ICAEW ARF · Chapter 11
Confidentiality, money laundering and regulation MCQs with Answers
10 multiple-choice questions on Confidentiality, money laundering and regulation for ICAEW ARF Assurance and Risk Fundamentals. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
In which of the following situations is an accountant REQUIRED to disclose confidential client information?
- A) When the accountant knows or suspects that the client is engaged in money laundering and must make a report
- B) When a journalist asks for details of the client's financial results
- C) When a potential investor in the client asks for information
- D) When another client asks about the creditworthiness of the client
Show answer & explanation
Answer: A) When the accountant knows or suspects that the client is engaged in money laundering and must make a report
Confidential information must not be disclosed without proper authority unless there is a legal or professional right or duty to disclose. UK law requires accountants in the regulated sector to report knowledge or suspicion of money laundering. Requests from journalists, investors or other clients do not create a duty to disclose and could breach confidentiality.
Question 2
During an audit, a senior learns that the client is about to make a takeover bid for a listed company. The senior buys shares in the target company. Which fundamental principle is primarily breached?
- A) Confidentiality
- B) Professional competence and due care
- C) Objectivity
- D) Professional behaviour only, as the information was not disclosed to anyone
Show answer & explanation
Answer: A) Confidentiality
Confidentiality prohibits using information obtained through professional work for personal advantage, as well as disclosing it. Using the information to buy shares breaches this principle and may also amount to insider dealing. It is not only a matter of professional behaviour, because the information was used even though it was not disclosed.
Question 3
A criminal deposits cash from drug dealing into several bank accounts in small amounts. Which stage of money laundering does this illustrate?
- A) Layering
- B) Placement
- C) Integration
- D) Concealment
Show answer & explanation
Answer: B) Placement
Placement is the initial stage, where criminal proceeds, often cash, are introduced into the financial system. Layering involves complex transactions to hide the source of the funds, and integration is when the funds re-enter the legitimate economy appearing clean.
Question 4
An audit senior wants to continue working at home on a client's payroll file, which contains employees' names, salaries and bank details. Which action best complies with data protection law (UK GDPR) and the duty of confidentiality?
- A) Email the file to a personal email account so that it can be opened on a home computer
- B) Copy the file to an unencrypted USB stick and delete it once the audit is finished
- C) Access the file only through the firm's secure, encrypted systems on a firm device, and use only the personal data needed for the audit work
- D) Print the file and take it home, because paper records are outside the scope of data protection law
Show answer & explanation
Answer: C) Access the file only through the firm's secure, encrypted systems on a firm device, and use only the personal data needed for the audit work
Personal data must be processed securely, protected against unauthorised access or loss, and limited to what is necessary for the purpose. Using the firm's encrypted systems and devices, and only the data needed for the work, meets these requirements and protects client confidentiality. Personal email accounts and unencrypted USB sticks expose the data to loss or interception, and personal data held in paper filing systems is still protected by data protection law.
Question 5
An accountant reports a suspicion of money laundering by a client to the firm's money laundering reporting officer. Afterwards the accountant tells the client that a report has been made. Which offence may the accountant have committed?
- A) Failure to report
- B) Placement
- C) Tipping off
- D) Breach of the duty of care
Show answer & explanation
Answer: C) Tipping off
Tipping off is the offence of disclosing that a report has been made, or that an investigation is under way, where this is likely to prejudice an investigation. The accountant did make the required report, so there has been no failure to report. Placement is a stage of money laundering rather than an offence by the accountant.
Question 6
How should an employee of an accountancy firm report a suspicion of money laundering by a client?
- A) Directly to the client's board of directors
- B) In the auditor's report to the shareholders
- C) To the firm's money laundering reporting officer, who decides whether to make a report to the National Crime Agency
- D) To the firm's marketing partner, who will decide whether to continue acting for the client
Show answer & explanation
Answer: C) To the firm's money laundering reporting officer, who decides whether to make a report to the National Crime Agency
Regulated firms must appoint a nominated officer, usually called the money laundering reporting officer. Staff make internal reports to this officer, who considers them and decides whether to submit a suspicious activity report to the National Crime Agency. Informing the client could amount to tipping off.
Question 7
Which of the following statements about the offence of failing to report money laundering by a person in the UK regulated sector is correct?
- A) The offence is committed only if the person had actual proof of money laundering
- B) The offence does not apply to accountants, only to banks
- C) The offence can be committed where there were reasonable grounds to know or suspect money laundering, even if the person did not actually suspect it
- D) The offence applies only where the amount involved exceeds the audit materiality level
Show answer & explanation
Answer: C) The offence can be committed where there were reasonable grounds to know or suspect money laundering, even if the person did not actually suspect it
For the regulated sector the test is objective as well as subjective: a person who should reasonably have known or suspected money laundering may commit an offence by not reporting. Proof is not required, the regulated sector includes accountants and auditors, and there is no materiality threshold for reporting suspicions.
Question 8
Under the Companies Act 2006, a firm can act as a statutory auditor only if it is registered with, and its audit work is monitored by, a recognised body. ICAEW carries out this role for its member firms. In doing so, which type of body is ICAEW acting as?
- A) A recognised qualifying body
- B) A recognised supervisory body
- C) An agent of the Registrar of Companies
- D) A professional body supervisor for anti-money laundering purposes
Show answer & explanation
Answer: B) A recognised supervisory body
A recognised supervisory body (RSB) registers firms as eligible for appointment as statutory auditors and monitors the quality of their audit work, under oversight by the competent authority. A recognised qualifying body (RQB) awards the professional qualification that makes an individual eligible; ICAEW is also an RQB, but that is a different role from registering and monitoring firms. ICAEW's anti-money laundering supervision is also a separate role, and the Registrar of Companies does not register or monitor auditors.
Question 9
An accountancy firm is asked to advise two clients who are competing to buy the same business. What is the most appropriate response?
- A) Advise both without telling either, as long as the work is done well
- B) Always advise the client who pays the higher fee
- C) Share each client's bid strategy with the other so that both are treated equally
- D) Advise both only if the conflict is disclosed, both clients consent, and safeguards such as separate teams and information barriers are applied
Show answer & explanation
Answer: D) Advise both only if the conflict is disclosed, both clients consent, and safeguards such as separate teams and information barriers are applied
Acting for competing clients creates a conflict of interest that threatens objectivity and confidentiality. The firm may continue only if the threats can be reduced to an acceptable level, normally by disclosure, obtaining consent and using separate teams with information barriers. Sharing information would breach confidentiality, and choosing by fee level is not an ethical basis.
Question 10
An accountant learns the following facts about four different clients. In which situation does the client hold criminal property under the Proceeds of Crime Act 2002, so that the accountant must consider making a money laundering report?
- A) A client makes a genuine arithmetical error in its VAT return and corrects it promptly
- B) A client deliberately fails to declare income to HM Revenue & Customs and keeps the tax saved
- C) A client chooses a tax-efficient pension contribution permitted by law
- D) A client makes a loss on a legitimate investment
Show answer & explanation
Answer: B) A client deliberately fails to declare income to HM Revenue & Customs and keeps the tax saved
Under the Act, criminal property includes any benefit from criminal conduct, including money saved through deliberate tax evasion. A client who deliberately fails to declare income and keeps the tax saved therefore holds criminal property, and an accountant in the regulated sector who knows or suspects this must consider reporting to the firm's money laundering reporting officer. An honest mistake that is promptly corrected, lawful tax planning and an investment loss do not involve criminal conduct.