CA Ethics and Governance 4 — Questions and Answers
Question 1: Which ethical framework evaluates the morality of an action based solely on its consequences and overall outcomes?
- Deontology
- Virtue ethics
- Consequentialism (Utilitarianism) (Correct answer)
- Rights-based ethics
Correct answer: Consequentialism (Utilitarianism)
Consequentialism judges actions by their results, seeking the greatest good for the greatest number, regardless of the method used.
Question 2: A CPA discovers their audit firm has a material financial interest in an audit client. Under the AICPA Code, this creates:
- A documentation requirement but not an independence threat
- A direct impairment of independence requiring withdrawal or divestiture (Correct answer)
- A familiarity threat that can be mitigated with additional review
- An advocacy threat that requires client disclosure only
Correct answer: A direct impairment of independence requiring withdrawal or divestiture
A financial interest in an audit client directly impairs independence and cannot be mitigated — the CPA must divest or withdraw from the engagement.
Question 3: The PCAOB was created primarily to:
- Set tax preparation standards for CPA firms
- Oversee audits of public companies to protect investors (Correct answer)
- Regulate financial reporting for private entities
- Establish state-level CPA licensure requirements
Correct answer: Oversee audits of public companies to protect investors
The Public Company Accounting Oversight Board was established by SOX to oversee audits of public companies and protect the interests of investors.
Question 4: Which governance principle holds that directors and officers must act in good faith and in the best interest of the corporation?
- Business judgment rule
- Fiduciary duty (Correct answer)
- Agency theory
- Separation of powers
Correct answer: Fiduciary duty
Fiduciary duty obligates directors and officers to act in the corporation's and shareholders' best interests with loyalty and care.
Question 5: When a CPA in public practice becomes aware of a former client's confidential information that is relevant to a current client, they should:
- Share the information to provide better service to the current client
- Use the information internally but not disclose it to the current client
- Maintain confidentiality and not use the information for any other client (Correct answer)
- Report the conflict to the state CPA board immediately
Correct answer: Maintain confidentiality and not use the information for any other client
Confidentiality obligations persist after the client relationship ends; a CPA must not disclose or use former client information for the benefit of other clients.
Question 6: A 'tone at the top' in corporate governance primarily refers to:
- The volume of communication from the accounting department
- Senior leadership's commitment to ethical conduct that sets organizational culture (Correct answer)
- Marketing messages approved by the board of directors
- Regulatory instructions issued by the SEC
Correct answer: Senior leadership's commitment to ethical conduct that sets organizational culture
Tone at the top describes how senior executives' ethical attitudes and behaviors shape the entire organization's ethical culture.
Question 7: Under the AICPA conceptual framework approach to ethics, when a CPA identifies a threat, the next step is to:
- Immediately withdraw from the engagement
- Evaluate whether safeguards can reduce the threat to an acceptable level (Correct answer)
- Report the threat to the AICPA ethics hotline
- Consult with the client before taking any action
Correct answer: Evaluate whether safeguards can reduce the threat to an acceptable level
After identifying a threat, a CPA must evaluate if available safeguards can eliminate or reduce the threat to an acceptable level before proceeding.
CA Ethics and Governance 4
Which ethical framework evaluates the morality of an action based solely on its consequences and overall outcomes?