Exam Practice

Questions (Version A)
Booklet 1 of 3

ETHICS AND GOVERNANCE

Time allowed: 1 hour and 36 minutes

To be used in conjunction with Ethics and Governance, 2nd edition. © Copyright CPA Australia unless otherwise indicated.
Page 2 ETHICS AND GOVERNANCE

CPA Program
Ethics and Governance
Before you begin
This exam practice question resource comprises three booklets:
1. Exam Practice Questions
2. Exam Practice Answers
3. Self-assessment.

To get the most out of this resource, we suggest you treat it like a real exam. That means you should
have worked through the entire Study guide, and utilised all your additional resources in My Online
Learning before attempting these practice questions.

We recommend you complete these questions electronically within this interactive PDF so that you
can simulate reading and answering multiple-choice questions on-screen, and practise typing a
response to an extended-response question. Alternatively, you may choose to print this document
and complete it in a paper-based format.

How to treat this like a real exam:

• Do not be tempted to look ahead to the answers featured in booklets 2 and 3.
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equivalent to approximately half a real exam (which is 195 minutes), so allow 96 minutes
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Upon completion of the exam questions, download booklets 2 and 3 and follow the instructions
provided to assess your responses.

Disclaimer: Your level of success in the exam practice questions is not indicative of your level
of success in the final exam. The best way to achieve success in the final exam is through
regular, structured study and by making use of all the learning resources available to you in
My Online Learning.
ETHICS AND GOVERNANCE Page 3

Instructions to candidates
These are open-book exam practice questions. You may use any printed material that you consider
relevant and that may assist you in completing the exam practice questions.

The time allowed for the exam practice questions is 1 hour and 36 minutes. There is no separate
reading time and writing can commence at the start of the time allowed.

The exam practice questions are structured as follows:

• Section A—multiple-choice questions
• Section B—extended-response questions.

The total number of marks for the exam practice questions is 42.

• Questions in Section A (Questions 1–30) are worth one mark each. You should allocate
approximately 60 minutes to this section.

• Questions in Section B (Questions 31–33) are worth a total of 12 marks. You should allocate
approximately 36 minutes to this section.

All characters and events are completely fictitious. Any resemblance to real persons and events
is purely coincidental.
ETHICS AND GOVERNANCE Page 5

Section A—Multiple-choice questions

This section consists of Questions 1–30. It is worth a total of 30 marks.

Allocate approximately 60 minutes to Section A.

Questions 1 to 30 are worth one (1) mark each. Please select only one option for each question.

1. Which one of the following is an attribute that traditionally distinguishes the accounting profession
from a non-professional occupation?

A community prestige

B pursuit of excellence

C membership exclusivity

D enlightened self-interest
_________________________________________________________________________________

2. Which one of the following is part of the application of professional judgment by an accountant?

A incorporation of ethical values into decision-making

B application of technical skills to structured problems

C choosing an outcome that best meets the needs of clients

D acquisition of knowledge through a formal educative process

_________________________________________________________________________________

3. Which of the following sets of attributes is included in the traditional concept of a profession?

A a code of ethics for its members, the existence of a governing body, and a lack
of autonomy

B a code of ethics for its members, the existence of a governing body, and a
systematic body of theory and knowledge

C the existence of a governing body, a systematic body of theory and knowledge,

and distinct government regulation over the governing body

D a code of ethics for its members, a systematic body of theory and knowledge,
and distinct government regulation over the governing body
_________________________________________________________________________________
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4. Which one of the following forms part of the co-regulatory model for the accounting profession
in Australia?

A Education requirements are set by government.

B Membership requirements are set by government.

C Accounting and auditing rules are set by government bodies.

D Ethical rules are set by government and enforced by the profession.

_________________________________________________________________________________

5. Which one of the following activities represents work performed by an accountant in

public practice?

A evaluating the internal controls of a business

B formulating the financial direction of a business

C ensuring a business generates sufficient cash flows

D ensuring the board of a business is functioning efficiently

_________________________________________________________________________________

6. Mary is a CPA whose current work assignment is to analyse, for a possible court case, the
financial records of a company whose cash flow does not seem to match its revenue growth.

Which type of public practice role best describes Mary’s field of study?

A forensic accounting

B assurance and audit

C internal audit services

D financial management
_________________________________________________________________________________

7. Which one of the following best explains professional ethics?

A the moral principles that guide how a business behaves

B the customs and shared attitudes of members of a profession

C the principles by which professionals should serve the public interest

D the obligation of professionals to obey the laws applicable to a situation

_________________________________________________________________________________
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8. Which one of the following is an ethical responsibility of a professional accountant?

A professional scepticism

B direct investigation of all discrepancies

C decisions that respect the organisational culture

D the application of relevant experience to fulfil all client requests

_________________________________________________________________________________

9. While reviewing a client’s accounting records, Sally Strong CPA has found entertainment
expenses were classified as staff training expenses. Sally has explained to the client that she will
correct the classification because, personally and professionally, she can only act with integrity.

Which of the following ethical theories has Sally applied to justify her decision?

A virtue ethics

B egoism

C utilitarianism

D ethics of rights
_________________________________________________________________________________

10. Rebecca Wong is a partner in a public practice. Rebecca receives a box of chocolates from
a client as an expression of appreciation for excellent service she provided to the client during
the past year. Under APES 110 Code of Ethics for Professional Accountants, which one of the
following is correct?

A Rebecca should refuse the gift as the self-interest threat is unacceptable.

B Rebecca should refuse the gift as it will create a familiarity threat.

C Rebecca can accept the gift provided she declares this gift to her fellow partner.

D Rebecca can accept the gift as its nature and intent are not likely to result in a
significant threat.
_________________________________________________________________________________

11. A junior accountant of a manufacturing company suspects their employer has been illegally
dumping significant amounts of waste.

Under the ‘Responding to Non-Compliance with Laws and Regulations’ (NOCLAR) requirements,
what should the junior accountant do?

A report the suspected non-compliance to the auditor

B report the suspected non-compliance to their immediate superior

C no action is required because it is only a suspected non-compliance

D no action is required because the non-compliance is only an environmental issue

_________________________________________________________________________________
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12. Sarah works for a large corporation. She discovers that her department released a report that
contained false financial information. She reports the fraud as required by her corporation’s
guidelines and applicable legal standards.

Which of the following principles of the Accounting and Professional and Ethical Standards Board
(APESB) Code of Ethics does Sarah’s action demonstrate?

A maintaining loyalty

B acting with integrity

C maintaining confidentiality

D acting with good intentions

_________________________________________________________________________________

13. While auditing a listed company, Brigid uncovers large cash payments. Brigid suspects these
payments are bribes paid to suppliers in order to secure contracts. The chief financial officer
proposes to significantly increase the audit fee if Brigid agrees to overlook the cash payments.

Using the American Accounting Association (AAA) model, what should Brigid consider when
making her decision?

A the impacts on stakeholders affected by the auditor’s decision

B the potential negative impact on the company’s suppliers

C the potential short-term reduction in the company’s share price

D the audit fee foregone if Brigid does not agree to overlook the payments
_________________________________________________________________________________

14. Gerry works as an accountant for the Yellow Building Corporation (YBC). He discovers that
a member of the board of directors has an undisclosed financial interest in a company that is
currently tendering for a large contract with YBC. Gerry determines that this conflict of interest
may be an ethics violation.

According to the American Accounting Association (AAA) model for ethical decision-making,
which one of the following should Gerry next identify to help him make an ethical decision about
this situation?

A determine whether shareholders will be negatively impacted by the board member’s

financial interest

B determine the amount of financial interest the board member has in the company to see
whether it is material

C decide whether to discuss the matter privately with the board member or bring it to the
attention of YBC’s CEO

D obtain information on whether the board member’s interest violates rules or would
typically be seen as unacceptable
_________________________________________________________________________________
ETHICS AND GOVERNANCE Page 9

15. Corporate governance in the public sector should have which one of the following guiding
principles?

A focus on profit for good intent

B protection of shareholder value

C closed elections of board members

D boards should have authority to carry out their responsibilities

_________________________________________________________________________________

16. The system of corporate governance in Asia can be characterised by which one of the following?

A strict continuous disclosure requirements

B cohesive networks of minority shareholders

C representation of stakeholder interests on boards

D strong influence of non-executive directors on boards

_________________________________________________________________________________

17. Which one of the following statements best describes the concept of ‘comply or explain’?

A A corporation must disclose when management disagrees with a decision of the board
of directors.

B A corporation must provide an explanation when it does not comply with government
legislation.

C A corporation must explain to its shareholders the reason behind non-compliance

with a governance recommendation.

D Management must explain to the board of directors the reason behind non-compliance
with a governance recommendation.
_________________________________________________________________________________

18. Which one of the following remuneration methods best contributes to the alignment of
management and shareholder interests?

A a bonus based on achieving short-term profit targets

B a bonus based on achieving aggressive sales targets

C an award of shares based on the past year’s financial results

D an award of options with future share price targets

_________________________________________________________________________________
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19. A company’s chief executive officer (CEO) and other members of the executive team have
a comprehensive compensation package that includes a base salary, annual bonuses and
share options. The annual bonuses are tied to company performance.

To align executive pay with the interests of the shareholders, which one of the following best
reflects current recommendations for the executive team’s compensation package.

A Annual bonuses should be linked to performance on both short-term and

long-term goals.

B The base salary should be below market average and annual bonuses should be
above average.

C The base salary, annual bonuses and long-term share-option incentives should all be
above average.

D The compensation packages should be in line with the multiples outlined in the Economic
Times (Goyal 2012) report for the country.
_________________________________________________________________________________

20. A company has been following current recommendations from the Financial Reporting Council
(FRC) on promoting diversity. A member of the board of directors resigns, and the company must
fill the open position.

To achieve diversity at the board level according to FRC, which of the following should the
company look for when evaluating candidates?

A a female candidate with applicable skills and experience

B a candidate with applicable skills and experience who is the same gender as the
departing board member

C a candidate with applicable skills and experience who may have personality
attributes and a background that differs from those of most board members

D a female candidate with applicable skills and experience who is either younger or older,
who has a different background than most of the other board members
_________________________________________________________________________________

21. The obligation to ensure potential employees are not misled in relation to advertised employment
positions is specified in which one of the following pronouncements?

A ASX Principles

B Corporations Act 2001 (Cwlth)

C Australian Consumer Law

D OECD Principles of Corporate Governance

_________________________________________________________________________________
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22. Which one of the following most accurately describes the ideal composition of an audit
committee, based on the auditing standards?

A non-executive and executive directors

B chief executive officer (CEO) and non-executive directors

C non-executive directors and external consultants

D non-executive directors only

_________________________________________________________________________________

23. A corporation plans to expand its business to include the manufacturing of consumer products.
Company management wants to get the products to market quickly because this will increase
their year-end bonuses. The compliance officer has stepped in to ensure the products will not be
sold until safety concerns are addressed.

To ensure the ongoing effectiveness of the compliance program, which of the following actions
should the company take?

A conduct a review of all product returns and customer product complaints

B provide ad hoc training and education on company policies and procedures

C regularly review compliance policies and procedures to determine whether they are being
followed and are effective

D have a reward system that compensates management and employees for complying with
company policies and procedures
_________________________________________________________________________________

24. A group of friends work together in buying shares to artificially inflate their price and sell them at a
large profit. They are engaging in which one of the following offences?

A pools

B churning

C cartel operation

D insider trading
_________________________________________________________________________________

25. ‘Development that meets the needs of the present world without compromising the ability of future
generations to meet their own needs.’

This is a definition of

A sustainable development.

B environmental development.

C financial development.

D economic development.
_________________________________________________________________________________
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26. Which one of the following explains why organisations might be motivated to provide social and
environmental information?

A to ensure stock markets reflect all relevant information

B to demonstrate that management has been effective in managing resources

C to demonstrate that agents are behaving in accordance with the interests of principals

D to ensure an organisation is operating within the context of other firms’ behaviours

_________________________________________________________________________________

27. Which one of the following represents a mandatory corporate obligation in relation to reporting
environmental risks?

A the social contract

B United Nations Global Compact

C operating and financial view in a directors’ report

D International Accounting Standards Board (IASB) Conceptual Framework for Financial

Reporting 2010 (Conceptual Framework)
_________________________________________________________________________________

28. Which one of the following sections of an annual report includes mandatory social and
environmental reporting requirements?

A financial statements

B corporate governance information

C chair and chief executive officer (CEO) joint report

D director’s declaration and independent auditor’s report

_________________________________________________________________________________

29. Which one of the following can explain why an entity volunteers to provide non-mandatory
information?

A true and fair view

B enlightened self-interest

C Emissions Reduction Fund

D National Pollutant Inventory (NPI)

_________________________________________________________________________________
ETHICS AND GOVERNANCE Page 13

30. Run Inc. (Run) is a multi-national company that manufactures sports equipment. The company
fulfils all mandatory reporting requirements but does not provide non-mandatory environmental
reporting.

Which one of the following statements describes the most important reason for Run to provide
non-mandatory environmental reporting?

A to follow what is considered current practice

B to promote awareness of pending regulatory requirements

C to make the company’s brand more appealing to consumers

D to demonstrate the ability to be both profitable and environmentally responsible

_________________________________________________________________________________
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END OF SECTION A

EXAM PRACTICE QUESTIONS CONTINUE ON THE NEXT PAGE

ETHICS AND GOVERNANCE Page 15

Section B—Extended-response questions

This section consists of Questions 31–33. These questions all relate to Case 1. This section is
worth a total of 12 marks.

Ensure that you write your answers in the corresponding space provided for each question.

Allocate approximately 36 minutes to Section B.

Case 1 (12 marks)

Sky-high ambitions
LLE Ltd (LLE) was established 15 years ago in Sydney and provided construction services to
property developers. Because of the company’s extensive use of cranes, the nature of LLE’s
business has since evolved to include importing and assembling cranes for use on building sites.
Some of these cranes are used by LLE, while others are sold to property developers who employ
their own workforces to operate the cranes.

LLE’s board currently consists of five people: Brian Long, the current chair; three directors, who were
the original founders; and Winnie Leung, who joined LLE’s board three years ago as a non-executive
director. Brian has a 12 per cent equity stake in LLE; the three original founders each hold a 10 per
cent equity share; and the general public holds 58 per cent. Winnie does not have an equity interest
in the firm.

Lately LLE has experienced challenging financial times due to several factors. These include
rising labour costs on construction sites, a sharp decline in the demand for new apartments, and a
weakening Australian dollar that has increased the cost of importing crane components. All of these
issues have led to LLE holding excessive stock of crane parts.

To counter these financial difficulties, Brian decided that drastic action was necessary. He therefore
sold some excess crane parts to his wife’s property development company. Brian advised Winnie of
this sale at a social lunch. Brian explained that, as the sale was done at market value, he did not think
it was necessary to notify other board members, even though LLE’s constitution provides that related
party transactions can only be undertaken with a majority of the board’s approval.

Another strategy devised by Brian to stimulate LLE’s business was to sell crane parts as well
as assembly services at a discount to his preferred property developers. This was a particularly
successful strategy in lifting LLE’s revenues, with one developer reciprocating the favour by agreeing
to build Brian’s new holiday home at a significant discount. Brian did not disclose this benefit to
LLE’s board as he considered the benefit of his strategy to LLE’s business to outweigh any personal
considerations.

Additionally, Brian devised a strategy where arrangements were made with other crane importers
and assemblers who were also experiencing financial difficulties due to the construction downturn.
They agreed to concentrate on geographic areas in which each individual business was the strongest.
This strategy enabled each company to cut operating costs relating to geographic areas where they
were the weakest. Brian also arranged for the companies to liaise with each other on acceptable
prices at which they would quote customers for crane assembly in order to maintain profit margins
in the industry. These strategies were endorsed by the other LLE directors.
Page 16 ETHICS AND GOVERNANCE

LLE’s advertising brochures claimed their assembled cranes were subjected to all current Australian
safety tests. However, over the past six months there have been several accidents arising from
the use of the cranes, which has resulted in serious injuries to LLE’s employees and to some of its
customers. Investigating workplace accident officers have reported that the cranes did not meet
Australian standards when subjected to heavy loads and when operating in strong winds.

Employees had previously raised such safety concerns with LLE’s senior management, but their
concerns were not taken seriously and the employees did not want to risk losing their positions by
making further complaints. LLE’s procedures were unclear as to how employee safety issues should
be dealt with. There is no information published on its intranet site or occupational health and safety
notice boards, and there have been no regular occupational health and safety meetings between
senior management and employees. LLE’s annual report was also silent on employee issues.

31. With reference to case facts, examine two (2) ways in which Brian has breached his statutory
duties as a director of LLE (maximum 2 marks). Provide one (1) recommendation for each breach
as to what the company could have done to prevent that breach (maximum 2 marks).
(4 marks)

32. Explain how LLE has breached the OECD Principles of Corporate Governance 4 and 5 in relation
to its employees. Your answer should clearly identify two (2) sub-principles (one for each of
Principles 4 and 5), and explain what the breach consists of, with reference to case facts.
(4 marks)

33. With reference to case facts, examine two (2) ways LLE has breached competition laws and
provide two (2) recommendations for how LLE could have prevented these breaches.
(4 marks)

Ensure that you write your answers in the corresponding space provided for each question
on the following pages.
ETHICS AND GOVERNANCE Page 17

31. With reference to case facts, examine two (2) ways in which Brian has breached his statutory
duties as a director of LLE (maximum 2 marks). Provide one (1) recommendation for each breach
as to what the company could have done to prevent that breach (maximum 2 marks).
(4 marks)
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ETHICS AND GOVERNANCE Page 19

32. Explain how LLE has breached the OECD Principles of Corporate Governance 4 and 5 in relation
to its employees. Your answer should clearly identify two (2) sub-principles (one for each of
Principles 4 and 5), and explain what the breach consists of, with reference to case facts.
(4 marks)
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33. With reference to case facts, examine two (2) ways LLE has breached competition laws and
provide two (2) recommendations for how LLE could have prevented these breaches.
(4 marks)
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END OF THE EXAM PRACTICE QUESTIONS

This is the end of the exam practice questions. Refer to the ‘Exam Practice Answers’
and ‘Self‑assessment’ booklets in My Online Learning to check your responses.