Unit 14 - MCQs JJKK Answers

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14: (90) Ethical Considerations for Management

1: (17) Business Ethics


2: (37) Ethics for Management Accountants
3: (25) Fraud and the Fraud Risk Model (Fraud Triangle)
4: (11) Managing the Risk of Fraud

1: (17) Business Ethics

Question: 1 The branch of moral philosophy in which what is good or right derives from the action
itself, regardless of the consequences, is

A. Social justice.
Answer (A) is incorrect.
In accordance with social justice, everyone deserves equal economic, social, and political
opportunities.

Deontology.
B.
Answer (B) is correct.
Deontology is based on the belief that what is good or right derives from the action itself,
regardless of the outcome. A decision is right if it follows a moral code or law, even if the
consequences are bad.

Utilitarianism.
C.
Answer (C) is incorrect.
Utilitarianism values maximizing positive effects, such as welfare or happiness. It focuses on
outcomes resulting in the greatest good for the greatest number of people.

Teleology.
D.
Answer (D) is incorrect.
Teleology is the moral philosophy that measures the moral good by what is achieved. The
focus is on the outcome in general, not in terms such as welfare or happiness.

Question: 2 What is the best description of distributive justice?

A. Assets should be allocated equally within a society.


Answer (A) is correct.
Distributive justice states that assets should be allocated equally within a society.

B. Everybody deserves equal economic, social, and political opportunities, irrespective of gender,
race, religion, etc.
Answer (B) is incorrect.
This answer choice describes social justice.

C. Those who have done wrong should be punished objectively and proportionally.
Answer (C) is incorrect.
This answer choice describes retributive justice.

D. Those who have suffered unfairly can seek to be made whole.


Answer (D) is incorrect.
This answer choice describes restorative justice.

Question: 3 The difference between morality and virtue is

A. Morality is the understanding of what is right and wrong, and virtues are the characteristics of morality
of an individual.
Answer (A) is incorrect.
Ethics is a philosophical understanding of what is right and wrong, good and bad.
B. Morality is the application of ethical principles, and virtues are the characteristics of morality of
an individual.
Answer (B) is correct.
Morality is the application of ethical principles, and virtues are the characteristics of morality
of an individual. A moral decision can be made by someone who is not virtuous but who
applies ethical standards.

Virtues are applications of ethical principles, and morality is the characteristic of an ethical
C. individual.
Answer (C) is incorrect.
Virtues are the characteristics of morality of an individual, and morality is about the
application of ethical standards.

Morality and virtues are synonymous and can be used interchangeably.


D.
Answer (D) is incorrect.
Morality and virtues are not the same concepts. Morality is the application of ethical
principles, and virtues are the characteristics of morality of an individual.

Question: 4 Relativism is the branch of moral philosophy that

A. Denies the existence of universal moral principles.


Answer (A) is correct.
Relativism is the branch of moral philosophy that denies the existence of universal moral principles.
An action (decision) is right if it is based on what appears to be right or reasonable within one’s own
belief system.

Regards the moral good as derived from the outcome of an action or decision.
B.
Answer (B) is incorrect.
Utilitarianism (the greatest good for the greatest number) and teleology (the outcome in
general) focus on the outcome of an action or decision as indicative of its rightness of
goodness.
Asserts what is good derives from the action or decision itself regardless of the outcome.
C.
Answer (C) is incorrect.
Deontology asserts what is good derives from the action or decision itself regardless of the
outcome.

D. Everyone should receive what is deserved.


Answer (D) is incorrect.
Justice is the concept that everyone should receive what is deserved.

Question: 5 A large Internet company must protect the privacy of user data while providing services
and earning profits. Option A maximizes profits and customer satisfaction with services
while providing minimal security for customer data. Option B will result in lower profits
and customer satisfaction with maximum security for user data. A cost-benefit analysis
quantifies profits, customer satisfaction, and the losses from breaches of data security.
This analysis indicates that Option A is preferable. The company’s adoption of this
approach is most consistent with which branch of moral philosophy?

A. Fiduciary responsibility.
Answer (A) is incorrect.
Fiduciary responsibility is the legal responsibility to act solely for the benefit of others.

Utilitarianism.
B.
Answer (B) is correct.
Utilitarianism values maximizing positive effects, such as welfare or happiness. The morally
right decision is the one that maximizes these positive effects. The general principle is that
the “greatest happiness to the greatest number of people” is the measure for right or wrong
decisions. Utilitarianism is a branch of teleological philosophy. The difference between
teleology and utilitarianism is that the first focuses on the outcome in general. If the outcome
achieved is good, the decision was morally good. The second focuses on the greater good
for the greater number of people and is purely focused on an outcome in such terms as
welfare and happiness. Accordingly, the protection of the privacy of user data may be the just
and ethically preferable decision under most branches of moral philosophy. But utilitarianism
asserts that the greater good for the greater number of people results from the company’s
Option A, which benefits shareholders, employees, and customers despite the privacy risk.

Teleology.
C.
Answer (C) is incorrect.
Under teleology, the decision is good if the outcome is good in general.

Deontology.
D.
Answer (D) is incorrect.
In deontology, a decision is right if it follows a moral rule or law even if the consequences of
the decision are bad.

Question: 6 In Country X, government officials are expected to be paid reasonable amounts to


facilitate performance of routine services. An example is a payment to expedite
issuance of a license to operate an import-export business. These facilitation payments
are routinely made even by applicants that meet all the legal requirements, including
payment of statutory fees. In Country X, such payments are regarded as ethical. In
Country Z, such payments are regarded as unethical and illegal. The differing ethical
judgments of facilitation payments are both most likely to be considered correct under
which branch of moral philosophy?

A. Relativism.
Answer (A) is correct.
Relativism (or moral relativism) asserts that no universal set of moral principles exists. A decision is
right if it is based on what appears to be right within the belief or value system of an individual or
culture. From this perspective, the beliefs regarding facilitation payments in Country X and Country
Z are both correct.

Virtue ethics.
B.
Answer (B) is incorrect.
Virtue ethics is focused on the individual, not the action itself (deontology) or the outcome
(teleology). Thus, it considers the virtues of the individual carrying out the action. This action
not only is judged as right or wrong but also guides the individual to the types of
characteristics and behavior a “good” person would seek.

Social justice.
C.
Answer (C) is incorrect.
In accordance with social justice, everybody deserves equal economic, social, and political
opportunities, irrespective of gender, race, religion, etc.
Deontology.
D.
Answer (D) is incorrect.
In deontology, a decision is right if it follows a moral rule or law even if the consequences of
the decision are bad.

Question: 7 A manager of an organization does more than apply the organization’s ethical
standards. What type of manager does this describe?

A. Moral manager.
Answer (A) is incorrect.
A moral manager does the right thing, but nothing more.

Utilitarian manager.
B.
Answer (B) is incorrect.
A utilitarian manager seeks the greatest happiness to the greatest number of people.

Virtuous manager.
C.
Answer (C) is correct.
A virtuous manager does more than apply the organization’s ethical standards. Doing the
right thing, but nothing more, is moral behavior. Going further and setting a personal standard
and example is virtuous behavior.

Ethical manager.
D.
Answer (D) is incorrect.
An ethical manager has an understanding of what is right and wrong.

Question: 8 Which behavior is considered ethical?


A. Using child labor for production.
Answer (A) is incorrect.
This is an unethical action. Unethical behavior can be defined as being the “wrong” choice or the
“bad” decision.

Agreeing not to release toxic substances into the environment.


B.
Answer (B) is correct.
This is ethical behavior. Ethical behavior can be described as acting in a way that is
consistent with what society and individuals typically think are good values.

Paying kickbacks to customers to retain business.


C.
Answer (C) is incorrect.
This is an unethical action. Unethical behavior can be defined as being the “wrong” choice or
the “bad” decision

Knowingly selling defective widgets.


D.
Answer (D) is incorrect.
This is an unethical action. Unethical behavior can be defined as being the “wrong” choice or
the “bad” decision.

Question: 9 What branch of moral philosophy states that what is good or right is derived from the
action itself regardless of the consequences?

A. Deontology.
Answer (A) is correct.
Deontology states that what is good or right is derived from the action itself regardless of the
consequences. In deontology, a decision is right if it follows a moral rule or law even if the
consequences of the decision are bad.
Teleology.
B.
Answer (B) is incorrect.
Teleology states that everything is a function of its end, purpose, or goal. The moral good is
derived from what is achieved and whether the consequences of an action are considered
“good.”

Utilitarianism.
C.
Answer (C) is incorrect.
Utilitarianism values maximizing positive effects. The general principle is that the “greatest
happiness to the greatest number of people” is the measure for right or wrong decisions.

Relativism.
D.
Answer (D) is incorrect.
Relativism claims that no universal set of moral principles exists. A decision is right if it is
based on what appears to be right or reasonable within one’s own belief or value system.

Question: 10 Which one of the following moral philosophies states that an action is morally
acceptable if it promotes the greater good?

A. Relativism.
Answer (A) is incorrect.
Relativism claims that no universal moral principles exist. A decision is right if it
appears to be right within one’s own belief or value system.

Deontology.
B.
Answer (B) is incorrect.
Deontology treats a decision as good, regardless of the consequences, if it follows a moral
rule or law.

Utilitarianism.
C.
Answer (C) is correct.
Utilitarianism values maximizing positive effects. The general principle is that the greatest
good for the greatest number of people determines whether an action is right. Utilitarianism
addresses not whether the outcome is good in general but whether happiness is maximized.

Teleology.
D.
Answer (D) is incorrect.
Teleology focuses on the outcome in general. If the outcome is good, the decision was
morally good.

Question: 11 Which branch of moral philosophy emphasizes the outcome of the decision in terms of
the greatest good for the greatest number of people?

A. Virtue ethics.
Answer (A) is incorrect.
Virtue ethics treats a decision as right if a virtuous individual would do the same in similar
circumstances.

Teleology.
B.
Answer (B) is incorrect.
The teleological perspective is that the moral good derives from the outcome of an action. For
example, the effects of decisions on multiple stakeholders should be considered.

Utilitarianism.
C.
Answer (C) is correct.
Utilitarianism values maximizing positive effects, such as welfare or happiness. It focuses on
an outcome in such terms as the greatest good for the greatest number of people.

Deontology.
D.
Answer (D) is incorrect.
Deontology is based on the belief that what is good or right derives from the action itself
regardless of the outcome. A decision is right if it follows a moral rule or law even if the
consequences are bad.

Which business ethics concept most likely applies to an organization’s need to know its
Question: 12 business partners?

A. Fairness.
Answer (A) is incorrect.
Fairness is often used interchangeably with justice. However, although justice is
viewed as a standard of rightness, fairness emphasizes judging a decision without
the interference of one’s personal opinions or feelings.

Ethical due diligence.


B.
Answer (B) is correct.
Due diligence is a thorough evaluation of an organization or individual to assess potential
risks. Ethical due diligence should be considered by organizations. Without knowing its
business partners, an organization cannot uphold its own ethical standards.

Fiduciary responsibility.
C.
Answer (C) is incorrect.
Fiduciary responsibility is the legal responsibility to act solely in the best interests of another

Teleology.
D.
Answer (D) is incorrect.
Teleology is the moral philosophy that regards the moral good as derived from what is
achieved, that is, from the outcome in general.

Question: 13 The branch of moral philosophy in which a decision is right if a virtuous person would
do the same in the same circumstances is

A. Virtue ethics.
Answer (A) is correct.
According to virtue ethics, a decision is right if a virtuous person would do the same in the same
circumstances. Virtue ethics is focused on the individual, not the action itself (deontology) or the
outcome (teleology).

Teleology.
B.
Answer (B) is incorrect.
According to teleology, whether an action is right depends on the outcome, that is, what is
achieved. What a virtuous person would do or the existence of a moral rule or law is
irrelevant.

Justice.
C.
Answer (C) is incorrect.
Justice is about giving every individual what (s)he deserves. The most common interpretation
of justice is that equals should be treated equally, and unequals should be treated unequally.
Judging an action as right or wrong is not necessarily part of justice.

Deontology.
D.
Answer (D) is incorrect.
Deontology judges the action itself as right or wrong according to the valid rules in the case.
What a virtuous person would do or the result of the action is not considered.

Question: 14 The concept of business ethics that requires judging decisions without regard for
personal opinions or feelings is

A. Fairness.
Answer (A) is correct.
Fairness is often used interchangeably with justice. However, although justice is viewed as a standard
of rightness, fairness emphasizes judging a decision without the interference of one’s personal
opinions or feelings. Within business ethics, fairness means applying the same rules, standards, or
criteria in the same situations. A person’s bias should be minimized when making decisions.
Integrity.
B.
Answer (B) is incorrect.
Integrity is an individual’s internal compass that guides behavior. Integrity in the workplace
means that a person does what (s)he says. Within business ethics, one who acts with
integrity upholds ethical standards and is incorruptible.

Relativism.
C.
Answer (C) is incorrect.
Relativism claims that no universal set of moral principles exists. A decision is right if it is
based on what appears to be right or reasonable within one’s own belief or value system.

Social justice.
D.
Answer (D) is incorrect.
In accordance with the concept of social justice, everyone deserves equal economic, social,
and political opportunities, irrespective of gender, race, religion, etc.

Question: 15 Which one of the following moral philosophies is focused on the consequences of an
action when judging whether that action is morally acceptable or not?

A. Deontology.
Answer (A) is incorrect.
Deontology treats a decision as good, regardless of the consequences, if it follows a moral rule or law.

Relativism.
B.
Answer (B) is incorrect.
Relativism claims that no universal moral principles exist. A decision is right if it appears to be
right within one’s own belief or value system.

Teleology.
C.
Answer (C) is correct.
Teleology focuses on the outcome in general. If the outcome is good, the decision was
morally good.

Utilitarianism.
D.
Answer (D) is incorrect.
Utilitarianism values maximizing positive effects. The general principle is that the greatest
good for the greatest number of people determines whether an action is right. Utilitarianism
addresses not whether the outcome is good in general but whether happiness is maximized.

While entering the workplace, Mike found $20 on the ground. Mike can either (a) keep
Question: 16 the $20 for himself or (b) find the individual who dropped the money. Mike chose to
look for the individual who dropped the money. What term can be used to describe
Mike’s actions?

A. Fiduciary responsibility.
Answer (A) is incorrect.
Fiduciary responsibility is the legal responsibility to act solely for the best
interests of another.

Fairness.
B.
Answer (B) is incorrect.
Fairness emphasizes judging a decision without the interference of one’s personal opinions
or feelings

Due diligence.
C.
Answer (C) is incorrect.
Due diligence is a thorough evaluation of an organization or individual to assess potential
risks

Integrity.
D.
Answer (D) is correct.
Integrity is an individual’s moral compass that guides behavior. Often, core principles of
integrity are virtue, compassion, honesty, loyalty, and objectivity. Mike’s actions were
compassionate. Thus, we can conclude that Mike acted with integrity.

Question: 17 How do teleology and utilitarianism differ?

A. Teleology judges an action itself, and utilitarianism claims that decisions cannot be
judged because of differences in belief systems.
Answer (A) is incorrect.
Deontology is the branch that judges an action itself regardless of consequences.
Relativism is the branch that claims no universal set of moral principles exists
because of differences in belief systems.

B. Teleology focuses on the outcome in general, and utilitarianism focuses on the greater good as
an outcome.
Answer (B) is correct.
Utilitarianism focuses on the outcome, which should be the greatest good for the greatest
number of people. Teleology focuses on the general outcome. Thus, the moral good is
measured by what is achieved.

C. Teleology judges an action itself, and utilitarianism focuses on the greater good as an outcome.
Answer (C) is incorrect.
Deontology is the moral philosophy branch that judges the action itself as right or wrong,
without regard for consequences, depending on whether it is consistent with a moral rule or
law.

D. Teleology focuses on the outcome in general, and utilitarianism focuses on what a virtuous
person would do.
Answer (D) is incorrect.
According to virtue ethics, what is right depends on what a virtuous person would do in the
same circumstances.
2: (37) Ethics for Management Accountants

Question: 1 A company has a December 31 year end. Which one of the following options to
increase net income during the last month of the company’s fiscal year end
would least likely result in a violation of the IMA Statement of Ethical Professional
Practice?

A. Postpone planned marketing expenditures until January.


Answer (A) is correct.
Postponing planned marketing expenditures until a future date is least likely a violation of the IMA
Statement of Ethical Professional Practice. If marketing funds have not been expended or a liability
incurred, the applicable financial reporting framework does not require recognition of an expense.

Persuade suppliers to postpone billing until January 1.


B.
Answer (B) is incorrect.
Persuading suppliers to postpone billing overstates net income when the goods have been
received and accepted. This action violates (1) the integrity standard (an act discreditable to
the profession) and (2) the credibility standard (not communicating information fairly and
objectively). Under accrual accounting, when the goods are received and accepted, a liability
is incurred

Reduce the calculated allowance for bad debts and bad debt expenses.
C.
Answer (C) is incorrect.
Reducing the calculated allowance for bad debts and bad debt expense without justification
violates (1) the integrity standard (an act discreditable to the profession) and (2) the credibility
standard (not communicating information fairly and objectively). Justification may include
higher than expected collections on account.

Delay the year-end closing until January 4 to capture sales over the New Year’s holiday in the
D. current year.
Answer (D) is incorrect.
Recording sales made in the next period in the current period intentionally overstates
revenue. This practice violates the integrity and credibility standards. It should be detected by
the external auditor’s cutoff procedures.
Question: 2 The IMA Statement of Ethical Professional Practice requires an IMA member to follow
the established policies of the organization when faced with an ethical conflict. If these
policies do not resolve the conflict, the member should

A. Communicate the problem to authorities outside the organization.


Answer (A) is incorrect.
Such action is inappropriate unless legally prescribed.

B. Contact the next higher managerial level if initial presentation to the immediate superior does
not resolve the conflict.
Answer (B) is correct.
In these circumstances, the problem should be discussed with the immediate superior unless
(s)he is involved. In that case, initial presentation should be to the next higher managerial
level. If the problem is not satisfactorily resolved after initial presentation, the question should
be submitted to the next higher level.

C. Discuss the problem with the immediate superior if (s)he is involved in the conflict.
Answer (C) is incorrect.
The proper action would be to present the matter to the next higher managerial level.

D. Consult the board of directors immediately.


Answer (D) is incorrect.
This course of action would be appropriate only for the chief executive officer or for his or her
immediate subordinate when the CEO is involved in the conflict.

Question: 3 Recently, a company submitted to management a budget for the coming year. Included
in the budget were the plans for a new product, a rechargeable fan. The new fan will
not only last longer than the competitor’s product but is also more quiet. While not yet
approved, the budget called for aggressive advertising to support its sales targets, as
the business community was not yet aware that the company was close to production
of a new fan. A member of the management accounting staff “shared” the budget with
a distributor. In accordance with the IMA Statement of Ethical Professional Practice,
which one of the following would best represent an ethical conflict in this situation?

A. The staff member exposed the company to a potential lawsuit.


Answer (A) is incorrect.
The sharing of a preliminary budget would not expose a company to a potential lawsuit.
B. The price has not been established, so expectations must be managed.
Answer (B) is incorrect.
Whether expectations need to be managed is not an ethical issue.

C. The budget has not been approved and therefore is not for publication.
Answer (C) is incorrect.
An unapproved document is still confidential.

D. The employee should refrain from disclosing confidential information.


Answer (D) is correct.
The confidentiality standard states that every member has a responsibility to keep information
confidential except when disclosure is authorized or legally required.

Question: 4 Which of the following actions is required, as an IMA member, to uphold the standards
of Integrity?

A. Refrain from engaging in any conduct that would involve the use of confidential information for
unethical or illegal advantage.
Answer (A) is incorrect.
This action pertains to upholding the standards of Confidentiality.

B. Communicating professional limitations or other constraints that would preclude responsible


judgment or successful performance of an activity.
Answer (B) is incorrect.
This action pertains to upholding the standards of Credibility.

C. Refrain from violating relevant laws, regulations, and technical standards while performing
professional duties.
Answer (C) is incorrect.
This action pertains to upholding the standards of Competence.
D. Refrain from engaging in any conduct that would prejudice carrying out duties ethically.
Answer (D) is correct.
An IMA member upholds the standards of Integrity by (1) mitigating actual conflicts of
interest, (2) refraining from engaging in any conduct that would prejudice carrying out duties
ethically, (3) abstaining from engaging in or supporting any activity that might discredit the
profession, and (4) contributing to a positive ethical culture and place integrity of the
profession above personal interest.

Question: 5 An IMA member has discovered that her company is violating environmental
regulations. If the entity has no established policy for resolving ethics issues and her
immediate superior is involved, the appropriate action is to

A. Consult the audit committee.


Answer (A) is incorrect.
The audit committee is consulted first only if it is the next higher managerial level

Do nothing because she has a duty of loyalty to the organization.


B.
Answer (B) is incorrect.
The integrity standard prohibits supporting any activity that might discredit the profession.

Confront her immediate superior.


C.
Answer (C) is incorrect.
If the superior is involved, the next higher managerial level should be consulted first.

Present the matter to the next higher managerial level.


D.
Answer (D) is correct.
To resolve an ethical issue, the first step is usually to follow the entity’s established policy.
Without an established policy, the member might consult his or her immediate superior. If that
individual is involved, the matter should be taken to the next higher level of management.
Question: 6 An accountant has frequent business contact with customers, suppliers, and creditors
in the course of performing professional duties. Which of the following circumstances
would most likely threaten the accountant’s adherence to the ethical principles and
standards of the IMA Statement of Ethical Professional Practice?

A. The accountant accepted two World Cup tickets from a supplier and flew to the stadium in the
company’s jet along with a number of the supplier’s executives.
Answer (A) is correct.
The accountant’s acceptance of two World Cup tickets from a supplier and flying to the stadium in
the company’s jet along with a number of the supplier’s executives threatens the accountant’s
adherence to the integrity standard. This standard states that a member must (1) mitigate actual
conflicts of interests and (2) refrain from conduct that might prejudice carrying out duties ethically.
The acceptance of benefits from a supplier creates a conflict of interest that might prejudice carrying
out duties ethically

B. The accountant attends a professional conference where the accountant goes out to dinner and
socializes with accountants from other companies in the industry.
Answer (B) is incorrect.
Attending a professional conference helps the accountant to maintain leadership and
expertise by enhancing knowledge and skills

C. The accountant attends a charity event at the invitation of the company’s audit firm, which
bought two tables of tickets to support the event.
Answer (C) is incorrect.
Attending a charity event at the invitation of the company’s audit firm is not conduct that might
prejudice carrying out duties ethically.

D. The accountant speaks quarterly with analysts regarding the company’s past performance and
future prospects.
Answer (D) is incorrect.
Speaking quarterly with analysts does not involve (1) a conflict of interest, (2) carrying out
duties unethically, or (3) an act discreditable to the profession.

Question: 7 A management accountant was recently tried and convicted in court for producing and
selling illegal narcotic drugs. None of the activity occurred during work hours, and he
performed duties as a management accountant without incident during the period of
illegal activity. The management accountant has argued that because the illegal activity
was unrelated to his service as a management accountant, no ethical violation had
been committed. Which provision of the IMA Statement of Ethical Professional
Practice is most likely to apply to the management accountant’s illegal actions?
A. Competence.
Answer (A) is incorrect.
The competence standard is irrelevant to illegal actions outside the scope of work.

Credibility.
B.
Answer (B) is incorrect.
The management accountant’s illegal activities did not involve professional activities related
to the credibility standard. Examples of these professional activities are (1) communicating
information appropriately, (2) reporting delays or deficiencies in information, and
(3) communicating constraints that preclude successful performance.

Integrity.
C.
Answer (C) is correct.
The integrity standard states that each member must abstain from engaging in or supporting
any activity that might discredit the profession. Being convicted of producing and selling
illegal narcotic drugs is an activity that discredits the profession.

Confidentiality.
D.
Answer (D) is incorrect.
The confidentiality standard is irrelevant to the management accountant’s illegal actions. The
member did not disclose confidential information without authorization or a legal requirement
or use such information unethically or illegally.

Question: 8 Under the express terms of the IMA Statement of Ethical Professional Practice, an IMA
member may not

A. Accept other employment while serving as a financial manager or management accountant.


Answer (A) is incorrect.
Other employment may be accepted unless it constitutes a conflict of interest.

B. Advertise.
Answer (B) is incorrect.
The Statement does not address advertising.
C. Disclose confidential information unless authorized or legally required.
Answer (C) is correct.
IMA members may not disclose confidential information unless authorized or legally required.
They also must inform all relevant parties regarding appropriate use of confidential
information and monitor to ensure compliance.

Encroach on the practice of another IMA member.


D.
Answer (D) is incorrect.
The Statement does not address encroachment on the practice of another IMA member.

Question: 9 Elite Running Ltd. has recently implemented a new evaluation process that bases
bonuses primarily on the variance between budgeted and actual cost for cost centers.
Individuals with budgeted to actual variances in excess of 20% will receive no bonus.
Richard Bane oversees one cost center of Elite and is concerned that his bonus will be
adversely impacted. He has a strong personal relationship with the controller, who is
responsible for developing, reviewing, and approving budgets. He has asked the
controller to accept his budget with estimated costs higher than would be reasonably
expected for the next fiscal year. In appreciation for accepting these inflated costs,
Bane offered the controller season tickets to the sport of his choice. Which one of the
following standards of the IMA Statement of Ethical Professional Practice is relevant?

A. Credibility, if the controller shares Bane’s offer with another member of the management team.
Answer (A) is incorrect.
Reporting the manager’s offer to another member of management would not impact the controller’s
credibility.

B. Competence, if the controller accepts the tickets because he has not performed his duties in
accordance with established laws.
Answer (B) is incorrect.
The acceptance of the bribe offer would be a violation of the integrity standard, not the
competence standard.

C. Integrity, if the controller accepts the tickets because acceptance would prejudice his ability to
carry out his duties.
Answer (C) is correct.
The controller would be in violation of the IMA’s integrity standard if he were to accept the
bribe. A requirement of the integrity standard is to refrain from engaging in any conduct that
would prejudice carrying out duties ethically.

D. Confidentiality, if the controller fails to report the incident to the audit committee.
Answer (D) is incorrect.
There is nothing in the confidentiality standard saying that the controller should not report a
bribe offer.

Question: 10 Charlie Benwal was on a team that evaluated a potential acquisition. Both Benwal’s
employer and the potential target are publicly-traded companies. A significant portion
of Benwal’s personal investment portfolio is composed of the target company’s stock,
which Benwal did not disclose. Based on the IMA Statement of Ethical Professional
Practice, Benwal would be in violation of which one of the following standards?

A. Integrity.
Answer (A) is correct.
The integrity standard in the IMA Statement of Ethical Professional Practice states that members
have a responsibility to mitigate actual conflicts of interest and to regularly communicate with
business associates to avoid apparent conflict of interest. All parties should be advised of any
potential conflict.

Confidentiality.
B.
Answer (B) is incorrect.
Not disclosing a conflict of interest is a violation of the integrity standard.

Competence.
C.
Answer (C) is incorrect.
Not disclosing a conflict of interest is a violation of the integrity standard.

Credibility.
D.
Answer (D) is incorrect.
Not disclosing a conflict of interest is a violation of the integrity standard

Question: 11 A new accountant is assisting in the month-end close of the books. His supervisor told
him to accrue a large receivable and said that he would provide the supporting
documentation later. The new accountant made the accrual, and the books were
closed. Subsequently, the new accountant found out that the company would have
missed the earnings estimate without the receivable. The new accountant requested
the documentation, but the supervisor could not provide it. Other associates told the
new accountant that this supervisor had directed that undocumented entries be
recorded in the books in the past and that the former accountant had left the company
because he was uncomfortable making the entries. Recommend the best course of
action for the new accountant.

A. The new accountant should present this issue to his supervisor’s manager to resolve
it.
Answer (A) is correct.
When faced with unethical issues, the accountant should follow the organization’s
established policies on the resolution of such issues. If these policies do not
resolve the unethical issue, (s)he should first discuss the issue with his or her
immediate superior except when it appears that the supervisor is involved. In that
case, (s)he should present the issue to the next management level. Since the new
accountant’s supervisor is involved in the conflict, he should present the issue to
his supervisor’s manager.

B. The new accountant should report to the board of directors that the company did not truly meet
the earnings estimate.
Answer (B) is incorrect.
If the immediate superior is the chief executive officer or equivalent, the acceptable reviewing
authority may be a group such as the audit committee, executive committee, board of
directors, board of trustees, or owners. The company’s independent accounting firm should
not be contacted since they are not involved with this issue. Since the new accountant’s
superior is not the CEO or equivalent, he should not go to the board of directors with this
issue.

C. The new accountant should confront his supervisor about the undocumented receivable that
appeared to be inaccurate.
Answer (C) is incorrect.
The new accountant should not confront his supervisor about the undocumented receivable.
The appropriate course of action would be to present the issue to the next management level.
Since the new accountant’s supervisor is involved in the conflict, he should present the issue
to his supervisor’s manager.
D. The new accountant should evaluate the materiality of the receivable to determine if it is worthy
of follow-up.
Answer (D) is incorrect.
Materiality is not considered since this involves ethical conflict arising from the audit team.
The materiality of the receivable does not matter.

Question: 12 A staff accountant becomes aware of an off-balance-sheet bank account where funds
have been diverted with offsetting credits approved by his immediate supervisor. His
immediate supervisor refuses to discuss it and suggests the staff accountant forget
about it. Which one of the following should be the staff accountant’s next course of
action in this circumstance?

A. Communicate concerns confidentially to the company’s external legal counsel.


Answer (A) is incorrect.
The member should consider consulting his or her attorney. The client of the
company’s external legal counsel is the company, not the staff accountant.

B. Communicate concerns confidentially to the company’s independent auditor.


Answer (B) is incorrect.
Communication outside the chain of command is inappropriate unless a satisfactory
resolution is not achieved at levels of management above the immediate supervisor.

C. Put concerns in writing to the immediate supervisor and copy the company’s independent
auditor.
Answer (C) is incorrect.
When the immediate supervisor appears to be involved, the matter should not be discussed
with him or her.

D. Discuss concerns with the level of management above the immediate supervisor.
Answer (D) is correct.
According to the IMA Statement of Ethical Professional Practice, to resolve an ethical issue,
the first step is usually to follow the entity’s established policy. Without an established policy,
the member might consult his or her immediate supervisor. If that individual is involved, the
matter should be taken to the next higher level of management.

Question: 13 A financial manager who is an IMA member discovers an issue that could result in
misleading users of the firm’s financial data. She has informed her immediate
supervisor. She should report the circumstances to the audit committee or the board of
directors only if

A. The immediate supervisor reports the situation to his or her superior.


Answer (A) is incorrect.
The immediate supervisor has taken action toward satisfactory resolution.

B. The immediate supervisor, who reports to the chief executive officer, knows about the situation
but refuses to correct it.
Answer (B) is incorrect.
The CEO is the next higher managerial level.

C. The immediate supervisor assures the member that the problem will be resolved.
Answer (C) is incorrect.
The immediate supervisor has promised to take action toward satisfactory resolution.

D. The immediate supervisor, the firm’s chief executive officer, knows about the situation but
refuses to correct it.
Answer (D) is correct.
To resolve an ethical issue, the first step is usually to follow the entity’s established policy.
Without an established policy, the member might consult his or her immediate supervisor. If
that individual is involved, the matter should be taken to the next higher level of management.
If the immediate supervisor is the chief executive officer or equivalent, the acceptable
reviewing authority may be a group such as the audit committee, executive committee, board
of directors, board of trustees, or owners.

Question: 14 Employee A observes that Employee B is improperly altering department records to


meet month end goals. These records are for internal use only and do not impact the
company’s financial records. Employee A notifies her supervisor of the impropriety, and
the supervisor advises Employee A that she instructed Employee B to alter the records
and an adjustment would be made the subsequent month to correct the records.
Employee A should

A. Communicate the unethical behavior to external authorities.


Answer (A) is incorrect.
Before communicating with any external authorities, the employee should follow the organization’s
established policies.

Do nothing since the supervisor authorized the behavior.


B.
Answer (B) is incorrect.
When an employee encounters an ethical issue, (s)he should follow the organization’s
established policies.

Follow the organization’s established procedures on the resolution of such conflict.


C.
Answer (C) is correct.
To resolve an ethical issue, the first step is usually to follow the organization’s established
policies. Without established policies, the member might consult his or her immediate
supervisor. If that individual is involved, the matter should be taken to the next higher level of
management.

D. Advise the supervisor that her behavior was unethical and do not communicate the impropriety
any further.
Answer (D) is incorrect.
The first step in resolving an ethical issue is to follow the organization’s established policies.
If the policies cannot resolve the issue, the employee considers other actions, such as
discussion with the immediate supervisor.

Question: 15 If an IMA member has a problem in identifying unethical behavior or resolving an


ethical conflict, the first action (s)he should normally take is to

A. Consult the board of directors.


Answer (A) is incorrect.
The board would be consulted initially only if the immediate superior is the chief
executive officer and that person is involved in the ethical conflict.

B. Resign from the company.


Answer (B) is incorrect.
Resignation is a last resort.
C. Discuss the problem with his or her immediate superior.
Answer (C) is correct.
The IMA Statement of Ethical Professional Practice states that the member should first
discuss an ethical problem with his or her immediate superior. If the superior is involved, the
problem should be taken initially to the next higher managerial level.

D. Notify the appropriate law enforcement agency.


Answer (D) is incorrect.
An IMA member should keep information confidential except when disclosure is authorized or
legally required.

Question: 16 Which standard in the IMA Statement of Ethical Professional Practice states that
financial management professionals should not engage in activities that might discredit
the profession?

A. Confidentiality.
Answer (A) is incorrect.
The confidentiality standard states an IMA member’s responsibility not to disclose or use the firm’s
confidential information inappropriately.

B. Competence.
Answer (B) is incorrect.
The competence standard pertains to an IMA member’s responsibility to enhance
professional skills and knowledge to maintain appropriate leadership and expertise. It also
pertains to the performance of duties in accordance with relevant laws, regulations, and
technical standards.

C. Credibility.
Answer (C) is incorrect.
The credibility standard requires that (1) information be communicated “fairly and objectively”
and (2) all information that could reasonably be expected to influence users be provided.

D. Integrity.
Answer (D) is correct.
The integrity standard relates to a member’s responsibility to (1) mitigate actual conflicts of
interest, regularly communicate with business associates to avoid apparent conflicts of
interest, and advise all parties of any potential conflicts of interest; (2) refrain from engaging
in any conduct that would prejudice carrying out duties ethically; (3) abstain from engaging in
or supporting any activity that might discredit the profession; and (4) contribute to a positive
ethical culture and place integrity of the profession above personal interests.

Question: 17 When is an IMA member permitted to communicate confidential information to


individuals or authorities outside the firm?

A. The IMA member knowingly communicates the information indirectly through a subordinate.
Answer (A) is incorrect.
The IMA member should inform all relevant parties regarding appropriate use of confidential
information and monitor to ensure compliance.

B. Such communication is legally required.


Answer (B) is correct.
According to the IMA Statement of Ethical Professional Practice, members are responsible
for observing the confidentiality standard. Thus, the IMA member should keep information
confidential except when disclosure is authorized or legally required.

C. An officer at the IMA member’s bank has requested information on a transaction that could
influence the firm’s stock price.
Answer (C) is incorrect.
The IMA member is required to refrain from using confidential information for unethical or
illegal advantage.

D. An ethical conflict exists and the board has refused to act.


Answer (D) is incorrect.
The IMA Statement of Ethical Professional Practice requires members to keep information
confidential except when disclosure is authorized or legally required.

Question: 18 A financial manager has discovered that her company is violating environmental
regulations. If her immediate superior is involved, the appropriate action is to
A. Present the matter to the next higher managerial level.
Answer (A) is correct.
To resolve an ethical problem, the financial manager/management accountant’s first step is usually to
consult his or her immediate superior. If that individual is involved, the matter should be taken to the
next higher level of management.

Confront her immediate superior.


B.
Answer (B) is incorrect.
If the superior is involved, the next higher managerial level should be consulted first.

Do nothing since she has a duty of loyalty to the organization.


C.
Answer (C) is incorrect.
Practitioners of management accounting and financial management have an obligation to the
public, their profession, the organization they serve, and themselves, to maintain the highest
standards of ethical conduct.

Consult the audit committee.


D.
Answer (D) is incorrect.
The audit committee would be consulted first only if it were the next higher managerial level

Question: 19 According to the IMA Statement of Ethical Professional Practice, a member has a
responsibility to recognize professional limitations. Under which standard of ethical
conduct would this responsibility be included?

A. Integrity.
Answer (A) is incorrect.
The integrity standard pertains to (1) conflicts of interest, (2) avoidance of acts discreditable to the
profession, (3) refraining from activities that prejudice the ability to carry out duties ethically, and
(4) contributing to a positive ethical culture.
Credibility.
B.
Answer (B) is correct.
One of the responsibilities of an IMA member under the credibility standard is to
“communicate professional limitations or other constraints that would preclude judgment or
successful performance of an activity.”

Confidentiality.
C.
Answer (C) is incorrect.
The confidentiality standard states an IMA member’s responsibility not to disclose or use the
firm’s confidential information.

Competence.
D.
Answer (D) is incorrect.
One of the responsibilities of an IMA member under the competence standard is to “maintain
an appropriate level of professional leadership and expertise by enhancing knowledge and
skills.” (S)he must also “perform professional duties in accordance with relevant laws,
regulations, and technical standards.” The third requirement under this standard is to “provide
decision support information and recommendations that are accurate, clear, concise, and
timely.”

Question: 20 An accountant has concerns that a particular transaction is being recorded in a manner
that does not reflect the nature of the transaction and believes that alternative
accounting is being used to avoid recording the appropriate expense for a period. The
accountant attempted to speak to the accounting manager, but the manager rebuffed
the accountant and said there was no time to discuss the issue further. According to
the IMA Statement of Ethical Professional Practice, what is the next appropriate step
the accountant should take regarding this issue?

A. Discuss the issue with the next level of management over the accounting manager.
Answer (A) is correct.
To resolve an ethical issue, the first step is usually to follow the entity’s established policy. Without
an established policy, the member might consult his or her immediate supervisor. If that individual is
involved, the matter should be taken to the next higher level of management.

Discuss the issue with the firm’s legal counsel.


B.
Answer (B) is incorrect.
Only after discussing the issue with the next level of management should the accountant
consult with his or her attorney. However, the firm’s legal counsel should not be contacted by
the accountant.

Resign from the position with the company.


C.
Answer (C) is incorrect.
Only if resolution efforts fail should the IMA member consider disassociation.

D. Discuss the issue with the company’s independent accounting firm.


Answer (D) is incorrect.
Communication outside the chain of command is inappropriate unless a satisfactory
resolution is not achieved at levels of management above the immediate supervisor.

The controller is responsible for directing the budgeting process. In this role, the
Question: 21 controller has significant influence with executive management as individual
department budgets are modified and approved. For the current year, the controller
was instrumental in the approval of a particular line manager’s budget without
modification, even though significant reductions were made to the budgets submitted
by other line managers. As a token of appreciation, the line manager in question has
given the controller a gift certificate for a popular local restaurant. In considering
whether or not to accept the certificate, the controller should refer to which section of
the IMA Statement of Ethical Professional Practice?

A. Confidentiality.
Answer (A) is incorrect.
The confidentiality standard applies to an IMA member’s responsibility not to
disclose or use the firm’s confidential information.

B. Integrity.
Answer (B) is correct.
The integrity standard requires an IMA member to “refrain from engaging in any conduct that
would prejudice carrying out duties ethically.”

Competence.
C.
Answer (C) is incorrect.
The competence standard pertains to an IMA member’s responsibility to maintain his or her
professional skills and knowledge. It also pertains to the performance of activities in
accordance with relevant laws, regulations, and technical standards.

Credibility.
D.
Answer (D) is incorrect.
The credibility standard requires that (1) information be communicated “fairly and objectively”
and (2) all information that could reasonably influence users be disclosed.

Question: 22 Which one of the following is an example of an overarching ethical principle from IMA
Statement of Ethical Professional Practice?

A. Competence.
Answer (A) is incorrect.
Competence is one of the four standards listed in the IMA Statement of Ethical Professional Practice.

Fairness.
B.
Answer (B) is correct.
The IMA’s overarching principles include honesty, fairness, objectivity, and responsibility.
Members must act in accordance with these principles and should encourage others within
their organizations to adhere to them.

Integrity.
C.
Answer (C) is incorrect.
Integrity is one of the four standards listed in the IMA Statement of Ethical Professional
Practice

Confidentiality.
D.
Answer (D) is incorrect.
Confidentiality is one of the four standards listed in the IMA Statement of Ethical Professional
Practice

IMA members are obligated to maintain the highest standards of ethical conduct.
Question: 23 Accordingly, the IMA Statement of Ethical Professional Practice explicitly requires that
IMA members

A. Comply with generally accepted auditing standards.


Answer (A) is incorrect.
Compliance with GAAS is a requirement of external auditors.

Adhere to generally accepted accounting principles.


B.
Answer (B) is incorrect.
Adherence to GAAP is not expressly required by the IMA Statement of Ethical Professional
Practice.

Obtain sufficient appropriate evidence when expressing an opinion.


C.
Answer (C) is incorrect.
The expression of an opinion is a function of an external auditor

D. Not condone violations by others.


Answer (D) is correct.
The principles section of the IMA Statement of Ethical Professional Practice states, “IMA’s
overarching ethical principles include Honesty, Fairness, Objectivity, and Responsibility.
Members shall act in accordance with these principles and shall encourage others within their
organizations to adhere to them.”

Question: 24 Year-end bonuses at each branch office are based on branch profitability. Due to a
slow economy, profitability through the third quarter at the Northeast branch is under
budget. To address this issue, the accounting staff at the Northeast branch develops a
list of end-of-year actions designed to boost earnings for the year. Which one of the
following is most likely to violate the IMA Statement of Ethical Professional Practice?
A. Requesting the branch’s advertising agency to delay billing third-quarter advertisements until January.
Answer (A) is correct.
Requesting delay of billing until the next accounting period violates the integrity and credibility
standards. Integrity is impaired because an IMA member should abstain from engaging in or
supporting any activity that might discredit the profession. Credibility is impaired because an IMA
member should (1) communicate information fairly and objectively and (2) provide all relevant
information that could reasonably be expected to influence an intended user’s understanding of
reports, analyses, or recommendations. Delaying the reporting of expenses properly recognizable in
the third quarter misstates the financial statements.

B. Offering additional discounts to customers to entice them to increase purchases in the third
quarter.
Answer (B) is incorrect.
Offering additional discounts to customers to increase purchases in the third quarter neither
discredits the profession nor fails to communicate fair and objective information. Additional
discounts are used widely in practice and are not unethical unless they involve predatory
pricing.

C. Deferring planned painting and refurbishment of the warehouse until the following year.
Answer (C) is incorrect.
Deferring planned painting and refurbishment of the warehouse until the following year does
not result in a misstatement of expenses. Recognition is not required until work has been
done and a liability has been incurred.

D. Deferring advertising expense by reducing the number of newspaper advertisements run in the
third quarter.
Answer (D) is incorrect.
Reducing the number of newspaper advertisements in the third quarter results in correctly
associating (matching) cause (advertisements) with effect (expenses).

Question: 25 Which ethical standard is most clearly violated if an IMA member knows of information
that could mislead users but does not report the deficiency?

A. Legality.
Answer (A) is incorrect.
Legality is not addressed in the IMA Statement of Ethical Professional Practice.
B. Confidentiality.
Answer (B) is incorrect.
The confidentiality standard relates to, among other things, the IMA member’s responsibility
not to disclose or use the firm’s confidential information inappropriately.

C. Credibility.
Answer (C) is correct.
The credibility standard in the IMA Statement of Ethical Professional Practice requires,
among other things, that all relevant information that could reasonably influence users be
provided.

D. Competence.
Answer (D) is incorrect.
The competence standard pertains to, among other things, the member’s responsibility to
maintain an appropriate level of professional leadership and expertise.

After a competitive bidding process, a company’s purchasing director awarded a


Question: 26 contract to the lowest bidder, an organization in which she had a personal interest.
Because the winning bidder had the lowest price, she did not disclose her relationship
with the entity. In fact, she frequently highlighted the fact that the winning bidder had
the most experience servicing contracts of this nature. Which one of the values of
ethical decision making did the purchasing director violate?

A. Honesty, because she was not being truthful about the experience of the bidder.
Answer (A) is incorrect.
The facts do not indicate that the statement about the winning bidder’s experience
was false

B. None, because a competitive bidding process was utilized.


Answer (B) is incorrect.
The undisclosed conflict of interest violated the integrity principle.

C. Integrity, because her relationship with the bidder could have impaired her judgment.
Answer (C) is correct.
The purchasing director had an actual conflict of interest but should have avoided even an
apparent conflict of interest. The appropriate action was to advise all parties of the
circumstances to avoid even the appearance of making a secret profit. Furthermore, the
transaction was not improper solely on the grounds of the conflict of interest. The transaction
may have been fair to the company and approved by the appropriate superiors after full
disclosure.

D. Fairness, because she did not tell the truth about her relationship with the vendor.
Answer (D) is incorrect.
The purchasing director’s fault was not failure to tell the truth about her relationship with the
vendor. The fault was lack of full disclosure.

Question: 27 An accountant has discovered unethical conduct in his organization and fails to act
because of fear of retaliation. He will be in violation of all of the following IMA ethical
standards except

A. Communicate information fairly and objectively.


Answer (A) is incorrect.
The accountant did not take any action. Thus, relevant information was not communicated, and the
credibility standard was violated.

B. Disclose all relevant information that could reasonably be expected to influence an intended
user.
Answer (B) is incorrect.
The lack of action taken by the accountant is a failure to disclose relevant information that
could affect a user’s decision making. Thus, the accountant violated the credibility standard.

C. Refrain from using confidential information for unethical or illegal advantage.


Answer (C) is correct.
The accountant did not use confidential information for any sort of personal advantage.
Therefore, the confidentiality standard was not violated.

D. Refrain from engaging in any conduct that would prejudice carrying out of duties correctly.
Answer (D) is incorrect.
A failure to report unethical conduct due to fear of retaliation is a failure to perform duties
correctly. Therefore, this standard (of integrity) has been violated.

Question: 28 Andrew Babbitt is a management accountant at Ace Mining Corporation (AMC), a


processor of ores and minerals. He learned that AMC had been disposing hazardous
waste materials in a nearby residential landfill. Babbitt knew that the waste materials
could pose a danger to the residents in the area and that there could be legal
ramifications for disposing hazardous waste in a residential landfill. When Babbitt
discussed the issue with his supervisor the next morning, he was told to ignore it. Due
to the significance of the matter, Babbitt decided to discuss the matter with his attorney
and then notified the appropriate authorities. In accordance with the IMA Statement of
Ethical Professional Practice, which one of the following is the correct evaluation of
Babbitt’s decision to notify the authorities?

A. Babbitt’s actions were appropriate only if his attorney indicated that there was a clear violation of the
law.
Answer (A) is correct.
Under the IMA Statement of Ethical Professional Practice, if an ethical issue cannot be resolved
within the member’s organization, the member should consider consulting an attorney to learn of any
legal obligations, rights, and risks concerning the issue. If the attorney concludes that a violation of
law has occurred, the authorities should be notified accordingly. However, if no violation of law
occurred, it may not be necessary to contact the authorities.

B. Babbitt’s actions were appropriate as an immediate action.


Answer (B) is incorrect.
If the disposition of the hazardous materials is not a violation of the law, Babbitt should not
necessarily notify the authorities immediately.

C. Babbitt’s actions were inappropriate because they violated the confidentiality standard.
Answer (C) is incorrect.
Babbitt’s actions did not violate the confidentiality standard.

D. Babbitt’s actions were inappropriate because they involved insubordination.


Answer (D) is incorrect.
Under the IMA Statement of Ethical Professional Practice, when resolving ethical issues, the
member may discuss the issue with his or her immediate supervisor. If the supervisor
appears to be involved, the issue could be presented to the next level of management. Thus,
insubordination does not render Babbitt’s actions inappropriate.
Question: 29 A typical code of ethical conduct for financial managers or management accountants in
an organization requires all of the following except

A. Integrity and a refusal to compromise professional values for the sake of personal goals.
Answer (A) is incorrect.
Integrity is a typical provision in ethical codes, as well as independence from conflicts of
interest. Compromising professional values for the sake of personal goals represents a
conflict of interest.

B. Subjectivity in presenting information, preparing reports, and making analyses.


Answer (B) is correct.
Subjectivity in presenting information would not be a part of an ethical code of conduct.
Objectivity is often a part of a code of conduct, such as that of the IMA.

C. Independence from conflicts of professional interest.


Answer (C) is incorrect.
Independence from conflicts of professional interest is a typical provision in ethical codes.

D. Independence from conflicts of economic interest.


Answer (D) is incorrect.
Independence from conflicts of economic interest is a typical provision in ethical codes.

Question: 30 The IMA Statement of Ethical Professional Practice includes a competence standard. It
requires an IMA member to

A. Discuss, with subordinates, their responsibilities regarding the disclosure and use of
confidential information about the firm.
Answer (A) is incorrect.
The confidentiality standard requires an IMA member to inform all relevant
parties about appropriate use of confidential information and to monitor to ensure
compliance.
B. Report information, whether favorable or unfavorable.
Answer (B) is incorrect.
The credibility standard requires an IMA member to communicate information fairly and
objectively.

C. Enhance his or her skills.


Answer (C) is correct.
One of the responsibilities of an IMA member under the competence standard is to maintain
an appropriate level of professional leadership and expertise by enhancing knowledge and
skills.

D. Call the IMA’s helpline to ask about application of the Statement to an ethical issue.
Answer (D) is incorrect.
One of the suggestions in the “Resolving Ethical Issues” section is to use the IMA’s
anonymous helpline.

Question: 31 The IMA Statement of Ethical Professional Practice includes an integrity standard. It
requires an IMA member to

A. Report all information that could influence users of financial statements.


Answer (A) is incorrect.
The credibility standard requires an IMA member to provide all relevant
information that could reasonably be expected to influence an intended user’s
understanding of the reports, analyses, and recommendations.

B. Disclose confidential information when authorized by his or her firm or required under the law.
Answer (B) is incorrect.
The confidentiality standard requires an IMA member to keep information confidential except
when disclosure is authorized or legally required.

C. Provide recommendations that are accurate.


Answer (C) is incorrect.
The competence standard states that the member should provide decision support
information and recommendations that are accurate, clear, concise, and timely.
D. Mitigate actual conflicts of interest.
Answer (D) is correct.
One of the responsibilities of an IMA member under the integrity standard is to mitigate actual
conflicts of interest, regularly communicate with business associates to avoid apparent
conflicts of interest, and advise all parties of any potential conflicts of interest.

Question: 32 In accordance with the IMA Statement of Ethical Professional Practice, a member who
fails to perform professional duties in accordance with relevant standards is acting
contrary to which one of the following standards?

A. Competence.
Answer (A) is correct.
One of the responsibilities of an IMA member under the competence standard is to “maintain an
appropriate level of professional leadership and expertise by enhancing knowledge and skills.” (S)he
must also “perform professional duties in accordance with relevant laws, regulations, and technical
standards.” The third requirement under this standard is to “provide decision support information and
recommendations that are accurate, clear, concise, and timely.”

Confidentiality.
B.
Answer (B) is incorrect.
The confidentiality standard states an IMA member’s responsibility not to disclose or use the
firm’s confidential information

Integrity.
C.
Answer (C) is incorrect.
The integrity standard pertains to (1) conflicts of interest, (2) avoidance of acts discreditable
to the profession, (3) refraining from activities that prejudice the ability to carry out duties
ethically, and (4) contributing to a positive ethical culture.

Credibility.
D.
Answer (D) is incorrect.
The credibility standard requires that (1) information be communicated “fairly and objectively”
and (2) all information that could reasonably influence users be disclosed.
Question: 33 You have examined your organization’s financial statements and determined that they
present a number of significant items in a fraudulent manner. You know that you
should report this situation to management but are concerned that reporting it might
result in your employment being terminated. Failure to report this situation is a violation
of which of the ethical standard(s) outlined in the IMA Statement of Ethical Professional
Practice?

A. Competence.
Answer (A) is incorrect.
The competence standard applies to an IMA member’s knowledge and skills.

Confidentiality.
B.
Answer (B) is incorrect.
The confidentiality standard applies to (1) nondisclosure of confidential information unless
authorized or legally required and (2) not using it inappropriately. The standard does not
apply to fraudulent reporting.

Credibility.
C.
Answer (C) is correct.
The credibility standard requires (1) communicating information fairly and objectively;
(2) providing all relevant information that could reasonably be expected to influence an
intended user’s understanding of reports, analyses, or recommendations; (3) reporting delays
or deficiencies in information, timeliness, processing, or internal controls in conformance with
organization policy or applicable law; and (4) communicating professional limitations or other
constraints that would preclude responsible judgment or successful performance of an
activity. The credibility standard is violated because fraudulent reporting does not
communicate information fairly. The relevant information that could reasonably be expected
to influence an intended user’s understanding also is not provided.

Confidentiality and Integrity.


D.
Answer (D) is incorrect.
The confidentiality standard applies only to the protection of sensitive information. But fraud
violates the integrity standard. Fraud discredits the profession because it involves carrying
out duties unethically.
Question: 34 A new accounting clerk at a firm that had recently terminated several employees due to
budgetary cutbacks accidentally viewed a supervisor’s biweekly paycheck. Not
realizing that the paycheck included an annual bonus, the accounting clerk erroneously
multiplied the gross pay by 26 to find annual earnings. The accounting clerk was
amazed that this supervisor appeared to earn more than twice the local average for
employees in an accounting supervisory position. The accounting clerk discussed this
situation with a friend, a recently terminated employee of the company who now
worked for a local newspaper. As a result of this discussion, the supervisor’s
“outrageous” salary was made public. Which one of the standards of the IMA
Statement of Ethical Professional Practice did the accounting clerk’s actions violate?

A. Credibility.
Answer (A) is incorrect.
The credibility standard states that an IMA member must (1) communicate information fairly and
objectively; (2) provide all relevant information that could reasonably be expected to influence an
intended user’s understanding of reports, analyses, or recommendations; (3) report any delays or
deficiencies in information, timeliness, processing, or internal controls in conformance with
organization policy or applicable law; and (4) communicate professional limitations or other
constraints that would preclude responsible judgment or successful performance of an activity.

Competence.
B.
Answer (B) is incorrect.
The competence standard states that an IMA member must (1) maintain an appropriate level
of professional expertise by enhancing knowledge and skills; (2) perform professional duties
in accordance with relevant laws, regulations, and technical standards; and (3) provide
decision support information and recommendations that are accurate, clear, concise, and
timely.

Confidentiality.
C.
Answer (C) is correct.
The confidentiality standard states that each IMA member must (1) keep information
confidential except when disclosure is authorized or legally required, (2) inform all relevant
parties regarding appropriate use of confidential information and monitor to ensure
compliance, and (3) refrain from using confidential information for unethical or illegal
advantage.

Integrity.
D.
Answer (D) is incorrect.
The integrity standard states that an IMA member must (1) mitigate actual conflicts of
interest, regularly communicate with business associates to avoid apparent conflicts of
interest, and advise all parties of any potential conflicts; (2) refrain from engaging in any
conduct that would prejudice carrying out duties ethically; (3) abstain from engaging in or
supporting any activity that might discredit the profession; and (4) contribute to a positive
ethical culture and place integrity of the profession above personal interests.

Question: 35 According to the IMA Statement of Ethical Professional Practice, a member has a
responsibility to recognize and help manage risk. Under which standard of ethical
conduct would this responsibility be included?

A. Credibility.
Answer (A) is incorrect.
The credibility standard requires that (1) information be communicated “fairly and objectively” and
(2) all information that could reasonably influence users be disclosed.

Integrity.
B.
Answer (B) is incorrect.
The integrity standard applies to conflicts of interest, avoidance of acts discreditable to the
profession, refraining from activities that prejudice the ability to carry out duties ethically, and
contributing to a positive ethical culture

Competence.
C.
Answer (C) is correct.
The competence standard requires an IMA member to provide decision support information
and recommendations that are accurate, clear, concise, and timely. It also requires a member
to recognize and help manage risk.

Confidentiality.
D.
Answer (D) is incorrect.
The confidentiality standard states an IMA member’s responsibility not to disclose or use the
firm’s confidential information
Question: 36 A new management accountant is concerned about complying with the ethical
standard of competence in the IMA Statement of Ethical Professional Practice. Which
one of the following is not required under the standard of competence?

A. Perform duties in accordance with relevant regulations and standards.


Answer (A) is incorrect.
An IMA member must perform professional duties in accordance with relevant laws, regulations, and
technical standards

Maintain expertise in all areas of accounting.


B.
Answer (B) is correct.
Maintaining expertise in all areas of accounting is difficult. According to the competence
standard in the IMA Statement of Ethical Professional Practice, a CMA must maintain an
appropriate level of professional leadership and expertise by enhancing knowledge and skills.
This level does not include expertise in all areas of accounting.

Enhance knowledge and skills.


C.
Answer (C) is incorrect.
A CMA must maintain an appropriate level of professional leadership and expertise by
enhancing knowledge and skills.

Provide recommendations that are accurate and timely.


D.
Answer (D) is incorrect.
An IMA member must provide decision support information and accurate, clear, concise, and
timely recommendations.

Question: 37 Integrity is an ethical requirement for all IMA members. One aspect of integrity requires

A. Performance of professional duties in accordance with relevant laws.


Answer (A) is incorrect.
Performance of professional duties in accordance with relevant laws states an aspect of the
competence requirement.
Avoidance of apparent conflicts of interest.
B.
Answer (B) is correct.
According to the IMA Statement of Ethical Professional Practice, IMA members must
“mitigate actual conflicts of interest. Regularly communicate with business associates to
avoid apparent conflicts of interest. Advise all parties of any potential conflicts of interest.”

Refraining from using confidential information for unethical or illegal advantage.


C.
Answer (C) is incorrect.
Refraining from using confidential information for unethical or illegal advantage is an aspect
of the confidentiality requirement.

Maintenance of an appropriate level of professional leadership and expertise.


D.
Answer (D) is incorrect.
Maintenance of an appropriate level of professional leadership and expertise is an aspect of
the competence requirement
3: (25) Fraud and the Fraud Risk Model (Fraud Triangle)

Question: 1 Who is responsible for minimizing the opportunity to misappropriate assets in an


organization?

A. The external auditor.


Answer (A) is incorrect.
The external auditor expresses an opinion on the fairness of the financial statements

Management.
B.
Answer (B) is correct.
Management is expected to create systems and procedures to mitigate exposure to fraud
and to cope with it effectively when discovered.

Law enforcement.
C.
Answer (C) is incorrect.
Law enforcement may become involved once fraud is discovered, but it is not responsible for
mitigating fraud within an organization.

Employees.
D.
Answer (D) is incorrect.
Employees are not expected to create systems to lower the exposure to fraud and to cope
with it effectively when discovered.

Question: 2 What is the most likely reason for management to overstate expenses?

A. To maximize cash on hand.


Answer (A) is incorrect.
Understating expenses has no direct effect on cash.
To minimize tax liability.
B.
Answer (B) is correct.
The most likely reason for management to understate income by overstating expenses is to
minimize tax liability

To maximize net income.


C.
Answer (C) is incorrect.
Management may understate expenses to maximize net income.

To earn a bonus.
D.
Answer (D) is incorrect.
Management may understate expenses to earn a bonus

Question: 3 How can a management accountant use the Fraud Triangle to identify and manage the
risk of fraud?

A. The Fraud Triangle provides a model for explaining the pressures, rationalizations, and opportunities
that influence people to commit fraud.
Answer (A) is correct.
The Fraud Triangle is a model for explaining the factors that cause someone to commit fraud. It
consists of three components: pressures, rationalizations, and opportunities.

The Fraud Triangle provides a SOX-compliant model for examining the company’s internal
B. control environment in terms of its risk of fraud.
Answer (B) is incorrect.
The Fraud Triangle is a model for explaining the pressures, rationalizations, and opportunities
that cause people to commit fraud.

C. The Fraud Triangle provides a model for explaining how persuasion, coercion, and conviction
influence people to commit fraud.
Answer (C) is incorrect.
The three elements of the Fraud Triangle are pressures, rationalizations, and opportunities.

D. The Fraud Triangle provides a model for explaining the motives, means, and opportunities that
influence people to commit fraud.
Answer (D) is incorrect.
The Fraud Triangle consists of pressures, rationalizations, and opportunities.

Question: 4 Most employee fraud cases involve

A. Overstatement of revenues.
Answer (A) is incorrect.
Overstatement of revenues is associated with fraudulent financial reporting, not employee fraud.

Financial or vice-related pressures.


B.
Answer (B) is correct.
Most employee fraud cases involve financial or vice-related pressures. Employees often have
an actual or a perceived need for money.

Misstatement of financial statements.


C.
Answer (C) is incorrect.
Misstatement of financial statements is associated with fraudulent financial reporting, not
employee fraud.

Need for social acceptance.


D.
Answer (D) is incorrect.
Most employee fraud cases do not result from a need for social acceptance.

Question: 5 Management is often able to rationalize the commission of fraud by


A. Reasoning that it is in the best interests of the company.
Answer (A) is correct.
Rationalization is a person’s ability to justify actions as consistent with his or her
personal code of ethics. A person may rationalize a fraud by believing that the
misdeed is to help the company to prosper or survive. Thus, a person may believe
that the ends justify the means.

B. Blaming it on others.
Answer (B) is incorrect.
Blaming does not relate to rationalization.

Forcing staff to perpetrate it.


C.
Answer (C) is incorrect.
Forcing staff to perpetuate a fraud does not rationalize it.

Hiding it.
D.
Answer (D) is incorrect.
Hiding a fraud does not rationalize it.

Question: 6 A manufacturing entity, located in a sparsely populated region of the country, has a
policy of leaving its raw material inventory warehouse doors open during normal
business hours to optimize workflow. The controller for the entity has just noticed that
some raw material inventory is missing. Using the Fraud Triangle model, the controller
has determined that the entity’s policy most likely increases the risk of fraud by

A. Increasing the ease of rationalization of the fraudulent activity.


Answer (A) is incorrect.
Rationalization is a person’s ability to justify actions as consistent with his or her personal code of
ethics. It is not affected by an open warehouse.

B. Increasing the opportunity to commit the fraud.


Answer (B) is correct.
The three elements of the Fraud Triangle are pressure, opportunity, and rationalization.
Opportunity is the ability of a person not only to perpetrate but also to conceal fraud and is
created by an absence of oversight, inadequate internal controls, or the lack of enforcement
of controls. Leaving the warehouse doors open represents an inadequate internal control that
increases the opportunity to commit fraud.

Assisting employees to perceive a financial need.


C.
Answer (C) is incorrect.
Leaving the warehouse doors open would not help employees in perceiving their financial
need.

Incentivizing employees to commit the fraud.


D.
Answer (D) is incorrect.
Employees would be incentivized to commit fraud by experiencing a financial need that could
be solved through theft.

Question: 7 A company has a strong internal control structure in its accounting department. It has a
high degree of duty segregation, regular reconciliations, strict reviews, and
comprehensive internal audits. A disgruntled fixed assets accountant has been
contemplating the embezzlement of cash receipts processed by the accounts
receivable department. The accountant plans to use these funds to sustain his
gambling problem. Using the Fraud Triangle model, what is the best assessment of
fraud risk for the company’s situation?

A. Low, because both opportunity and rationalization are absent.


Answer (A) is incorrect.
Opportunity is absent, but rationalization is present because the accountant is disgruntled.

Medium, because rationalization is absent.


B.
Answer (B) is incorrect.
Rationalization is present because the accountant is disgruntled. Opportunity is absent.
High, because pressure, opportunity, and rationalization are all present.
C.
Answer (C) is incorrect.
Pressure and rationalization are present, but opportunity is absent.

Medium, because opportunity is absent.


D.
Answer (D) is correct.
The company’s fraud risk is medium even though it has effective internal control because
both pressure and rationalization are present.

Question: 8 Rationalization of a fraud by an employee may be in the form of all the


following except

A. Feelings of being underpaid.


Answer (A) is incorrect.
Feelings of being underpaid may be used by an employee to justify or rationalize stealing.

Belief in being overworked.


B.
Answer (B) is incorrect.
Belief in being overworked may be used by an employee to justify or rationalize stealing.

Pressure from one’s spouse.


C.
Answer (C) is correct.
Pressure from one’s spouse is a motive for the misappropriation of assets. It is a pressure –
not a rationalization

Belief that rank has its privileges.


D.
Answer (D) is incorrect.
Belief that rank has its privileges may be used by an employee to justify or rationalize
stealing.
Question: 9 Fraudulent financial reporting is most often committed by

A. Customers.
Answer (A) is incorrect.
Managers, not customers, are responsible for financial reporting.

Employees stealing assets.


B.
Answer (B) is incorrect.
Misappropriation of assets is most often committed by employees.

An auditor while performing an audit.


C.
Answer (C) is incorrect.
Auditors are not responsible for financial reporting

Management to deceive financial statement users.


D.
Answer (D) is correct.
Fraudulent financial reporting is committed by management in an attempt to deceive financial
statement users.

Question: 10 Inappropriate earnings management is typically considered one form of

A. Fraudulent financial reporting.


Answer (A) is correct.
Inappropriate earnings management has been defined as the purposeful intercession in the financial
reporting process.
Embezzlement.
B.
Answer (B) is incorrect.
Embezzlement is a form of misappropriation of assets.

Misappropriation of assets.
C.
Answer (C) is incorrect.
Misappropriation of assets is one of the two main classifications of employee fraud

Theft of assets.
D.
Answer (D) is incorrect.
Theft is a form of misappropriation of assets.

Question: 11 Ghosting employees is a form of fraud that

A. Maintains employees on the payroll who no longer work for the organization.
Answer (A) is correct.
Ghosting maintains employees on the payroll who no longer work for the organization.

Records payroll to another account in an attempt to understate payroll expense.


B.
Answer (B) is incorrect.
Ghosting does not understate payroll expense.

C. Understates labor expense by failing to record payroll.


Answer (C) is incorrect.
Ghosting is not a result of failing to record payroll.

D. Expects employees to work for nothing.


Answer (D) is incorrect.
Ghosting does not involve employees working for nothing.

Question: 12 In the fraud risk model, rationalization relates to

A. The belief that the ends justify the means.


Answer (A) is incorrect.
The elements of the fraud risk model are (1) opportunity, (2) rationalization, and (3) pressure
(motive). The belief that the ends justify the means is not an element of the fraud risk model. It is
simply one form of rationalization.

The need for cash or other resources.


B.
Answer (B) is incorrect.
Motivation relates to the need for cash or other resources.

A person’s ability to justify actions as consistent with his or her personal code of ethics.
C.
Answer (C) is correct.
Rationalization relates to the person’s ability to justify the commission of a fraud. Auditors
should assume that anyone has this ability.

D. The ability of a person not only to perpetrate but also to conceal fraud.
Answer (D) is incorrect.
Opportunity relates to the ability of a person not only to perpetrate but also conceal a fraud. A
failure of internal control creates opportunity.

Question: 13 Public record searches may be effective in certain instances. Which of the following is
a limitation on public record searches?

A. It is often very costly to search public records.


Answer (A) is incorrect.
Use of public sources of information is usually cost effective. In fact, Internet searches may be
virtually costless.

Very few types of information are available.


B.
Answer (B) is incorrect.
A vast amount of information is available from public sources.

The information from public sources is most often incorrect.


C.
Answer (C) is incorrect.
In most cases, the information obtained is correct. However, care should be taken because
information may have changed since it was first collected and reported.

D. Availability of records may be limited.


Answer (D) is correct.
Records for early periods may be limited or nonexistent.

Question: 14 Which of the following are red flags indicating misappropriation of assets?

I. Unexplained budget variances


II. Poor supervision
III. Failure of certain employees to take vacations

IV.

A. II and III only.


Answer (A) is incorrect.
Unexplained budget variances are also a red flag indicating misappropriation of assets

I and II only.
B.
Answer (B) is incorrect.
The failure of certain employees to take vacations is also a red flag indicating possible
fictitious payrolls.

I and III only.


C.
Answer (C) is incorrect.
Poor supervision is also a red flag indicating deficiency in safeguarding assets.

I, II, and III.


D.
Answer (D) is correct.
Among other things, unexplained budget variances, poor supervision, and failure of certain
employees to take vacations are red flags indicating misappropriation of assets.

Which of the fraud risk factors related to employee fraud can be effectively controlled
Question: 15 by the organization?

A. Pressure.
Answer (A) is incorrect.
Opportunity is the only factor that can be effectively controlled by the
organization.

Rationalization.
B.
Answer (B) is incorrect.
Rationalization (integrity) can be addressed but not effectively controlled by the organization.

Motive.
C.
Answer (C) is incorrect.
Motive (pressure) cannot be effectively controlled by the organization.

Opportunity.
D.
Answer (D) is correct.
Opportunity is mitigated by internal controls, which can be effectively designed and
implemented by the organization.

Question: 16 High risk of employee fraud is most likely when there is pressure, rationalization, and

A. Limited responsibility.
Answer (A) is incorrect.
Limited employee responsibility mitigates the risk of employee fraud.

Internal control.
B.
Answer (B) is incorrect.
Internal control mitigates the risk of employee fraud.

Opportunity.
C.
Answer (C) is correct.
Opportunity creates risk of employee fraud.

Personal integrity.
D.
Answer (D) is incorrect.
Personal integrity mitigates the risk of employee fraud.

Question: 17 The Public Company Accounting Oversight Board and the SEC would
be most interested in an organization’s activities related to

A. Effectiveness of internal controls.


Answer (A) is incorrect.
Management of the organization would be most interested in the effectiveness of internal controls.
Fraudulent financial reporting.
B.
Answer (B) is correct.
Fraudulent financial reporting is most often committed by management to deceive financial
statement users. The PCAOB and the SEC would be most interested in these types of
activities.

Failure to adequately compensate employees.


C.
Answer (C) is incorrect.
The organization’s ability to hire and retain good employees would be contingent on their
compensation policies

The misappropriation of assets.


D.
Answer (D) is incorrect.
Management of the organization would be most interested in the misappropriation of assets
by employees.

Question: 18 Misappropriation of assets is most often perpetrated by

A. Employees.
Answer (A) is correct.
Employees who have fiduciary responsibilities for assets are most likely to steal them.

Auditors.
B.
Answer (B) is incorrect.
Independent auditors have little opportunity or motive to misappropriate assets.

Customers.
C.
Answer (C) is incorrect.
Customers may misappropriate assets, but most businesses are more vulnerable to
misappropriation by employees.

Suppliers.
D.
Answer (D) is incorrect.
Suppliers may misappropriate assets, but most businesses are more vulnerable to
misappropriation by employees.

Question: 19 When none of the three fraud risk factors are present, an accountant

A. Should consider the likelihood of fraud to be high.


Answer (A) is incorrect.
When all three factors are present, fraud risk is high.

Will likely search more diligently for fraud.


B.
Answer (B) is incorrect.
When fraud risk factors are present, the accountant will likely search more diligently for fraud.

Can rule out the presence of fraud.


C.
Answer (C) is incorrect.
The accountant would need more solid evidence to rule out the presence of fraud

Should not rule out the presence of fraud completely.


D.
Answer (D) is correct.
Even when no factors are observed, an accountant cannot completely exclude the risk of
fraud. Factors may be present but hidden from the accountant.
Question: 20 Based on the fraud risk model, which of the following is the most likely motive for
employee theft?

A. Gambling losses.
Answer (A) is correct.
An employee’s actual or perceived need for assets, for example, from gambling losses, can create the
motivation to commit fraud.

Ineffective supervision.
B.
Answer (B) is incorrect.
Ineffective supervision creates the opportunity to commit fraud.

Belief that rank has its privileges.


C.
Answer (C) is incorrect.
The belief that rank has its privileges is a justification that some employees may use to justify
fraud.

Ineffective internal controls.


D.
Answer (D) is incorrect.
Ineffective internal controls create the opportunity to commit fraud.

The term or expression most associated with misappropriation of assets is


Question: 21

A. Stealing.
Answer (A) is correct.
Misappropriation of assets results from theft, embezzlement, or an action that
causes payment for items not received. It is an act of stealing by employees.

Fraudulent financial statements.


B.
Answer (B) is incorrect.
Fraudulent financial reporting causes the financial statements to be misstated.

Failure to file a tax return.


C.
Answer (C) is incorrect.
Failure to file a tax return is a legal issue

Earnings management.
D.
Answer (D) is incorrect.
Earnings management causes the financial statements to be misstated.

Question: 22 Based on the fraud risk model, which of the following most likely is not an opportunity
to commit employee fraud?

A. Lack of physical controls.


Answer (A) is incorrect.
Lack of physical controls creates an opportunity to commit fraud.

Living beyond one’s means.


B.
Answer (B) is correct.
Living beyond one’s means is pressure or motivation to commit fraud.

Poor accounting records.


C.
Answer (C) is incorrect.
Poor accounting records create an opportunity to commit fraud.

Lack of transaction authorizations.


D.
Answer (D) is incorrect.
Lack of transaction authorizations creates an opportunity to commit fraud.

Question: 23 The fraud risk factor that may be mitigated by internal controls is

A. Opportunity.
Answer (A) is correct.
The opportunity for individuals to perpetrate a fraud can be mitigated by proper controls. Examples
are appropriate oversight, segregation of duties, and the audit process itself.

Pressure.
B.
Answer (B) is incorrect.
Pressure relates to motive and cannot be mitigated by controls.

Rationalization.
C.
Answer (C) is incorrect.
Rationalization cannot be affected by controls because it is a mental state of a potential
perpetrator of a fraud.

Motive.
D.
Answer (D) is incorrect.
Like rationalization, motive is a mental state that cannot be mitigated by controls.

Question: 24 Which of the following is a motive for fraudulent financial reporting?

A. A manager’s compensation is tied to reported financial results.


Answer (A) is correct.
When a manager’s compensation is tied to reported financial results, the motive for fraud is stronger.
There is no internal auditing function.
B.
Answer (B) is incorrect.
When there is no internal auditing function, the opportunity for fraud increases.

Oversight of management is lacking.


C.
Answer (C) is incorrect.
When oversight of management is lacking, the opportunity for fraud increases

The board of directors includes a number of related parties.


D.
Answer (D) is incorrect.
When the board of directors includes a number of related parties, the opportunity for fraud
increases.

Question: 25 An employee is stealing office supplies and believes that everybody else is doing
it. The fraud risk factor represented by the employee is

A. Rationalization.
Answer (A) is correct.
Certain employee attitudes or rationalizations are often associated with acts of fraud, including
believing everybody else is doing it.

Motive.
B.
Answer (B) is incorrect.
Need or desire for assets creates motive

Opportunity.
C.
Answer (C) is incorrect.
Control weaknesses create opportunity.
Ability.
D.
Answer (D) is incorrect.
Ability is not a fraud risk factor.
4: (11) Managing the Risk of Fraud

Internal control cannot be designed to provide reasonable assurance regarding the


Question: 1 achievement of objectives related to

A. Compliance with applicable laws and regulations.


Answer (A) is incorrect.
Internal control can provide reasonable assurance regarding compliance with
applicable laws and regulations.

Elimination of all fraud.


B.
Answer (B) is correct.
Internal control is a process designed to provide reasonable assurance regarding the
achievement of organizational objectives. Because of inherent limitations, however, no
system can be designed to eliminate all fraud.

Effectiveness and efficiency of operations.


C.
Answer (C) is incorrect.
Internal control can provide reasonable assurance regarding effectiveness and efficiency of
operations.

Reliability of financial reporting.


D.
Answer (D) is incorrect.
Internal control can provide reasonable assurance regarding reliability of financial reporting.

Question: 2 A proper segregation of duties requires that an individual

A. Authorizing a transaction records it.


Answer (A) is incorrect.
Authorization and recordkeeping should be separate.
Maintaining custody of an asset be entitled to access the accounting records for the asset.
B.
Answer (B) is incorrect.
Recordkeeping and asset custody should be separate.

Recording a transaction not compare the accounting record of the asset with the asset itself.
C.
Answer (C) is correct.
One person should not be responsible for all phases of a transaction, i.e., for authorization,
recording, and custodianship of the related assets. These duties should be performed by
separate individuals to reduce the opportunities for any person to be in a position of both
perpetrating and concealing errors or fraud in the normal course of his or her duties. For
instance, an employee who receives and lists cash receipts should not be responsible for
comparing the recorded accountability for cash with existing amounts.

D. Authorizing a transaction maintain custody of the asset that resulted from the transaction.
Answer (D) is incorrect.
Authorization and asset custody should be separate.

Question: 3 The reporting of accounting information plays a central role in the regulation of
business operations. The importance of sound internal control practices is underscored
by the Foreign Corrupt Practices Act of 1977, which requires publicly owned U.S.
corporations to maintain systems of internal control that meet certain minimum
standards. Preventive controls are an integral part of virtually all accounting processing
systems, and much of the information generated by the accounting system is used for
preventive control purposes. Which one of the following is not an essential element of
a sound preventive control system?

A. Implementation of state-of-the-art software and hardware.


Answer (A) is correct.
Preventive controls are designed to prevent an error or irregularity from occurring. State-of-the-art
hardware and software would presumably incorporate the latest control features, but a less advanced
system could very well contain a sound preventive control structure. Hence, state-of-the-art
components are not essential for effective control.

Documentation of policies and procedures.


B.
Answer (B) is incorrect.
Documentation provides a guide for conduct.

Separation of responsibilities for the recording, custodial, and authorization functions.


C.
Answer (C) is incorrect.
Segregation of functions makes it more difficult for one person both to perpetrate and conceal
an irregularity.

D. Sound personnel practices.


Answer (D) is incorrect.
Hiring honest and capable employees prevents many problems.

Question: 4 An organization relied heavily on e-commerce for its transactions. Evidence of the
organization’s security awareness manual would be an example of which of the
following types of controls?

A. Compliance.
Answer (A) is incorrect.
Compliance relates to abiding by laws, regulations, contracts, etc.

Detective.
B.
Answer (B) is incorrect.
Detective controls are not applied in advance. They provide post-performance feedback
about whether deviations from standards have occurred.

Preventive.
C.
Answer (C) is correct.
Preventive controls are measures taken in advance so that anticipated problems associated
with performance of an activity will not occur. Creating a security awareness manual involves
anticipating problems.
Corrective.
D.
Answer (D) is incorrect.
Corrective controls are not applied in advance. They solve problems identified by detective
controls.

Question: 5 Internal controls may be preventive, detective, corrective, or directive. Which of the
following is preventive?

A. Preparing bank reconciliations.


Answer (A) is incorrect.
Bank reconciliations disclose errors in the accounts but have no preventive effect

Requiring two persons to open mail.


B.
Answer (B) is correct.
Preventive controls are designed to prevent an error or an irregularity. Detective and
corrective controls attempt to identify and correct errors or irregularities that have already
occurred. Preventive controls are usually more cost beneficial than detective or corrective
controls. Assigning two individuals to open mail is an attempt to prevent misstatement of cash
receipts.

Using batch totals.


C.
Answer (C) is incorrect.
The use of batch totals may detect a missing or lost document but will not necessarily prevent
a document from becoming lost.

Reconciling the accounts receivable subsidiary file with the control account.
D.
Answer (D) is incorrect.
Reconciling the subsidiary file with the master file may detect and lead to the correction of
errors, but the control does not prevent errors.
Question: 6 Segregation of duties is a fundamental concept in an effective system of internal
control. Nevertheless, the internal auditor must be aware that this safeguard can be
compromised through

A. Collusion among employees.


Answer (A) is correct.
By segregating duties, organizations make it more difficult for one person to perpetrate a fraud. When
custody of the asset and recordkeeping for the asset are invested in different persons, a fraud
generally cannot be executed by one of the two parties. However, if they collude, the internal control
aspect of the segregation is nullified.

Irregular employee reviews.


B.
Answer (B) is incorrect.
Irregular employee reviews may affect employee job performance, but they alone cannot
negate effective separation of duties.

Absence of internal auditing.


C.
Answer (C) is incorrect.
While the absence of an internal audit activity may lessen the chances that an organization
will maintain effective internal control over the long run, by itself it cannot negate effective
segregation of duties.

Lack of training of employees.


D.
Answer (D) is incorrect.
Lack of training by itself cannot negate effective separation of duties.

Question: 7 Which of the following sets of duties would not be performed by a single individual in a
company with the most effective segregation of duties in place?

A. Preparing monthly customer statements and maintaining the accounts payable subsidiary ledger.
Answer (A) is incorrect.
Preparing monthly customer statements and maintaining the accounts payable subsidiary ledger both
involve the recording of transactions. Thus, the segregation of duties is not violated.
Having custody of signed checks yet to be mailed and maintaining depreciation schedules.
B.
Answer (B) is incorrect.
Although custody and recordkeeping are generally incompatible, the holding of signed checks
and maintaining the depreciation schedule does not lend itself to facilitating fraud (i.e., signed
checks cannot be used in conjunction with the depreciation schedule to conceal fraud). Thus,
the segregation of duties is not violated.

Approving sales returns on customers’ accounts and depositing customers’ checks in the bank.
C.
Answer (C) is correct.
The organizational structure should segregate duties and responsibilities so that an individual
is not in the position both to perpetrate and conceal fraud or error. The ideal segregation of
duties is authorization of the transaction (e.g., unusual credit approvals), recording of the
transaction, and custody of the assets (e.g., inventory, receivables, and cash) associated with
the transaction. A single individual who approves sales returns and deposits customers’
checks is responsible for both authorization of the transaction and custody of the assets.
Thus, this set of duties should not be performed by a single individual in a company because
it would violate the segregation of duties.

Posting accounts payable transactions and entering additions and terminations to payroll.
D.
Answer (D) is incorrect.
Posting accounts payable transactions and entering additions and terminations to payroll are
both the recording of transactions. Thus, the segregation of duties is not violated.

Question: 8 An adequate system of internal controls is most likely to detect a fraud perpetrated by
a

A. Single manager.
Answer (A) is incorrect.
Even a single manager may be able to override controls.

Group of employees in collusion.


B.
Answer (B) is incorrect.
A group has a better chance of successfully perpetrating a fraud than does an individual
employee.

Single employee.
C.
Answer (C) is correct.
Segregation of duties and other control procedures serve to prevent or detect a fraud
committed by an employee acting alone. One employee may not have the ability to engage in
wrongdoing or may be subject to detection by other employees in the course of performing
their assigned duties. However, collusion may circumvent controls. For example, comparison
of recorded accountability with assets may fail to detect fraud if persons having custody of
assets collude with record keepers.

Group of managers in collusion.


D.
Answer (D) is incorrect.
Management can override controls

Question: 9 A retail company is required to perform a stock count to identify shortages at least once
per month. What type of control is this?

A. Detective Control
Answer (A) is correct.
Detective controls alert the proper people after an unwanted event. They are known as “after-the-fact”
controls. A stock count is a detective control because it can identify inventory shortages after
inventory shrinkage has occurred.

Corrective Control
B.
Answer (B) is incorrect.
Corrective controls correct the negative effects of unwanted events. For example, a quality
team that addresses ongoing problems to correct processes is a corrective control.

Preventive Control
C.
Answer (C) is incorrect.
A preventive control deters the occurrence of an unwanted event. Storing cash in a locked
safe and segregation of duties are examples of preventive controls.

Directive Control
D.
Answer (D) is incorrect.
Directive controls cause or encourage the occurrence of a desirable event. Common
examples are policies and procedure manuals.

Question: 10 The frequency of the comparison of recorded accountability with assets (for the
purpose of safeguarding assets) should be determined by

A. The cost of the comparison and whether the susceptibility to loss results from errors or fraud.
Answer (A) is incorrect.
Whether the susceptibility to loss arises from errors or fraud should have little bearing on the
frequency of the comparison.

The nature and amount of the asset and the cost of making the comparison.
B.
Answer (B) is correct.
Assets should be compared with the recorded accountability as frequently as the nature and
amount of the assets require, within the limits of acceptable costs of comparison. The costs
of safeguarding assets should not exceed the expected benefits.

The amount of assets independent of the cost of the comparison.


C.
Answer (C) is incorrect.
The costs of controls should be considered when making the comparison.

D. The auditor in consultation with client management.


Answer (D) is incorrect.
Management, not the auditor, has responsibility for internal control.
Question: 11 Which of the following is the best way to compensate for the lack of adequate
segregation of duties in a small organization?

A. Disclosing lack of segregation of duties to the external auditors during the annual review.
Answer (A) is incorrect.
Disclosure is not an adequate control.

B. Requiring accountants to pass a yearly background check.


Answer (B) is incorrect.
A criminal may be able to pass a background check.

C. Allowing for greater management oversight of incompatible activities.


Answer (C) is correct.
Complete segregation may not be feasible due to cost-benefit restraints. Compensating
controls most likely are established when segregation of duties is not feasible. Typical
compensating controls may include more management oversight.

D. Replacing personnel every 3 or 4 years.


Answer (D) is incorrect.
Rotating personnel may be difficult in a small organization.

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