CMA P2 Professional Ethics: practice questions with answers

Question 1

Under the IMA Statement of Ethical Professional Practice, which of the following is one of the four overarching ethical principles?

1. A Integrity
2. B Confidentiality
3. C Objectivity
4. D Credibility

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Answer: C. The IMA Statement has two layers. The principles that guide conduct are Honesty, Fairness, Objectivity and Responsibility. The standards that members must comply with are Competence, Confidentiality, Integrity and Credibility. Only Objectivity is a principle.

Question 2

Tomas, a management accountant at Fenwick Freight, finds that his immediate supervisor has been moving current-period expenses into the next period to meet a bonus target. Fenwick has no established policy or reporting system for ethical issues. According to the IMA Statement's guidance on resolving ethical issues, what should Tomas consider doing first?

1. A Report the matter to the SEC and the financial press
2. B Confront his supervisor and demand that the entries be reversed
3. C Present the issue to the next level of management above his supervisor
4. D Resign from Fenwick and keep the matter to himself

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Answer: C. When faced with an ethical issue, a member should first follow the organisation's established policies. Where none exist, the resolution process could include discussion with the immediate supervisor or, if the supervisor appears to be involved, the next level of management. The member may also call IMA's anonymous helpline and consult his or her own attorney. If these efforts fail, the member may consider leaving the organisation.

Question 3

At the busiest clinic of Wrexley Dental Group, the front-desk receptionist collects patients' payments, some of them in cash. For walk-in patients who pay in cash, she does not enter the visit in the billing system and keeps the cash. The receipts therefore never appear in the clinic's records. Which fraud scheme is this?

1. A Cash larceny, in which cash is stolen after it has been recorded in the accounting records
2. B Skimming, in which cash is stolen before the sale or receipt is recorded in the accounting records
3. C Lapping, in which one customer's payment is used to cover the theft of another customer's payment
4. D A billing scheme, in which the organization pays invoices for goods or services it never received

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Answer: B. Skimming is a form of asset misappropriation in which cash is stolen before it is recorded. Because no entry is made, the books still balance and there is no recorded shortage, which makes skimming hard to detect.

Useful controls include:
- recording every visit in the system before payment is taken (pre-numbered or system-generated receipts);
- reconciling appointment and treatment records with billings and cash;
- analysing cash takings by staff member and shift; and
- encouraging patients to ask for a receipt.

By contrast, cash larceny steals cash that has already been recorded, so it creates a shortage that must be concealed.

Question 4

Corliss Apparel replaces a low-cost overseas supplier found to be using child labour with a more expensive supplier that is certified for fair labour practices. Under the three-sphere model of sustainability, which sphere does this decision mainly address?

1. A Environmental
2. B Social
3. C Economic
4. D Legal

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Answer: B. The three spheres of sustainability are economic (long-term financial viability), environmental (protecting natural resources and limiting pollution) and social (treatment of employees, communities, human rights and labour practices). Avoiding child labour in the supply chain is mainly a social sustainability decision.

Question 5

Rosalind, a finance manager at a US-listed company, has documents showing that the company has been inflating revenue. She is considering reporting the matter directly to the Securities and Exchange Commission (SEC) under the whistleblower program created by the Dodd-Frank Act. Which statement about the program is correct?

1. A Awards are available only to employees who first report the matter through the company's internal hotline
2. B Awards are a fixed 50% of any penalty collected, whatever the size of the total sanctions
3. C The program protects whistleblowers against retaliation but does not pay any financial award
4. D If her original information leads to sanctions over $1 million, she may receive 10% to 30% of the amount collected

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Answer: D. The Dodd-Frank Wall Street Reform and Consumer Protection Act (2010) created the SEC whistleblower program:

- The whistleblower must voluntarily provide original information about a possible securities law violation.
- If it leads to a successful enforcement action with monetary sanctions over $1 million, the SEC pays an award of 10% to 30% of the sanctions collected.
- Whistleblowers may report directly to the SEC and can do so anonymously through an attorney; reporting internally first is encouraged and can increase the award, but is not required.
- Dodd-Frank also prohibits retaliation against whistleblowers who report to the SEC.

This complements the Sarbanes-Oxley Act, which protects employees of public companies from retaliation for reporting suspected securities fraud.

Question 6

A plant controller at Dunwich Components has large personal medical bills, and the CEO has told plant managers that anyone who misses the quarterly profit target will be replaced. The controller starts recording fictitious inventory to raise reported profit. The medical bills and the CEO's threat are examples of which element of the fraud triangle?

1. A Opportunity
2. B Pressure
3. C Rationalization
4. D Capability

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Answer: B. The fraud triangle has three elements:

- Pressure (incentive or motivation): financial difficulties, unrealistic targets, threats to job security.
- Opportunity: weak internal controls or the ability to override them.
- Rationalization: the attitude that allows the person to justify the act.

The controller's medical bills and the CEO's threat are both forms of pressure. Unrealistic targets set by management are a common source of pressure for financial reporting fraud.