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9706 · 3.2.2

Ethical Considerations — practice questions

Practice and worked examples for 9706 Ethical Considerations. Short previews only — attempt the full question in MarkScheme against the official scheme.

Worked example 1

You are a management accountant at Innovate Ltd. The company's profit target for bonus purposes is $500,000. The current profit forecast is $480,000. The Financial Controller has asked you to reduce the provision for doubtful debts from 5% to 2% of trade receivables, which stand at $1,000,000. There has been no significant change in customer payment patterns. Advise the management accountant, with reference to ethical principles and calculating the financial impact of the request.

Show solution outline
  1. Calculate the financial impact:
    • Current provision: $1,000,000 * 5% = $50,000
    • Proposed provision: $1,000,000 * 2% = $20,000
    • Reduction in expense (and increase in profit): $50,000 - $20,000 = $30,000
    • Revised profit forecast: $480,000 + $30,000 = $510,000. This now exceeds the bonus target.
  2. Identify Ethical Principles Breached:
    • Integrity: Making this change without justification would be dishonest and misleading to stakeholders who rely on the financial statements.
    • Objectivity: The accountant's professional judgement would be compromised by the undue influence (intimidation threat) from the Financial Controller. The decision would not be based on evidence but on achieving a bonus.
    • Professional Competence and Due Care: Changing an accounting estimate without a valid basis is not acting with due care and misrepresents the company's true financial position.
  3. Recommended Course of Action:
    • The management accountant should not make the adjustment.
    • They should explain to the Financial Controller that the change is not justifiable and would breach ethical principles.
    • If pressure continues, the issue should be escalated to the audit committee or a non-executive director. Seeking advice from a professional body's ethics helpline would also be appropriate.

Worked example 2

Kai is an accountant in practice preparing the year-end financial statements of a client, Zeta Ltd. The managing director of Zeta Ltd offers Kai two expensive tickets to a major sports event and says he hopes the accounts will 'look strong' for the bank.

Identify the ethical principles at risk and explain what Kai should do. [5 marks]

Show solution outline
  1. Objectivity is at risk. Objectivity means not allowing bias, a conflict of interest or the undue influence of others to override professional judgement. Accepting a valuable gift creates a self-interest threat: Kai may be less willing to challenge the client's figures for fear of losing the benefit or the client.
  2. Integrity is at risk. Integrity means being straightforward and honest. If the accounts were made to 'look strong' when the evidence does not support it, Kai would be knowingly associated with misleading information.
  3. Who is affected. The bank will rely on the financial statements when it decides whether to lend. Figures that are too favourable could lead it to make a poor decision.
  4. Recommended course of action:
    • Decline the tickets, politely, and record that the offer was made.
    • Prepare the financial statements on the evidence, whatever the client hopes they will show.
    • Report the offer to a senior colleague, following the firm's procedures. If the pressure continues, seek advice from the professional body.
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