethics
  3. Descriptive ethics
  4. Meta-ethics Correct answer.

Explanation

Meta-ethics analyses the language, logic and status of moral claims, asking what it means to call something good or to say a moral obligation exists. Normative ethics instead proposes substantive standards of right conduct, and applied ethics applies those standards to concrete practical problems.

Question 28The nature of ethics and the accounting profession

Professional scepticism in an audit engagement is best described as:

  1. an obligation to detect every misstatement in the financial statements
  2. an assumption that client management is dishonest until proven otherwise
  3. a refusal to accept any written representation from a client
  4. a questioning mind and a critical assessment of the evidence obtained Correct answer.

Explanation

Scepticism is an attitude of alert questioning combined with critical evaluation of evidence, not a presumption of dishonesty. It requires the auditor to consider whether evidence may be unreliable or misleading and to seek corroboration where doubt exists. It coexists with an open, professional working relationship with the client.

Question 29The nature of ethics and the accounting profession

A professional accounting body's code of ethics primarily serves to:

  1. guide members' conduct and express the profession's public commitments Correct answer.
  2. restate the minimum standards of conduct already imposed by statute
  3. provide promotional material that members can give to prospective clients
  4. protect the commercial interests of the members of the professional body

Explanation

A professional code sets out the values and obligations that define the profession's service to the public, guiding members where the law is silent or permissive. It both directs behaviour and signals to the community that the profession accepts obligations beyond commercial self-interest. Codes typically exceed, rather than merely repeat, legal minimums.

Question 30The nature of ethics and the accounting profession

A deontological approach holds that the rightness of an action depends on:

  1. whether the action conforms to a duty or rule, regardless of its consequences Correct answer.
  2. whether the majority of people in the community would approve of it
  3. the character traits that the person performing the action displays
  4. the total balance of good over harm that the action produces

Explanation

Deontology locates moral value in the action itself and in the duties or rules that govern it, so consequences do not determine permissibility. This contrasts with consequentialist theories, which judge actions solely by their outcomes. Under a deontological view, a breach of a duty remains wrong even if it produces good results.

Question 31The nature of ethics and the accounting profession

Virtue ethics is chiefly concerned with:

  1. the formal rules that define a person's duties
  2. the distribution of benefits between competing groups
  3. the aggregate consequences of a decision for all affected parties
  4. the character and dispositions of the person making the decision Correct answer.

Explanation

Virtue ethics asks what kind of person one should be, emphasising traits such as honesty, integrity and courage that dispose an agent to act well. Right action is what a person of practical wisdom and good character would do in the circumstances. This differs from theories centred on rules or on outcomes.

Question 32The nature of ethics and the accounting profession

In Kohlberg's theory of moral development, a person who complies with group expectations in order to be regarded as a good member of the group is at the:

  1. pre-conventional level
  2. pre-moral level
  3. post-conventional level
  4. conventional level Correct answer.

Explanation

The conventional level is characterised by conformity to social norms, laws and the expectations of significant others, with moral worth tied to maintaining approval and social order. The pre-conventional level is driven by punishment avoidance and self-interest, while the post-conventional level rests on self-chosen universal principles.

Question 33The nature of ethics and the accounting profession

A client's finance director hints that the audit firm's engagement will not be renewed unless the auditor accepts a questionable revenue treatment. This creates which threat to independence?

  1. Self-review threat
  2. Intimidation threat Correct answer.
  3. Familiarity threat
  4. Self-interest threat

Explanation

An intimidation threat arises where a member is deterred from acting objectively by actual or perceived pressure, such as the implicit threat of losing the engagement. The distinguishing feature is coercion that could compromise the auditor's judgement. Self-interest would involve a financial or other interest of the member rather than pressure exerted by the client.

Question 34The nature of ethics and the accounting profession

Under APES 110, whether a threat to compliance with the fundamental principles is at an acceptable level is determined by reference to whether:

  1. the professional body has previously approved the engagement type
  2. the client considers the proposed treatment to be appropriate
  3. a reasonable and informed third party would agree it is acceptable Correct answer.
  4. the engagement partner is personally comfortable with the level of risk

Explanation

The Code uses an objective test: a reasonable and informed third party, weighing all relevant facts, would conclude the threat is at an acceptable level. This prevents the member from relying solely on their own assessment or the client's preferences. The standard is applied before the member decides whether safeguards are needed.

Question 35The nature of ethics and the accounting profession

An action may be legal yet still be unethical because:

  1. law sets a minimum standard of conduct while ethics demands more Correct answer.
  2. ethical standards are set only by government regulators
  3. the law is applied inconsistently across different jurisdictions
  4. legal obligations apply only to incorporated entities

Explanation

Law establishes a floor of enforceable conduct, whereas ethical reasoning asks what ought to be done and can require more than mere compliance. Conduct such as exploiting a legal loophole to mislead users may satisfy the letter of the law yet breach duties of honesty and fairness. Ethics therefore operates as a broader normative framework.

Question 36The nature of ethics and the accounting profession

A stakeholder view of the firm holds that managers should:

  1. act only in accordance with directions issued by government
  2. maximise shareholder wealth within the limits of the law
  3. balance the legitimate interests of all groups affected by the firm Correct answer.
  4. give priority to the interests of employees over other groups

Explanation

Stakeholder theory treats the firm as accountable to all parties with a legitimate interest, including employees, customers, suppliers, communities and shareholders. Managers must weigh and balance those interests rather than serve one group exclusively. This contrasts with shareholder primacy, which prioritises owner wealth subject to legal constraints.

Question 37The nature of ethics and the accounting profession

Ethical sensitivity, in Rest's model of moral behaviour, refers to:

  1. the ability to recognise that a situation has an ethical dimension Correct answer.
  2. detailed knowledge of the rules contained in the professional code
  3. the strength of a person's desire to do the right thing
  4. the ability to construct a convincing justification for a decision

Explanation

Ethical sensitivity is the capacity to interpret a situation and recognise that it raises ethical issues affecting others. It precedes moral judgement and intention in Rest's four-component model, because a person who does not perceive an ethical issue will not engage in ethical reasoning at all. The other components concern judgement, motivation and implementation.

Question 38The nature of ethics and the accounting profession

In Jones's issue-contingent model of ethical decision-making, moral intensity is higher when:

  1. harm is concentrated on identifiable people close to the decision-maker Correct answer.
  2. the effects of the decision are diffuse and widely dispersed
  3. the consequences will only become apparent in the distant future
  4. responsibility for the decision is shared among many people

Explanation

Moral intensity captures characteristics of the issue itself, including the magnitude of consequences, social consensus, probability of effect and proximity to those affected. Intensity rises when harm is serious, likely and felt by identifiable people nearby. Diffuse, distant or postponed harms reduce perceived intensity and weaken ethical engagement.

Question 39The nature of ethics and the accounting profession

The 'is–ought' problem, which cautions against defending an accounting practice simply because 'this is how it has always been done', refers to the error of:

  1. confusing the requirements of statute with the requirements of custom
  2. judging the rightness of an action solely by its consequences
  3. treating every ethical rule as universally binding on all cultures
  4. deriving prescriptive obligations from purely descriptive facts Correct answer.

Explanation

The is–ought gap holds that statements about what is the case cannot by themselves establish conclusions about what ought to be done. A prevailing practice is a descriptive fact; justifying it as ethically required needs a separate normative premise. Appeals to tradition therefore carry no automatic moral authority.

Question 40The nature of ethics and the accounting profession

Rawls's 'veil of ignorance' is a device used to:

  1. choose principles of justice without knowing one's own place in society Correct answer.
  2. justify existing inequalities as the product of history
  3. predict the long-run consequences of a proposed rule
  4. maximise the total welfare of a community

Explanation

The veil of ignorance removes knowledge of one's own talents, wealth and social position so that principles of justice are chosen impartially. Because anyone might end up in the worst position, choosers are led toward principles that protect the least advantaged. This makes the device a test of fairness rather than a calculation of total welfare.

Question 41Ethical decision-making and professional conduct in practice

A CPA in public practice holds a direct financial interest in a company that is also an audit client of the firm. Which threat to independence does this most directly create?

  1. A self-interest threat Correct answer.
  2. An advocacy threat
  3. An intimidation threat
  4. A self-review threat

Explanation

A self-interest threat arises when a financial or other interest of the member or firm could inappropriately influence judgement. Holding shares in an audit client aligns the member's personal financial outcome with the client's reported results. Self-review, advocacy and intimidation threats arise from different circumstances, such as re-evaluating one's own work, promoting a client's position, or being pressured by a client.

Question 42Ethical decision-making and professional conduct in practice

An engagement partner has audited the same client for twelve years and has developed a close personal friendship with the client's chief financial officer. Which threat to the partner's objectivity is most directly indicated?

  1. A self-interest threat
  2. A familiarity threat Correct answer.
  3. An advocacy threat
  4. A self-review threat

Explanation

A familiarity threat arises when a member becomes too sympathetic to a client's interests because of a long or close relationship. Long association combined with personal friendship is the classic indicator. Self-review concerns the evaluation of one's own work, advocacy concerns promoting a client's position, and self-interest concerns a member's own financial or other interest.

Question 43Ethical decision-making and professional conduct in practice

In which circumstance may a CPA disclose confidential information obtained from a client without breaching the confidentiality principle?

  1. When the client has not paid the member's fees
  2. When the disclosure would help the member attract a new client
  3. When disclosure is required by law or authorised by the client Correct answer.
  4. When a competitor would benefit commercially from the information

Explanation

The confidentiality principle permits disclosure where it is required by law, permitted by law and authorised by the client, or where there is a professional duty or right to disclose. Commercial advantage, fee disputes and competitive benefit are never valid grounds. Disclosure beyond these recognised exceptions breaches the principle.

Question 44Ethical decision-making and professional conduct in practice

Shortly before an audit report is finalised, a client offers the engagement partner and their spouse an all-expenses-paid overseas holiday. What is the most appropriate response?

  1. Accept it, because client hospitality is customary in business
  2. Decline it, because it creates a self-interest threat to objectivity Correct answer.
  3. Accept it, provided the value is disclosed to the firm
  4. Accept it only if the client insists in writing

Explanation

Accepting significant hospitality from a client whose affairs the member is assessing creates a self-interest threat and may appear to compromise independence. Where the offer is not trivial and made at a critical time, the appropriate response is to decline it. Disclosure to the firm may be part of a safeguard process, but it does not make acceptance appropriate in these circumstances.

Question 45Ethical decision-making and professional conduct in practice

A sole practitioner is offered an engagement to prepare complex consolidated financial statements for a multinational group, a type of work the practitioner has never performed. What is the most appropriate course of action?

  1. Accept it, because due care obligations apply only to audit work
  2. Accept it if the fee is disclosed to the client in advance
  3. Decline unless competence is gained through training or expert advice Correct answer.
  4. Accept it and learn the required skills while performing the work

Explanation

Professional competence and due care require a member to attain and maintain the knowledge and skill needed for the engagement. A member should not accept work they are not competent to perform unless they can obtain the necessary competence, for example through training, consultation or engaging an expert. Fee disclosure does not cure a lack of competence.

Question 46Ethical decision-making and professional conduct in practice

Which form of advertising by a CPA is consistent with the Code of Ethics?

  1. Advertising that is truthful, lawful and not misleading Correct answer.
  2. Advertising supported by client testimonials that promise results
  3. Comparative advertising claiming superiority over named competitors
  4. Advertising using exaggerated claims provided a disclaimer is included

Explanation

Marketing and advertising must be honest and truthful and must not be misleading, deceptive or in breach of the law. Claims of superiority over named competitors, misleading testimonials and exaggerated claims supported by disclaimers all fail this standard. The test is whether a reasonable reader would be misled.

Question 47Ethical decision-making and professional conduct in practice

Which fee arrangement most clearly creates a self-interest threat to a CPA's objectivity?

  1. A fixed fee agreed before the engagement begins
  2. A retainer paid monthly regardless of work done
  3. An hourly rate charged for time actually spent
  4. A percentage of the tax saved if a dispute succeeds Correct answer.

Explanation

A contingent fee ties the member's reward to the outcome of the work, creating a self-interest threat because the member may be motivated to reach a particular conclusion. Fixed, hourly and retainer arrangements are based on work performed or time committed, not on the outcome. Certain engagements, such as audits and other assurance work, preclude contingent fees altogether.

Question 48Ethical decision-making and professional conduct in practice

Which best describes what is meant by 'tone at the top' in an organisation's ethical governance?

  1. The existence of an anonymous whistleblower hotline
  2. The scope of the internal audit plan approved each year
  3. The ethical culture modelled by senior leaders Correct answer.
  4. The wording of the organisation's published mission statement

Explanation

Tone at the top refers to the ethical culture set by leadership through their conduct and the signals they send about acceptable behaviour. Written statements, hotlines and audit plans are supporting controls, but they do not by themselves establish culture. Where leaders' actions contradict their words, the culture reflects the actions.

Question 49Ethical decision-making and professional conduct in practice

A CPA firm acts for two clients that are preparing competing takeover bids for the same target company. What is the most appropriate response?

  1. Accept both engagements but assign a separate engagement team to each client
  2. Accept both engagements and rely on the clients to raise any concerns themselves
  3. Disclose the conflict and obtain informed consent, or decline one engagement Correct answer.
  4. Accept both engagements and keep the conflict confidential to protect client information

Explanation

A conflict of interest exists where the interests of two clients are opposed. The member should disclose the conflict to both parties and obtain their informed consent, apply appropriate safeguards such as separate teams supported by confidentiality arrangements, or withdraw from one or both engagements. Silence and reliance on clients to raise concerns do not satisfy the requirement.

Question 50Ethical decision-making and professional conduct in practice

While working on an audit, a CPA reads board papers revealing that the client will announce a takeover of a listed company next week. The CPA's spouse holds shares in the target company. What should the CPA do?

  1. Not use or communicate the information and ensure the spouse does not trade on it Correct answer.
  2. Tell the spouse to buy more shares before the announcement
  3. Buy the shares personally and disclose the holding after the announcement
  4. Share the information with the audit team because it is internal to the firm

Explanation

Price-sensitive information obtained through professional work must not be used for personal gain or passed on to others. Using or communicating it may also constitute insider trading under the law. The member should keep the information confidential and take steps to prevent anyone connected to them from trading on it.