ICAEW SE · Chapter 9
Threats and safeguards MCQs with Answers
9 multiple-choice questions on Threats and safeguards for ICAEW SE Sustainability and Ethics. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
A finance manager's bonus depends on the company reporting profit above a target, and she is responsible for estimating a large provision. Which threat to the fundamental principles does this create?
- A) Self-review threat
- B) Advocacy threat
- C) Self-interest threat
- D) Familiarity threat
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Answer: C) Self-interest threat
A self-interest threat is the threat that a financial or other interest will inappropriately influence an accountant's judgement or behaviour. Her bonus gives her a personal incentive to understate the provision. Safeguards include independent review of the estimate by someone without a similar incentive.
Question 2
An accountancy firm designs a client's inventory valuation system and then audits the inventory figures produced by that system. Which threat arises?
- A) Intimidation threat
- B) Advocacy threat
- C) Self-review threat
- D) Self-interest threat
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Answer: C) Self-review threat
A self-review threat arises when an accountant evaluates the results of their own or their firm's previous work. The audit team may not appropriately evaluate a system the firm designed. This is a key reason why some non-audit services are restricted for audit clients.
Question 3
An audit manager has worked on the same client for many years and has become close friends with the client's finance director. Which threat is most likely to arise?
- A) Self-review threat
- B) Advocacy threat
- C) Self-interest threat
- D) Familiarity threat
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Answer: D) Familiarity threat
A familiarity threat arises when, because of a long or close relationship, an accountant becomes too sympathetic to the client's interests or too accepting of their work. Safeguards include rotating senior staff and having the work reviewed by someone not involved in the engagement.
Question 4
An accountant in practice is asked by a client to represent it publicly in a dispute with a tax authority, promoting the client's position. Which threat arises?
- A) Familiarity threat
- B) Advocacy threat
- C) Self-review threat
- D) Intimidation threat
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Answer: B) Advocacy threat
An advocacy threat arises when an accountant promotes a client's or employer's position to the point that their objectivity is compromised. Acting on a client's behalf in a dispute can create this threat. For audit clients, such services may be restricted because of their effect on independence.
Question 5
A company's chief executive tells the financial controller that she will lose her job unless she agrees to an accounting treatment that she considers inappropriate. Which threat is this?
- A) Advocacy threat
- B) Familiarity threat
- C) Self-review threat
- D) Intimidation threat
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Answer: D) Intimidation threat
An intimidation threat is the threat that an accountant will be deterred from acting objectively because of actual or perceived pressures, including attempts to exercise undue influence. Threatening dismissal is a clear example. The controller should not give in to the pressure and should consider raising the matter with those charged with governance or seeking advice.
Question 6
Under the conceptual framework in the ICAEW Code of Ethics, what are the three main steps an accountant should follow when dealing with threats to the fundamental principles?
- A) Ignore minor threats, report major threats, and resign
- B) Calculate threats, disclose threats, and insure against threats
- C) Identify threats, evaluate threats, and address threats
- D) Delegate threats, document threats, and accept threats
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Answer: C) Identify threats, evaluate threats, and address threats
The conceptual framework requires accountants to identify threats to compliance with the fundamental principles, evaluate whether they are at an acceptable level, and address them by eliminating them or reducing them to an acceptable level. Where that is not possible, the accountant should decline or end the relevant service or activity.
Question 7
When evaluating whether a threat to the fundamental principles is at an acceptable level, which test does the ICAEW Code of Ethics require an accountant to apply?
- A) The balance of probabilities test
- B) The reasonable and informed third party test
- C) The going concern test
- D) The materiality threshold of 5% of profit
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Answer: B) The reasonable and informed third party test
An acceptable level is one at which an accountant using the reasonable and informed third party test would likely conclude that the accountant complies with the fundamental principles. The test considers whether a hypothetical person with relevant knowledge, weighing all the facts, would reach the same conclusion. Legal and accounting tests such as the balance of probabilities and going concern are not used for this purpose.
Question 8
How do the ethical threats typically faced by professional accountants in business tend to differ from those faced by accountants in public practice?
- A) Accountants in business never face self-interest threats
- B) Accountants in business are more likely to face pressure from their own employer, for example from managers whose interests depend on reported results, and may find it harder to walk away because their livelihood depends on one organisation
- C) Only accountants in public practice face intimidation threats
- D) Accountants in business are not required to comply with the fundamental principles
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Answer: B) Accountants in business are more likely to face pressure from their own employer, for example from managers whose interests depend on reported results, and may find it harder to walk away because their livelihood depends on one organisation
Accountants in business often face pressure from superiors and colleagues to present results favourably, and their employment and income depend on a single employer, which can make intimidation and self-interest threats harder to resist. Accountants in practice face threats arising from client relationships and fees. All professional accountants must comply with the fundamental principles.
Question 9
An employee reports serious wrongdoing at her employer to an appropriate regulator after internal reporting has failed. Which statement about whistleblowing in the UK is correct?
- A) Whistleblowers have no legal protection in the UK
- B) Whistleblowing is always a breach of confidentiality and results in disciplinary action by ICAEW
- C) Whistleblowing law requires employees to report all concerns to the media first
- D) The Public Interest Disclosure Act 1998 can protect workers who make qualifying disclosures from dismissal or detriment, although whistleblowers may still experience personal stress and strained working relationships
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Answer: D) The Public Interest Disclosure Act 1998 can protect workers who make qualifying disclosures from dismissal or detriment, although whistleblowers may still experience personal stress and strained working relationships
The Public Interest Disclosure Act 1998 provides protection for workers who make protected disclosures in the public interest, for example to their employer or to a prescribed person such as a regulator. Even with legal protection, speaking out can have a significant personal impact, including stress and damaged relationships. Disclosure to the media is protected only in limited circumstances and is not the first step.