CPA Australia Ethics and Governance M4 (Knowledge Equity Questions - CONSOLIDATED)
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CPA Australia
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CPA Australia
It can be a pain to click into Knowledge Equity, fumbling to remember which question it was that you wanted to do some extra revising on, especially during the last-minute revision period. Hence, To provide a better overview of my revision process, I have consolidated all the questions + answers fr...
Module 4: Governance in Practice (KE Questions) 3. How should a non-executive director be remunerated?
1. Which of the following indicate a person who can initiate A. To the extent of the shares they hold and the benefit that may
the two-strike rule? arise from an increased share price
B. According to their performance levels within the company
A. A shareholder holding 45 per cent of the shares in an entity. C. On an incentive basis to retain them as a director
B. A senior manager who holds 2 per cent of the shares in the D. On the outcomes of the remuneration committee
entity.
C. A board director who holds 51 per cent of the shares in the Answer:
entity. A. To the extent of the shares they hold and the benefit that
D. A junior employee who is considering buying shares of his may arise from an increased share price
employing entity. A is Correct (P 220). Given that it is a non-executive director,
remuneration can only be based on the shares they hold and not
Answer: for performance or to incentivise.
A. A shareholder holding 45 per cent of the shares in an
entity. Module: 4 > Part: A > 4.2 Diversity - fairness and performance >
Only eligible shareholders can initiate the two-strike rule. Eligible Page: 220
shareholders are those shareholders who are not employed in a
senior position within the company. 4. What issue did the Enron case highlight for auditors?
A is the only option that satisfies the criteria for eligible A. That audit work needs to be reviewed more regularly
shareholders. B. The lack of compliance with audit standards
C. The loopholes within the regulatory process
B and C are incorrect because people are employed in the entity D. The importance of auditor independence where fees for
in senior positions. services are material
D is incorrect as the person is not a shareholder Answer:
D. The importance of auditor independence where fees for
Module: 4 > Part: A > 4.1 Mitigating the risk of financial failure > services are material
Page: 214 D is correct (P227) Enron was been billed $52 million for audit
services and $27 million for non-audit services and was Arthur
2. Which of the following relating to the resolution to spill the Andersen's largest client therefore there is a threat to
board is correct? independence as you become dependent on the fees given the
size.
A. 25 per cent of eligible shareholders need to vote in favour of
the spill vote. Module: 4 > Part: A > 4.2 Diversity - fairness and performance >
B. 50 per cent of eligible shareholders need to vote in favour of Page: 220
the spill vote.
C. 25 per cent of all shareholders need to vote ‘no’ to the 5. What is earnings management?
remuneration report. A. Monitoring when and how customers pay their accounts
D. 50 per cent of all shareholders need to vote ‘no’ to the B. Monitoring the earning potential of the business or corporation
remuneration report. C. Deferring income to a later period or bringing income forward in
the financials for a better financial result
Answer: D. Excessive remuneration earned by managers or senior
B. 50 per cent of eligible shareholders need to vote in favour executives to retain high quality skills
of the spill vote.
B is correct because once the two-strike rule has been initiated Answer:
(which is achieved by 25% of eligible shareholders voting ‘no’ to C. Deferring income to a later period or bringing income
the remuneration report in year 1 and year 2), 50% of eligible forward in the financials for a better financial result
shareholders need to vote in favour of the spill. C is correct (P 225). Also called "window dressing". This presents
the company's financials in a misleading way that looks more
Module: 4 > Part: A > 4.1 Mitigating the risk of financial failure > favourable to stakeholders and is contrary to what directors are
Page: 214 required to do according the Corporation act.
Module: 4 > Part: A > 4.2 Diversity - fairness and performance >
Page: 225
6. There have been many factors that have led to corporate
governance failure. The GFC highlighted a number of lessons
for governance.
Which of the following is a lesson taken from the GFC?
A.The inadequacy of computer models
B. Boards must approve strategy
C. The risk appetite of the company
D. The ability of boards to establish suitable mechanisms for
monitoring implementation of strategy
, annual general meetings of the corporation. This is the best way
Answer: for shareholders to be involved in corporate governance
D. The ability of boards to establish suitable mechanisms for processes.
monitoring implementation of strategy
A is incorrect because shareholders in a listed corporation may
D is correct (P 209). It is the boards responsibility to monitor that take an active interest in their shareholding in a number of ways
the strategy it has envisioned for the company is being put in — based on information made available to shareholders.
place the only way to do this is by establishing tools or However, this information would not permit a shareholder to take
mechanisms on which to measure this. an active role in the management of the corporation. This is
exactly as the law provides because shareholders elect a board of
Module: 4 > Part: A > 4.2 Diversity - fairness and performance > directors that manages on their behalf, including through the
Page: 225 selection of executives and the delegation of powers to those
executives. There would be chaos if every shareholder in a listed
7. In Australia what is the only way a director of a public corporation could actively manage the company. In small (non-
company can we removed before the expiry of their term? listed) corporations, it is common for shareholders to become
involved in management.
A. At a meeting of the senior executives
B. At a general meeting of the shareholders C is incorrect. In selling their shares, shareholders remove
C. At a general meeting of the directors themselves from the organisation and thus remove their capacity
D. On retirement of another board member to influence the organisation’s governance.
Answer: D is incorrect because shareholders will not normally have any
B. At a general meeting of the shareholders ability to overrule board decisions, as boards make decisions
B is correct (P 213). In Australia the removal of a director before where empowered and normally do not make decisions where
term can only be done by a shareholder's vote at a general shareholders have the right to vote. Where the board is not
meeting. empowered to decide a matter, then it recommends shareholders
should vote in a certain way at general meetings.
Module: 4 > Part: A > 4.1 Mitigating the risk of financial failure >
Page: 213 If the shareholders do not follow the board’s recommendations,
this is not to be regarded as the shareholders overruling the
8. What is Wilful Blindness? board. There is a mechanism by which shareholders can indicate
displeasure with the board by way of what is called a non-binding
A. A formal legal term in Australian law vote. This is most apparent in respect of executive remuneration,
B. A term included in the UK Foreign and Corrupt Practices Act where shareholders can voice their dissent regarding the board’s
(1977) decisions on executive salaries. Though such non-binding votes
C. An issue linked to governance failure by shareholders indicate dissent, they may not necessarily change
D. It is the effective oversight of the company the salaries of executives — they could merely demonstrate that
the shareholders disagree at that time.
Answer:
C. An issue linked to governance failure Module: 4 > Part: C > 4.10 Representation > Page: 277
C is correct (P 210). It is where individuals avoid legal liability for a
wrongful act by making sure that they are unaware of the facts 10. In Australia, in common with most countries, which of the
making them liable (plausible deniability) and it is linked to following is specifically required by law to become a
governance failure. company director?
Module: 4 > Part: A > 4.1 Mitigating the risk of financial failure > A. To be fully certified as a qualified company director
Page: 213 B. To be a natural person of at least 16 years of age
C. To have specific qualifications in appropriate business
9. Which of the following would be the best way for a disciplines
shareholder (not being an institutional shareholder) to D. To be a person not currently disqualified from managing a
become involved in the corporate governance of a listed corporation
corporation in which they own shares?
Answer:
A. By taking an active interest and an active role in the D. To be a person not currently disqualified from managing a
management of the corporation corporation
B. By voting through proxy or by attendance at the general D is correct as you are not allowed to become a director if you
meetings of the corporation have been disqualified from managing a corporation.
C. By selling their shares on the market because the corporation A is incorrect because while boards would look for directors with
fails to pay dividends at an appropriate level appropriate experience and skills, there are no compulsory
D. By overruling board decisions, including through votes against certifications required.
the board in relation to non-binding shareholder votes B is incorrect because you must be a natural person of at least 18
years of age.
Answer: C is incorrect because while boards would look for directors with
B. By voting through proxy or by attendance at the general appropriate experience and skills, there are no specific
meetings of the corporation educational qualifications.
B is correct as it is appropriate for shareholders to vote by proxy Module: 4 > Part: A > 4.1 Mitigating the risk of financial failure >
(someone votes on their behalf as directed by the shareholder or Page: 208
with the permission of the shareholder) or by attendance at the
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