CA Ethics and Governance 3 — Questions and Answers
Question 1: Which of the following is considered a safeguard created by the profession to mitigate threats to a CPA's independence?
- Client-provided gifts below a materiality threshold
- Peer review requirements and disciplinary processes (Correct answer)
- Long-term audit engagements with a single client
- Allowing clients to set audit fees based on outcomes
Correct answer: Peer review requirements and disciplinary processes
Peer review requirements, continuing education mandates, and disciplinary processes are profession-created safeguards that help protect CPA independence.
Question 2: Ethical relativism in accounting ethics holds that:
- Ethical rules are absolute and apply universally regardless of culture
- Ethical standards vary by culture and context with no universal truth (Correct answer)
- Ethics are determined solely by legal standards
- Professional codes override all personal ethical considerations
Correct answer: Ethical standards vary by culture and context with no universal truth
Ethical relativism posits that moral standards differ across cultures and situations, with no single universal ethical framework.
Question 3: A CPA firm partners with a financial services company to refer clients for investment products and receives compensation. This arrangement must be:
- Kept confidential to protect the client's privacy
- Disclosed to clients and permissible only if it doesn't impair objectivity (Correct answer)
- Reported annually to the AICPA ethics board
- Approved by the SEC before proceeding
Correct answer: Disclosed to clients and permissible only if it doesn't impair objectivity
Referral fees and commissions must be disclosed to clients and must not impair the CPA's objectivity under the AICPA Code.
Question 4: Which of the following BEST describes the role of an audit committee in corporate governance?
- Managing daily financial operations
- Overseeing financial reporting, internal controls, and the external audit (Correct answer)
- Approving executive compensation packages
- Setting the company's strategic direction
Correct answer: Overseeing financial reporting, internal controls, and the external audit
The audit committee oversees the integrity of financial reporting, internal control effectiveness, and the relationship with external and internal auditors.
Question 5: A CPA is asked to represent a client before the IRS in a tax dispute. This is an example of which threat to objectivity?
- Self-review threat
- Advocacy threat (Correct answer)
- Familiarity threat
- Self-interest threat
Correct answer: Advocacy threat
Representing a client's position before a regulatory body creates an advocacy threat because the CPA promotes the client's interests.
Question 6: Which concept requires auditors to maintain independence in both fact AND appearance?
- Dual independence standard
- Independence in form and substance (Correct answer)
- Absolute independence doctrine
- Reasonable assurance principle
Correct answer: Independence in form and substance
Auditors must be independent in fact (actually unbiased) and in appearance (perceived as unbiased by reasonable observers).
Question 7: The 'cooling-off period' under Sarbanes-Oxley prohibits a public company from hiring a former audit partner in a financial oversight role for at least:
- 6 months after leaving the audit firm
- 1 year after leaving the audit firm (Correct answer)
- 2 years after the last audit they led
- 5 years after any engagement with the client
Correct answer: 1 year after leaving the audit firm
SOX requires a one-year cooling-off period before a former audit engagement partner can take a financial oversight role at a former audit client.
CA Ethics and Governance 3
Which of the following is considered a safeguard created by the profession to mitigate threats to a CPA's independence?