ICAEW AF · Chapter 2
Ethics and sustainability in financial reporting MCQs with Answers
7 multiple-choice questions on Ethics and sustainability in financial reporting for ICAEW AF Accounting Fundamentals. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Which of the following is NOT one of the fundamental principles in the IESBA Code of Ethics for Professional Accountants?
- A) Independence
- B) Objectivity
- C) Professional behaviour
- D) Integrity
Show answer & explanation
Answer: A) Independence
The five fundamental principles are integrity, objectivity, professional competence and due care, confidentiality, and professional behaviour. Independence is a separate requirement that applies to accountants carrying out audit and assurance work; it is not one of the five fundamental principles.
Question 2
Priya, a newly qualified accountant, is told by the finance director that she will 'not be kept on' unless she leaves a large repair invoice out of this year's accounts so that the profit target is met. Which threat to compliance with the fundamental principles does Priya face?
- A) Intimidation threat
- B) Self-review threat
- C) Familiarity threat
- D) Advocacy threat
Show answer & explanation
Answer: A) Intimidation threat
An intimidation threat arises when an accountant is deterred from acting objectively by actual or perceived pressures, including threats of dismissal. The finance director's pressure threatens Priya's integrity and objectivity. A self-review threat concerns evaluating one's own earlier work, familiarity arises from long or close relationships, and advocacy arises from promoting a client's position.
Question 3
Under the fundamental principle of confidentiality, in which of the following situations may a professional accountant disclose confidential information about an employer without the employer's permission?
- A) When the information would help the accountant obtain a better-paid position elsewhere
- B) When disclosure is required by law, for example a report of suspected money laundering
- C) When the information is more than one year old
- D) When a former colleague asks for the information to help with a job application
Show answer & explanation
Answer: B) When disclosure is required by law, for example a report of suspected money laundering
Confidential information may be disclosed without consent where disclosure is required by law, such as reporting suspected money laundering to the appropriate authority, or where there is a professional duty or right to disclose. Using confidential information for personal advantage or for the benefit of third parties is a breach of the principle, and the passage of time does not remove the duty of confidentiality.
Question 4
What is the main advantage of a principles-based code of ethics compared with a rules-based code?
- A) It means that any action not specifically prohibited is acceptable
- B) It provides a complete list of prohibited actions that can be checked mechanically
- C) It removes the need for professional judgement by the accountant
- D) It can be applied to new and unusual situations that a list of specific rules would not anticipate
Show answer & explanation
Answer: D) It can be applied to new and unusual situations that a list of specific rules would not anticipate
A principles-based code sets out fundamental principles and a conceptual framework for identifying, evaluating and addressing threats. Because it relies on professional judgement, it can be applied to situations that rules could not foresee. Rules-based codes tend to encourage a 'box-ticking' approach in which anything not expressly prohibited is treated as allowed.
Question 5
What is the main aim of the International Sustainability Standards Board (ISSB)?
- A) To audit the sustainability reports published by listed companies
- B) To replace the IASB as the setter of IFRS Accounting Standards
- C) To set the rates of environmental taxes charged by national governments
- D) To develop IFRS Sustainability Disclosure Standards that provide a global baseline of sustainability-related information for investors and other capital market participants
Show answer & explanation
Answer: D) To develop IFRS Sustainability Disclosure Standards that provide a global baseline of sustainability-related information for investors and other capital market participants
The ISSB was established by the IFRS Foundation to develop IFRS Sustainability Disclosure Standards. These are intended to provide a comprehensive global baseline of sustainability-related disclosures that meet the information needs of investors and capital markets. The ISSB sits alongside the IASB; it does not replace it, set taxes or audit reports.
Question 6
Which IFRS Sustainability Disclosure Standard sets out the specific requirements for disclosures about climate-related risks and opportunities?
- A) IAS 1
- B) IFRS 15
- C) IFRS S2
- D) IFRS S1
Show answer & explanation
Answer: C) IFRS S2
IFRS S2 Climate-related Disclosures requires disclosure of information about climate-related risks and opportunities. IFRS S1 sets out the general requirements for disclosure of sustainability-related financial information. IAS 1 deals with presentation of financial statements and IFRS 15 with revenue.
Question 7
Under IFRS S1, an entity should disclose information about which sustainability-related risks and opportunities?
- A) Only those that have already caused a loss recognised in the statement of profit or loss
- B) All environmental matters, regardless of their effect on the entity
- C) Only those that the entity's local regulator has specifically listed
- D) Those that could reasonably be expected to affect the entity's cash flows, access to finance or cost of capital over the short, medium or long term
Show answer & explanation
Answer: D) Those that could reasonably be expected to affect the entity's cash flows, access to finance or cost of capital over the short, medium or long term
IFRS S1 is aimed at the primary users of general purpose financial reports. It requires disclosure of sustainability-related risks and opportunities that could reasonably be expected to affect the entity's prospects, meaning its cash flows, access to finance or cost of capital over the short, medium or long term. The focus is on information that is useful to investors and lenders, not on every environmental matter.