Exam Practice Answers : Version A

Exam Practice
Answers (Version A)
Booklet 2 of 3
ETHICS AND GOVERNANCE
To be used in conjunction with Ethics and Governance, 2nd edition. © Copyright CPA Australia unless otherwise indicated.
Page 2 ETHICS AND GOVERNANCE
CPA Program
Ethics and Governance
Scoring the exam practice questions
Now that you have completed your exam practice questions in booklet 1, you are ready to
see how you performed.
You’ll need to use this booklet alongside your ‘Self-assessment’ booklet (booklet 3).
How to assess your multiple-choice questions

In this booklet, check whether your answer is correct or incorrect and read the explanation to
understand why. You may then record your responses in the ‘Self-assessment’ booklet. Each correct
response is awarded one mark. There are no marks deducted for incorrect responses.
How to assess your extended-response questions

Read the answer provided, and compare and contrast it to your own response. Review the explanation
of the mark allocation and award marks to your own response accordingly. Record your marks in the
‘Self-assessment’ booklet.
Total your marks

Use the ‘Self-assessment’ booklet to determine the total marks you earned for each module (for both
the multiple-choice questions and extended-response questions). You can then use this as an
indication of where you performed favourably, and where you may wish to invest more study time
in the lead up to your real exam.
ETHICS AND GOVERNANCE Page 3
Section A—Multiple-choice questions

This section consists of Questions 1–30. It is worth a total of 30 marks.
Allocate approximately 60 minutes to Section A.
Questions 1 to 30 are worth one (1) mark each. Please select only one option for each question.
1. Which one of the following is an attribute that traditionally distinguishes the accounting profession
from a non-professional occupation?
A community prestige
B pursuit of excellence
C membership exclusivity
D enlightened self-interest
Correct answer option B

Explanation of correct option The correct answer is Option B because the pursuit of excellence
is part of the attribute of service to the community—being one of
the traditional attributes of the accounting profession—whereby
an accountant accepts responsibility to maintain and update their
knowledge and skills, and apply them in the best interests of
society.
Explanation of incorrect options Option A is incorrect because this attribute is part of the market
control view of the accounting profession rather than the traditional
view.
Option C is incorrect because this attribute is part of the market

control view of the accounting profession rather than the traditional
view.
Option D is incorrect because where enlightened self-interest

conflicts with the public interest, the public interest (i.e. the ideal of
service to the community—being one of the traditional attributes of
the accounting profession) prevails.
_________________________________________________________________________________
2. Which one of the following is part of the application of professional judgment by an accountant?
A incorporation of ethical values into decision-making
B application of technical skills to structured problems
C choosing an outcome that best meets the needs of clients
D acquisition of knowledge through a formal educative process
Correct answer option A

Explanation of correct option The correct answer is Option A because the application of
professional judgment includes the expectation that accountants
can judge values and make judgments regarding values when they
make decisions.
Explanation of incorrect options Option B is incorrect because the application of professional
judgment involves the ability to solve unstructured problems (rather
than structured problems).
Option C is incorrect because the application of professional

judgment requires the accountant to choose the outcome that best
meets the needs of society (pursuant to the profession’s service
ideal) rather than best meets the needs of clients.
Option D is incorrect because while the acquisition of knowledge

through a formal educative process is important, the application of
professional judgment goes beyond mere acquisition of knowledge
(i.e. professional judgment refers to the ability to apply accumulated
knowledge and experience gained through accounting training).
_________________________________________________________________________________
3. Which of the following sets of attributes is included in the traditional concept of a profession?
A a code of ethics for its members, the existence of a governing body, and a lack
of autonomy
B
a code of ethics for its members, the existence of a governing body, and a
systematic body of theory and knowledge
C the existence of a governing body, a systematic body of theory and knowledge,

and distinct government regulation over the governing body
D a code of ethics for its members, a systematic body of theory and knowledge,
and distinct government regulation over the governing body

Explanation of correct option The correct answer is Option B because these are three of the
attributes of the traditional concept of a profession:
• members establish a code of ethics
• members of the profession organise as a group and establish
their own means of self-regulation
• members of the profession work together to define the
knowledge and skills related to the profession.
Explanation of incorrect options Option A is incorrect because the governing body does have
autonomy in the traditional concept of a profession.
Options C and D are incorrect because in the traditional concept of

a profession, the body is governed by the members rather than by
the government.
_________________________________________________________________________________
4. Which one of the following forms part of the co-regulatory model for the accounting profession
in Australia?
A Education requirements are set by government.
B Membership requirements are set by government.
C Accounting and auditing rules are set by government bodies.
D Ethical rules are set by government and enforced by the profession.
Correct answer option C

Explanation of correct option The correct answer is Option C because under the co-regulatory
model for the accounting profession in Australia, accounting
and auditing standards are set by government bodies [e.g. the
Australian Accounting Standards Board (AASB) sets Australian
Accounting Standards].
Explanation of incorrect options Option A is incorrect because under the co-regulatory model for the
accounting profession in Australia, education requirements are set
by the accounting profession rather than by government.
Option B is incorrect because under the co-regulatory model for the

accounting profession in Australia, membership requirements are
set by the accounting profession rather than by government.
Option D is incorrect because under the co-regulatory model for

the accounting profession in Australia, ethical requirements are set
and enforced by the accounting profession (rather than enforced by
government).
_________________________________________________________________________________
5. Which one of the following activities represents work performed by an accountant in

public practice?
A evaluating the internal controls of a business
B formulating the financial direction of a business
C ensuring a business generates sufficient cash flows
D ensuring the board of a business is functioning efficiently

Explanation of correct option The correct answer is Option A because an accountant in public
practice can (for example, as part of financial management or
internal audit services) be involved in evaluating the adequacy of
the internal controls of a business.
Explanation of incorrect options Option B is incorrect because formulating the financial direction of
a business is a private practice role of the finance director or chief
financial officer of a business.
Option C is incorrect because ensuring a business has sufficient

cash flows is a private practice role of a treasury accountant or,
where one exists, a finance director or chief financial officer.
Option D is incorrect because ensuring the efficient functioning

of the board of directors is a private practice role of a company
secretary.
_________________________________________________________________________________
6. Mary is a CPA whose current work assignment is to analyse, for a possible court case, the
financial records of a company whose cash flow does not seem to match its revenue growth.
Which type of public practice role best describes Mary’s field of study?
A forensic accounting
B assurance and audit
C internal audit services
D financial management

Explanation of correct option The correct answer is Option A. The forensic accounting public
practice role typically involves analysing financial information to
support legal proceedings, such as cases involving fraud.
Explanation of incorrect options Option B is incorrect. The assurance and audit public practice role
typically involves review and attestation of a company’s financial
statements. Although this role does sometimes include information
security, it does not include fraud investigation.
Option C is incorrect. The internal audit services public practice role

primarily involves risk management.
Option D is incorrect. The financial management public practice role

includes financial controls and corporate governance.
_________________________________________________________________________________
7. Which one of the following best explains professional ethics?
A the moral principles that guide how a business behaves
B the customs and shared attitudes of members of a profession
C the principles by which professionals should serve the public interest
D the obligation of professionals to obey the laws applicable to a situation

Explanation of correct option The correct answer is Option C because the overriding ethical
responsibility of a member of a profession is to serve the best
interests of the public.
Explanation of incorrect options Option A is incorrect because this relates to business ethics rather
than professional ethics.
Option B is incorrect because it focuses inwardly on the customs

and attitudes of members of the profession rather than standards of
behaviour expected from society in general.
Option D is incorrect because following laws does not necessarily

mean a person has behaved ethically.
_________________________________________________________________________________
8. Which one of the following is an ethical responsibility of a professional accountant?
A professional scepticism
B direct investigation of all discrepancies
C decisions that respect the organisational culture
D the application of relevant experience to fulfil all client requests

Explanation of correct option The correct answer is Option A because a professional accountant
must make sure any observed discrepancies are appropriately
investigated and resolved.
Explanation of incorrect options Option B is incorrect because accountants are responsible for
making sure that investigations of discrepancies are conducted, not
that they must conduct these investigations themselves.
Option C is incorrect because allowing an organisation’s culture to

influence decisions can result in unethical outcomes.
Option D is incorrect because the accountant’s ethical responsibility

is to the public, not to a specific client.
_________________________________________________________________________________
9. While reviewing a client’s accounting records, Sally Strong CPA has found entertainment
expenses were classified as staff training expenses. Sally has explained to the client that she will
correct the classification because, personally and professionally, she can only act with integrity.
Which of the following ethical theories has Sally applied to justify her decision?
A virtue ethics
B egoism
C utilitarianism
D ethics of rights

Explanation of correct option The correct answer is Option A because virtue ethics relates to
traits of character that cause a person to act with integrity.
Explanation of incorrect options Option B is incorrect because egoism relates to acting in one’s
self-interest. Sally may have chosen to accept the paying client’s
misclassification in order to maintain a profitable commercial
relationship with them.
Option C is incorrect because utilitarianism relates to acting out of

a (greater) benefit calculation and not out of upholding personal
behaviour values.
Option D is incorrect because ethics of rights relates to one’s right

to act in a certain way or receive certain benefits, not to upholding
personal behaviour values.
_________________________________________________________________________________
10. Rebecca Wong is a partner in a public practice. Rebecca receives a box of chocolates from a
client as an expression of appreciation for excellent service she provided to the client during
the past year. Under APES 110 Code of Ethics for Professional Accountants, which one of the
following is correct?
A Rebecca should refuse the gift as the self-interest threat is unacceptable.
B Rebecca should refuse the gift as it will create a familiarity threat.
C Rebecca can accept the gift provided she declares this gift to her fellow partner.
D
Rebecca can accept the gift as its nature and intent are not likely to result in a
significant threat.
Correct answer option D

Explanation of correct option The correct answer is Option D because the nature of the gift
(including its trivial value) and the intent behind the gift (expression
of appreciation for excellent service) is not likely to result in a
reasonable and well-informed person concluding that there is a
significant threat to the fundamental principles in APES 110.
Explanation of incorrect options Option A is incorrect because, as outlined in Option D, there are no
significant threats to the fundamental principles in APES 110.
Option B is incorrect because the value of the gift is trivial and

inconsequential and therefore not likely to result in a familiarity
threat.
Option C is incorrect because, as outlined in Option D, there are

no significant threats to the fundamental principles in APES 110.
Although Rebecca can declare this gift to her fellow partner, this is
not required by APES 110.
_________________________________________________________________________________
11. A junior accountant of a manufacturing company suspects their employer has been illegally
dumping significant amounts of waste.
Under the ‘Responding to Non-Compliance with Laws and Regulations’ (NOCLAR) requirements,
what should the junior accountant do?
A report the suspected non-compliance to the auditor
B report the suspected non-compliance to their immediate superior
C no action is required because it is only a suspected non-compliance
D no action is required because the non-compliance is only an environmental issue

Explanation of correct option The correct answer is Option B because the junior accountant,
being a member in business who is not in a senior position, is
required to inform their immediate superior about the suspected
non-compliance.
Explanation of incorrect options Option A is incorrect because the determination of whether the
suspected non-compliance needs to be communicated with the
external auditor is a responsibility of a senior member in business
rather than the junior accountant.
Option C is incorrect because NOCLAR deals with how

accountants must respond when they become aware of non-
compliance, so the junior accountant cannot ignore the matter,
particularly as it relates to dumping significant amounts of waste.
Option D is incorrect because NOCLAR would cover environmental

protection laws, being a matter fundamental to the company’s
operations, or the breach thereof could result in material penalties.
_________________________________________________________________________________
12. Sarah works for a large corporation. She discovers that her department released a report that
contained false financial information. She reports the fraud as required by her corporation’s
guidelines and applicable legal standards.
Which of the following principles of the Accounting and Professional and Ethical Standards Board
(APESB) Code of Ethics does Sarah’s action demonstrate?
A maintaining loyalty
B acting with integrity
C maintaining confidentiality
D acting with good intentions

Explanation of correct option The correct answer is Option B as it correctly identifies integrity
as the principle of the APESB Code of Ethics that applies in this
situation.
Explanation of incorrect options Option A is incorrect because loyalty to employers and clients is not
a fundamental principle of the APESB Code of Ethics and, when
placed above the public interest, puts the accountant at risk of
compromising his or her integrity.
Option C is incorrect because this instance is not an example of the

principle of maintaining confidentiality.
Option D is incorrect because acting with good intentions is not

a principle of the APESB Code of Ethics and does not assure
compliance with the Code.
_________________________________________________________________________________
13. While auditing a listed company, Brigid uncovers large cash payments. Brigid suspects these
payments are bribes paid to suppliers in order to secure contracts. The chief financial officer
proposes to significantly increase the audit fee if Brigid agrees to overlook the cash payments.
Using the American Accounting Association (AAA) model, what should Brigid consider when
making her decision?
A the impacts on stakeholders affected by the auditor’s decision
B the potential negative impact on the company’s suppliers
C the potential short-term reduction in the company’s share price
D the audit fee foregone if Brigid does not agree to overlook the payments

Explanation of correct option The correct answer is Option A because under the AAA model, all
stakeholders affected by a decision should be identified and the
(negative and positive) impacts on them arising from each possible
course of action determined.
Explanation of incorrect options Option B is incorrect because it only identifies the negative impact
on one stakeholder—the company’s suppliers—rather than the
positive and negative impacts on all stakeholders.
Option C is incorrect because it only identifies the negative impact

on one stakeholder—the company—rather than the positive and
negative impacts on all stakeholders.
Option D is incorrect because it only identifies the negative impact

on Brigid rather than the positive and negative impacts on all
stakeholders affected by her decision.
_________________________________________________________________________________
14. Gerry works as an accountant for the Yellow Building Corporation (YBC). He discovers that
a member of the board of directors has an undisclosed financial interest in a company that is
currently tendering for a large contract with YBC. Gerry determines that this conflict of interest
may be an ethics violation.
According to the American Accounting Association (AAA) model for ethical decision-making,
which one of the following should Gerry next identify to help him make an ethical decision about
this situation?
A determine whether shareholders will be negatively impacted by the board member’s

financial interest
B determine the amount of financial interest the board member has in the company to see
whether it is material
C decide whether to discuss the matter privately with the board member or bring it to the
attention of YBC’s CEO
D
obtain information on whether the board member’s interest violates rules or would
typically be seen as unacceptable

Explanation of correct option The correct answer is Option D. According to the AAA model,
Gerry has already established the facts and the ethical issues. He
must now identify the norms, principles, and values related to the
situation.
Explanation of incorrect options Option A is incorrect because it involves weighing courses of action
from both short-term and long-term perspectives. In the AAA model,
this corresponds to the sixth step.
Option B is incorrect because this would be a fact-finding activity,

which is part of the first step in the AAA model.
Option C is incorrect because this would fall into the category of

considering possible courses of action, which corresponds to the
fourth step in the AAA model.
_________________________________________________________________________________
15. Corporate governance in the public sector should have which one of the following guiding
principles?
A focus on profit for good intent
B protection of shareholder value
C closed elections of board members
D boards should have authority to carry out their responsibilities

Explanation of correct option The correct answer is Option D because it is a major guiding
principle for all governance in public and corporate sectors.
Explanation of incorrect options Option A is incorrect as a focus on profit is not a guiding principle of
good governance.
Option B is incorrect as this is not a focus in the public sector or of

good governance in general.
Option C is incorrect as this is not open or transparent, which are

guiding principles of all governance.
_________________________________________________________________________________
16. The system of corporate governance in Asia can be characterised by which one of the following?
A strict continuous disclosure requirements
B cohesive networks of minority shareholders
C representation of stakeholder interests on boards
D strong influence of non-executive directors on boards

Explanation of correct option The correct answer is Option B because Asian companies have
a considerable concentration of ownership under which most
companies either have a majority shareholder or a cohesive group
of minority shareholders who act together to control the company.
Explanation of incorrect options Option A is incorrect because strict continuous disclosure
requirements are a feature of market-based systems. By contrast,
disclosure is minimal in relationship-based systems, which exist in
Asian countries.
Option C is incorrect because boards in Asian countries are

dominated by shareholders rather than representing the interests of
a wider group of stakeholders.
Option D is incorrect because the role of non-executive directors

has often been relatively unimportant in Asian companies.
_________________________________________________________________________________
17. Which one of the following statements best describes the concept of ‘comply or explain’?
A A corporation must disclose when management disagrees with a decision of the board
of directors.
B A corporation must provide an explanation when it does not comply with government
legislation.
C
A corporation must explain to its shareholders the reason behind non-compliance
with a governance recommendation.
D Management must explain to the board of directors the reason behind non-compliance
with a governance recommendation.

Explanation of correct option The correct answer is Option C. According to the concept of
‘comply or explain’ as introduced in the Financial Aspects of
Corporate Governance (CFACG 1992), a corporation must explain
to its shareholders the reason for not complying with a governance
recommendation.
Explanation of incorrect options Option A is incorrect. Management must comply with board
decisions or they will likely be removed.
Option B is incorrect because corporations are subject to legal

action if they fail to comply with government legislation.
Option D is incorrect. Although management may disagree with

governance recommendations and may present their reasons to the
board of directors, this is not what is meant by ‘comply or explain’.
_________________________________________________________________________________
18. Which one of the following remuneration methods best contributes to the alignment of
management and shareholder interests?
A a bonus based on achieving short-term profit targets
B a bonus based on achieving aggressive sales targets
C an award of shares based on the past year’s financial results
D an award of options with future share price targets

Explanation of correct option The correct answer is Option D because performance payments
should be designed to motivate managers’ future performance.
Furthermore, conditions based on future share price targets will
benefit the managers (options can be awarded) and shareholders
(increase in shareholder wealth).
Explanation of incorrect options Option A is incorrect as remuneration methods should be based
on a mixture of short-term and long-term profit targets, rather than
just short-term profit targets, which may increase the possibility that
management may engage in short-term risky behaviour.
Option B is incorrect because the pursuit of aggressive sales

targets may result in excessive risk being undertaken, which does
not result in higher profits (for example, higher sales may result
in higher bad debts). Targets should be based on profits or a
ratio that includes profits earned by shareholders (e.g. return on
shareholders’ equity).
Option C is incorrect because it is based on past performance.

However, remuneration should be based on future performance or
a combination of past performance and future performance.
_________________________________________________________________________________
19. A company’s chief executive officer (CEO) and other members of the executive team have
a comprehensive compensation package that includes a base salary, annual bonuses, and
share options. The annual bonuses are tied to company performance.
To align executive pay with the interests of the shareholders, which one of the following best
reflects current recommendations for the executive team’s compensation package.
A
Annual bonuses should be linked to performance on both short-term and
long-term goals.
B The base salary should be below market average and annual bonuses should be
above average.
C The base salary, annual bonuses and long-term share-option incentives should all be
above average.
D The compensation packages should be in line with the multiples outlined in the Economic
Times (Goyal 2012) report for the country.

Explanation of correct option The correct answer is Option A. This encourages the management
team to act in the best interest of shareholders.
Explanation of incorrect options Option B is incorrect. This structure could incentivise executives to
make decisions for short-term benefit that could have a negative
long-term impact.
Option C is incorrect. Shareholders would be negatively impacted

by an overly generous compensation package.
Option D is incorrect because these rates pertain specifically to

CEOs.
_________________________________________________________________________________
20. A company has been following current recommendations from the Financial Reporting Council
(FRC) on promoting diversity. A member of the board of directors resigns, and the company must
fill the open position.
To achieve diversity at the board level according to FRC, which of the following should the
company look for when evaluating candidates?
A a female candidate with applicable skills and experience
B a candidate with applicable skills and experience who is the same gender as the
departing board member
C
a candidate with applicable skills and experience who may have personality
attributes and a background that differs from those of most board members
D a female candidate with applicable skills and experience who is either younger or older,
who has a different background than most of the other board members

Explanation of correct option The correct answer is Option C. In seeking such a candidate, the
company should be open to all qualified people regardless of race,
ethnicity, gender and other attributes. Diversity also encompasses
attributes such as background, personality, and psychological
attributes.
Explanation of incorrect options Option A is incorrect. Gender is only one component of diversity;
the board should be open to other types of diversity as well and
should not restrict itself to certain attributes.
Option B is incorrect. Gender is only one component of diversity.

Simply replacing the departing board member with a new member
according to gender does not promote diversity according to the
FRC Code.
Option D is incorrect. Although gender, age and background are

attributes to consider in promoting diversity, the company should
not restrict itself to candidates with only certain attributes, nor
should it ignore other types of diversity.
_________________________________________________________________________________
21. The obligation to ensure potential employees are not misled in relation to advertised employment
positions is specified in which one of the following pronouncements?
A ASX Principles
B Corporations Act 2001 (Cwlth)
C Australian Consumer Law
D OECD Principles of Corporate Governance

Explanation of correct option The correct answer is Option C. Australian Consumer Law
provides protections to every potential employee when applying for
advertised employment positions.
Explanation of incorrect options Option A is incorrect because the ASX Principles do not specifically
address misleading conduct in relation to advertised employment
positions.
Option B is incorrect because the Corporations Act does not

specifically address misleading conduct in relation to advertised
employment positions.
Option D is incorrect because the OECD Principles of Corporate

Governance do not specifically address misleading conduct in
relation to advertised employment positions.
_________________________________________________________________________________
22. Which one of the following most accurately describes the ideal composition of an audit
committee, based on the auditing standards?
A non-executive and executive directors
B chief executive officer (CEO) and non-executive directors
C non-executive directors and external consultants
D non-executive directors only

Explanation of correct option The correct answer is Option D because according to the auditing
standards, the audit committee should ideally be comprised of non-
executive directors only.
Explanation of incorrect options Option A is incorrect. The audit committee should ideally not include
executive directors.
Option B is incorrect. The audit committee should not include the

CEO, who is usually the most powerful/influential executive director.
Option C is incorrect. External consultants are paid fees for their

service but do not have a fiduciary duty to the company.
_________________________________________________________________________________
23. A corporation plans to expand its business to include the manufacturing of consumer products.
Company management wants to get the products to market quickly because this will increase
their year-end bonuses. The compliance officer has stepped in to ensure the products will not be
sold until safety concerns are addressed.
To ensure the ongoing effectiveness of the compliance program, which of the following actions
should the company take?
A conduct a review of all product returns and customer product complaints
B provide ad hoc training and education on company policies and procedures
C
regularly review compliance policies and procedures to determine whether they are
being followed and are effective
D have a reward system that compensates management and employees for complying with
company policies and procedures

Explanation of correct option The correct answer is Option C. Policies and procedures must be
audited to determine whether they are effective and are being used.
Explanation of incorrect options Option A is incorrect because this is a reactive step. A good
compliance program would work to prevent returns and complaints.
Option B is incorrect. To be effective, training must be regular and

ongoing.
Option D is incorrect. Rewards should be based on performance

and not on compliance with policies and procedures.
_________________________________________________________________________________
24. A group of friends work together in buying shares to artificially inflate their price and sell them at a
large profit. They are engaging in which one of the following offences?
A pools
B churning
C cartel operation
D insider trading

Explanation of correct option The correct answer is Option A because pools are organised
groups of investors who work together to buy the shares of
particular corporations in order to induce a rise in the price of
shares.
Explanation of incorrect options Option B is incorrect because churning involves the placing of
buy and/or sell orders for shares to artificially increase the market
turnover for a stock and, in turn, an activity-driven price increase for
the stock.
Option C is incorrect because a cartel operation involves a contract,

agreement or understanding between a group of competitors
attempting to restrict competition in a relevant market.
Option D is incorrect because insider trading involves using insider

information to make investment decisions.
_________________________________________________________________________________
25. ‘Development that meets the needs of the present world without compromising the ability of future
generations to meet their own needs.’
This is a definition of
A sustainable development.
B environmental development.
C financial development.
D economic development.

Explanation of correct option The correct answer is Option A as sustainable development is
development that meets the needs of the present world without
compromising the ability of future generations to meet their own
needs.
Explanation of incorrect options Options B, C and D are incorrect as the definition does not relate to
financial, economical or environmental development.
_________________________________________________________________________________
26. Which one of the following explains why organisations might be motivated to provide social and
environmental information?
A to ensure stock markets reflect all relevant information
B to demonstrate that management has been effective in managing resources
C to demonstrate that agents are behaving in accordance with the interests of principals
D to ensure an organisation is operating within the context of other firms’ behaviours

Explanation of correct option The correct answer is Option D because under institutional theory,
organisations might provide social and environmental information to
demonstrate that they are operating within the expectations of the
industry within which they operate.
Explanation of incorrect options Option A is incorrect because stock markets focus more on the
provision of financial information than social or environmental
information.
Option B is incorrect because this is the basis of stewardship

theory (i.e. management primarily provides financial information to
capital (debt and equity) providers to demonstrate accountability for
efficiently managing their capital contributions). This is a narrower
rationale compared to what might motivate an organisation to
provide social and environmental information.
Option C is incorrect because this is the basis of agency theory

where shareholders (or debtholders) are the principals and
boards are their agents. By contrast, the provision of social and
environmental information is driven more by wider relationships
between an organisation and its stakeholders.
_________________________________________________________________________________
27. Which one of the following represents a mandatory corporate obligation in relation to reporting
environmental risks?
A the social contract
B United Nations Global Compact
C operating and financial view in a directors’ report
D International Accounting Standards Board (IASB) Conceptual Framework for Financial

Reporting 2010 (Conceptual Framework)

Explanation of correct option The correct answer is Option C because the operating and financial
review required to be included in a directors’ report (prepared under
s. 299A(1) of the Corporations Act 2001 (Cwlth)) should include a
discussion about environmental risks.
Explanation of incorrect options Option A is incorrect because a social contract is an implied (i.e. not
official) agreement between an organisation and society. Hence, it
is not a mandatory corporate obligation but rather a set of societal
expectations.
Option B is incorrect because the United Nations Global Compact is

a voluntary initiative rather than a mandatory corporate obligation.
Option D is incorrect because the IASB Conceptual Framework

focuses on financial reporting rather than environmental matters.
_________________________________________________________________________________
28. Which one of the following sections of an annual report includes mandatory social and
environmental reporting requirements?
A financial statements
B corporate governance information
C chair and chief executive officer (CEO) joint report
D director’s declaration and independent auditor’s report

Explanation of correct option The correct answer is Option B. ASX corporate governance
recommendations are typically covered in the corporate
governance information section of an annual report. Specifically,
Section 299A and Section 296 of the Corporations Act 2001 (Cwlth)
are typically covered in the director’s report and the notes to the
financial statements, respectively.
Explanation of incorrect options Options A, C and D are incorrect because mandatory social
environmental reporting requirements are not typically covered in
any of these sections of an annual report.
_________________________________________________________________________________
29. Which one of the following can explain why an entity volunteers to provide non-mandatory
information?
A true and fair view
B enlightened self-interest
C Emissions Reduction Fund
D National Pollutant Inventory (NPI)

Explanation of correct option The correct answer is Option B because this perspective argues
that organisations may provide non-mandatory information (e.g.
corporate social responsibility (CSR) information) when it is in their
own interest to provide such information.
Explanation of incorrect options Option A is incorrect because the requirement to provide a true
and fair view is the basis for mandatory financial reporting—for
example, under the Corporations Act 2001 (Cwlth).
Option C is incorrect because this fund was created by the

Australian Government to provide incentives for businesses to
reduce emissions, rather than being the basis for non-mandatory
reporting.
Option D is incorrect because the NPI is the basis for a mandatory

reporting requirement rather than the provision of non-mandatory
information.
_________________________________________________________________________________
30. Run Inc. (Run) is a multi-national company that manufactures sports equipment. The company
fulfils all mandatory reporting requirements but does not provide non-mandatory environmental
reporting.
Which one of the following statements describes the most important reason for Run to provide
non-mandatory environmental reporting?
A to follow what is considered current practice
B to promote awareness of pending regulatory requirements
C to make the company’s brand more appealing to consumers
D to demonstrate the ability to be both profitable and environmentally responsible

Explanation of correct option The correct answer is Option A. Because these voluntary
requirements have become commonplace, a corporation that fails
to provide the non-mandatory reports will appear to be out of sync
with industry standards.
Explanation of incorrect options Option B is incorrect because the company has no obligation to
promote awareness of regulations, pending or otherwise.
Option C is incorrect because non-mandatory environmental

reporting will have little impact on the end customer’s brand
awareness.
Option D is incorrect because demonstrating this ability is not a

significant reason to provide the non-mandatory reports.
_________________________________________________________________________________
Section B—Extended-response questions

This section consists of Questions 31–33. These questions all relate to Case 1. This section is
worth a total of 12 marks.
Ensure that you write your answers in the corresponding space provided for each question.
Allocate approximately 36 minutes to Section B.
Case 1 (12 marks)
Sky-high ambitions
LLE Ltd (LLE) was established 15 years ago in Sydney and provided construction services to
property developers. Because of the company’s extensive use of cranes, the nature of LLE’s
business has since evolved to include importing and assembling cranes for use on building sites.
Some of these cranes are used by LLE, while others are sold to property developers who employ
their own workforces to operate the cranes.
LLE’s board currently consists of five people: Brian Long, the current chair; three directors, who were
the original founders; and Winnie Leung, who joined LLE’s board three years ago as a non-executive
director. Brian has a 12 per cent equity stake in LLE; the three original founders each hold a 10 per
cent equity share; and the general public holds 58 per cent. Winnie does not have an equity interest
in the firm.
Lately LLE has experienced challenging financial times due to several factors. These include
rising labour costs on construction sites, a sharp decline in the demand for new apartments, and a
weakening Australian dollar that has increased the cost of importing crane components. All of these
issues have led to LLE holding excessive stock of crane parts.
To counter these financial difficulties, Brian decided that drastic action was necessary. He therefore
sold some excess crane parts to his wife’s property development company. Brian advised Winnie of
this sale at a social lunch. Brian explained that, as the sale was done at market value, he did not think
it was necessary to notify other board members, even though LLE’s constitution provides that related
party transactions can only be undertaken with a majority of the board’s approval.
Another strategy devised by Brian to stimulate LLE’s business was to sell crane parts as well
as assembly services at a discount to his preferred property developers. This was a particularly
successful strategy in lifting LLE’s revenues, with one developer reciprocating the favour by agreeing
to build Brian’s new holiday home at a significant discount. Brian did not disclose this benefit to
LLE’s board as he considered the benefit of his strategy to LLE’s business to outweigh any personal
considerations.
Additionally, Brian devised a strategy where arrangements were made with other crane importers
and assemblers who were also experiencing financial difficulties due to the construction downturn.
They agreed to concentrate on geographic areas in which each individual business was the strongest.
This strategy enabled each company to cut operating costs relating to geographic areas where they
were the weakest. Brian also arranged for the companies to liaise with each other on acceptable
prices at which they would quote customers for crane assembly in order to maintain profit margins
in the industry. These strategies were endorsed by the other LLE directors.
LLE’s advertising brochures claimed their assembled cranes were subjected to all current Australian
safety tests. However, over the past six months there have been several accidents arising from
the use of the cranes, which has resulted in serious injuries to LLE’s employees and to some of its
customers. Investigating workplace accident officers have reported that the cranes did not meet
Australian standards when subjected to heavy loads and when operating in strong winds.
Employees had previously raised such safety concerns with LLE’s senior management, but their
concerns were not taken seriously and the employees did not want to risk losing their positions by
making further complaints. LLE’s procedures were unclear as to how employee safety issues should
be dealt with. There is no information published on its intranet site or occupational health and safety
notice boards, and there have been no regular occupational health and safety meetings between
senior management and employees. LLE’s annual report was also silent on employee issues.
31. With reference to case facts, examine two (2) ways in which Brian has breached his statutory
duties as a director of LLE (maximum 2 marks). Provide one (1) recommendation for each breach
as to what the company could have done to prevent that breach (maximum 2 marks).
(4 marks)
32. Explain how LLE has breached the OECD Principles of Corporate Governance 4 and 5 in relation
to its employees. Your answer should clearly identify two (2) sub-principles (one for each of
Principles 4 and 5), and explain what the breach consists of, with reference to case facts.
(4 marks)
33. With reference to case facts, examine two (2) ways LLE has breached competition laws and
provide two (2) recommendations for how LLE could have prevented these breaches.
(4 marks)
Ensure that you write your answers in the corresponding space provided for each question
on the following pages.
31. With reference to case facts, examine two (2) ways in which Brian has breached his statutory
duties as a director of LLE (maximum 2 marks). Provide one (1) recommendation for each breach
as to what the company could have done to prevent that breach (maximum 2 marks).
(4 marks)
Relevant statutory duties breached by Brian include:
Duty breached and supporting case fact Recommendation to prevent breach

Avoid conflicts of interest 1. LLE should have had and enforced a policy on
1. Brian had a conflict of interest in securing a declaring potential conflicts of interest to the
discount on the construction cost of his new board. This policy should have required obtaining
holiday home in return for selling crane parts and majority approval and excluding any director
assembly services at below market value to the experiencing the conflict from the decision-
construction company that would build Brian’s making process before proceeding with the
holiday home. proposed transaction.
OR OR
2. Brian sold the crane parts to his wife’s company. 2. LLE could have provided training to the directors
This is a related-party transaction, and therefore to inform them on how a conflict of interest is
Brian had a conflict between his concerns for his identified and what steps should be undertaken
wife and his concerns for LLE. when such a conflict arises.
Act in the best interests of the corporation 1. As a matter of policy, LLE could have required
1. Brian failed to act in the best interests of LLE by directors to always submit operational equipment
obtaining a personal discount on the construction sales made at a discount to market value to a
cost of his new holiday home (not disclosed board decision in a formal meeting.
to LLE) to the detriment of LLE (as it failed to
receive full market value on the sale of the
cranes).
OR OR
2. Brian failed to act in the best interests of LLE by 2. LLE could have put in place a policy on directors
selling the cranes in exchange for a discount on receiving bribes or gifts and benefits above a
the construction cost of his holiday home. In this certain value.
way, Brian diverted benefits of the transaction to
himself instead of the company.
OR OR
3. Brian failed to act in the best interests of LLE as 3. LLE could have had a compliance program that
a result of engaging in cartel conduct together included training directors on identifying legal
with other businesses in the same industry. By issues and avoiding legal risks to the company.
agreeing to allocate different geographic areas
to each business for the purpose of exercising
monopoly, they breached competition laws, thus
potentially attracting legal action and penalties for
the company.
Duty breached and supporting case fact Recommendation to prevent breach

Exercise powers for a proper purpose LLE could have provided governance training and
LLE’s constitution states that related-party mentoring to the directors to educate them on
transactions can be undertaken provided that a the scope and limits of their powers under LLE’s
majority of LLE’s board approves. Although Brian constitution.
considered that the sale of crane parts to his
wife’s company was in LLE’s best interests as the
transaction was at market value, Brian only informally
advised Winnie of the sale rather than obtaining the
approval of a majority of LLE’s board. Hence, Brian
acted outside his powers.
OR
Brian failed to properly exercise his powers as a

director of LLE as a result of engaging in cartel
conduct (allocating geographic territories and price
fixing) together with other businesses in the same
industry.
Mark allocation:
• 1 mark for examining each relevant statutory duty breached provided this is supported by
a relevant case fact (maximum 2 marks)
• 1 mark for each recommendation for how these breaches could have been avoided
(maximum 2 marks)
32. Explain how LLE has breached the OECD Principles of Corporate Governance 4 and 5 in relation
to its employees. Your answer should clearly identify two (2) sub-principles (one for each of
Principles 4 and 5), and explain what the breach consists of, with reference to case facts.
(4 marks)
OECD principles breached by LLE include:
Principle and sub-principle breached Supporting case fact and reason for breach
Principle 4: The role of stakeholders in corporate The employees of LLE are working with unsafe
governance cranes that have failed safety inspections. The
employees have a right to a safe workplace, but
4B. Where stakeholders’ interests are protected by the directors have breached the law to provide a
law the stakeholder should have the opportunity to safe workplace and have breached the OECD sub-
obtain effective redress for violation of their rights. principle 4B because there are no procedures in
place for the employees to question the management
about their safety.
Principle 4: The role of stakeholders in corporate There are no regular meetings between senior
governance management (as the board’s agent) and employees
to facilitate employee participation in matters such as
4C. Mechanisms for employee participation should employee safety.
be permitted to develop.
Employees are also not provided with access
to information regarding their safety, such as a
company intranet site, emails or an occupational
health and safety notice board.
This is a breach of 4C because absence of these

resources does not allow for employee participation
to develop.
Principle 4: The role of stakeholders in corporate The employees are not comfortable reporting health
governance and safety issues to the management as their
concerns are overlooked, and they are worried about
4E. Stakeholders, including individual employees losing their jobs if they persist in reporting the unsafe
and their representative bodies, should be able to cranes. As there is no avenue or procedure for the
freely communicate their concerns about illegal or employees to contact the board and voice their
unethical practices to the board and the competent concerns, LLE is in breach of sub-principle 4E.
public authorities and their rights should not be
compromised for doing this.
Principle 5: Disclosure and transparency LLE does not provide access to information regarding
(5A) Disclosure should be made of material employee safety on its intranet site, occupational
information on: health and safety noticeboards or annual report.
• foreseeable risk factors (5A.7) Also, LLE does not have clear procedures as to how
• issues regarding employees and other employee safety issues should be dealt with. This
stakeholders (5A.8) breaches 5A because material information regarding
crane safety (a foreseeable risk factor directly
relevant to employees) is not disclosed.
Mark allocation:
• 1 mark for identifying each sub-principle breached (maximum 2 marks)
• 1 mark for each explanation of the breach and supporting case fact (maximum 2 marks)
33. With reference to case facts, examine two (2) ways LLE has breached competition laws and
provide two (2) recommendations for how LLE could have prevented these breaches.
(4 marks)
Competition laws breached by LLE include:
Competition laws breached Supporting case fact Recommendations

Cartel conduct involving an Brian devised a strategy (which Given that the board of directors
arrangement or understanding was endorsed by the other seems to have endorsed the
between competitors to allocate directors of LLE) with other cartel behaviour, LLE should have
markets among themselves. crane importers and assemblers exercised due diligence when
This conduct is prohibited under to distribute their operations to nominating board members,
the Australian Competition and geographic areas in which each paying specific attention
Consumer Act 2010 (Cwlth). was the strongest. This is a form to selecting directors with
of cartel conduct because it appropriate knowledge of the law
effectively allocates geographic and who were prepared to act with
areas among competitors, integrity in all circumstances.
facilitating their monopoly
advantage in each region. OR
Cartel conduct in the form of an Brian devised a strategy (which
LLE should have implemented
arrangement or understanding was endorsed by the other
policies and procedures (including
between competitors to fix prices. directors of LLE) with other crane
training) to ensure compliance
This conduct is prohibited under importers and assemblers to liaise
with competition law with regard
the Australian Competition and with each other on acceptable
to avoiding cartel conduct, and
Consumer Act 2010 (Cwlth). prices at which they would quote
it should have ensured these
customers for crane assembly in
procedures were audited and
order to maintain profit margins in
reviewed regularly.
the industry.
Mark allocation:
• 1 mark for examining each breach of competition laws provided it is also accompanied by
a relevant case fact (maximum 2 marks)
• 1 mark for each recommendation for how these breaches could have been prevented
(maximum 2 marks)
END OF THE EXAM PRACTICE QUESTIONS

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Exam Practice

ETHICS AND GOVERNANCE

How to assess your multiple-choice questions

How to assess your extended-response questions

Total your marks

Section A—Multiple-choice questions

Allocate approximately 60 minutes to Section A.

Correct answer option B

Option C is incorrect because this attribute is part of the market

Option D is incorrect because where enlightened self-interest

A incorporation of ethical values into decision-making

B application of technical skills to structured problems

C choosing an outcome that best meets the needs of clients

D acquisition of knowledge through a formal educative process

Correct answer option A

Option C is incorrect because the application of professional

Option D is incorrect because while the acquisition of knowledge

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

Correct answer option B

Options C and D are incorrect because in the traditional concept of

A Education requirements are set by government.

B Membership requirements are set by government.

C Accounting and auditing rules are set by government bodies.

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

Correct answer option C

Option B is incorrect because under the co-regulatory model for the

Option D is incorrect because under the co-regulatory model for

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

A evaluating the internal controls of a business

B formulating the financial direction of a business

C ensuring a business generates sufficient cash flows

D ensuring the board of a business is functioning efficiently

Correct answer option A

Option C is incorrect because ensuring a business has sufficient

Option D is incorrect because ensuring the efficient functioning

B assurance and audit

C internal audit services

Correct answer option A

Option C is incorrect. The internal audit services public practice role

Option D is incorrect. The financial management public practice role

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

A the moral principles that guide how a business behaves

B the customs and shared attitudes of members of a profession

C the principles by which professionals should serve the public interest

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

Correct answer option C

Option B is incorrect because it focuses inwardly on the customs

Option D is incorrect because following laws does not necessarily

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

B direct investigation of all discrepancies

C decisions that respect the organisational culture

D the application of relevant experience to fulfil all client requests

Correct answer option A

Option C is incorrect because allowing an organisation’s culture to

Option D is incorrect because the accountant’s ethical responsibility

Correct answer option A

Option C is incorrect because utilitarianism relates to acting out of

Option D is incorrect because ethics of rights relates to one’s right

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

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

Correct answer option D

Option B is incorrect because the value of the gift is trivial and

Option C is incorrect because, as outlined in Option D, there are

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

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