CA Ethics and Governance 2 — Questions and Answers
Question 1: A CPA discovers that a client has overstated revenue to meet loan covenants. The client refuses to correct the financials. What should the CPA do?
- Ignore the issue to maintain the client relationship
- Withdraw from the engagement and consider reporting obligations (Correct answer)
- Issue a qualified opinion and continue the engagement
- Discuss the matter only with the audit committee
Correct answer: Withdraw from the engagement and consider reporting obligations
When a client refuses to correct material misstatements, the CPA must withdraw and evaluate reporting obligations under professional standards.
Question 2: Under the AICPA Code of Professional Conduct, which threat arises when a CPA audits financial statements they personally prepared?
- Advocacy threat
- Familiarity threat
- Self-review threat (Correct answer)
- Intimidation threat
Correct answer: Self-review threat
A self-review threat occurs when a CPA reviews their own prior work, compromising objectivity.
Question 3: Which governance body is primarily responsible for overseeing the external auditor in a publicly traded U.S. company?
- Board of directors
- Audit committee (Correct answer)
- CEO and CFO
- Internal audit department
Correct answer: Audit committee
The audit committee, composed of independent directors, is responsible for overseeing the external audit process under SEC and SOX requirements.
Question 4: A CPA's client pressures them to change an audit conclusion under threat of losing the engagement. This is an example of which threat to independence?
- Self-interest threat
- Familiarity threat
- Advocacy threat
- Intimidation threat (Correct answer)
Correct answer: Intimidation threat
An intimidation threat occurs when a CPA is deterred from acting objectively by actual or perceived coercion from a client.
Question 5: Which principle of the AICPA Code of Professional Conduct requires CPAs to be straightforward and honest in professional and business relationships?
- Objectivity
- Integrity (Correct answer)
- Due care
- Confidentiality
Correct answer: Integrity
Integrity requires CPAs to be honest and straightforward, avoiding subordination of judgment and misrepresentation.
Question 6: A corporate governance framework is BEST described as:
- A set of tax minimization strategies approved by the board
- A system of rules and processes by which a company is directed and controlled (Correct answer)
- An internal document outlining employee benefits
- A compliance checklist for external auditors
Correct answer: A system of rules and processes by which a company is directed and controlled
Corporate governance refers to the system of rules, practices, and processes by which a company is directed and controlled, balancing stakeholder interests.
Question 7: Under Sarbanes-Oxley Section 302, who must certify the accuracy of financial reports filed with the SEC?
- The external auditor and audit committee chair
- The CEO and CFO (Correct answer)
- The board of directors as a whole
- The chief compliance officer
Correct answer: The CEO and CFO
SOX Section 302 requires the CEO and CFO to personally certify the accuracy and completeness of financial reports submitted to the SEC.
CA Ethics and Governance 2
A CPA discovers that a client has overstated revenue to meet loan covenants.
The client refuses to correct the financials.
What should the CPA do?