AICPA Ethics, Governance & Business Law 3 — Questions and Answers
Question 1: Which of the following best describes the 'business judgment rule' as it applies to corporate directors?
- Directors must guarantee profitable outcomes for shareholders
- Directors are protected from liability if they acted on an informed basis in good faith (Correct answer)
- Directors must defer all major decisions to shareholders for approval
- Directors are personally liable for any business losses during their tenure
Correct answer: Directors are protected from liability if they acted on an informed basis in good faith
The business judgment rule presumes that directors acted in good faith, on an informed basis, and in the honest belief that the action was in the corporation's best interest.
Question 2: Under the AICPA Code of Professional Conduct, the 'conceptual framework' approach requires CPAs to do what when facing potential ethical conflicts?
- Always consult legal counsel before proceeding
- Identify threats, evaluate significance, and apply safeguards (Correct answer)
- Automatically decline any engagement with identified threats
- Report all identified threats to the AICPA ethics hotline
Correct answer: Identify threats, evaluate significance, and apply safeguards
The conceptual framework requires CPAs to identify threats to compliance, evaluate their significance, and apply appropriate safeguards to eliminate or reduce them to an acceptable level.
Question 3: Under the Foreign Corrupt Practices Act (FCPA), which of the following payments to a foreign government official is explicitly permitted?
- Payments to obtain a large government construction contract
- Facilitating payments to expedite routine non-discretionary government actions (Correct answer)
- Gifts valued over $500 to influence a procurement decision
- Payments to ensure a foreign official votes favorably on legislation
Correct answer: Facilitating payments to expedite routine non-discretionary government actions
The FCPA contains an exception for 'facilitating payments' (grease payments) made to expedite routine, non-discretionary governmental actions such as mail delivery or utility services.
Question 4: A written contract that violates the Statute of Frauds requirement is best described as:
- Void and unenforceable under all circumstances
- Voidable at the option of either party
- Unenforceable unless the non-defaulting party elects to enforce it
- Valid if partially performed by both parties (Correct answer)
Correct answer: Valid if partially performed by both parties
Under the part performance doctrine, a contract that falls within the Statute of Frauds may be enforced if there has been sufficient partial performance by both parties.
Question 5: Under the Securities Exchange Act of 1934, insider trading violations most commonly involve trading based on:
- Publicly available financial analyst reports
- Material non-public information obtained through a position of trust (Correct answer)
- Historical stock price patterns and technical analysis
- Foreign currency exchange rate forecasts
Correct answer: Material non-public information obtained through a position of trust
Insider trading involves buying or selling securities based on material information that is not publicly available, obtained by virtue of a special relationship or position of trust.
Question 6: Which component of the COSO Internal Control framework addresses the processes used by management to identify and analyze risks to achieving objectives?
- Control environment
- Control activities
- Risk assessment (Correct answer)
- Monitoring activities
Correct answer: Risk assessment
The risk assessment component involves management's process for identifying, analyzing, and responding to risks relevant to achieving the entity's objectives.
Question 7: Under contract law, which doctrine allows a court to refuse enforcement of a contract whose terms are oppressively one-sided and were imposed on a party with no meaningful choice?
- Promissory estoppel
- Unconscionability (Correct answer)
- Impossibility of performance
- Economic duress
Correct answer: Unconscionability
Unconscionability allows courts to refuse enforcement of contracts that are oppressively unfair, typically involving both procedural unfairness (unequal bargaining power) and substantive unfairness (harsh terms).
AICPA Ethics, Governance & Business Law 3
Which of the following best describes the 'business judgment rule' as it applies to corporate directors?