CA Ethics and Governance 5 — Questions and Answers
Question 1: Which of the following scenarios represents a 'conflict of interest' for a CPA in a tax engagement?
- Providing services to two unrelated clients in the same industry
- Representing two clients in the same transaction with opposing positions (Correct answer)
- Working on an engagement for a client in a field the CPA is unfamiliar with
- Preparing returns for a client whose books were audited by another firm
Correct answer: Representing two clients in the same transaction with opposing positions
A conflict of interest arises when a CPA represents two clients with opposing interests in the same transaction without proper consent and safeguards.
Question 2: The Dodd-Frank Act whistleblower program incentivizes reporting securities violations by offering:
- Immunity from all related civil lawsuits
- Monetary awards ranging from 10% to 30% of sanctions collected (Correct answer)
- A guaranteed government position after reporting
- Complete anonymity without requiring attorney representation
Correct answer: Monetary awards ranging from 10% to 30% of sanctions collected
Dodd-Frank provides financial awards of 10%–30% of monetary sanctions over $1 million to whistleblowers who voluntarily provide original information to the SEC.
Question 3: Which of the following is an example of a 'material weakness' in internal controls?
- A minor typographical error in a footnote disclosure
- A significant deficiency that has a reasonable possibility of resulting in a material misstatement (Correct answer)
- An internal control that is effective but not documented
- A minor reconciling item in a low-risk account
Correct answer: A significant deficiency that has a reasonable possibility of resulting in a material misstatement
A material weakness is a deficiency in internal control where there is a reasonable possibility that a material misstatement will not be prevented or detected on a timely basis.
Question 4: Professional skepticism in auditing requires auditors to:
- Assume management is dishonest until proven otherwise
- Question evidence critically and be alert to conditions indicating fraud (Correct answer)
- Accept all client representations without independent verification
- Apply skepticism only when fraud red flags are explicitly identified
Correct answer: Question evidence critically and be alert to conditions indicating fraud
Professional skepticism means maintaining a questioning mind and critically assessing audit evidence throughout the engagement without assuming management dishonesty.
Question 5: An audit firm that performs both external audit and extensive internal audit services for the same public company likely violates which principle?
- Confidentiality, because internal audit results are proprietary
- Independence, because the firm would be auditing its own work (Correct answer)
- Due care, because the workload exceeds firm capacity
- Competence, because internal and external audits require different skills
Correct answer: Independence, because the firm would be auditing its own work
Performing both external and internal audit services for the same public company creates a self-review threat that impairs the external auditor's independence.
Question 6: Under the FCPA (Foreign Corrupt Practices Act), facilitation payments (grease payments) are:
- Fully prohibited with no exceptions for any amount
- Allowed for routine governmental actions but not for obtaining business (Correct answer)
- Permitted if disclosed on SEC filings
- Legal only in countries where local law does not prohibit them
Correct answer: Allowed for routine governmental actions but not for obtaining business
The FCPA provides a narrow exception allowing small facilitation payments to foreign officials only to expedite routine, non-discretionary governmental actions.
Question 7: A CPA who knowingly signs a tax return with fraudulent information may face which of the following consequences?
- Only civil penalties assessed by the IRS
- Criminal prosecution, civil penalties, and loss of CPA license (Correct answer)
- A warning letter from the AICPA ethics committee only
- Mandatory continuing education requirements as the sole penalty
Correct answer: Criminal prosecution, civil penalties, and loss of CPA license
Knowingly participating in tax fraud can result in criminal charges under federal law, IRS civil penalties, and professional disciplinary action including license revocation.
CA Ethics and Governance 5
Which of the following scenarios represents a 'conflict of interest' for a CPA in a tax engagement?