LAW Chapter 1 test Questions and
Complete Solutions Graded A+
Most ethics codes require accountants to act in "the public interest." Assume that a large, publicly
traded automobile manufacturer prepares financial statements that require restatement due to a
material error made by the company's accounting staff. What subcategories of "the public," such as
investors, were owed a duty of care by the company's accounting staff? - Answer: The company's
accounting staff clearly owes a duty of professional care to the company's existing stockholder, short-
term creditors, and long-term creditors. Other less obvious financial statement readers include
prospective investors, existing employees, prospective employees, and the employee's union.
Is it ethical to use a company credit card to make an online Internet purchase if you will reimburse your
employer? - Answer: No it is not unless the purchase is for company use.
What is Ethics? - Answer: -The principles, norms and standards of conduct governing an individual or
group
-Ethics: Rule imposed externally by an organization or by broader society
-Morals: rules are self-imposed rules
-The term morals and ethics are used interchangeably
What is the process of individual ethical decision-making behavior? - Answer: Moral Awareness - Ethical
Judgement - Ethical Behavior
Characteristics of Individuals: Individual Differences and Cognitive Biases
Characteristics of Organizations: Group and Organizational Pressures and Organizational Culture
- Both go into the process
A well-regarded accounting firm has a policy of giving a $1,000 commitment fee to brilliant freshman
accounting majors if they agree to not interview with named competitor firms while they are still
enrolled in school. Is this firm's policy ethical? - Answer: -A fervent believer in the economic benefits of
,voluntary market exchanges would support this policy. Both parties presumably are better off if they opt
to enter into such an agreement
-On the other hand, students are often desperate to satisfy their short-term needs for liquidity, and
some would view the firm's actions in offering such an agreement to be unconscionable, or
overreaching, and contrary to the best interests of the students exploring other employment
opportunities that might better suit their needs
Prescriptive - Answer: How people ought to make ethical decisions
Psychological - Answer: How people actually make ethical decisions
Practical - Answer: Decision making framework
AICPA Code of Professional Conduct: Principles - Answer: Responsibilities
Public Interest
Integrity
Objectivity and Independence
Due Care
Scope and Nature of Services
When the accountant advised Lou about whether Celebrity Loan Company was required to maintain a
workers' compensation policy, both parties were at a poker game. Did the accountant have a duty to
give accurate advice? - Answer: - An accountant always has a duty to give accurate advice. If the social
setting in which the question was posed was unsuitable for the rendition of professional advice, the
accountant should have deferred answering the question until the parties could meet in an office
setting.
- Assume that the accountant was not an expert workers' compensation insurance issues, but he wanted
to help out Lou, who was his client and friend.
Did the Accountant violate any Principles of the AICPA's Code of Professional Conduct? Which ones? -
Answer: Yes.
- Under the Responsibility Principle of the Code of Conduct, a CPA must demonstrate a commitment to
professionalism. Giving Serious business advice at a poker game is questionable.
, - Under the Due Care and Scope and Nature of Services Principles, a CPA has to exercise proper care and
limit the scope of his services to topics about which he is competent. The accountant admittedly had no
expertise in this area and should not have rendered any advice to his client.
Assume that the accountant gave his advice to Lou and never billed Lou for the accountant's services.
Would your answers above be different - Answer: No
-Accountants often answer quick emails or phone calls and do not explicitly charge for quick inquiries.
From a broader perspective, they factor these minor "no charge' situations into their billing rate for their
other services. The fact that there was no express charge for this advice is irrelevant.
Do you Believe that the accountant has an ethical duty to reimburse Lou? - Answer: Yes
-When a person acts carelessly, he has an ethical and legal responsibility to accept the consequences of
his actions.
How much do you believe that the accountant should pay to Lou? - Answer: -As of year-end, Year 1, it
was probable and estimable that the Loan Company was going to be liable for Jeff's medical bills. The
liability existed at year-end.
-Moreover, by the time that the accountant prepared the year-end balance sheet, Jeff had died and the
amount of his medical bills was known to be $688,000 liability, which would have reduced owners'
equity by this same $688,000 amount.
-Consequently, the deceased brother's one-half share of the owners' equity, and the resulting price paid
by surviving brother Lou, was too high price paid by surviving brother Lou, was too high by $344,000.
Lou is entitled to receive the $344,000 amount that he is overpaid.
Cognitive Moral Development
Level 1
Level 2
Level 3 - Answer: Level 1: Preconventional
External rules
-Stage !: Act purely out of self-interest. Will disobey rules as long as they can avoid punishment
-Stage 2: Others also have desires and punishment is proportionate
Complete Solutions Graded A+
Most ethics codes require accountants to act in "the public interest." Assume that a large, publicly
traded automobile manufacturer prepares financial statements that require restatement due to a
material error made by the company's accounting staff. What subcategories of "the public," such as
investors, were owed a duty of care by the company's accounting staff? - Answer: The company's
accounting staff clearly owes a duty of professional care to the company's existing stockholder, short-
term creditors, and long-term creditors. Other less obvious financial statement readers include
prospective investors, existing employees, prospective employees, and the employee's union.
Is it ethical to use a company credit card to make an online Internet purchase if you will reimburse your
employer? - Answer: No it is not unless the purchase is for company use.
What is Ethics? - Answer: -The principles, norms and standards of conduct governing an individual or
group
-Ethics: Rule imposed externally by an organization or by broader society
-Morals: rules are self-imposed rules
-The term morals and ethics are used interchangeably
What is the process of individual ethical decision-making behavior? - Answer: Moral Awareness - Ethical
Judgement - Ethical Behavior
Characteristics of Individuals: Individual Differences and Cognitive Biases
Characteristics of Organizations: Group and Organizational Pressures and Organizational Culture
- Both go into the process
A well-regarded accounting firm has a policy of giving a $1,000 commitment fee to brilliant freshman
accounting majors if they agree to not interview with named competitor firms while they are still
enrolled in school. Is this firm's policy ethical? - Answer: -A fervent believer in the economic benefits of
,voluntary market exchanges would support this policy. Both parties presumably are better off if they opt
to enter into such an agreement
-On the other hand, students are often desperate to satisfy their short-term needs for liquidity, and
some would view the firm's actions in offering such an agreement to be unconscionable, or
overreaching, and contrary to the best interests of the students exploring other employment
opportunities that might better suit their needs
Prescriptive - Answer: How people ought to make ethical decisions
Psychological - Answer: How people actually make ethical decisions
Practical - Answer: Decision making framework
AICPA Code of Professional Conduct: Principles - Answer: Responsibilities
Public Interest
Integrity
Objectivity and Independence
Due Care
Scope and Nature of Services
When the accountant advised Lou about whether Celebrity Loan Company was required to maintain a
workers' compensation policy, both parties were at a poker game. Did the accountant have a duty to
give accurate advice? - Answer: - An accountant always has a duty to give accurate advice. If the social
setting in which the question was posed was unsuitable for the rendition of professional advice, the
accountant should have deferred answering the question until the parties could meet in an office
setting.
- Assume that the accountant was not an expert workers' compensation insurance issues, but he wanted
to help out Lou, who was his client and friend.
Did the Accountant violate any Principles of the AICPA's Code of Professional Conduct? Which ones? -
Answer: Yes.
- Under the Responsibility Principle of the Code of Conduct, a CPA must demonstrate a commitment to
professionalism. Giving Serious business advice at a poker game is questionable.
, - Under the Due Care and Scope and Nature of Services Principles, a CPA has to exercise proper care and
limit the scope of his services to topics about which he is competent. The accountant admittedly had no
expertise in this area and should not have rendered any advice to his client.
Assume that the accountant gave his advice to Lou and never billed Lou for the accountant's services.
Would your answers above be different - Answer: No
-Accountants often answer quick emails or phone calls and do not explicitly charge for quick inquiries.
From a broader perspective, they factor these minor "no charge' situations into their billing rate for their
other services. The fact that there was no express charge for this advice is irrelevant.
Do you Believe that the accountant has an ethical duty to reimburse Lou? - Answer: Yes
-When a person acts carelessly, he has an ethical and legal responsibility to accept the consequences of
his actions.
How much do you believe that the accountant should pay to Lou? - Answer: -As of year-end, Year 1, it
was probable and estimable that the Loan Company was going to be liable for Jeff's medical bills. The
liability existed at year-end.
-Moreover, by the time that the accountant prepared the year-end balance sheet, Jeff had died and the
amount of his medical bills was known to be $688,000 liability, which would have reduced owners'
equity by this same $688,000 amount.
-Consequently, the deceased brother's one-half share of the owners' equity, and the resulting price paid
by surviving brother Lou, was too high price paid by surviving brother Lou, was too high by $344,000.
Lou is entitled to receive the $344,000 amount that he is overpaid.
Cognitive Moral Development
Level 1
Level 2
Level 3 - Answer: Level 1: Preconventional
External rules
-Stage !: Act purely out of self-interest. Will disobey rules as long as they can avoid punishment
-Stage 2: Others also have desires and punishment is proportionate
