IFA Ethics, Law & Professional Responsibilities 3 — Questions and Answers
Question 1: A member in public practice acts as company secretary and statutory auditor for the same small business. Which fundamental principle is most at risk?
- Confidentiality
- Objectivity, due to the management threat (Correct answer)
- Professional competence
- Professional behavior
Correct answer: Objectivity, due to the management threat
Performing management functions (company secretary) while also auditing creates a management/self-review threat that seriously compromises objectivity.
Question 2: Under the Proceeds of Crime Act 2002 (UK), the offence of 'tipping off' occurs when:
- An accountant bills excessive fees
- A person discloses that a suspicious activity report has been made in a way that prejudices an investigation (Correct answer)
- An accountant shares client data with a competitor
- A client is informed of an impending tax inspection
Correct answer: A person discloses that a suspicious activity report has been made in a way that prejudices an investigation
Tipping off is a criminal offence under POCA 2002 that occurs when someone discloses information that could prejudice a money-laundering investigation, including that a SAR has been filed.
Question 3: The IFA's disciplinary process can result in which of the following sanctions for proven misconduct?
- Criminal prosecution by the IFA
- Fines, reprimand, suspension, or expulsion from membership (Correct answer)
- Civil damages awarded to injured third parties
- Automatic referral to HMRC
Correct answer: Fines, reprimand, suspension, or expulsion from membership
The IFA's disciplinary panel can impose fines, issue reprimands, suspend members, or expel them; it cannot itself prosecute crimes or award civil damages.
Question 4: When a member realises mid-engagement that they lack the competence to complete a complex piece of specialist tax work, the correct response is to:
- Complete the work and disclose limitations in a disclaimer
- Obtain appropriate specialist assistance or refer the client to a competent practitioner (Correct answer)
- Charge reduced fees and proceed anyway
- Ask the client to sign a waiver of liability
Correct answer: Obtain appropriate specialist assistance or refer the client to a competent practitioner
The duty of professional competence requires members to obtain specialist help or refer the client rather than deliver sub-standard work regardless of disclaimers.
Question 5: Which of the following situations would most likely trigger a statutory duty to report suspicions of money laundering under UK law?
- A client asks for split invoicing purely to simplify administration
- A client insists on paying large cash fees and cannot explain the source of funds (Correct answer)
- A client frequently changes bank accounts
- A client delays payment of professional fees by 60 days
Correct answer: A client insists on paying large cash fees and cannot explain the source of funds
Large, unexplained cash payments are a classic red flag indicator; combined with inability to explain the source of funds, this triggers a reporting obligation.
Question 6: A member receives a request from a new client for copies of working papers held about a former client. The member should:
- Provide all papers immediately as the new client is now paying
- Refuse, as confidentiality to the former client survives the end of the engagement (Correct answer)
- Charge the former client for retrieval and then release the papers
- Provide only papers older than five years
Correct answer: Refuse, as confidentiality to the former client survives the end of the engagement
The duty of confidentiality is not extinguished when a professional relationship ends; papers belonging to or containing information about the former client must not be disclosed.
Question 7: Under the Companies Act 2006, a small company is exempt from a statutory audit if it satisfies at least two of which thresholds?
- Turnover ≤£10.2m, balance sheet ≤£5.1m, employees ≤50 (Correct answer)
- Turnover ≤£6.5m, balance sheet ≤£3.26m, employees ≤50
- Turnover ≤£10.2m, balance sheet ≤£5.1m, employees ≤250
- Turnover ≤£2m, balance sheet ≤£1m, employees ≤10
Correct answer: Turnover ≤£10.2m, balance sheet ≤£5.1m, employees ≤50
As of 2016 the small company audit exemption thresholds are annual turnover ≤£10.2m, balance sheet total ≤£5.1m, and average employees ≤50—satisfying two of three qualifies.
IFA Ethics, Law & Professional Responsibilities 3
A member in public practice acts as company secretary and statutory auditor for the same small business.
Which fundamental principle is most at risk?