ICAEW SE Ethics and public trust: practice questions with answers

Question 1

The ICAEW Code states that a distinguishing mark of the accountancy profession is its acceptance of the responsibility to act in the public interest. Which statement best captures what this means for a professional accountant?

1. A The accountant must put the public interest above the law wherever the two appear to be in conflict
2. B The accountant must publish any client information that members of the public would find useful
3. C The accountant's responsibility is not exclusively to satisfy the needs of an individual client or employer
4. D The accountant must serve the client's wishes, limited only by what the law expressly prohibits

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Answer: C. ICAEW Code 100.1 A1 states that a distinguishing mark of the profession is its acceptance of the responsibility to act in the public interest. A professional accountant's responsibility is therefore not exclusively to satisfy the needs of an individual client or employing organisation.

Investors, lenders, employees, government and the public rely on accountants' work. The fundamental principles and the conceptual framework exist so that this reliance is justified. Acting in the public interest does not override the law or the duty of confidentiality.

Question 2

The finance director of Bramhope Youth Trust, a charity, overspent a grant-funded budget by authorising unbudgeted spending. She is required to appear before the trustees to explain her decisions, and her discretionary bonus is withheld as a result. Which concept does this most directly illustrate?

1. A Transparency
2. B Accountability
3. C Independence
4. D Professional scepticism

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Answer: B. Accountability is the obligation of those entrusted with authority or resources to explain and justify how they have used them, and to accept the consequences. Being called to explain the overspend to the trustees and losing her bonus are both features of accountability.

Transparency (open disclosure of information) and governance (the structures by which an organisation is directed and controlled) support accountability. The trustees holding her to account is good governance in action, but the concept the scenario most directly shows is accountability.

Question 3

Callum Reid, an audit senior at Ashby Pryce LLP, is auditing Kestrel Plant Hire Ltd. Management says a large receivable from one customer is fully recoverable. Callum notes that the customer has paid nothing for eight months and its latest filed accounts show net liabilities. Which action best demonstrates professional scepticism?

1. A Accept management's explanation, because management's explanations have been reliable in earlier audits
2. B Record the explanation on file and move on, because management will confirm it in a written representation letter
3. C Conclude that management is lying and report the directors to the authorities for fraud straight away
4. D Treat management's explanation as one piece of evidence and seek corroboration, given the contrary information

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Answer: D. Professional scepticism is an attitude that includes a questioning mind, alertness to conditions that may indicate misstatement, and a critical assessment of evidence. The customer's eight months of non-payment and its net liabilities contradict management's claim. A sceptical auditor would seek more evidence, such as receipts after the year end, correspondence with the customer and the customer's latest financial position, before accepting it.

Scepticism is neither blind acceptance nor an assumption of dishonesty. The ICAEW Code links it to compliance with the fundamental principles (Section 120), and auditing standards require it in audit.

Question 4

Ruth Okafor, a management accountant at Linfield Electricals Ltd, is estimating the inventory write-down for the year. She starts from last year's write-down percentage and adjusts it only slightly, even though a major product line has since been made obsolete by a competitor's launch. Which type of bias is Ruth most likely showing?

1. A Availability bias
2. B Groupthink
3. C Overconfidence bias
4. D Anchoring bias

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Answer: D. The ICAEW Code (120.12 A2) lists biases that can affect professional judgement. Anchoring bias is the tendency to use an initial piece of information as an anchor against which later information is inadequately assessed. Ruth starts from last year's percentage and makes only a small adjustment, despite major new evidence (obsolescence), which is anchoring.

She could reduce the bias by building the estimate from current evidence (product-line ageing and sales prospects) and having it reviewed by someone else.

Question 5

Marcus Hale ACA, financial controller of Cresswell Timber Ltd, altered expense records to hide personal spending charged to the company. His employer dismissed him, and the matter has been reported to ICAEW. Which statement about the consequences for Marcus is correct?

1. A ICAEW cannot act, because its disciplinary rules apply only to members working in public practice firms
2. B ICAEW cannot act, because dismissal by his employer has already dealt fully with the misconduct
3. C ICAEW can take disciplinary action, up to exclusion from membership, alongside any employer or court action
4. D ICAEW can act only after Marcus has been convicted of a criminal offence relating to the records

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Answer: C. Dishonest conduct has consequences at several levels. For Marcus as an individual these include:

- employment: dismissal, already taken;
- professional: ICAEW's disciplinary process, which can lead to sanctions up to exclusion from membership;
- legal: possible civil recovery or criminal proceedings.

ICAEW's disciplinary bye-laws apply to all members, wherever they work. Professional discipline is separate from, and can run alongside, any employment or criminal action.

Question 6

Ben Ashworth, a newly qualified ACA, tells a colleague: "If the ICAEW Code doesn't specifically prohibit something, I'm free to do it." Why is Ben's reasoning inconsistent with the ICAEW Code?

1. A The Code is rules-based and lists every prohibited action, so Ben must check the list before acting
2. B The Code is principles-based, so its principles apply even to situations it does not specifically address
3. C The Code applies only to the situations covered by its independence standards in Parts 4A and 4B
4. D The Code requires Ben to obtain ICAEW's written approval before taking any action it does not mention

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Answer: B. The ICAEW Code, like the IESBA Code it is derived from, is principles-based. It sets out five fundamental principles and a conceptual framework for identifying, evaluating and addressing threats to them. The framework applies to situations the Code does not specifically describe. The Code also contains some specific requirements and prohibitions (marked R), but these are not an exhaustive list.

Ben's "if it isn't banned it's allowed" reasoning is the loophole-seeking attitude that a principles-based approach is designed to prevent.