Acct Ethics Exam 3 Ch. 5 & 6

This is the preferred approach to deal with conflicts of interests Management Disclosure Remediation Avoidance Awareness

Avoidance

Which of the following is not a mechanism for monitoring a code of ethics? Ethics audit or internal audit procedures Reviews by legal department Awards and bonuses Annual sign-off by employees Employee surveys

Awards and bonuses

Directors' Duties

Duty of Loyalty & Good Faith Act in the best interests of the corporation Recognize and deal with conflicts of interest Not divulge confidential information received as a director, nor use it for personal advantage May not divert opportunities for self-dealing, other co's Conflict of Interest Process - declare, refrain from voting, no appearance of conflict to taint co. decisions, resign Duty of Care, Diligence & Skill that a reasonably prudent person would exercise in comparable circumstances Informed judgements, consideration of relevant info, active role in key matters

Values necessary to discharge duties and maintain rights (Features, Duties, Rights, & Values of Accounting Profession)

Honesty Integrity Objectivity, based on independent judgement Desire to exercise due care and professional scepticism Competence Confidentiality Commitment to place the needs of the public, the client, the profession, and the employer or firm before the  professional's own self-interest

Which of the following is not an ethics risk management principle? Normal definitions of risk are too narrow for stakeholder accountability Assign responsibility, develop follow-up processes and board review Discovery and remediation are essential The code of ethics must be reviewed by independent parties An ethics risk exists when expectations of stakeholders may not be met

The code of ethics must be reviewed by independent parties

Governance

Those mechanisms, processes and relations by which corporations are controlled and directed.

The most important factor in encouraging employee observance to an ethics program is that employees perceive that it is: Compliance-based Value-based Achievement oriented Stakeholder-based Externally oriented

Value-based

If a professional accountant is auditing a public company and she receives company shares as payment for her audit services, she will be violating the following fundamental principle: a. Integrity b. Objectivity c. Professional due care d. Confidentiality e. All of the above

b. Objectivity

This organization issues auditing standards, carries out inspections of public accounting firms auditing U.S. public clients, and imposes sanctions when applicable: a. CPAB b. PCAOB c. SEC d. FASB e. AICPA

b. PCAOB

Professional Accountants, in their fiduciary role, owe primary loyalty to: a. The accounting profession b. The client c. The general public d. Government regulations e. All of the above

c. The general public

Character traits associated with ethical leadership include: a. Integrity b. Honesty c. Trustworthiness d. All of the above

d, All of the above

The adoption of the following measures would reduce the expectation gap and lessen public misunderstanding of the auditor's role a. Publish a statement of management responsibility b. Auditor to report annually to audit committee c. Expand audit report to clarify auditor's role and the level of assurance d. (a) and (b) e. (a) and (c)

d. (a) and (c)

The following value is NOT necessary for an accounting professional: a. Honesty b. Integrity c. Objectivity d. A primary commitment to self-interest e. All but one of the above

d. A primary commitment to self-interest

The following duties are essential to maintaining a fiduciary relationship in the accounting profession: a. Development and maintenance of required knowledge and skills b. Maintenance of trust c. Maintenance of an acceptable personal reputation d. All of the above e. (a) and (b) only

d. All of the above

A professional accountant is auditing client A and providing consulting services to client B. Both clients are in the same industry. If the professional accountant uses specific information from client A's audit to prepare a business plan for client B, he will be violating the following fundamental principle: a. Integrity b. Objectivity c. Professional due care d. Confidentiality e. All of the above

d. Confidentiality

A professional accountant has been the partner in charge of a particular audit client for the past eight years. This situation could result in the following threat to professional independence: a. Self-review b. Intimidation c. Advocacy d. Familiarity e. None of the above

d. Familiarity

This organization can issue auditing standards in the U.S.: a. AICPA b. FASB c. SEC d. PCAOB e. All of the above

e. All of the above

This organization is developing an international code of conduct for professional accountants: a. International Accounting Standards Board b. European Federation of Accountants c. Financial Accounting Standards Board d. Public Accounting Oversight Board e. International Federation of Accountants

e. International Federation of Accountants

A new audit client was taken on by a professional accountant's firm. The fee for this client's audit engagement is significantly lower than that charged by the prior accountants. This situation could result in the following threat to professional independence: a. Self-review b. Intimidation c. Advocacy d. Familiarity e. None of the above

e. None of the above

A professional accounting firm has several audit and tax clients, however, a single client represents 40% of the firm's revenue. This situation could result in the following threat to professional independence: a. Self-review b. Intimidation c. Advocacy d. Familiarity e. Over-dependence

e. Over-dependence

Agency Theory

individuals attempt to opportunistically maximize his/her own personal gain

Stewardship Theory

management wants to do a good job through performance of their duties

Shareholder Theory

shareholders' interests are the most important - shareholder primacy, wealth maximization

Stakeholder Theory

stakeholders' interests are as important as profit. Quality of life, manger satisfaction and respect for society and the environment are also relevant.

Self-interest threat

that a member could benefit, financially or otherwise, from an interest in, or relationship with, a client or persons associated with the client.

Adverse interest threat

that a member will not act with objectivity because the member's interests are opposed to the client's interests.

Self-review threats

that a member will not appropriately evaluate the results of a previous judgment made or service performed or supervised by the member or an individual in the member's firm and that the member will rely on that service in forming a judgment as part of another.

Advocacy threat

that a member will promote a client's interests or position to the point that his or her objectivity or independence is compromised

Intimidation threats/Undue influence threat

that a member will subordinate his or her judgment to an individual associated with a client or any relevant third party due to that individual's reputation or expertise, aggressive or dominant personality, or attempts to coerce or exercise excessive influence over the member.

Management participation threat

that a member will take on the role of client management or otherwise assume management responsibilities, such may occur during an engagement to provide nonattest services

Familiarity threat

that, due to a long or close relationship with a client, a member will become too sympathetic to the client's interests or too accepting of the client's work or product.

Features (Features, Duties, Rights, & Values of Accounting Profession)

Provision of important fiduciary services to society Extensive knowledge and skill are required Training and skills required are largely intellectual in character Overseen by self-regulating membership organisations Accountable to governmental authority

Which of the following is not true? Principles are more useful than rules because principles can be interpreted as new circumstances require Rules are more useful than principles because rules can be interpreted as new circumstances require A blend of principles and rules is often optimal All of the above (a) and (c) only

Rules are more useful than principles because rules can be interpreted as new circumstances require

Insider Trading

SEC requires management insiders to wait until the information is released to the public before allowing insiders to trade

Which of the following is not an example of emerging public accountability standards or initiatives? SOX-404 GRI AA-1000 FTSE4Good All of the above

SOX-404

Directors' Functional Responsibilities

Safeguard the interests of the company's shareholders Review overall business strategy, and in some jurisdictions take stakeholder interests into account Select and compensate the company's senior executives Evaluate internal controls and external auditor, and recommend the company's outside auditor for election by the shareholders Oversee the company's financial statements, and recommend them to the board for transmission to the shareholders Monitor overall company performance Ensure: An effective system of internal controls and internal audit An effective whistleblower system reporting to the audit committee Effectiveness of the company's risk management program Efficacy of the company's ethical corporate culture

A fundamental problem examined by agency theory is how it is possible to align: Shareholders' and stakeholders' goals Manager's and stakeholders' goals Shareholders' and managers' goals Principal's and shareholders' goals Agent's and stakeholders' goals

Shareholders' and managers' goals

Foundation of Ethical Values (Behrman)

Significantly delineated by and founded on ethical considerations rather than techniques or tools

The most common sources of conflict of interest are: Financial Family connections Motivation (a) and (b) None of the above

(a) and (b)

A conflict of interest exists when a given decision maker (D) and another person (P) are in the following situation: D has to exercise judgement in P's behalf P has to exercise judgement in D's behalf D has a special interest that interferes with proper judgement (a) and (b) (a) and (c)

(a) and (c)

Corporations are now increasingly realizing that they are accountable: a. Legally to shareholders b. Legally to all stakeholders c. Strategically to additional stakeholders (a) and (b) (a) and (c)

(a) and (c)

The company's internal auditors and the Ethics Officer should report: a. Day-to-day to the CEO b. Day-to-day to the Audit Committee of the Board of Directors c. Regularly to the Audit Committee of the Board of Directors without management being present (a) and (c) (a) and (b)

(a) and (c)

The 20/60/20 rule states the percent of employees who would commit a fraudulent act if the chance of getting caught is considered low: 20% 60% 80% 100% None of the above

60%

Rights permitted in most jurisdictions (Features, Duties, Rights, & Values of Accounting Profession)

Ability to hold oneself out as a designated professional to render important fiduciary services Ability to set entrance standards and examine candidates Self-regulation and discipline based on codes of conduct Participation in the development of accounting and audit practice Access to some or all fields of accounting and audit endeavour

A Conference Board survey identified the following rationale for developing codes of ethics: Make employees aware that adherence is critical to bottom-line success Provide a statement of do's and don'ts Discuss what is expected in stakeholder relationships Establish values and mission All of the above

All of the above

Experience has revealed that, to be effective, a code must be reinforced by: Tone at the top Ethics officer and internal auditors A comprehensive ethical culture Principles, rules and examples All of the above

All of the above

Professional Judgment

An understanding of professional thinking on right and wrong behavior as described in professional standards & embodied in professional practices.

This code deals with ethics principles plus additional examples: Credo Code of ethics Code of conduct Code of practice All of the above

Code of conduct

Duties expected of a profession

Competence Objectivity Integrity Confidentiality Discipline

Duties essential to a fiduciary relationship (Features, Duties, Rights, & Values of Accounting Profession)

Continuing attention to the needs of clients and other stakeholders Development and maintenance of required knowledge and skills, including professional scepticism Maintenance of the trust inherent in a fiduciary relationship by behaviour exhibiting responsible values Maintenance of an acceptable personal reputation Maintenance of a credible reputation as a profession

Business Judgment Rule

Courts are reluctant to second-guess reasonable business judgements made by unconflicted directors. Directors and officers will not be held to be in breach of the duty of care under s. 122(1)(b) of the CBCA if they act prudently and on a reasonably informed basis.

SOX imposed the following new penalties for executives: Fines Suspension Criminal prosecution for executives Return of ill-gotten gains All of the above

Criminal prosecution for executives

Integrity or Values-based

Defines organizational values and encourages employee commitment

Protect top management from blame

Defensive "CYA" or cover your ___

The primary focus of an integrity-based ethics program is: Preventing, detecting and punishing violations of the law Define organizational values and encourage employee commitment Improve image and relationship with stakeholders Protect management from blame All of the above

Define organizational values and encourage employee commitment

Building trust within an organization can have favorable impact on employee's willingness to share information and ideas in a process of: Ethical awareness Ethical awakening Ethical renewal Ethical wave None of the above

Ethical renewal

Essential Features (Bayles)

Extensive training Provision of important services to society Training and skills largely intellectual in character

Directors' Behavioral Expectations

Fiduciary Duties Acting in the best interest of the company (shareholders & stakeholders) Loyalty to be demonstrated by independent judgment. Actions to be in good faith, obedient to the interests of all Actions demonstrate due care, diligence, and skill (i.e. financial literacy) Conflicts Require disclosure, and actions to manage effectively Liability Issues Business Judgment Rule Oppression remedy Personal liability for Tort Claims

Typical Features

Generally licensed or certified Represented by organisations, associations, or institutes Autonomy

Which of the following is not a characteristic identified by forensic experts in prospective fraud situations? High intelligence Greed Need for whatever is taken Opportunity to take advantage Low probability of being caught

High intelligence

Personal Liability for Tort Claims

If a director committed a tortious act (one that injures people or property) on a third party, they cannot escape personal liability because they did it on behalf of a corporation when performing their corporate duties. A tort can be intentional or unintentional, where unintentional includes negligence or negligent misrepresentation due to lack of the duty of care or foreseeability.

Oppression Remedy

If shareholders believe they have been treated oppressively or unfairly by the decisions of directors, they can apply to the courts for financial compensation or other sanctions citing the need for an oppression remedy If directors have not been self-dealing or appropriating opportunities, they can usually defend personal attacks under the Business Judgement Rule Reservation - minority interest shareholders are often unable to get the treatment they would like - they are in the rumble seat. Multiple voting controversy - Magna buys out founder

Satisfaction of external stakeholders

Improvement of image with and relationships with external stakeholders (customers, the community, suppliers)

The primary focus of a compliance-based ethics program is: Preventing, detecting and punishing violations of the law Define organizational values and encourage employee commitment Improve image and relationship with stakeholders Protect management from blame All of the above

Preventing, detecting and punishing violations of the law

Compliance-based

Preventing, detecting, and punishing violations of the law

Professional Accountants

Professional accountants owe their primary loyalty to the public interest, not to their clients or their management or to themselves.

Efficient Market Hypothesis (EMH) by Eugene Fama

Weak Form Market Semi-strong Form Market Strong Form Market

Resource Based Theory

a firm's internal environment, including its resources and capabilities are most important in determining strategy

Which of the following is not a fundamental principle in codes of conduct for professional accountants? a. Act in the client's best interest b. Objectivity and independence c. Maintain the good reputation of the profession d. Maintain confidentiality e. Not to be associated with misleading information

a. Act in the client's best interest

According to Kohlberg, at this stage of moral reasoning, fear of punishment and authorities are a motive for doing right: a. Pre-conventional b. Conventional c. Post-conventional d. Autonomous e. Principled

a. Pre-conventional

According to Kohlberg, at this stage of moral reasoning, adherence to moral codes or to codes of law and order are a motive for doing right: a. Pre-conventional b. Conventional c. Post-conventional d. Autonomous e. Principled

b. Conventional

The recommendation of appointment and review of the external auditors by the audit committee is an example of: a. Safeguards reducing the risk of conflict of interest created by the profession, legislation, or regulation b. Safeguards reducing the risk of conflict of interest between an auditor and management c. Safeguards reducing the risk of conflict of interest within a professional accounting firm's own systems and procedures d. All of the above e. (a) and (c) only

b. Safeguards reducing the risk of conflict of interest between an auditor and management

The following elements are essential features of a profession: a. Extensive training, license or certification, and provision of important services to society b. Extensive training, primarily intellectual skills, and representation by professional organizations c. Extensive training, provision of important services to society, and primarily intellectual skills d. License or certification, representation by professional organizations, and autonomy e. License or certification, autonomy, and provision of important services to society

c. Extensive training, provision of important services to society, and primarily intellectual skills

If a professional accountant is billing an audit client for more hours than those actually worked, he will be violating the following fundamental principle: a. Objectivity b. Professional due care c. Integrity d. Confidentiality e. All of the above

c. Integrity

The external review of an audit firm's quality control system is an example of: a. Safeguards reducing the risk of conflict of interest within the audit profession b. Safeguards reducing the risk of conflict of interest within a client c. Safeguards reducing the risk of conflict of interest within a professional accounting firm d. All of the above e. (a) and (c) only

c. Safeguards reducing the risk of conflict of interest within a professional accounting firm

Using partners who do not report to audit partners for the provision of non-assurance services to an assurance client would be an example of: a. Safeguards reducing the risk of conflict of interest created by the profession, legislation, or regulation b. Safeguards reducing the risk of conflict of interest within a client c. Safeguards reducing the risk of conflict of interest within a professional accounting firm d. All of the above e. (a) and (c) only

c. Safeguards reducing the risk of conflict of interest within a professional accounting firm