IFA Ethics, Law & Professional Responsibilities 2 — Questions and Answers
Question 1: An IFA member discovers that a client's bookkeeper has been making unauthorized transfers to a personal account. What is the member's primary obligation?
- Ignore it if the amounts are immaterial
- Inform the client immediately and consider money-laundering reporting obligations (Correct answer)
- Confront the bookkeeper directly without telling the client
- Resign from the engagement without explanation
Correct answer: Inform the client immediately and consider money-laundering reporting obligations
The member must alert the client and evaluate whether suspicious activity reporting is required under anti-money-laundering legislation.
Question 2: Under the IFA Code of Ethics, what does the 'safeguards' approach primarily aim to do?
- Eliminate all threats to independence
- Reduce threats to an acceptable level (Correct answer)
- Transfer liability to third parties
- Increase billable hours for compliance work
Correct answer: Reduce threats to an acceptable level
Safeguards are controls designed to reduce identified threats to an acceptable level, not necessarily eliminate them entirely.
Question 3: Which legal concept holds that an accountant can be liable to third parties who foreseeably rely on negligently prepared financial statements?
- Contributory negligence
- Privity of contract
- The Caparo three-stage test (Correct answer)
- Absolute liability
Correct answer: The Caparo three-stage test
The Caparo Industries v Dickman (1990) case established a three-stage test—foreseeability, proximity, and fairness—for third-party negligence claims against auditors.
Question 4: A member prepares tax returns for a client who later asks the member to represent them in a tax dispute involving those same returns. Which threat arises?
- Advocacy threat combined with self-review threat (Correct answer)
- Familiarity threat only
- Intimidation threat
- No threat, as it is a routine extension of service
Correct answer: Advocacy threat combined with self-review threat
Representing a client in a dispute about work the member prepared creates both an advocacy threat (championing the client's position) and a self-review threat (reviewing own prior work).
Question 5: Under UK data protection law, which principle requires that personal data not be kept longer than necessary for its purpose?
- Data minimisation
- Storage limitation (Correct answer)
- Purpose limitation
- Integrity and confidentiality
Correct answer: Storage limitation
The storage limitation principle under UK GDPR requires personal data to be deleted or anonymised once it is no longer needed for its original purpose.
Question 6: A prospective employer asks an IFA member to inflate projected earnings in a business plan to secure a bank loan. The member should:
- Comply if instructed in writing
- Refuse and consider whether to resign if pressure continues (Correct answer)
- Prepare two versions and let the client choose
- Disclose the request only to the IFA
Correct answer: Refuse and consider whether to resign if pressure continues
Preparing misleading financial information breaches integrity; the member must refuse and, if the client persists, consider resignation and possible reporting.
Question 7: Which of the following best describes 'professional skepticism' in an accounting context?
- Assuming all client representations are false
- A questioning mind and critical assessment of evidence (Correct answer)
- Refusing to accept any oral explanations
- Delegating judgment to senior partners only
Correct answer: A questioning mind and critical assessment of evidence
Professional skepticism means maintaining a questioning mind and critically assessing evidence without assuming either honesty or dishonesty on the part of clients.
IFA Ethics, Law & Professional Responsibilities 2
An IFA member discovers that a client's bookkeeper has been making unauthorized transfers to a personal account.
What is the member's primary obligation?