CAF-6 · Chapter 13
Ethical issues in financial reporting MCQs with Answers
15 multiple-choice questions on Ethical issues in financial reporting for CAF-6 Corporate Reporting. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
According to the ICAP Code of Ethics, which fundamental principle requires a member to be straightforward and honest in all professional and business relationships?
- A) Objectivity
- B) Integrity
- C) Confidentiality
- D) Professional Behaviour
Show answer & explanation
Answer: B) Integrity
Integrity implies fair dealing and truthfulness. It requires a chartered accountant to be straightforward and honest in all professional and business relationships.
Question 2
Zaid, a CFO, is preparing the year-end financial statements. His CEO pressures him to hide a massive impending loss by delaying the recording of certain expenses. If Zaid complies, which threat to his fundamental principles is primarily occurring?
- A) Self-review threat
- B) Familiarity threat
- C) Intimidation threat
- D) Advocacy threat
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Answer: C) Intimidation threat
An intimidation threat occurs when a member is deterred from acting objectively because of actual or perceived pressures, including attempts to exercise undue influence (such as a CEO pressuring a CFO).
Question 3
A chartered accountant holds a significant amount of shares in the company where he works as the Finance Director. This scenario most clearly creates which type of threat to his objectivity?
- A) Self-interest threat
- B) Self-review threat
- C) Familiarity threat
- D) Intimidation threat
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Answer: A) Self-interest threat
A self-interest threat arises when a financial or other interest will inappropriately influence a professional accountant's judgment or behavior, such as owning shares whose value depends on the financial statements they prepare.
Question 4
Which fundamental principle is threatened if an accountant uses confidential insider information about an impending lucrative merger to buy shares in the company before the news goes public?
- A) Professional competence and due care
- B) Confidentiality
- C) Advocacy
- D) Objectivity
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Answer: B) Confidentiality
The principle of confidentiality prohibits a member from using confidential information acquired as a result of professional and business relationships for their personal advantage or the advantage of third parties.
Question 5
Under what circumstance might it be acceptable for a chartered accountant to disclose confidential client/employer information?
- A) To help a close friend make an investment decision.
- B) When there is a legal or professional right or duty to disclose, and it is authorized by the employer or law.
- C) When a competitor offers a financial reward for the data.
- D) Whenever the accountant leaves the employment of the company.
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Answer: B) When there is a legal or professional right or duty to disclose, and it is authorized by the employer or law.
Exceptions to confidentiality exist when disclosure is permitted by law and authorized, required by law (e.g., anti-money laundering), or there is a professional duty/right to disclose (e.g., to comply with ICAP investigations).
Question 6
A financial accountant promotes the shares of their employing company to potential investors in a highly exaggerated manner to help the company secure a loan. What specific threat does this action create?
- A) Familiarity threat
- B) Advocacy threat
- C) Intimidation threat
- D) Self-review threat
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Answer: B) Advocacy threat
An advocacy threat occurs when a chartered accountant promotes a client's or employing organization's position to the point that their objectivity is compromised.
Question 7
If a chartered accountant in business determines that the financial information they are associated with is materially false or misleading, and the superiors refuse to correct it, what is the ultimate course of action?
- A) Sign off on it but add a small footnote.
- B) Report it to the local newspaper immediately.
- C) Refuse to remain associated with the misleading information, which may involve resigning.
- D) Adjust the figures secretly without telling management.
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Answer: C) Refuse to remain associated with the misleading information, which may involve resigning.
If safeguards fail and the information remains misleading, the accountant must disassociate from it. If unable to do so while employed, resignation from the employing organization might be the only appropriate action.
Question 8
A major supplier offers the Chief Accountant of a company an expensive all-expenses-paid holiday. The accountant is currently negotiating contract renewal with this supplier. Which threats are most likely created here?
- A) Self-interest and Familiarity threats
- B) Advocacy and Self-review threats
- C) Intimidation and Advocacy threats
- D) Professional competence and Due care threats
Show answer & explanation
Answer: A) Self-interest and Familiarity threats
Accepting significant gifts creates a self-interest threat (financial gain) and a familiarity threat (becoming too sympathetic to the supplier's interests).
Question 9
Which principle requires an accountant to maintain professional knowledge and skill at the level required to ensure that clients or employers receive competent professional service?
- A) Integrity
- B) Objectivity
- C) Professional competence and due care
- D) Professional behaviour
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Answer: C) Professional competence and due care
This is the exact definition of the fundamental principle of professional competence and due care.
Question 10
A newly qualified accountant accepts a role as Head of Tax for a multinational corporation, despite having zero experience or training in international tax laws. Which fundamental principle is being threatened?
- A) Integrity
- B) Professional competence and due care
- C) Confidentiality
- D) Advocacy
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Answer: B) Professional competence and due care
Accepting a task or job without the requisite skills, experience, or training directly threatens the principle of professional competence and due care.
Question 11
What is a 'Self-review' threat in the context of the ICAP Code of Ethics?
- A) The threat that an accountant will rely too heavily on their own previous judgment or work when performing a current activity.
- B) The threat that an accountant will review their salary inappropriately.
- C) The threat that management will review the accountant's work negatively.
- D) The threat of reviewing competitor's financial statements.
Show answer & explanation
Answer: A) The threat that an accountant will rely too heavily on their own previous judgment or work when performing a current activity.
A self-review threat is the risk that a professional will not appropriately evaluate the results of a previous judgment made or service performed by themselves or someone else in their firm/organization.
Question 12
If a threat to compliance with the fundamental principles is identified, the ICAP Code requires the accountant to apply 'safeguards'. What is the purpose of these safeguards?
- A) To completely ignore the threat.
- B) To eliminate the threat or reduce it to an acceptable level.
- C) To hide the threat from the audit committee.
- D) To justify unethical behavior legally.
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Answer: B) To eliminate the threat or reduce it to an acceptable level.
Safeguards are actions or other measures that may eliminate threats or reduce them to an acceptable level.
Question 13
A manager asks you to capitalize routine repair and maintenance costs to boost current year profits to secure a bank loan. Complying with this request would primarily violate which accounting and ethical standards?
- A) IAS 16 and Integrity / Objectivity
- B) IAS 2 and Confidentiality
- C) IFRS 15 and Familiarity
- D) IAS 37 and Advocacy
Show answer & explanation
Answer: A) IAS 16 and Integrity / Objectivity
Routine maintenance cannot be capitalized under IAS 16. Doing so deliberately to inflate profits involves knowingly producing misleading information, violating Integrity and Objectivity.
Question 14
Which principle imposes an obligation on all professional accountants to comply with relevant laws and regulations and avoid any action that discredits the profession?
- A) Objectivity
- B) Professional Behaviour
- C) Confidentiality
- D) Advocacy
Show answer & explanation
Answer: B) Professional Behaviour
Professional behaviour requires members to comply with relevant laws and avoid actions that may bring discredit to the accountancy profession.
Question 15
In a corporate structure, if an ethical conflict cannot be resolved with an immediate supervisor, who is typically the next most appropriate party within the organization to consult?
- A) The external auditor
- B) The media
- C) The Audit Committee or Those Charged with Governance (e.g., the Board of Directors)
- D) A major shareholder
Show answer & explanation
Answer: C) The Audit Committee or Those Charged with Governance (e.g., the Board of Directors)
Standard ethical conflict resolution protocols suggest escalating the issue internally to higher levels of management, such as the Audit Committee or the Board of Directors, before considering external avenues.