ACA Professional Ethics (ICAEW Code) 3 — Questions and Answers
Question 1: Independence of mind means the accountant:
- Has no financial interests in any company
- Reaches conclusions without being affected by influences that compromise professional judgement (Correct answer)
- Is not employed by the client
- Has no personal relationships with client staff
Correct answer: Reaches conclusions without being affected by influences that compromise professional judgement
Independence of mind is the internal state of actually being objective — not allowing biases, conflicts of interest, or undue influence to compromise professional judgement, regardless of whether others perceive it.
Question 2: A 'cooling-off' period for audit partners of listed companies is required to prevent:
- Self-review threats
- Familiarity threats developing over long association (Correct answer)
- Intimidation threats from management
- Advocacy threats in takeover situations
Correct answer: Familiarity threats developing over long association
Mandatory audit partner rotation and cooling-off periods are safeguards against familiarity threats, which can develop when a partner has a close relationship with client management over many years.
Question 3: Under the ICAEW Code, professional accountants in business have the same ethical obligations as those in practice. If a finance director is instructed to falsify accounts, they should:
- Comply if the instruction comes from the CEO
- Refuse and consider whistleblowing through appropriate channels (Correct answer)
- Simply resign without further action
- Prepare the accounts as instructed and disclose in the notes
Correct answer: Refuse and consider whistleblowing through appropriate channels
A finance director (accountant in business) must refuse instructions that would involve preparing misleading financial statements; depending on circumstances they may need to escalate internally or through external whistleblowing channels.
Question 4: Lowballing in professional fees refers to:
- Charging excessive fees
- Setting an artificially low fee to obtain a new audit appointment, creating self-interest threats (Correct answer)
- Reducing fees for charities and public bodies
- Charging variable fees based on the outcome of tax advice
Correct answer: Setting an artificially low fee to obtain a new audit appointment, creating self-interest threats
Lowballing involves quoting an unrealistically low audit fee to win an appointment, which may create pressure to cut audit work below acceptable standards and creates a self-interest threat.
Question 5: Under the ICAEW Code, a financial interest in an audit client is identified as which type of threat?
- Familiarity threat
- Advocacy threat
- Self-interest threat (Correct answer)
- Intimidation threat
Correct answer: Self-interest threat
A financial interest (e.g., holding shares in an audit client) creates a self-interest threat to independence and objectivity, as the accountant has a personal financial stake in the client's results.
Question 6: The concept of 'ethical sensitivity' in professional ethics means:
- Having strong personal opinions on ethical issues
- Being aware of the ethical dimensions and potential impact of actions and decisions (Correct answer)
- Only applying ethics when auditing listed companies
- Reporting all unethical behaviour to HMRC
Correct answer: Being aware of the ethical dimensions and potential impact of actions and decisions
Ethical sensitivity is the ability to recognise when a situation has ethical implications — identifying potential harms, affected parties, and ethical principles at stake before deciding on a course of action.
ACA Professional Ethics (ICAEW Code) 3
Independence of mind means the accountant: