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Chapter 05 - Audit Responsibilities and Accounting FraudChapter 05 Audit Responsibilities and Accounting Fraud Multiple Choice Questions 1. Deliberately underbidding for an audit engagement to obtain a client and secure more lucrative management advisory or consulting services is known as: A. Opinion shopping B. High-balling C. Low-balling D. Client shopping 2. One of the articles of professional conduct, due care, requires a member to discharge professional responsibilities with _______ and _______. A. Confidentiality and integrity B. Objectivity and ethics C. Standard morals and ethics D. Competence and diligence 3. Susie is an auditor with XYZ Audit firm. The Senior Audit member has told her that all fieldwork must be completed by the end of the week. Susie knows that corners have been cut and certain tests not completed due to the time constraints. The integrity of the firm could be compromised. What should Susie do? A. Do nothing. B. Talk with the chain of command of the client to see that her concerns are dealt with. C. Follow the chain of command of XYZ to see that her concerns are dealt with. D. Talk with a reporter from the Wall Street Journal. 5-1 Chapter 05 - Audit Responsibilities and Accounting Fraud 4. The expectations gap refers to: A. The space that exists between a train coming into the station and the platform used to board the train B. The difference between what the public expects an audit to uncover and what the profession believes is the purpose of an audit C. The difference between projected earnings based on analysts' expectations and actual earnings D. The difference between what the audit sets out to discover and what it actually does discover 5. Which of the following is an element of the introductory paragraph of an auditor's report? A. Identifies the type of opinion the auditor is giving B. Identifies the management's responsibilities for the statements C. Identifies audit testing and procedures used D. Identifies the generally accepted auditing standards followed in conducting the audit 6. Which of the following is not an element of the scope paragraph of the auditor's report? A. States the auditor's responsibility to express an opinion on the financial statements. B. States the audit provides reasonable assurance that the statements are free of material misstatement. C. States audit provides reasonable basis for the opinion. D. States the audit evaluates the overall financial statement presentation. 7. Typically, when a going concern issue exists the auditor should: A. Issue an unqualified opinion with an explanatory paragraph B. Explain the reasons for the going concern issue C. Indicate where management's plans to deal with the going concern are addressed D. All of the above 5-2 Chapter 05 - Audit Responsibilities and Accounting Fraud 8. Which of the following is the most likely reason for an auditor to issue a qualified opinion? A. Inability to gather sufficient relevant information to form the basis for the opinion B. Differences with management that lead to trust issues on the part of the auditor C. Going concern issue D. Difference of opinion with management on the application of generally accepted accounting principles 9. Adverse opinions are preceded by a separate paragraph that should contain all of the following except for: A. Substantive alternative treatments of GAAP B. Substantive reasons for the adverse opinion C. Principal effect of the adverse treatment on financial position and results of operations and cash flows D. All of the above should be included in explaining the basis for the adverse opinion 10. Under which of the following set of circumstances might the auditors disclaim an opinion? A. The financial statements contain a departure from generally accepted accounting principles, the effect of which is material B. There is a client scope restriction that precludes the auditors' compliance with generally accepted auditing standards C. There has been a material change between periods in the method of the application of accounting principles D. Differences with management that lead to trust issues on the part of the auditor 11. When would it be appropriate for an auditor to withdraw from an engagement? A. In order to avoid issuing an adverse opinion. B. When that auditor cannot observe the taking of inventory or is unable to confirm receivables. C. When the management cannot be trusted. D. When the auditor has overbooked too much work. 5-3 All of the above may create doubts about usefulness 5-4 .Chapter 05 . Whether the auditor was independent in conducting the audit D. Auditors do not examine all of the transactions B. Quality of professionals that perform an audit B. The required standards apply to all companies B. Whether the auditor obtained sufficient competent evidential matter to render an opinion 14. Language in the audit report relies on subjective evaluations such as what is meant by "reasonable" C. Transactions examined are based on materiality and risk assessment determinations D. Which of the following is true about PCAOB audit standards? A. Criteria for judging the quality of audit work C. Which of the following is not one of the reporting standards of GAAS that guides auditors in formulating the audit opinion? A. D. Consistency in the application of GAAP. B. The required standards apply to all not-for-profit entities 13. Which of the following summarizes the essence of field work standards of GAAS? A. Adequate disclosures exist in the statements. The required standards apply to all public companies only C. C. Whether the auditor reviewed the client's financial statements for adherence to GAAP 15. Criteria used to judge whether the audit has met quality requirements C. The standards that guide auditors in issuing the audit report D. The required standards apply to all privately held companies only D. Quality of professionals that perform an audit B.Audit Responsibilities and Accounting Fraud 12. Gathering sufficient audit evidence to warrant an opinion. Some critics claim the usefulness of the audit report is limited because: A. Which of the following summarizes the essence of general standards of GAAS? A. 16. The financial statements have followed GAAP. The illegal acts have a direct and immaterial effect on financial statement amounts D. The concept of materiality recognizes that some matters are more important for fair presentation of financial statements B. Which of the following is not a component of internal control? A. Information and communication systems C. Monitoring of controls D. An auditor's consideration of materiality is influenced by the auditor's perception of the need of the readers of the financial statements 18. Independence of the audit committee 20. Whether the auditor has been able to gather sufficient evidence to warrant the statement that the financial statements present fairly D. The auditors' determination of whether the financial statements "present fairly" is based on: A. The illegal acts have an indirect and material effect on financial statement amounts B. Whether the users are able to assess the reliability of the financial statements B. The auditor's responsibility with regard to illegal acts is greatest when: A. Illegal acts exist regardless of the effects on the financial statements 5-5 . Control environment B.Chapter 05 .Audit Responsibilities and Accounting Fraud 17. Whether the statements have been prepared in accordance with the same GAAP used from one year to another C. Materiality should be predictable from audit to audit so that the readers of financial statements know what constitutes materiality D. Which of the following is not correct about materiality? A. Materiality judgments are made in light of surrounding circumstances and necessarily involve quantitative and qualitative judgments C. The illegal acts have a direct and material effect on financial statement amounts C. Whether the accounting principles used are appropriate in the circumstances 19. Bring the matter to the attention of the SEC C. Management fails to correct for the error 25. Assess the impact of the illegal act on the auditor's opinion 22. Communicate to the audit committee both material and immaterial amounts of fraud that are detected C. An auditor concludes that a client has committed an illegal act that has not been properly accounted for or disclosed. Communicate to the SEC both material and immaterial amounts of fraud that are detected 5-6 . Client refuses to take the remedial steps deemed necessary by the auditors 23. The illegal act has a material effect on the financial statements B. The first step for an auditor who concludes an illegal act exists is to: A.Chapter 05 . Material or immaterial C. Bring the matter to the attention of the audit committee B. Material B. The auditors' responsibility to communicate findings with respect to fraud can best be summarized as: A. Communicate to the audit committee both material and immaterial amounts of fraud B. Auditor cannot reasonably estimate the effect of the illegal act on the financial statements D. Due to an illegal act D. Communicate to the SEC material amounts of fraud D. All of the above are additional requirements 24. The auditor should withdraw from the engagement if the A. Senior management and the board have not acted properly to correct for the act C. Auditors are responsible to detect and correct errors when they are: A. The failure to correct for the action is reasonably expected to warrant a departure from the standard audit report D. Auditor is precluded from obtaining sufficient competent evidence about the illegal act B. Illegal act has an effect on the financial statements that is both material and direct C. The Private Securities Litigation Reform Act imposes additional requirements on public companies reporting to the SEC and their auditors when: A. Assess the impact of the illegal act on the financial statements D.Audit Responsibilities and Accounting Fraud 21. An error is always an intentional act designed to deceive another party B. All of the following are in a position to commit fraud except for: A. Budget pressures C. 27. D.Audit Responsibilities and Accounting Fraud 26. The purpose of the fraud triangle is to identify: A. Top management who can override internal controls C. Desire to maximize the value of stock options B. The causes of when the audit opinion should be qualified. Materiality D. The difference between an error in the financial statements as compared to fraud is: A. Rationalization 28. Employees who have access to assets B. To identify the causes of when there may be intentional misstatements or omissions of amounts or disclosures in the financial statements. Which of the following is not part of the fraud triangle? A. Opportunity C. Meet financial analysts' earnings expectations D. Incentives B. External auditors who manipulate the amounts recorded in the financial statements D. Fraud is always an intentional act designed to deceive another party C.Chapter 05 . An error always leads to a qualification of the auditors' opinion D. Each of the following represents a pressure that might lead to fraud except for: A. C. B. All of the above are in a position to commit fraud 5-7 . Fraudulent financial reporting is always material in amount 29. Inadequate internal controls 30. To identify the causes of when there is a lack of independence in performing an audit. All of the above. Audit Responsibilities and Accounting Fraud 31. Crossing out the date of exercise on the option certificate and changing it to an earlier date when the stock price was lower B. All companies use aggressive accounting techniques. D. C. 33. Setting up special-purpose-entities to keep debt off Tyco's books D. We are correcting a temporary problem that will not exist in the future. B. D. All of the following tend to be rationalizations for fraud except for: A. Members of the audit committee are responsible for each of the following except for: A. Rendering an audit opinion after examining the entity's financial statements and internal controls 5-8 . Assessing whether management has set the appropriate ethical tone for the organization C.Chapter 05 . We need to protect the shareholders and keep the stock price high. The fraud at Tyco included each of the following acts except for: A. Evaluating management's identification of fraud risks B. Backdating options refers to: A. The employee will be fired unless s/he goes along with the fraud. Benefits given to certain members of the board of directors to secure their silence about the fraud B. Granting options to employees working for the company in years prior to the granting of the options D. The deliberate use of company assets for personal reasons. The deliberate overstatement of financial statements. Related party transactions that were not adequately disclosed 35. C. Changing the future exercise price to correspond market increases in the stock price 34. The deliberate omission of disclosures from the statements. All of the above. Corporate assets used by members of top management for personal purposes C. Changing the grant date of the options to lower the exercise price and reduce reported earnings C. Discussing with the external auditors financial reporting matters of concern D. 32. B. The misappropriation of assets refers to: A. Known and likely misstatements D. A minority of audit reports issued during the fraud period contained unqualified audit opinions 5-9 . The design and performance of audit procedures to respond to assessed risks B. Known and unknown misstatements B. Likely and unknown misstatements C. Elevation of importance of independent financial statement audits 37. The Committee of Sponsoring Organizations of the Treadway Committee (COSO) analyzed the financial reporting of public companies during the 1987-1997 periods when business failures due to accounting fraud were high and found that: A. The audit committee always sanctioned the fraud D. Top management was frequently involved in the fraud with the CFO being the person most frequently involved C. Whether the standards close the expectation gap C. The eight risk assessment auditing standards issued by the AICPA identify the following types of misstatements: A.Chapter 05 . Improvement of the quality and integrity of both internal controls over financial reporting and independent financial statement audits C. All material misstatements 39. The AICPA issued eight Statements on Auditing Standards (SAS 104-111) that address risk assessment with respect to: A. What is the motive behind the PCAOB Integrated Audit Concept? A.Audit Responsibilities and Accounting Fraud 36. Top management was frequently involved in the fraud with the CEO being the person most frequently involved B. The role and responsibilities of the audit committee in preventing fraud D. Improvement of the speed and reliability of both corporate financial reporting and independent financial statement audits D. All of the above 38. Elevation of importance of internal controls B. Which of the following statements is correct regarding auditor independence as stated by the AICPA in Rule 101? A. Evaluate whether management has accepted responsibility for the effectiveness of internal control B. C. Evaluate whether management asserts whether the controls are effective in correcting the material weakness C.Audit Responsibilities and Accounting Fraud 40. All were cited as reasons for the decline 42. Employees only 43. Evaluate whether management has conducted an audit of internal controls 41. Supervisor of an accountant D. A covered member's immediate family can have a direct financial interest in a client. D. 5-10 .Chapter 05 . Improved audits of financial statements B. Everyone but the people within the company B. B. A covered member can have a joint investment with a client. A study conducted of financial statement restatements in 2007 and 2008 indicated a decline in the number of restatements as a result of each of the following except for: A.4 requires that the external auditors should take each of the following steps when reporting on whether a material weakness still exists in the internal controls except for: A. One ethical dilemma for professional accountants is a conflict between the interests of the stakeholders. Who or what is a stakeholder? A. Improved reliability of internal controls C. Evaluate whether management has obtained sufficient evidence to support its assessment D. A covered member can have a direct financial interest in a client as long as it is not material and is disclosed properly. PCAOB Auditing Standard No. A more relaxed approach of the SEC regarding materiality and the need to file restatements D. A covered member involved in the audit of a bank can have an auto loan at the bank. People who are affected by the outcomes of decisions that are made C. Difference of opinion with management on a material application of accounting standards 48. Difference of opinion with management on earnings estimate of a material amount C. Qualified opinion C.Audit Responsibilities and Accounting Fraud 44. Under bidding. Which is not a link of the chain of command that the controller should inform of a material misstatement in the financial statements? A. B. Adverse opinion 47. Which of the following is considered a negative auditor's opinion? A. D. 45. C. Which of the following is an example of opinion shopping by a company? A. Option pricing. CFO 46. Changing auditors due to wanting desired accounting treatment C. Which of the following is a reason for an auditor to issue a qualified opinion? A. Low-balling. CEO C. Changing auditors due to the size of the audit firm 5-11 . Audit Committee of Board of Directors B. Standard opinion B. Changing auditors due to the quality of work by the auditors B.Chapter 05 . Changing auditors due to the size of the audit fees D. A. Unqualified opinion D. Difference of opinion with management on presentation of financial statements in the annual report B. If a company is seeking out views of different accounting firms until they find one with a desired accounting treatment. Hotline D. Difference of opinion with management on preferred accounting principles under GAAP D. it would be called ______. Opinion shopping. In which of the following circumstances would an adverse opinion be appropriate? A.Chapter 05 . 50. Five percent of net income C. The statements are not in conformity with generally accepted accounting principles regarding stock options plans. An uncertainty prevents the issuance of a standard unqualified opinion. To detect and report illegal acts that have an indirect and immaterial effect on financial statement amounts. D. Exercise of due care B. Risks of illegal acts 52. B. 5-12 . Risks of material misstatements due to fraud D. Which of the following is not true of "reasonable assurance"? A. To detect and report illegal acts that have an indirect and material effect on financial statement amounts. Absolute guarantee C. To detect and report illegal acts that have a direct and immaterial effect on financial statement amounts. Which of the following is not a consideration in determining a measure of materiality? A. What is the auditor's responsibility with regard to illegal acts? A. C. The auditor has been unable to obtain sufficient competent evidential matter. Followed GAAS 51. C. To detect and report illegal acts that have a direct and material effect on financial statement amounts. Appearance of independence D. The principal auditors decide to make reference to the report of another auditor who audited a subsidiary.Audit Responsibilities and Accounting Fraud 49. D. B. Strong internal control B. Because of the risk of material misstatement.Chapter 05 . Objective judgment B. Linkage between the risks of misstatement and the nature. Incorporate enhanced corporate governance into internal control principles. PCAOB Auditing Standard No. Incorporate enhanced internal control principles into enhanced corporate governance. Independent integrity D. D. Improving deployment of information technology 5-13 . Identifying risks of fraud D. The framework of COSO Enterprise Risk Management is to A. A more-in-depth sampling of evidence. C. timing. Enhancing risk response decisions B. Professional skepticism C. D. Seizing opportunities D. C. and extent of audit procedures. Professional skepticism about fraud C. A rigorous assessment of risk of material misstatement. Characteristics of fraud 54. 57. B.Audit Responsibilities and Accounting Fraud 53. an audit of financial statements in accordance with GAAS should be planned and performed with an attitude of A. Which of the following is not an element of COSO Enterprise Risk Management? A. Reducing operating surprises and losses C. 2 and eight risk assessment standards of AICPA require the auditor to do all but: A. B. Which of the following is not an area of fraud considerations detailed by SAS 99? A. Incorporate enhanced audit sampling procedures in the testing of internal controls. 55. Impartial conservatism 56. Incorporate enhanced audit sampling procedures in substantive testing. Assessing the impact of fraud B. A more in-depth understanding of the entity and environment. Kazweski & Dooktaviski B. Questions about the collectability of outstanding loans 5-14 . In the Imperial Valley Thrift & Loan case. Insufficient equity capital C. Marcus Yamabuto 61. Management does not have a stock option plan 59.Audit Responsibilities and Accounting Fraud 58. Issues related to a peer review of an audit are the subject matter of which case? A. Failure to maintain an internal control system sufficient to provide reasonable assurance that the financial statements were prepared in conformity with GAAP 60. The magnitude of loan losses B. Imperial Valley Thrift & Loan C. each of the following were reasons for the going concern issue except for: A. Obtained money or property by the use of untrue statements of material facts or omission of material information C.Chapter 05 . Misuse of company resources by members of top management D. Management's attitude toward aggressive financial statement reporting and its emphasis on meeting projected profit numbers would significantly influence an entity's control environment when A. each of the following allegations were made against the company except for the following: A. Audit Client Considerations D. In the General Electric case. Operating losses over an extended period of time D. The audit committee is active in overseeing the entity's financial reporting C. Internal auditors report to the audit committee B. Offered to sell company securities during the period when the company issued materially misleading financial statements B. Management is dominated by one shareholder with little other governance D. Delayed the of recognition of revenue into a later period than seemed justified C. All of the above 64. that was discussed in The Audit Report case contained each of the following deficiencies except for: A. The audit report on Sky Hook. Internal controls over operating activities D. The report failed to identify the comparative financial statements included in the audit C. The falsification of inventory amounts D. Issues that arise between the predecessor audit firm and the client C. The primary issue discussed in the Krispy Kreme case was: A. An unusual aspect of the Edvid case is that the company: A. Special purpose entities D. Inc. Use of "round trip" transactions to accelerate the recording of earnings C. The failure to render an opinion based on the audit 66. The Marcus Yamabuto case deals with issues related to: A. Premature revenue recognition B.Chapter 05 . The report was not addressed to the shareholders and/or the board of directors B. Accelerated the recording of revenue into an earlier period than seemed to be justified B. The Audit Client Consideration case deals with issues related to: A. Use of special-purpose-entities to keep debt off the books B. Franchise revenue accounting C. Internal controls over the making of doughnuts 63.Audit Responsibilities and Accounting Fraud 62. Going concern issues raised by previous auditors D. The failure to properly identify the auditing standards followed D. Acceptance of new clients B. All of the above 5-15 . All of the above 65. Deferred derivative losses on the balance sheet thereby inflating profits B. Sold derivatives to increase cash flows prior to bank financing D. Used derivatives to hide subprime loans C. 5-16 . The Committee of Sponsoring Organizations of the Treadway Committee (COSO) analyzed the financial reporting of public companies during the 1987-1997 periods when business failures due to accounting fraud were high. 70. Explain each of the three sides of the fraud triangle (SAS 99) with respect to how it contributes toward the possibility that fraud in the financial statements may be present. Fraudulent inflation of inventory to reduce losses on the income statement Essay Questions 69. Fraudulent recording of revenues on sales to customers B.Audit Responsibilities and Accounting Fraud 67. Fraudulent use of company resources by top management for personal purposes C. The primary accounting issue in the Royal Ahold case is: A.Chapter 05 . Fraudulent inflation of promotional allowances to increase operating income D. Describe the major findings of COSO with respect to financial statement fraud. All of the above 68. Fannie Mae's financial statements were investigated because of allegations that the company: A. and illegal acts. Differentiate between the auditors' responsibilities to detect errors. Materiality is one of the most difficult judgments to make in auditing financial statements. Explain the circumstances under which an auditor should give each of the following opinions: (a) Unqualified opinion (b) Unqualified opinion with an explanatory paragraph (c) Qualified opinion (d) Adverse opinion 72. 73. How would you assess the ethics of a company that has experienced each event with respect to motivation and the integrity of those who go along with such events? 5-17 .Chapter 05 . fraud. Explain what is meant by materiality and explain the basis for the auditor's assessment of whether there is a material misstatement in the financial statements.Audit Responsibilities and Accounting Fraud 71. How can an individual resist the temptation to become involved in fraud by possessing the characteristics of behavior included in each stage? 5-18 . Analyze each of those stages with respect to the three elements of the fraud triangle. Kohlberg's model addresses the stages of moral development a person might move through in developing a strong sense of ethics. What are the audit committee's responsibilities with respect to fraud and risk assessment? 77. 76.Chapter 05 . 75. In the Tyco fraud the corporate governance system completely broke down.Audit Responsibilities and Accounting Fraud 74. Explain the auditors' responsibilities to assess fraud including the role of professional judgment. Explain the failings in the corporate governance system at Tyco and how the Sarbanes-Oxley Act addresses those failings. Audit Responsibilities and Accounting Fraud 78. Currently he is doing review of rental property compliance testing completed by the staff accountants. Arty do and why? Use the ethical theory and ethical decision making model to discuss the situation. Mr. 79. 4 of the PCAOB to report on whether a previously reported material weakness still exists.Chapter 05 . To request more information from the client would cause massive delays and the manager is pressing hard for the information before the Christmas vacation. Describe the steps that auditors should take under Auditing Standard No. Arty works for Smile Accounting Firm as a senior accountant. 5-19 . He realizes that the staff accountants only tested two tenants per property instead of the required three by the audit program. What should Mr. Using the internal control framework from SAS 55. "An interest buyer has about the unsecured site and might get scared by the student complaints". Campus Fast is a new audit client. the business must meet highly ambitious earnings numbers. The driver has promised the family of the passenger that the company will make good on any expenses and admitted the company policy on repaying all traffic tickets. It has offered to pay any speeding or other moving violation tickets to its delivery drivers. One student is claiming that she had $12. Client Fast uses public Wi-Fi to place and deliver restaurant take out for students at the Up and Coming State University. 5-20 . The customer may pay via the Internet. Additionally. unsecured public Wi-Fi to take orders via the Internet. 2) The company guarantees fast delivery.Chapter 05 . who all happen to be members of the same student organization on campus. The business plan is to find a buyer or place an IPO of the company by graduation in two years. assess the internal control and risks of Campus Fast. are claiming that using Campus Fast has allowed their identity to be stolen. Campus Fast was founded by three highly ambitious MBA students at the university. Attorneys for the injured party are threatening to sue and publicize the situation. The passenger in the other car is in critical condition and the intensive care unit in the hospital. take a tour around the world and then start another company.000 of charges on her credit card to the unsecured Internet site of Campus Fast. Several students. Management plans to pay off the complaining students and keep the true liability off the balance sheet. The founders expect to pay off all student loans. 98. Unfortunately one of the drivers was involved in an accident due to running a red light. COSO and Enterprise Risk Management. The founders do not have enough cash to take care of this problem but are still trying to keep the situation from the auditors and potential buyer.Audit Responsibilities and Accounting Fraud 80. the company is dealing with two situations that the founders would like to keep from the auditors: 1) The company has been using free. In order for the business plan to work on the timeline for graduation. A. Susie is an auditor with XYZ Audit firm. 5-21 . The integrity of the firm could be compromised. Standard morals and ethics D. C. Talk with a reporter from the Wall Street Journal. What should Susie do? A. High-balling C. Do nothing. Confidentiality and integrity B. One of the articles of professional conduct. B.Chapter 05 . requires a member to discharge professional responsibilities with _______ and _______. Opinion shopping B. D. Deliberately underbidding for an audit engagement to obtain a client and secure more lucrative management advisory or consulting services is known as: A. Client shopping 2. due care. Susie knows that corners have been cut and certain tests not completed due to the time constraints. Talk with the chain of command of the client to see that her concerns are dealt with.Audit Responsibilities and Accounting Fraud Chapter 05 Audit Responsibilities and Accounting Fraud Answer Key Multiple Choice Questions 1. Objectivity and ethics C. The Senior Audit member has told her that all fieldwork must be completed by the end of the week. Low-balling D. Follow the chain of command of XYZ to see that her concerns are dealt with. Competence and diligence 3. Identifies the management's responsibilities for the statements C. Typically. Identifies the type of opinion the auditor is giving B. All of the above 5-22 . B. The expectations gap refers to: A. States the audit evaluates the overall financial statement presentation. The space that exists between a train coming into the station and the platform used to board the train B. Which of the following is an element of the introductory paragraph of an auditor's report? A. 7. The difference between what the public expects an audit to uncover and what the profession believes is the purpose of an audit C. Explain the reasons for the going concern issue C. when a going concern issue exists the auditor should: A. States audit provides reasonable basis for the opinion. Identifies audit testing and procedures used D.Audit Responsibilities and Accounting Fraud 4. Indicate where management's plans to deal with the going concern are addressed D. Which of the following is not an element of the scope paragraph of the auditor's report? A. Issue an unqualified opinion with an explanatory paragraph B. D. The difference between what the audit sets out to discover and what it actually does discover 5. The difference between projected earnings based on analysts' expectations and actual earnings D. States the auditor's responsibility to express an opinion on the financial statements. States the audit provides reasonable assurance that the statements are free of material misstatement. C. Identifies the generally accepted auditing standards followed in conducting the audit 6.Chapter 05 . Principal effect of the adverse treatment on financial position and results of operations and cash flows D. Substantive alternative treatments of GAAP B. B. The financial statements contain a departure from generally accepted accounting principles. There is a client scope restriction that precludes the auditors' compliance with generally accepted auditing standards C.Chapter 05 . Differences with management that lead to trust issues on the part of the auditor 11. Going concern issue D. C. When the management cannot be trusted. the effect of which is material B. When that auditor cannot observe the taking of inventory or is unable to confirm receivables. Difference of opinion with management on the application of generally accepted accounting principles 9. All of the above should be included in explaining the basis for the adverse opinion 10.Audit Responsibilities and Accounting Fraud 8. There has been a material change between periods in the method of the application of accounting principles D. 5-23 . Inability to gather sufficient relevant information to form the basis for the opinion B. Adverse opinions are preceded by a separate paragraph that should contain all of the following except for: A. Differences with management that lead to trust issues on the part of the auditor C. When would it be appropriate for an auditor to withdraw from an engagement? A. Substantive reasons for the adverse opinion C. In order to avoid issuing an adverse opinion. Which of the following is the most likely reason for an auditor to issue a qualified opinion? A. When the auditor has overbooked too much work. D. Under which of the following set of circumstances might the auditors disclaim an opinion? A. Language in the audit report relies on subjective evaluations such as what is meant by "reasonable" C. Adequate disclosures exist in the statements. Quality of professionals that perform an audit B. All of the above may create doubts about usefulness 5-24 . 16. The standards that guide auditors in issuing the audit report D. Whether the auditor obtained sufficient competent evidential matter to render an opinion 14. Which of the following summarizes the essence of field work standards of GAAS? A. The required standards apply to all privately held companies only D.Audit Responsibilities and Accounting Fraud 12. D. Auditors do not examine all of the transactions B. The required standards apply to all public companies only C. The required standards apply to all companies B. Which of the following summarizes the essence of general standards of GAAS? A. Gathering sufficient audit evidence to warrant an opinion. Consistency in the application of GAAP. Some critics claim the usefulness of the audit report is limited because: A. C. The required standards apply to all not-for-profit entities 13. Whether the auditor was independent in conducting the audit D. Quality of professionals that perform an audit B. Which of the following is true about PCAOB audit standards? A. Criteria for judging the quality of audit work C. B.Chapter 05 . Transactions examined are based on materiality and risk assessment determinations D. Criteria used to judge whether the audit has met quality requirements C. Whether the auditor reviewed the client's financial statements for adherence to GAAP 15. Which of the following is not one of the reporting standards of GAAS that guides auditors in formulating the audit opinion? A. The financial statements have followed GAAP. Chapter 05 .Audit Responsibilities and Accounting Fraud 17. Materiality judgments are made in light of surrounding circumstances and necessarily involve quantitative and qualitative judgments C. Monitoring of controls D. The auditor's responsibility with regard to illegal acts is greatest when: A. The illegal acts have a direct and immaterial effect on financial statement amounts D. Whether the statements have been prepared in accordance with the same GAAP used from one year to another C. Information and communication systems C. Control environment B. An auditor's consideration of materiality is influenced by the auditor's perception of the need of the readers of the financial statements 18. Which of the following is not a component of internal control? A. Illegal acts exist regardless of the effects on the financial statements 5-25 . Whether the users are able to assess the reliability of the financial statements B. Independence of the audit committee 20. The illegal acts have an indirect and material effect on financial statement amounts B. Whether the auditor has been able to gather sufficient evidence to warrant the statement that the financial statements present fairly D. The illegal acts have a direct and material effect on financial statement amounts C. Materiality should be predictable from audit to audit so that the readers of financial statements know what constitutes materiality D. Which of the following is not correct about materiality? A. The auditors' determination of whether the financial statements "present fairly" is based on: A. The concept of materiality recognizes that some matters are more important for fair presentation of financial statements B. Whether the accounting principles used are appropriate in the circumstances 19. Chapter 05 - Audit Responsibilities and Accounting Fraud 21. The first step for an auditor who concludes an illegal act exists is to: A. Bring the matter to the attention of the audit committee B. Bring the matter to the attention of the SEC C. Assess the impact of the illegal act on the financial statements D. Assess the impact of the illegal act on the auditor's opinion 22. An auditor concludes that a client has committed an illegal act that has not been properly accounted for or disclosed. The auditor should withdraw from the engagement if the A. Auditor is precluded from obtaining sufficient competent evidence about the illegal act B. Illegal act has an effect on the financial statements that is both material and direct C. Auditor cannot reasonably estimate the effect of the illegal act on the financial statements D. Client refuses to take the remedial steps deemed necessary by the auditors 23. The Private Securities Litigation Reform Act imposes additional requirements on public companies reporting to the SEC and their auditors when: A. The illegal act has a material effect on the financial statements B. Senior management and the board have not acted properly to correct for the act C. The failure to correct for the action is reasonably expected to warrant a departure from the standard audit report D. All of the above are additional requirements 24. Auditors are responsible to detect and correct errors when they are: A. Material B. Material or immaterial C. Due to an illegal act D. Management fails to correct for the error 25. The auditors' responsibility to communicate findings with respect to fraud can best be summarized as: A. Communicate to the audit committee both material and immaterial amounts of fraud B. Communicate to the audit committee both material and immaterial amounts of fraud that are detected C. Communicate to the SEC material amounts of fraud D. Communicate to the SEC both material and immaterial amounts of fraud that are detected 5-26 Chapter 05 - Audit Responsibilities and Accounting Fraud 26. The purpose of the fraud triangle is to identify: A. The causes of when the audit opinion should be qualified. B. To identify the causes of when there may be intentional misstatements or omissions of amounts or disclosures in the financial statements. C. To identify the causes of when there is a lack of independence in performing an audit. D. All of the above. 27. Which of the following is not part of the fraud triangle? A. Incentives B. Opportunity C. Materiality D. Rationalization 28. The difference between an error in the financial statements as compared to fraud is: A. An error is always an intentional act designed to deceive another party B. Fraud is always an intentional act designed to deceive another party C. An error always leads to a qualification of the auditors' opinion D. Fraudulent financial reporting is always material in amount 29. Each of the following represents a pressure that might lead to fraud except for: A. Desire to maximize the value of stock options B. Budget pressures C. Meet financial analysts' earnings expectations D. Inadequate internal controls 30. All of the following are in a position to commit fraud except for: A. Employees who have access to assets B. Top management who can override internal controls C. External auditors who manipulate the amounts recorded in the financial statements D. All of the above are in a position to commit fraud 5-27 Chapter 05 - Audit Responsibilities and Accounting Fraud 31. All of the following tend to be rationalizations for fraud except for: A. We need to protect the shareholders and keep the stock price high. B. All companies use aggressive accounting techniques. C. The employee will be fired unless s/he goes along with the fraud. D. We are correcting a temporary problem that will not exist in the future. 32. The misappropriation of assets refers to: A. The deliberate use of company assets for personal reasons. B. The deliberate overstatement of financial statements. C. The deliberate omission of disclosures from the statements. D. All of the above. 33. Backdating options refers to: A. Crossing out the date of exercise on the option certificate and changing it to an earlier date when the stock price was lower B. Changing the grant date of the options to lower the exercise price and reduce reported earnings C. Granting options to employees working for the company in years prior to the granting of the options D. Changing the future exercise price to correspond market increases in the stock price 34. The fraud at Tyco included each of the following acts except for: A. Benefits given to certain members of the board of directors to secure their silence about the fraud B. Corporate assets used by members of top management for personal purposes C. Setting up special-purpose-entities to keep debt off Tyco's books D. Related party transactions that were not adequately disclosed 35. Members of the audit committee are responsible for each of the following except for: A. Evaluating management's identification of fraud risks B. Assessing whether management has set the appropriate ethical tone for the organization C. Discussing with the external auditors financial reporting matters of concern D. Rendering an audit opinion after examining the entity's financial statements and internal controls 5-28 Known and unknown misstatements B. Improvement of the quality and integrity of both internal controls over financial reporting and independent financial statement audits C. The Committee of Sponsoring Organizations of the Treadway Committee (COSO) analyzed the financial reporting of public companies during the 1987-1997 periods when business failures due to accounting fraud were high and found that: A. Known and likely misstatements D. Elevation of importance of internal controls B.Chapter 05 . The audit committee always sanctioned the fraud D. Top management was frequently involved in the fraud with the CFO being the person most frequently involved C. The role and responsibilities of the audit committee in preventing fraud D. Improvement of the speed and reliability of both corporate financial reporting and independent financial statement audits D. Elevation of importance of independent financial statement audits 37. All material misstatements 39. Whether the standards close the expectation gap C. All of the above 38. Top management was frequently involved in the fraud with the CEO being the person most frequently involved B. The AICPA issued eight Statements on Auditing Standards (SAS 104-111) that address risk assessment with respect to: A. The eight risk assessment auditing standards issued by the AICPA identify the following types of misstatements: A. What is the motive behind the PCAOB Integrated Audit Concept? A. A minority of audit reports issued during the fraud period contained unqualified audit opinions 5-29 . Likely and unknown misstatements C.Audit Responsibilities and Accounting Fraud 36. The design and performance of audit procedures to respond to assessed risks B. Improved audits of financial statements B. PCAOB Auditing Standard No. Evaluate whether management has accepted responsibility for the effectiveness of internal control B. A study conducted of financial statement restatements in 2007 and 2008 indicated a decline in the number of restatements as a result of each of the following except for: A. One ethical dilemma for professional accountants is a conflict between the interests of the stakeholders. Improved reliability of internal controls C.Chapter 05 . 5-30 . B. People who are affected by the outcomes of decisions that are made C. All were cited as reasons for the decline 42. C. A covered member's immediate family can have a direct financial interest in a client. Evaluate whether management asserts whether the controls are effective in correcting the material weakness C. Evaluate whether management has conducted an audit of internal controls 41. Employees only 43. Evaluate whether management has obtained sufficient evidence to support its assessment D.Audit Responsibilities and Accounting Fraud 40.4 requires that the external auditors should take each of the following steps when reporting on whether a material weakness still exists in the internal controls except for: A. A more relaxed approach of the SEC regarding materiality and the need to file restatements D. Which of the following statements is correct regarding auditor independence as stated by the AICPA in Rule 101? A. A covered member can have a direct financial interest in a client as long as it is not material and is disclosed properly. D. A covered member involved in the audit of a bank can have an auto loan at the bank. Everyone but the people within the company B. Supervisor of an accountant D. Who or what is a stakeholder? A. A covered member can have a joint investment with a client. Changing auditors due to wanting desired accounting treatment C. Difference of opinion with management on a material application of accounting standards 48. B. Opinion shopping.Audit Responsibilities and Accounting Fraud 44. Changing auditors due to the size of the audit fees D. 45. Under bidding. CFO 46. Difference of opinion with management on earnings estimate of a material amount C. Which is not a link of the chain of command that the controller should inform of a material misstatement in the financial statements? A. Hotline D. A. Difference of opinion with management on presentation of financial statements in the annual report B. D. Adverse opinion 47. Low-balling. Changing auditors due to the size of the audit firm 5-31 . Unqualified opinion D. Option pricing. Audit Committee of Board of Directors B. C. it would be called ______. CEO C. Which of the following is considered a negative auditor's opinion? A. Changing auditors due to the quality of work by the auditors B.Chapter 05 . Which of the following is a reason for an auditor to issue a qualified opinion? A. If a company is seeking out views of different accounting firms until they find one with a desired accounting treatment. Standard opinion B. Which of the following is an example of opinion shopping by a company? A. Qualified opinion C. Difference of opinion with management on preferred accounting principles under GAAP D. D. What is the auditor's responsibility with regard to illegal acts? A. Followed GAAS 51. Which of the following is not a consideration in determining a measure of materiality? A. In which of the following circumstances would an adverse opinion be appropriate? A. Which of the following is not true of "reasonable assurance"? A. Absolute guarantee C. The statements are not in conformity with generally accepted accounting principles regarding stock options plans. 5-32 . B. B. 50. Risks of material misstatements due to fraud D. An uncertainty prevents the issuance of a standard unqualified opinion.Audit Responsibilities and Accounting Fraud 49. Risks of illegal acts 52. Strong internal control B. The auditor has been unable to obtain sufficient competent evidential matter. Exercise of due care B. C. To detect and report illegal acts that have an indirect and material effect on financial statement amounts. D. C. The principal auditors decide to make reference to the report of another auditor who audited a subsidiary.Chapter 05 . To detect and report illegal acts that have a direct and material effect on financial statement amounts. Five percent of net income C. Appearance of independence D. To detect and report illegal acts that have an indirect and immaterial effect on financial statement amounts. To detect and report illegal acts that have a direct and immaterial effect on financial statement amounts. Objective judgment B.Chapter 05 . Incorporate enhanced audit sampling procedures in substantive testing. B. Because of the risk of material misstatement. PCAOB Auditing Standard No. Incorporate enhanced audit sampling procedures in the testing of internal controls. D. The framework of COSO Enterprise Risk Management is to A. Reducing operating surprises and losses C. Linkage between the risks of misstatement and the nature. Assessing the impact of fraud B. Which of the following is not an element of COSO Enterprise Risk Management? A.Audit Responsibilities and Accounting Fraud 53. Seizing opportunities D. B. A rigorous assessment of risk of material misstatement. Incorporate enhanced internal control principles into enhanced corporate governance. Identifying risks of fraud D. Characteristics of fraud 54. an audit of financial statements in accordance with GAAS should be planned and performed with an attitude of A. Incorporate enhanced corporate governance into internal control principles. Which of the following is not an area of fraud considerations detailed by SAS 99? A. D. Impartial conservatism 56. Independent integrity D. 57. Improving deployment of information technology 5-33 . Enhancing risk response decisions B. A more in-depth understanding of the entity and environment. C. 2 and eight risk assessment standards of AICPA require the auditor to do all but: A. and extent of audit procedures. A more-in-depth sampling of evidence. Professional skepticism about fraud C. 55. timing. Professional skepticism C. C. Issues related to a peer review of an audit are the subject matter of which case? A. each of the following allegations were made against the company except for the following: A. The audit committee is active in overseeing the entity's financial reporting C. Management's attitude toward aggressive financial statement reporting and its emphasis on meeting projected profit numbers would significantly influence an entity's control environment when A. In the General Electric case. Offered to sell company securities during the period when the company issued materially misleading financial statements B. Marcus Yamabuto 61. Imperial Valley Thrift & Loan C. Management does not have a stock option plan 59. Kazweski & Dooktaviski B. each of the following were reasons for the going concern issue except for: A. Internal auditors report to the audit committee B. Insufficient equity capital C. Obtained money or property by the use of untrue statements of material facts or omission of material information C. In the Imperial Valley Thrift & Loan case. The magnitude of loan losses B.Chapter 05 .Audit Responsibilities and Accounting Fraud 58. Audit Client Considerations D. Management is dominated by one shareholder with little other governance D. Operating losses over an extended period of time D. Questions about the collectability of outstanding loans 5-34 . Misuse of company resources by members of top management D. Failure to maintain an internal control system sufficient to provide reasonable assurance that the financial statements were prepared in conformity with GAAP 60. Inc. The report failed to identify the comparative financial statements included in the audit C. The Marcus Yamabuto case deals with issues related to: A. Issues that arise between the predecessor audit firm and the client C. All of the above 5-35 . The report was not addressed to the shareholders and/or the board of directors B. The primary issue discussed in the Krispy Kreme case was: A.Chapter 05 . The Audit Client Consideration case deals with issues related to: A. Going concern issues raised by previous auditors D.Audit Responsibilities and Accounting Fraud 62. The failure to render an opinion based on the audit 66. Use of "round trip" transactions to accelerate the recording of earnings C. Special purpose entities D. Accelerated the recording of revenue into an earlier period than seemed to be justified B. Internal controls over operating activities D. The falsification of inventory amounts D. Use of special-purpose-entities to keep debt off the books B. Premature revenue recognition B. The failure to properly identify the auditing standards followed D. Delayed the of recognition of revenue into a later period than seemed justified C. Internal controls over the making of doughnuts 63. Acceptance of new clients B. Franchise revenue accounting C. The audit report on Sky Hook. All of the above 65. An unusual aspect of the Edvid case is that the company: A. that was discussed in The Audit Report case contained each of the following deficiencies except for: A. All of the above 64. All of the above 68. Deferred derivative losses on the balance sheet thereby inflating profits B. Explain each of the three sides of the fraud triangle (SAS 99) with respect to how it contributes toward the possibility that fraud in the financial statements may be present. Fraudulent inflation of inventory to reduce losses on the income statement Essay Questions 69. Fraudulent inflation of promotional allowances to increase operating income D. Fannie Mae's financial statements were investigated because of allegations that the company: A. Fraudulent use of company resources by top management for personal purposes C. The primary accounting issue in the Royal Ahold case is: A. Answers will vary 5-36 . The Committee of Sponsoring Organizations of the Treadway Committee (COSO) analyzed the financial reporting of public companies during the 1987-1997 periods when business failures due to accounting fraud were high.Audit Responsibilities and Accounting Fraud 67. Fraudulent recording of revenues on sales to customers B. Describe the major findings of COSO with respect to financial statement fraud.Chapter 05 . Answers will vary 70. Sold derivatives to increase cash flows prior to bank financing D. Used derivatives to hide subprime loans C. and illegal acts. In the Tyco fraud the corporate governance system completely broke down. Answers will vary 75. Answers will vary 73. Explain the auditors' responsibilities to assess fraud including the role of professional judgment. Explain the failings in the corporate governance system at Tyco and how the Sarbanes-Oxley Act addresses those failings.Chapter 05 . How would you assess the ethics of a company that has experienced each event with respect to motivation and the integrity of those who go along with such events? Answers will vary 74. Answers will vary 5-37 . Explain what is meant by materiality and explain the basis for the auditor's assessment of whether there is a material misstatement in the financial statements. Differentiate between the auditors' responsibilities to detect errors.Audit Responsibilities and Accounting Fraud 71. Materiality is one of the most difficult judgments to make in auditing financial statements. Explain the circumstances under which an auditor should give each of the following opinions: (a) Unqualified opinion (b) Unqualified opinion with an explanatory paragraph (c) Qualified opinion (d) Adverse opinion Answers will vary 72. fraud. Arty do and why? Use the ethical theory and ethical decision making model to discuss the situation. Describe the steps that auditors should take under Auditing Standard No. He realizes that the staff accountants only tested two tenants per property instead of the required three by the audit program.Chapter 05 . What are the audit committee's responsibilities with respect to fraud and risk assessment? Answers will vary 77. From rights. both of which could affect the opinion. 5-38 . What should Mr. the auditor should do the required work. Analyze each of those stages with respect to the three elements of the fraud triangle. 4 of the PCAOB to report on whether a previously reported material weakness still exists. Mr. This situation is a violation of due care general auditing standard and possibly sufficient evidential matter field work standard.Audit Responsibilities and Accounting Fraud 76. Answer will vary 79. Arty works for Smile Accounting Firm as a senior accountant. deontology and utilitarian approach. How can an individual resist the temptation to become involved in fraud by possessing the characteristics of behavior included in each stage? Answer will vary 78. Currently he is doing review of rental property compliance testing completed by the staff accountants. To request more information from the client would cause massive delays and the manager is pressing hard for the information before the Christmas vacation. Kohlberg's model addresses the stages of moral development a person might move through in developing a strong sense of ethics. Audit Responsibilities and Accounting Fraud 80. 98. who all happen to be members of the same student organization on campus. unsecured public Wi-Fi to take orders via the Internet. Unfortunately one of the drivers was involved in an accident due to running a red light. Management plans to pay off the complaining students and keep the true liability off the balance sheet. and monitoring. control activities. Several students. The driver has promised the family of the passenger that the company will make good on any expenses and admitted the company policy on repaying all traffic tickets. 2) The company guarantees fast delivery. take a tour around the world and then start another company. One student is claiming that she had $12. The founders do not have enough cash to take care of this problem but are still trying to keep the situation from the auditors and potential buyer. Additionally. Attorneys for the injured party are threatening to sue and publicize the situation. The students should discuss the control environment of Campus fast (founders intent on making goals) risk assessment (two potential contingent and actual liabilities that the founders are trying to cover up and keep off the balance sheet). "An interest buyer has about the unsecured site and might get scared by the student complaints". The founders expect to pay off all student loans. assess the internal control and risks of Campus Fast. Campus Fast was founded by three highly ambitious MBA students at the university. Client Fast uses public Wi-Fi to place and deliver restaurant take out for students at the Up and Coming State University. COSO and Enterprise Risk Management. The passenger in the other car is in critical condition and the intensive care unit in the hospital. Using the internal control framework from SAS 55. In order for the business plan to work on the timeline for graduation. The business plan is to find a buyer or place an IPO of the company by graduation in two years. information and communications systems (liability of using unsecured Wi-Fi). It has offered to pay any speeding or other moving violation tickets to its delivery drivers.000 of charges on her credit card to the unsecured Internet site of Campus Fast. Campus Fast is a new audit client. the company is dealing with two situations that the founders would like to keep from the auditors: 1) The company has been using free.Chapter 05 . Chapter 06 Legal and Regulatory Obligations in an Ethical Framework Multiple Choice Questions 5-39 . the business must meet highly ambitious earnings numbers. The customer may pay via the Internet. are claiming that using Campus Fast has allowed their identity to be stolen. Nonfeasance D. Due Care 4. The occurrence of events that result in losses for users of the financial statements B. Tort law C. A public company engages in deliberate activity to "cook the books" 2. Statutory law 3. Scienter C. The legal process that commences with the filing of a lawsuit D. No omissions or misstatements have been found in the client's financial statements D. Prudence B. if the auditor can demonstrate having performed services with the same degree of skill and judgment possessed by others in the profession. Business law B. Common law D. In the U. Which of the following would normally be considered sufficient to demonstrate due care on the part of the auditor? A. it can be said to have exercised: A.S.Audit Responsibilities and Accounting Fraud 1. The auditor cites adherence to generally accepted auditing standards (GAAS) C. The auditor had its work reviewed by another audit firm B. What is the first general stage in an audit-related dispute as identified by USC Professor Zoe-Vonna Palmrose? A.. The legal precedent that evolves from legal opinions issued by judges in deciding a case and guides judges in deciding similar cases in the future is referred to as: A.Chapter 05 . The auditor signs a statement expressing its unqualified opinion as to the fairness of the financial statements 5-40 . An investigation by plaintiff attorneys before filing to link the user losses with allegations that material omissions or misstatements in the financial statements C. 5-41 . Financial liability would occur when scienter was a factor. it did leave open the possibility that: A. The Ultramares v. A party's financial liability is limited D. A party may be a user of the financial statements B. Full joint and several liabilities would be reinstated. Limits an accountant's legal liability to only those parties with which it has a privity relationship C. however. A privity relationship means that A.Chapter 05 . Third parties may sue in the case of fraud or constructive fraud D. All possible third party users of financial statements must be anticipated. A party may sue if fraud has taken place C. C.Audit Responsibilities and Accounting Fraud 5. The Rosenblum case ruling was of concern to the accounting profession because it implied that A. Third parties may sue if one of the parties in contractual privity allowed it to C. Expands an accountant's legal liability to third parties identified by the client as intended recipients of work B. The Restatement (Second) of Torts Approach A. Third parties that were "foreseeable" may sue for ordinary negligence B. Touche case of 1933 held that a cause of action based on negligence could not be maintained by a third party who was not in contractual privity. The concept of contractual privity would no longer be important. Third parties who used the financial statements may sue 7. B. D. A party has a contractual obligation 6. Expands an accountant's legal liability to all possible users of the audited financial statements 8. Limits an accountant's legal liability to only those parties that have been named by the client D. Knowledge by the accountant that the financial statements are to be used for a particular purpose. The third party was not in contractual privity B.Audit Responsibilities and Accounting Fraud 9. case established three tests that must be satisfied for holding auditors liable for negligence to third parties. All of the following proof can be used in an auditor's defense against third party lawsuits for fraud except for: A. Accountants may be held liable even to third parties to whom they did not have a duty 12. D. Some action by the accountant linking him or her to the third party that provides evidence of the accountant's understanding of intended reliance. Negligence 11. When an auditor acts so carelessly in the application of professional standards that it implies a reckless disregard for the standards of due care is referred to as A. Auditors should always be liable when investors lose money due to deceit B.Chapter 05 . C. The third party was negligent D. 10. The third party did not suffer a loss 5-42 . The Credit Alliance v. Auditors should be able to detect all deceit by management D. Constructive fraud D. Accountants may be liable for fraud even when they had no knowledge of deceit C. Arthur Andersen & Co. When courts find accountants liable for constructive fraud. B. Fraud C. The identity of the third party must be directly known to the auditor. the implication is that A. All of the following are tests described EXCEPT A. The auditor did not have a duty to the third party C. The intention of the third party to rely on those statements. Scienter B. Physical inspection of inventory was not performed by the auditors D. the CPA automatically loses unless A. The CPA rebuts the allegations 17. Under the Securities Act of 1933. Securities and Exchange Act of 1934 D. Regulates the initial offering of securities D. Private Securities Litigation Reform Act of 1995 C. Is required by generally accepted auditing standards (GAAS) C.Audit Responsibilities and Accounting Fraud 13. The executives of McKesson and Robbins Pharmaceuticals were able to steal around $2. if damages were incurred and there was a material misstatement or omission in the financial statements. Limits the financial liability of independent auditors except in the case of gross negligence C. Offers an auditor's services to a client B. Securities Act of 1933 B.9 million in 1939 because A.Chapter 05 . The damages were incurred to a third party that was not a signatory to the contract C. Its auditors did not follow the generally accepted auditing standards (GAAS) of the time B. An audit engagement letter A. Regulates which services may be performed for a publicly-traded company by an audit firm 16. Formalizes the relationship between the auditor and the client for a specific engagement 14. Details the SEC's expectations for the audit firm for a specific engagement D. The Securities Act of 1933 A. The auditors were not independent and conspired with management to steal the funds 5-43 . The management intentionally deceived the auditors B. The independent audit of financial statements was not required at the time C. The CPA can shift the burden of proof to the investors D. The most relevant sources of civil liabilities for auditors failing to adhere to the requirements of the laws in carrying out professional obligations include all of the following except for: A. Regulates the auditing of financial statements for publicly-traded companies B. Sarbanes-Oxley Act of 2002 15. plaintiffs alleged that Coopers: A. Failed to follow the standards of ordinary care D. accountants may be subject to criminal penalties for: A. Moved liabilities off the balance sheet by using thousands of subsidiaries D.Audit Responsibilities and Accounting Fraud 18. Misfeasance C. Requires the filing of audited annual statements and reviewed quarterly statements C. Nonfeasance B. Willful violations of the acts D. The Securities and Exchange Act of 1934 A. Scienter 21. Constructive fraud D. Fraudulently recorded inventories that did not in fact exist B. Failed to properly audit the company's accounts receivable from two of its suppliers B. In the Jacobs v Coopers & Lybrand case. Recorded inventory below cost. Inflated its earnings by recording fictitious sales of insurance policies C. Turned a blind eye to red flags C. Under the Securities Act of 1933 and the Securities and Exchange Act of 1934. Securities fraud C. the audit client A. All of the above 22. Limits the financial liability of independent auditors except in the case of gross negligence B.Chapter 05 . All of the above 20. The legal term for the intent to deceive. manipulate or defraud is A. therefore understating costs of goods sold and overstating net income 5-44 . In the case of Equity Funding. Regulates which services may be performed for a publicly-traded company by an audit firm 19. Regulates the initial offering financial statements of securities D. Obstruction of justice B. What is the lesson from "Crazy Eddie" Antar? A. An auditor being held financially liable for investor losses D. The Private Securities Litigation Reform Act of 1995 applies the practice of ______. A payment made to a foreign government official to ensure that s/he does what is expected given their job requirements can be characterized as a: A. An auditor being forced to reveal private client information because fraud has occurred C. Asset misappropriation C. A defendant being forced to at least partially repay fraudulently gained money B. Accountants cannot afford to trust anyone D. Legal Payment 27. "Disgorgement" with respect to legal rulings refers to A. Lowballing D. Fraud triangle C. Financial fraud will always eventually reveal itself because it is unsustainable 24. government official to be awarded a major contract D. Do not flee from the police because they will eventually find you C.S.S. U. His prices were insane B.S. The Foreign Corrupt Practices Act (FCPA) forbids which kind of bribery: A. U. Facilitating Payment D. Giving up one's dinner after food poisoning 25. business payments to U. Bribe B. Risk assessment B. Proportionate liability 5-45 .Chapter 05 . business payments to a foreign customs official to ensure off-loading of merchandise C. U. A. All of the above 26. business payments to foreign government/official to be awarded a major contract B.S.Audit Responsibilities and Accounting Fraud 23. Auditors have tended to neglect their responsibility of due diligence D.Audit Responsibilities and Accounting Fraud 28. The independent auditor B. Only the negligent party considered to have "deep pockets" is held liable for damages D. Under the Private Securities Litigation Reform Act. The Securities and Exchange Commission B. Each negligent party could be held liable for the total of damages suffered 29. if an auditor concludes that an illegal act with a material effect on the financial statements has been reported to. The CEO and CFO D. The CEO C. The threat of private enforcement against accountants has increased 30. What is a worrisome consequence under the joint and several liability principles? A. Which of the following would be a logical consequence of the Private Securities Litigation Reform Act of 1995? A. The Federal Bureau of Investigation 31. the auditor should then report his/her conclusions to A. The CEO and controller 5-46 . The office of the controller/comptroller for the appropriate state D. Under the rules of the Sarbanes-Oxley Act of 2002. Each negligent party is only liable for the portion of damages for which it is responsible B. The company's board of directors C. but not dealt with by senior management. Each negligent party is liable for the portion of the damages for which it is responsible B. All negligent parties are always liable for damages C. Each negligent party could be held liable for the total of damages suffered C.Chapter 05 . who must certify the public reports filed with the SEC? A. Internal and external B. A. Three business days D. Civil and criminal penalties are not effective in preventing financial fraud 5-47 . The SEC has had many laws for many years that have not seemed to make much of a difference C. covers up. One month C. conceals. How long after the end of the fiscal period in which the audit or review was concluded are auditors required to retain work papers? A. 1 year B. One week B. falsifies. or tangible object with the intent to impede. Indefinitely D. or influence the investigation" is subject to certain penalties. One business day 35. How long do management and the audit committee have to act if the independent auditor reports possible illegal acts to them? A. or makes false entry in any record. document. mutilates. 5 years 33. Explicit and implicit D. destroys. anyone who "knowing alters. so it may not be enforced D.Chapter 05 . obstruct. 7 years C. It is not as stringent as international standards B. The penalties under Sarbanes-Oxley are especially stringent. There are two kinds of whistle blowing.Audit Responsibilities and Accounting Fraud 32. Anonymous and public 34. Direct and indirect C. Under section 801 of the Sarbanes-Oxley Act of 2002. What argument can be made that Sarbanes-Oxley may not be effective in reducing fraud? A. Knowingly altering or destroying records or documents related to an audit B. Insider trading C. All of the above 5-48 . Requiring officers. and shareholders owning 10 percent of the class of equity securities registered with the SEC to file reports concerning their ownership and trading of the corporations securities D. The SEC attempts to control insider trading in part by: A. In order for an employee to bring an action under Section 806 of the Sarbanes-Oxley Act in a whistle blowing case: A. The employee suffered an unfavorable personnel action B. Fraud D. obstruct. All of the above 39. Prohibiting officers and directors from buying stock of the company they work for/oversee B.Chapter 05 . directors. or otherwise influence an investigation with respect to the audit D. Insider trading B. Obstruction of justice C. Martha Stewart was found guilty of which offense with respect to her sale of ImClone stock? A. Prohibiting shareholders from buying stock of affiliated companies C. Dressing poorly when she sold the stock 38. The employer knew actually or constructively that the conduct occurred D.Audit Responsibilities and Accounting Fraud 36. Section 801 of the Sarbanes-Oxley Act makes it a crime to: A. Knowingly making a false entry in a record or document with the intent to impede. The employee must be engaged in a protected activity or conduct and the circumstances were sufficient to raise the inference that the protected activity was a contributing factor to the unfavorable action C. All of the above 37. The major purpose of the amended Federal Sentencing Guidelines is to: A.Chapter 05 . Treadway and AICPA D. Which Act requires firms who engaged in international operations to have internal controls and an audit committee? A. What is a payment made to someone in a government agency in order to obtain approval or assistance from that individual or organization called? A. Legal Payment 43. The Foreign Corrupt Practices Act of 1977 B. AICPA and Macdonald B. Which two organizations were formed to deal with the accounting profession's credibility? A. Grease D. Extend the statute of limitations for bringing a lawsuit for fraud against an auditor to seven years C.Audit Responsibilities and Accounting Fraud 40. Criminalize the bribery of foreign government/officials D. Bribe C. Treadway and SEC C. The Foreign Exchange Management Act of 1999 D. Allow a plaintiff to bring a lawsuit under the law for managers' or board of directors' breach of fiduciary duty 41. Facilitating Payment B. The Foreign Management Practices Act of 1977 5-49 . Allow federal judges to mitigate any sentence imposed on a company according to a mathematical formula B. The Foreign Exchange Regulation Act of 1973 C. Treadway and Macdonald 42. Perform audits in accordance with ethical principles when auditing standards are unclear B. The difference between an auditor's services regarding reports 10Q and 10K is A. An auditor fails to use appropriate accounting procedures and thereby fails to discover a client's internal practices C. Always follow the letter of the law when performing audits 48. Failing to meet some policyholders in person D. An auditor intentionally skips parts of the audit plan to cut costs and increase profitability 46. Negligent nonfeasance would be said to occur when A. The auditor provides "limited assurance" regarding 10Q and "absolute assurance" regarding 10K 45. Nonfeasance which results in investor losses D. The auditor provides "limited assurance" regarding 10Q and "reasonable assurance" regarding 10K B. Auditors deserve blame in failing to uncover fraud in the Equity Funding case due to A. The auditor provides no assurance regarding 10Q and "limited assurance" regarding 10K D. Failing to recognize that many insurance policy files were forged C. Failing to secure the audit plan 5-50 . The best defense for an auditor is to A. Constructive fraud C.Audit Responsibilities and Accounting Fraud 44. Failing to determine that some journal entries were phony B.Chapter 05 . An auditor issues an unqualified opinion for financial statements he or she knows to be materially misstated B. The term "manipulative" connotes A. Perform all work not only in accordance with US GAAS but also international GAAS D. The auditor provides "reasonable assurance" regarding 10Q and "limited assurance" regarding 10K C. Strictly adhere to the requirements of the generally agreed auditing principles (GAAS) C. Gross negligence B. Intentional or will conduct designed to deceive 47. An auditor fails to report an instance of financial fraud to the SEC D. B. 50. The length of the period in which the illegal conduct took place C. Court cases brought under the Securities Exchange Act of 1934 C. Pretexting C. An important issue in the Hewlett Packard case was: A. Making payments to a ministerial government employee of a foreign country to obtain a license to do business in that country. The number of investors who lost money as a result of the illegal conduct D. In which type of court case is proving "due diligence" essential to the auditor's defense? A. The opinion of the judge as to how egregious the illegal conduct was 51. Court cases brought under the Securities Exchange Act of 1933 B. Halliburton & KBR.Audit Responsibilities and Accounting Fraud 49. In the case of SEC v. the company will get a bigger contract. D. Providing payments to foreign government officials to obtain business. Bribing Nigerian government officials to look the other way while the companies developed and presented fraudulent financial statements B. Bribing Nigerian government officials to off-load merchandise at the country's piers D. Court cases brought by third parties under common law 52. Financial statement fraud 5-51 . Providing monetary assistance to a foreign political candidate with the understanding that if he or she wins.Chapter 05 . Bribing Nigerian government officials in order to obtain construction contracts C. Bribing foreign political parties to promote enacting more advantageous trade legislation. the commission charged Halliburton & KBR with: A. All of the following are crimes EXCEPT A. Regarding criminal sentences for illegal business conduct. the recommended sentence range depends primarily upon A. Sexting B. Twittering D. All of the above 53. How much money investors lost as a result of the illegal conduct B. C. Court cases brought by clients under common law D. Bribery of Philippine customs officials B. The main focus of the Con-Way case is the company's: A. in their defense. All of the above 58. 56. Overstated net realizable value of receivables 57. Insider trading C. Scienter C.Audit Responsibilities and Accounting Fraud 54. The defendant-auditors in the Anjoorian case argued. Fictitious invoices D. D.Chapter 05 . The plaintiff's theory of damages is speculative and against public policy. A major allegation in the XTO Energy case was the: A. A key consideration in deciding whether the shareholders in the Countrywide Corporation case would be successful in their lawsuit against members of the board of directors was application of: A. Overstated inventory amounts B. To be found guilty to third parties. All of the above 55. Breach of fiduciary duties of the board of directors B. Failure to properly record and disclose illicit payments to Philippine customs officials and officials at state-owned airlines doing business in the Philippines D. that: A. Business judgment rule D. C. They had no liability to third party shareholders. the court must find that an accountant had contemplated a specific transaction for which the financial statement will be used and that no such transaction was contemplated. Payments to foreign officials at state-owned airlines doing business in the Philippines C. Proportionate liability B. Privity rule 5-52 . All of the above. Sham software sales C. The Knowledgeware case dealt with which accounting issue? A. B. Violation of the FCPA D. Explain the duty of care of managers and directors. Arthur Young 60. All of the above 61. 5-53 .Chapter 05 . Michael Trent Reznor. Zurich's use of false insurance invoices to inflate revenues C. Reversed the ruling in Ultramares v. Was the first case where an individual brought a complaint against an employer under the whistle blowing provisions of the Sarbanes-Oxley Act C. Failure of Zurich's board of directors to carry out its fiduciary duties D. Cardinal Bankshares Corporation is it: A. Breach of fiduciary duty C. the lead singer in the band Nine Inch Nails.Audit Responsibilities and Accounting Fraud 59. Aiding and abetting fraud D. Touche D. filed a lawsuit against Richard Szekelyi and the Navigent Group in the Reznor v JAM. Zurich Financial Services case dealt with: A. Reversed the ruling in Bily v. Include in your explanation the role of ethics in making decisions that support such a level of care. Negligence B. A unique aspect of the lawsuit in Welch v. Was the first case to deal with the certification of false financial statements by the CEO and CFO thereby violating the Sarbanes-Oxley Act B. Failure of the auditors to exercise the degree of care and professional skepticism expected in an audit Essay Questions 62. Inc case alleging: A. The SEC v. Zurich's use of finite reinsurance transactions to inflate improperly financial performance B. Explain the accounting issues involved and ethical lapses in one of the following two cases: (a) Equity Funding or (2) Crazy Eddie.Audit Responsibilities and Accounting Fraud 63.Chapter 05 . Cite specific cases to support your Answer. Distinguish between an auditor's legal liability under common law and statutory law. Distinguish between an auditor's legal liability under the Securities Act of 1933 and the Securities and Exchange Act of 1934. 5-54 . What are the best defenses that an auditor can use to defend oneself against charges of fraud? How does ethical behavior relate to these defenses? 65. 66. 64. Do you believe this act adequately protects shareholders and other third parties that might bring a lawsuit actions auditor and other defendants? Why or why not? 5-55 . Explain the nature of the changes under the PSLRA with respect to legal liability. If you say that it is not. explain why such an action does not violate ethical actions.Audit Responsibilities and Accounting Fraud 67.S. in a major way. Describe the facts of the case and evaluate the plaintiffs' alleged violations by Coopers with respect to GAAS and GAAP. 68. Is insider trading always unethical? If you answer that it is explain why such an action violates ethical standards.Chapter 05 . The Jacobs v Coopers & Lybrand case deals with the issue of just how egregious an accounting firm's failure to comply with GAAS and GAAP have to be to subject that firm to a fraud claim arising out of its audit of financial statements. The Private Securities Litigation Reform Act of 1995 changed the legal climate in the U. 69. Auditors may be held liable to both their clients and third parties under common law.Chapter 05 . How does an auditor's ethical obligations and liability under common law intersect? 5-56 .Audit Responsibilities and Accounting Fraud 70. a. What must an ordinary third party prove to recover losses from an auditor under common law? c. Which of the provisions of the Sarbanes Oxley Act do you think is the most important? Why did you choose that particular provision? 71. What must a client prove to recover its losses from a client under common law? b. Do you think there can ever be enough laws on the books to reduce or eliminate unethical actions that have lead to the many lawsuits discussed in the chapter? Why or why not? 72. Do you agree? Why or why not? 5-57 .Audit Responsibilities and Accounting Fraud 73. A student states that as long as the auditor has followed all applicable laws.Chapter 05 . then the auditor has been ethical. S. Prudence B. An investigation by plaintiff attorneys before filing to link the user losses with allegations that material omissions or misstatements in the financial statements C. Scienter C. What is the first general stage in an audit-related dispute as identified by USC Professor Zoe-Vonna Palmrose? A. Common law D. Tort law C. Business law B. The occurrence of events that result in losses for users of the financial statements B. it can be said to have exercised: A. Due Care 5-58 .Chapter 05 . if the auditor can demonstrate having performed services with the same degree of skill and judgment possessed by others in the profession. A public company engages in deliberate activity to "cook the books" 2. In the U.Audit Responsibilities and Accounting Fraud Chapter 06 Legal and Regulatory Obligations in an Ethical Framework Answer Key Multiple Choice Questions 1. Statutory law 3.. The legal precedent that evolves from legal opinions issued by judges in deciding a case and guides judges in deciding similar cases in the future is referred to as: A. Nonfeasance D. The legal process that commences with the filing of a lawsuit D. A party may sue if fraud has taken place C. Which of the following would normally be considered sufficient to demonstrate due care on the part of the auditor? A. however. The auditor cites adherence to generally accepted auditing standards (GAAS) C. A party may be a user of the financial statements B. A privity relationship means that A. Expands an accountant's legal liability to third parties identified by the client as intended recipients of work B. The Restatement (Second) of Torts Approach A. Third parties who used the financial statements may sue 7. A party has a contractual obligation 6. Third parties may sue in the case of fraud or constructive fraud D. it did leave open the possibility that: A. Limits an accountant's legal liability to only those parties with which it has a privity relationship C. Touche case of 1933 held that a cause of action based on negligence could not be maintained by a third party who was not in contractual privity. Expands an accountant's legal liability to all possible users of the audited financial statements 5-59 . The Ultramares v. Third parties that were "foreseeable" may sue for ordinary negligence B. Limits an accountant's legal liability to only those parties that have been named by the client D. A party's financial liability is limited D. Third parties may sue if one of the parties in contractual privity allowed it to C.Audit Responsibilities and Accounting Fraud 4. The auditor signs a statement expressing its unqualified opinion as to the fairness of the financial statements 5. No omissions or misstatements have been found in the client's financial statements D. The auditor had its work reviewed by another audit firm B.Chapter 05 . Auditors should be able to detect all deceit by management D. Financial liability would occur when scienter was a factor. Full joint and several liabilities would be reinstated. All possible third party users of financial statements must be anticipated. The identity of the third party must be directly known to the auditor. Fraud C. the implication is that A. All of the following are tests described EXCEPT A. C. case established three tests that must be satisfied for holding auditors liable for negligence to third parties. The intention of the third party to rely on those statements.Chapter 05 . 9. Some action by the accountant linking him or her to the third party that provides evidence of the accountant's understanding of intended reliance. D. Negligence 11. The Credit Alliance v. Auditors should always be liable when investors lose money due to deceit B. Constructive fraud D. Accountants may be liable for fraud even when they had no knowledge of deceit C. Knowledge by the accountant that the financial statements are to be used for a particular purpose. B. B. When an auditor acts so carelessly in the application of professional standards that it implies a reckless disregard for the standards of due care is referred to as A. Accountants may be held liable even to third parties to whom they did not have a duty 5-60 . C. D. The concept of contractual privity would no longer be important. When courts find accountants liable for constructive fraud. Arthur Andersen & Co.Audit Responsibilities and Accounting Fraud 8. Scienter B. 10. The Rosenblum case ruling was of concern to the accounting profession because it implied that A. The third party was not in contractual privity B. The most relevant sources of civil liabilities for auditors failing to adhere to the requirements of the laws in carrying out professional obligations include all of the following except for: A. The third party did not suffer a loss 13. Is required by generally accepted auditing standards (GAAS) C.Chapter 05 . if damages were incurred and there was a material misstatement or omission in the financial statements. the CPA automatically loses unless A. Private Securities Litigation Reform Act of 1995 C. Regulates the initial offering of securities D. The Securities Act of 1933 A. All of the following proof can be used in an auditor's defense against third party lawsuits for fraud except for: A. The CPA rebuts the allegations 5-61 . Securities and Exchange Act of 1934 D. The management intentionally deceived the auditors B. Sarbanes-Oxley Act of 2002 15. The auditor did not have a duty to the third party C.Audit Responsibilities and Accounting Fraud 12. Regulates which services may be performed for a publicly-traded company by an audit firm 16. Limits the financial liability of independent auditors except in the case of gross negligence C. The CPA can shift the burden of proof to the investors D. The damages were incurred to a third party that was not a signatory to the contract C. Under the Securities Act of 1933. Regulates the auditing of financial statements for publicly-traded companies B. Offers an auditor's services to a client B. Securities Act of 1933 B. An audit engagement letter A. Details the SEC's expectations for the audit firm for a specific engagement D. The third party was negligent D. Formalizes the relationship between the auditor and the client for a specific engagement 14. The legal term for the intent to deceive. Scienter 21. The executives of McKesson and Robbins Pharmaceuticals were able to steal around $2. The independent audit of financial statements was not required at the time C. Under the Securities Act of 1933 and the Securities and Exchange Act of 1934. All of the above 5-62 . All of the above 20. Regulates which services may be performed for a publicly-traded company by an audit firm 19. In the Jacobs v Coopers & Lybrand case. Turned a blind eye to red flags C. Failed to properly audit the company's accounts receivable from two of its suppliers B. Nonfeasance B. accountants may be subject to criminal penalties for: A. Securities fraud C. Physical inspection of inventory was not performed by the auditors D. Failed to follow the standards of ordinary care D. Obstruction of justice B. Regulates the initial offering financial statements of securities D. plaintiffs alleged that Coopers: A.Chapter 05 . Limits the financial liability of independent auditors except in the case of gross negligence B. manipulate or defraud is A.9 million in 1939 because A. Constructive fraud D. The Securities and Exchange Act of 1934 A.Audit Responsibilities and Accounting Fraud 17. Its auditors did not follow the generally accepted auditing standards (GAAS) of the time B. Willful violations of the acts D. Misfeasance C. The auditors were not independent and conspired with management to steal the funds 18. Requires the filing of audited annual statements and reviewed quarterly statements C. Recorded inventory below cost.S. "Disgorgement" with respect to legal rulings refers to A.Chapter 05 . Bribe B. Facilitating Payment D.Audit Responsibilities and Accounting Fraud 22. Accountants cannot afford to trust anyone D. What is the lesson from "Crazy Eddie" Antar? A. business payments to foreign government/official to be awarded a major contract B.S. the audit client A. Financial fraud will always eventually reveal itself because it is unsustainable 24. Inflated its earnings by recording fictitious sales of insurance policies C. A defendant being forced to at least partially repay fraudulently gained money B.S. U. In the case of Equity Funding.S. Moved liabilities off the balance sheet by using thousands of subsidiaries D. The Foreign Corrupt Practices Act (FCPA) forbids which kind of bribery: A. therefore understating costs of goods sold and overstating net income 23. Do not flee from the police because they will eventually find you C. An auditor being forced to reveal private client information because fraud has occurred C. A payment made to a foreign government official to ensure that s/he does what is expected given their job requirements can be characterized as a: A. Fraudulently recorded inventories that did not in fact exist B. U. His prices were insane B. business payments to U. government official to be awarded a major contract D. Legal Payment 5-63 . An auditor being held financially liable for investor losses D. U. All of the above 26. Giving up one's dinner after food poisoning 25. business payments to a foreign customs official to ensure off-loading of merchandise C. Asset misappropriation C. Only the negligent party considered to have "deep pockets" is held liable for damages D. who must certify the public reports filed with the SEC? A. the auditor should then report his/her conclusions to A. Each negligent party could be held liable for the total of damages suffered 29. Auditors have tended to neglect their responsibility of due diligence D. The CEO and CFO D. The threat of private enforcement against accountants has increased 30. The company's board of directors C. Under the Private Securities Litigation Reform Act. The Private Securities Litigation Reform Act of 1995 applies the practice of ______. Under the rules of the Sarbanes-Oxley Act of 2002. The Federal Bureau of Investigation 31. The office of the controller/comptroller for the appropriate state D. Each negligent party is only liable for the portion of damages for which it is responsible B. Each negligent party could be held liable for the total of damages suffered C. if an auditor concludes that an illegal act with a material effect on the financial statements has been reported to. Risk assessment B. A. The CEO C. All negligent parties are always liable for damages C. Each negligent party is liable for the portion of the damages for which it is responsible B. Proportionate liability 28.Chapter 05 . Fraud triangle C. The independent auditor B. The Securities and Exchange Commission B. The CEO and controller 5-64 . Lowballing D. Which of the following would be a logical consequence of the Private Securities Litigation Reform Act of 1995? A.Audit Responsibilities and Accounting Fraud 27. What is a worrisome consequence under the joint and several liability principles? A. but not dealt with by senior management. Indefinitely D.Chapter 05 . One business day 35. or makes false entry in any record. What argument can be made that Sarbanes-Oxley may not be effective in reducing fraud? A. 1 year B. One month C. covers up.Audit Responsibilities and Accounting Fraud 32. The SEC has had many laws for many years that have not seemed to make much of a difference C. destroys. Anonymous and public 34. or tangible object with the intent to impede. falsifies. There are two kinds of whistle blowing. How long after the end of the fiscal period in which the audit or review was concluded are auditors required to retain work papers? A. The penalties under Sarbanes-Oxley are especially stringent. Under section 801 of the Sarbanes-Oxley Act of 2002. obstruct. Direct and indirect C. document. 5 years 33. anyone who "knowing alters. It is not as stringent as international standards B. One week B. Civil and criminal penalties are not effective in preventing financial fraud 5-65 . mutilates. Explicit and implicit D. A. conceals. How long do management and the audit committee have to act if the independent auditor reports possible illegal acts to them? A. Internal and external B. Three business days D. 7 years C. so it may not be enforced D. or influence the investigation" is subject to certain penalties. Chapter 05 - Audit Responsibilities and Accounting Fraud 36. The SEC attempts to control insider trading in part by: A. Prohibiting officers and directors from buying stock of the company they work for/oversee B. Prohibiting shareholders from buying stock of affiliated companies C. Requiring officers, directors, and shareholders owning 10 percent of the class of equity securities registered with the SEC to file reports concerning their ownership and trading of the corporations securities D. All of the above 37. Martha Stewart was found guilty of which offense with respect to her sale of ImClone stock? A. Insider trading B. Obstruction of justice C. Fraud D. Dressing poorly when she sold the stock 38. Section 801 of the Sarbanes-Oxley Act makes it a crime to: A. Knowingly altering or destroying records or documents related to an audit B. Insider trading C. Knowingly making a false entry in a record or document with the intent to impede, obstruct, or otherwise influence an investigation with respect to the audit D. All of the above 39. In order for an employee to bring an action under Section 806 of the Sarbanes-Oxley Act in a whistle blowing case: A. The employee suffered an unfavorable personnel action B. The employee must be engaged in a protected activity or conduct and the circumstances were sufficient to raise the inference that the protected activity was a contributing factor to the unfavorable action C. The employer knew actually or constructively that the conduct occurred D. All of the above 5-66 Chapter 05 - Audit Responsibilities and Accounting Fraud 40. The major purpose of the amended Federal Sentencing Guidelines is to: A. Allow federal judges to mitigate any sentence imposed on a company according to a mathematical formula B. Extend the statute of limitations for bringing a lawsuit for fraud against an auditor to seven years C. Criminalize the bribery of foreign government/officials D. Allow a plaintiff to bring a lawsuit under the law for managers' or board of directors' breach of fiduciary duty 41. Which two organizations were formed to deal with the accounting profession's credibility? A. AICPA and Macdonald B. Treadway and SEC C. Treadway and AICPA D. Treadway and Macdonald 42. What is a payment made to someone in a government agency in order to obtain approval or assistance from that individual or organization called? A. Facilitating Payment B. Bribe C. Grease D. Legal Payment 43. Which Act requires firms who engaged in international operations to have internal controls and an audit committee? A. The Foreign Corrupt Practices Act of 1977 B. The Foreign Exchange Regulation Act of 1973 C. The Foreign Exchange Management Act of 1999 D. The Foreign Management Practices Act of 1977 5-67 Chapter 05 - Audit Responsibilities and Accounting Fraud 44. The difference between an auditor's services regarding reports 10Q and 10K is A. The auditor provides "limited assurance" regarding 10Q and "reasonable assurance" regarding 10K B. The auditor provides "reasonable assurance" regarding 10Q and "limited assurance" regarding 10K C. The auditor provides no assurance regarding 10Q and "limited assurance" regarding 10K D. The auditor provides "limited assurance" regarding 10Q and "absolute assurance" regarding 10K 45. Negligent nonfeasance would be said to occur when A. An auditor issues an unqualified opinion for financial statements he or she knows to be materially misstated B. An auditor fails to use appropriate accounting procedures and thereby fails to discover a client's internal practices C. An auditor fails to report an instance of financial fraud to the SEC D. An auditor intentionally skips parts of the audit plan to cut costs and increase profitability 46. The term "manipulative" connotes A. Gross negligence B. Constructive fraud C. Nonfeasance which results in investor losses D. Intentional or will conduct designed to deceive 47. The best defense for an auditor is to A. Perform audits in accordance with ethical principles when auditing standards are unclear B. Strictly adhere to the requirements of the generally agreed auditing principles (GAAS) C. Perform all work not only in accordance with US GAAS but also international GAAS D. Always follow the letter of the law when performing audits 48. Auditors deserve blame in failing to uncover fraud in the Equity Funding case due to A. Failing to determine that some journal entries were phony B. Failing to recognize that many insurance policy files were forged C. Failing to meet some policyholders in person D. Failing to secure the audit plan 5-68 How much money investors lost as a result of the illegal conduct B.Chapter 05 . Providing payments to foreign government officials to obtain business. An important issue in the Hewlett Packard case was: A. Twittering D. Court cases brought by third parties under common law 52. B. Bribing foreign political parties to promote enacting more advantageous trade legislation. The length of the period in which the illegal conduct took place C. Sexting B. Making payments to a ministerial government employee of a foreign country to obtain a license to do business in that country. Bribing Nigerian government officials in order to obtain construction contracts C. In the case of SEC v. In which type of court case is proving "due diligence" essential to the auditor's defense? A.Audit Responsibilities and Accounting Fraud 49. Halliburton & KBR. the commission charged Halliburton & KBR with: A. All of the following are crimes EXCEPT A. Court cases brought by clients under common law D. 50. Financial statement fraud 5-69 . Pretexting C. Providing monetary assistance to a foreign political candidate with the understanding that if he or she wins. the company will get a bigger contract. the recommended sentence range depends primarily upon A. Court cases brought under the Securities Exchange Act of 1933 B. Bribing Nigerian government officials to off-load merchandise at the country's piers D. Regarding criminal sentences for illegal business conduct. Bribing Nigerian government officials to look the other way while the companies developed and presented fraudulent financial statements B. C. The number of investors who lost money as a result of the illegal conduct D. D. Court cases brought under the Securities Exchange Act of 1934 C. The opinion of the judge as to how egregious the illegal conduct was 51. All of the above 53. Proportionate liability B. Privity rule 5-70 . All of the above 55. Bribery of Philippine customs officials B. Payments to foreign officials at state-owned airlines doing business in the Philippines C. in their defense. Breach of fiduciary duties of the board of directors B. Business judgment rule D. D. Failure to properly record and disclose illicit payments to Philippine customs officials and officials at state-owned airlines doing business in the Philippines D. A major allegation in the XTO Energy case was the: A. Violation of the FCPA D. Sham software sales C. Overstated net realizable value of receivables 57. A key consideration in deciding whether the shareholders in the Countrywide Corporation case would be successful in their lawsuit against members of the board of directors was application of: A. 56. All of the above 58. the court must find that an accountant had contemplated a specific transaction for which the financial statement will be used and that no such transaction was contemplated. The main focus of the Con-Way case is the company's: A. The defendant-auditors in the Anjoorian case argued.Audit Responsibilities and Accounting Fraud 54. Fictitious invoices D. B. The plaintiff's theory of damages is speculative and against public policy. Overstated inventory amounts B. Scienter C. Insider trading C. To be found guilty to third parties. The Knowledgeware case dealt with which accounting issue? A.Chapter 05 . They had no liability to third party shareholders. All of the above. that: A. C. Zurich's use of finite reinsurance transactions to inflate improperly financial performance B. Arthur Young 60. the lead singer in the band Nine Inch Nails. Answers will vary 63. Answers will vary 5-71 . Include in your explanation the role of ethics in making decisions that support such a level of care. Was the first case where an individual brought a complaint against an employer under the whistle blowing provisions of the Sarbanes-Oxley Act C. Reversed the ruling in Bily v. Was the first case to deal with the certification of false financial statements by the CEO and CFO thereby violating the Sarbanes-Oxley Act B. Breach of fiduciary duty C. Cardinal Bankshares Corporation is it: A. Cite specific cases to support your Answer.Audit Responsibilities and Accounting Fraud 59. Zurich Financial Services case dealt with: A. The SEC v. Michael Trent Reznor.Chapter 05 . Touche D. Failure of Zurich's board of directors to carry out its fiduciary duties D. Explain the duty of care of managers and directors. All of the above 61. filed a lawsuit against Richard Szekelyi and the Navigent Group in the Reznor v JAM. Reversed the ruling in Ultramares v. Negligence B. Distinguish between an auditor's legal liability under common law and statutory law. Failure of the auditors to exercise the degree of care and professional skepticism expected in an audit Essay Questions 62. Inc case alleging: A. A unique aspect of the lawsuit in Welch v. Zurich's use of false insurance invoices to inflate revenues C. Aiding and abetting fraud D. Audit Responsibilities and Accounting Fraud 64. Answers will vary 67. Distinguish between an auditor's legal liability under the Securities Act of 1933 and the Securities and Exchange Act of 1934.Chapter 05 . Explain the accounting issues involved and ethical lapses in one of the following two cases: (a) Equity Funding or (2) Crazy Eddie. If you say that it is not. Answers will vary 5-72 . explain why such an action does not violate ethical actions. The Jacobs v Coopers & Lybrand case deals with the issue of just how egregious an accounting firm's failure to comply with GAAS and GAAP have to be to subject that firm to a fraud claim arising out of its audit of financial statements. Answers will vary 66. Answers will vary 68. What are the best defenses that an auditor can use to defend oneself against charges of fraud? How does ethical behavior relate to these defenses? Answers will vary 65. Is insider trading always unethical? If you answer that it is explain why such an action violates ethical standards. Describe the facts of the case and evaluate the plaintiffs' alleged violations by Coopers with respect to GAAS and GAAP. reliance on the auditors' representations. c.Chapter 05 . 5-73 . and gross negligence on the part of the auditors. Which of the provisions of the Sarbanes Oxley Act do you think is the most important? Why did you choose that particular provision? Answers will vary 71. and negligence on the part of the auditors. b. that the reliance was proximate cause of the losses. then the law and ethical obligations are in alignment. The Private Securities Litigation Reform Act of 1995 changed the legal climate in the U. ordinary third parties must prove losses. Auditors may be held liable to both their clients and third parties under common law. Explain the nature of the changes under the PSLRA with respect to legal liability. that the reliance was proximate cause of the losses. utilitarianism.S. What must a client prove to recover its losses from a client under common law? b. a.Audit Responsibilities and Accounting Fraud 69. deontology. What must an ordinary third party prove to recover losses from an auditor under common law? c. The student may use rights. or virtue theories to argue that if the auditor does his job. a client must prove losses. How does an auditor's ethical obligations and liability under common law intersect? a. To recover losses under common law. in a major way. To recover losses under common law. reliance on the auditors' report. Do you believe this act adequately protects shareholders and other third parties that might bring a lawsuit actions auditor and other defendants? Why or why not? Answers will vary 70. meeting all duties and obligations. Do you think there can ever be enough laws on the books to reduce or eliminate unethical actions that have lead to the many lawsuits discussed in the chapter? Why or why not? Answers will vary 72. " D. Students could use any of the ethical theories to justify their stand on this question. C. To maximize compensation including bonuses. A student states that as long as the auditor has followed all applicable laws. So if an auditor does only what is required by law. Managements emphasis on achieving long-term results to meet their financial goals. "Earnings management" is to project smoother earnings from year to year. Do you agree? Why or why not? The law represents the minimal moral standards of society. 5-74 .Audit Responsibilities and Accounting Fraud 73.Chapter 05 . B. A common practice of "earnings management" is to use "cookie-jar reserves. 3. which go beyond what the law requires. By following ethical standards. Virtue 2. the auditor is doing the minimum. an auditor should minimize his legal liabilities. The ideal pattern of earnings is volatility each year over a period of time. To smooth net income over time. If a company is managing its earnings. Fairness C. The executives manipulate the earnings in order to match their predetermined target. Which of the following is NOT considered "earnings management"? A. Egoism D. which of the ethical theories are they most likely following? A. then the auditor has been ethical. C. Rights B. Companies try to meet or beat Wall Street earnings projections in order to grow market capitalization and increase the value of stock options. D. B. Which of the following is NOT a motivation to manage earnings? A. Chapter 07 Earnings Management and the Quality of Financial Reporting Multiple Choice Questions 1. Chapter 05 . Manipulating asset net valuation amounts to minimize operating expenses for a period B. Accelerating the recording of revenue into an earlier period C. Delaying needed repairs to a later period D. All of the above were used 5-75 . Which technique was used by both WorldCom and Waste Management to manage earnings? A.Audit Responsibilities and Accounting Fraud 4. "? A. Healy and Wahlen C. Which of the following authors(s) focus(es) on "management's intent to deceive the stakeholders by using accounting devices to positively influence reported earnings.Audit Responsibilities and Accounting Fraud 5."? A. Thomas E. Only outright fraud is an unacceptable earnings management action. Thomas E. Schipper D. Which of the following author(s) emphasize(s) a "purposeful act by management in pursuit of its own self-interests as might be the case when earnings are manipulated to get the stock price up in advance of the exercise of stock options. Which of the following author(s) define(s) earnings management as "reasonable and legal management decision making and reporting intended to achieve stable and predictable financial results. McKee 8. McKee 7. Healy and Wahlen C. Dechow and Skinner B. Thomas E. Healy and Wahlen C."? A."? A. Healy and Wahlen C. McKee 5-76 .Chapter 05 . Schipper D. Schipper D. Which of the following authors(s) contend(s) "earnings management can be acceptable if linked to the choice of alternative accounting principles and estimates that report higher earnings than other methods might report given the circumstances. Dechow and Skinner B. Dechow and Skinner B. Schipper D. Thomas E. Dechow and Skinner B. McKee 6. In surveys of managers.Audit Responsibilities and Accounting Fraud 9. A misstatement that changes a loss into income or vice versa B. All were identified 13. Vorhies identifies four perspectives to help CPAs identify key internal control exceptions under the Sarbanes Oxley Act including: A. Which of the following is NOT a qualitative factor when assessing materiality? A. Professional judgment 5-77 . SAS No. Disclosing an item in one year but not in the next year B. Manipulating operating decisions D. especially trends in profitability D. From a virtue perspective B.Chapter 05 . Accounting manipulation C. From a rights perspective D. which technique to manage earnings was considered most acceptable? A. An internal control deficiency caused by accounting manipulations B. Qualitative aspects of the disclosure C. A large variance in an accounting estimate compared with the actual determined amount C. The use of simplistic numerical thresholds and rules of thumb 12. Changing inventory valuation in order to influence earnings B. The potential effect of the misstatement on trends. From an ethical perspective 10. The existence of statutory or regulator reporting requirements that affect materiality thresholds C. Establishing cookie jar reserves 11. From which perspective might one be able to rationalize the ethics of earnings management? A. A misstatement that changes a loss into income or vice versa D. From a utilitarian perspective C. Quantitative significance of the disclosure D. 107 identifies the following aspects of disclosure amounts deemed to be material except for: A. An adjustment of financial information due to an error correction D. revises its public financial information that was previously reported B. A company. Engaged in round trip transactions whereby Gemstar paid money to a third party to advertise its services and capitalized that cost while the third party used Gemstar's funds to buy advertising from Gemstar. C. B.Chapter 05 . One of the major costs of restatements is the amount of time between the restatement announcement and the final resolution of the restatement. Bright line rules are not really useful in making materiality judgments. D. The best definition of a financial restatement is: A. Inflated advertising revenue by improperly recording and reporting revenue amounts from multiple-elements transactions. disputed. C. Internal control requirements under generally accepted auditing standards B. and properly reported this as licensing and advertising revenue. Relaxation of materiality standards by the SEC 17. revises its public financial information for the current period C. Created cookie jar reserves of advertising revenue to smooth net income. All are part of the definition 16. The SEC Advisory Committee on Improvements in Financial Reporting identified each of the following as a view of equity and credit analysts about investor's views on materiality and financial statement restatements except for: A. Recorded revenue under expired. A company.Audit Responsibilities and Accounting Fraud 14. In the Glass Lewis survey of financial statements. and the company recorded 100% of that amount as revenue while capitalizing the cost of its advertising payments. either voluntarily or under prompting by its auditors or regulators. 5-78 . a somewhat surprising possible cause of the decline in restatements in 2008 may have been due to: A. The disclosure provided on restatements is not adequate. Each of the following techniques was used by Gemstar TV Guide International in its accounting fraud: A. either voluntarily or under prompting by its auditors or regulators. Bright line rules are useful in making materiality judgments. or non-existent agreements. More ethical management D. Identifying materiality amounts based on both quantitative and qualitative factors C. D. 15. B. Which of the following is NOT mentioned in the Xerox's case? A. Failing to write down or write off impaired assets. C. C. The ethical tone at the top set by CEOs Allaire and Thomas.Audit Responsibilities and Accounting Fraud 18. Releasing questionable reserves into income. Which of the following is NOT true according to Enron's case? A. Shifting Current Revenue to a later period B. B. B. 19. Boosting income with one-time gains C. 20. 5-79 . B. Fastow created SPE that borrowed money from banks and transferred to Enron in a sale of an operating asset no longer needed by Enron. Inc. Xerox failed to disclose GAAP violations that led to acceleration in the recognition of approximately $3 billion in equipment revenues. C. and CFO Romeril. Which of the following earnings management techniques are NOT presented in Lucent Technologies. Creating an allowance for uncollectible accounts and adjusting it at year end. Xerox misled investors by polishing its reputation on Wall Street and to boost the company's stock price. D.'s case? A. Failing to record expenses and related liabilities when future obligations remain. which equated business success with meeting long-term earnings target. Fastow developed the concept of buying up oil and gas companies to increase Enron's reserves for future sale. The SPE created by Fastow enabled Enron to keep debt off its books while benefiting from transfer and use of the cash borrowed by the SPE. Xerox recognized a greater amount of revenue on leases in early years than warranted and didn't break out revenues that should have been deferred and recognized in future years. Fastow worked to structure ventures that met the conditions under GAAP to keep the partnership activities off Enron's books and on the separate books of the partnership. Recording revenue too soon or of questionable quality D. D.Chapter 05 . Which of the following is NOT an earnings management technique? A. Shifting current expenses to a later or earlier period 21. D. B. Xerox recognized financing revenue when it is earned over the life of the lease. less any residual value the equipment is expected to retain once the lease expires. affecting the gain on transfer and earnings effect. Employees were evaluated in groups. All of the above. 23. D. Recording revenue too soon or of questionable quality D. Shifting Current Revenue to a later period B. Which of the following earnings management techniques are NOT presented in Lucent Technologies. 5-80 . C. What is the culture at Enron that is discussed in the case? A.Audit Responsibilities and Accounting Fraud 22. the goal was to remove the bottom 20% of each group every year. B. Employees worked later and later. Used mark-to-market estimates to inflate earnings in violation of GAAP. Deliberately over stated the allowance for uncollectible and adjusted it downward in future years. What did Xerox's top management do that violated GAAP? A. C. 13 to be accounted for as "sales-type" lease. Which of the following is NOT a technique used by Enron to manage earnings? A. Xerox leases met the criteria under SFAS No. Xerox recognized the fair value of the equipment leased as income in the period the lease is delivered.'s case? A. D. Used reserves to increase earnings when reported amounts were too low. Xerox used the "ROE" method which pulled forward a porting of finance income and recognized it immediately as equipment revenue and the "margin normalization" method which pulled forward a portion of service income and recognized it immediately as equipment revenue. Xerox prorated the portion of the lease payments that represents the fee for repair services and copier supplies over the term of lease against the financing income. 24. D. B. C. Boosting income with one-time gains C. Shifting current expenses to a later or earlier period 25. Selected which operating assets to "sell" to the SPEs. Enron had a cutthroat system and encouraged a "yes" culture. Inc.Chapter 05 . Prohibiting the provision of internal audit service for audit clients. 29. The best way to characterize the role of Sherron Watkins in the downfall of Enron is: A. JEDI B. To sell non-producing assets to the SPE. To select which assets to sell to the SPEs affecting the gain. 28. C. Which of the following is true? A. B.Chapter 05 . D. She gave in to the pressure of Andy Fastow to go along with materially misstated financial statements C. B. Ironman 27. All of the above. Cactus C. Related-party transactions require disclosure in the notes. To keep the large amount of debt off the books. She directed the internal auditors to examine numerous transactions that led to the discovery of the fraud B. D.Audit Responsibilities and Accounting Fraud 26. She was sent to jail even though she cooperated with the government in its case against Enron D. Chewco D. There are several aspects of Enron fraud that are dealt with directly in SOX further connecting Enron to reform in the accounting profession. C. To establish a mechanism to encourage companies to invest in needed assets while keeping related debt of its books. She tried to alert Ken Lay about the accounting scandal at Enron 5-81 . What is the original motivation by FASB on SPEs? A. Which of the following partnership that Enron created eventually lead Enron to an end? A. Off-balance-sheet financing activities must be disclosed in the notes to the financial statements. C. 32. Including investment income or gains as part of revenue. Including investment income or gains as a reduction in operating expenses. Bernie Ebbers D. He failed to exercise due care in setting up SPEs C. "Too many corporate managers.Audit Responsibilities and Accounting Fraud 30. Recording sales that lack economic substance. D. and then releasing them into your stomach. Recording revenue when future services remain to be provided. C. Buying a lot of chocolate chip cookies. 34. The basic ethical principle violated by Andy Fastow in his role as Enron's CFO and involvement with SPEs was: A. He lied to top management about what he was doing for the SPEs B. Boosting profits by selling undervalued assets. Jerry Seinfeld C. B. Accelerating the recording of revenues into an earlier year than is warranted. B. and analysts are participants in a game of nods and winks" is attributable to: A.Chapter 05 . Recording revenue before shipment or before the customer's unconditional acceptance. storing them for when you have a hunger attack. Arthur Levitt 5-82 . All of the following are examples of "Boosting Income with One-Time Gains" except for: A. Barry Minkow B. All of the above 31. Overstating or understating allowances and reversing amounts in the future to smooth out net income over time. C. B. 33. He had a conflict of interests in his dual roles D. All of the following are examples of "Recording revenue too soon or of questionable quality" except for: A. D. The expression. Recording sales that lack economic substance. D. "Cookie jar reserves" can best be described as: A. Delaying the recording of expenses to a later year to boost income in the current year. auditors. Recording revenue even though the customer is not obligated to pay. D. The company employed aggressive accounting practices to enhance its earnings. 2002. B. Which of the following is NOT true? A. KPMG 39. Arthur Andersen. C. Non-GAAP method of capitalization interest on landfill development costs. 5-83 . Refusal to write-off permitting and/or project costs on impaired or abandoned landfills. New audit standards include a prohibition against independent auditors providing many non-audit services and mandatory audit partner rotation. Congress passed the "Sarbanes-Oxley Act" on July 30. Recording revenue the customer is obligated to pay B. 38. D. 37. companies charge warranty costs to operating expense in the year of sale. Which of the following is NOT addressed in the Waste Management's case? A.Chapter 05 . B. Which of the following is NOT an earnings management technique? A. Which of the following is NOT an aggressive accounting practice? A. which was not considered material. had engaged in improper professional conduct. Arthur Andersen D. Including investment income or gains as part of revenue 36. D. The misstatements represented 10% of pre-tax income. C. Ernst & Young B. The company used the gain to offset unrelated operating expenses which was not in conformity with GAAP. companies are subject to the disclosure requirements of the Act. All reporting companies are required to include in their annual reports a report of management on the company's internal control over financial reporting.S. Only U. The presentation of pro forma information is now required. In the Xerox case. Failure to properly accrue for tax and self-insurance expense.Audit Responsibilities and Accounting Fraud 35. Recording revenue when future services remain to be provided C. Recording sales that lack economic substance D. who was Xerox's auditor? A. B. Under the accrual method. The company's auditor. Deloitte & Touche C. C. A utilitarian perspective C. B. Schipper B.Chapter 05 . "Earnings management either ignores or does not consider the rights of the investors and creditors to receive accurate. PCAOB assumes the peer review function over registered CPA firms. Which of the statement regarding PCAOB is NOT true? A. PCAOB stands for Public Company Accounting Oversight Board. McKee 5-84 . Earnings management reflects a conscious choice by management to smooth earnings over time and it does not include devices designed to "cook the books. Who identifies seven common financial shenanigans? A. PCAOB was established before the accounting scandal of Enron. Levitt D. A virtue perspective B." This statement is from: A. Schilit C.Audit Responsibilities and Accounting Fraud 40. Which of the following is NOT McKee's explanation of "earnings management"? A. It is a reasonable and legal management decision making and reporting intended to achieve stable and predictable financial results. 41. C. A materiality perspective 42. reliable and transparent financial statements. B. PCAOB protects the public interest by oversight of independent audits. D." 43. D. A rights perspective D. It creates a more stable and predictable earnings stream by smoothing net income. A smooth net income by choice does not reflect what investors and creditors need or want to know since it masks true performance. C. Going to a swap meet and capitalizing purchases instead of expensing them immediately against swap revenue B. the leases Xerox had signed met the criteria under SFAS No.Chapter 05 . Which of the following is NOT a motivation to manage earnings in the Lucent Technology case? A. Obtain sales bonus 46. Premature revenue recognition and off-balance-sheet entities D. The swap transactions used in the Solutions Network case to manage earnings can best be described as: A. In the Xerox case. Bargain purchase option leases D.Audit Responsibilities and Accounting Fraud 44. Recording as operating revenue on onetime gains from the sale of underperforming assets 5-85 . 13 to be accounted for as: A. Meet internal sales target D. Sales-type leases 45. The main accounting issues in the Nortel Networks case were: A. Meet predictions of outside securities analysts C. Recording revenue on software systems transactions in an earlier period than when obligated to buy the same in a later period C. Premature revenue recognition and hidden cash reserves B. Operating leases C. Using a cookie jar reserve to delay the recording of revenue into a later period D. Realize revenue B. Capitalization of operating expenses and hidden cash reserves C. Capital leases B. Capitalization of operating expenses and off-balance-sheet entities 47. B. The Big Bath Theory 5-86 . Lease capitalization C. Gemstar TV Guide C. Xerox D. WorldCom 49. Rationalization D. The element of the fraud triangle most directly dealt with in the Excello Telecommunications case is: A. Profit can be deferred if initial revenue exceeds future costs. The accounting rule for deferring profit on a sale-leaseback agreement such as the one dealt with in the Florida Transportation case can best be described as: A. Percentage of completion method D. Cookie jar reserves B.Audit Responsibilities and Accounting Fraud 48. The seller-lessee can defer profit on a sale-leaseback transaction if the seller retains substantially all of the use of the property through the leaseback. Enron B. 51. C. The seller-lessee can defer profit on a sale-leaseback transaction if the seller gives up substantially all of the use of the property through the leaseback. the company tried to manipulate earnings through the use of which accounting technique? A.Chapter 05 . In the Sweat Hog Construction case. Profit can be deferred if the upfront costs exceed future revenues. D. Materiality 50. Pressure/Incentives B. Opportunity C. The accounting issue in the Cubbies Cable case with respect to cable installations costs is closest to the accounting issue in which case? A. Scienter D.Audit Responsibilities and Accounting Fraud 52. He adhere to the business judgment rule and met his fiduciary obligations Essay Questions 5-87 . The legal issue in the Altris Software v PricewaterhouseCoopers case that failed to be proved by the plaintiffs was: A. The legal issue in the CellCyte Genetics Corporation case was: A. Making false and misleading statements in a court trial C. His actions were protected by attorney-client privilege B. While some of his actions may have turned out to be wrong. Which of the following was not an accounting issue in the Sunbeam case? A.Chapter 05 . Swap transactions 53. Channel stuffing C. Privity B. The former CEO of Vivendi Universal. Scienter 55. Privity D. used as his defense in the case that: A. While some of his actions may have turned out to be wrong. Due care 54. Making false and misleading statements in several SEC filings B. there never was an intent to defraud C. Jean-Marie Messier. Ordinary negligence C. Cookie jar reserves B. he did the best that he could to save the company from certain bankruptcy D. Bill and hold sales D. 57. Explain the reasons that these instances were frequent and amounts high during that period of time. What is a swap transaction? What criteria should be used to determine how and when to record revenue on swap transactions? Describe the facts of any one case in the book with respect to proper recording for revenue in swap transactions. The amount and size of earnings restatements were relatively high in the early and mid2000s. 5-88 .Audit Responsibilities and Accounting Fraud 56. Discuss all the factors an auditor should consider in making a materiality judgment. 59. Explain when earnings management may be an ethical practice. Many of the cases discussed in the chapter address the issue of swap transactions. 58.Chapter 05 . 62. Use the fraud triangle to evaluate the actions by those in top management at Enron as the accounting fraud unfolded. 61. Evaluate the ethics at Enron and by those in top management with respect to its operations and accounting and financial reporting techniques.Audit Responsibilities and Accounting Fraud 60. Explain each of the seven financial shenanigans described by Schilit. 63. Be sure to give an example of each one.Chapter 05 . Select either the Xerox or Lucent frauds described in the chapter and explain the accounting techniques used to commit fraud. 5-89 . Explain how and why the quality of financial reporting is an underlying issue in the frauds discussed in the chapter. The quality of financial reporting is an important issue in the chapter. Answers: Answers will vary 5-90 . Use the relevant elements of the decision making model described in chapter 2 including stakeholder and ethical considerations and decide on a course of action for Watkins. Lay told you he would take no steps to act on your concerns.Audit Responsibilities and Accounting Fraud 64.Chapter 05 . After an investigation by the lawyers who said there was nothing to worry about. Answers: Answers will vary 65. Assume you were in Sherron Watkins' position and you informed Ken Lay that the company might implode as a result of the accounting scandal. or virtue theories. If the Company has a Hotline. Of course. Now is he is pondering on a comment his wife made." What might the company be doing and what should Steve do from an ethical reasoning view? Answers: The Company is probably managing earnings. 5-91 . Steve must choose from refusing to assist the company in managing earnings (and probably lose his job) and blowing the whistle. he has just received news that the estimates of the estimated useful life and salvage values were wrong and must be changed. It is yearend. Steve may get to choose to be anonymous. you would think that the company could get done how its estimates affect expenses and those other accounts.Audit Responsibilities and Accounting Fraud 66.Chapter 05 . Steve may also want to discuss the matter with the audit committee. deontology. but after four years. Steve calls his wife to explain why he will be late again. Steve can reason from rights. utilitarianism. Steve is quickly moving up in the accounting department of RAC Inc. that changes the depreciation expense and accumulated depreciation. She said "I'm no accountant. A common practice of "earnings management" is to use "cookie-jar reserves. Which of the following is NOT a motivation to manage earnings? A. The ideal pattern of earnings is volatility each year over a period of time." D. Manipulating asset net valuation amounts to minimize operating expenses for a period B. "Earnings management" is to project smoother earnings from year to year. Delaying needed repairs to a later period D. which of the ethical theories are they most likely following? A. If a company is managing its earnings. Which of the following is NOT considered "earnings management"? A. Which technique was used by both WorldCom and Waste Management to manage earnings? A.Audit Responsibilities and Accounting Fraud Chapter 07 Earnings Management and the Quality of Financial Reporting Answer Key Multiple Choice Questions 1. Companies try to meet or beat Wall Street earnings projections in order to grow market capitalization and increase the value of stock options. All of the above were used 5-92 . Fairness C. B. To smooth net income over time. Managements emphasis on achieving long-term results to meet their financial goals. D. 4. Egoism D. The executives manipulate the earnings in order to match their predetermined target. C. To maximize compensation including bonuses.Chapter 05 . B. Accelerating the recording of revenue into an earlier period C. Virtue 2. C. 3. Rights B. Healy and Wahlen C."? A. Dechow and Skinner B. McKee 6. Thomas E. Healy and Wahlen C. Schipper D. Dechow and Skinner B."? A. Dechow and Skinner B. Thomas E. Healy and Wahlen C.Audit Responsibilities and Accounting Fraud 5."? A. McKee 8. Which of the following author(s) emphasize(s) a "purposeful act by management in pursuit of its own self-interests as might be the case when earnings are manipulated to get the stock price up in advance of the exercise of stock options. McKee 5-93 . Thomas E. Healy and Wahlen C. Schipper D.Chapter 05 . Schipper D. Which of the following author(s) define(s) earnings management as "reasonable and legal management decision making and reporting intended to achieve stable and predictable financial results. Thomas E. Schipper D. Which of the following authors(s) focus(es) on "management's intent to deceive the stakeholders by using accounting devices to positively influence reported earnings. Only outright fraud is an unacceptable earnings management action. Which of the following authors(s) contend(s) "earnings management can be acceptable if linked to the choice of alternative accounting principles and estimates that report higher earnings than other methods might report given the circumstances."? A. Dechow and Skinner B. McKee 7. Changing inventory valuation in order to influence earnings B. From an ethical perspective 10.Chapter 05 . which technique to manage earnings was considered most acceptable? A. Qualitative aspects of the disclosure C. From a virtue perspective B. From a utilitarian perspective C. The existence of statutory or regulator reporting requirements that affect materiality thresholds C. In surveys of managers. Manipulating operating decisions D. especially trends in profitability D. Which of the following is NOT a qualitative factor when assessing materiality? A. The use of simplistic numerical thresholds and rules of thumb 12. A misstatement that changes a loss into income or vice versa D. Quantitative significance of the disclosure D. From which perspective might one be able to rationalize the ethics of earnings management? A. A misstatement that changes a loss into income or vice versa B. A large variance in an accounting estimate compared with the actual determined amount C.Audit Responsibilities and Accounting Fraud 9. Vorhies identifies four perspectives to help CPAs identify key internal control exceptions under the Sarbanes Oxley Act including: A. Accounting manipulation C. An internal control deficiency caused by accounting manipulations B. From a rights perspective D. All were identified 13. 107 identifies the following aspects of disclosure amounts deemed to be material except for: A. Establishing cookie jar reserves 11. Professional judgment 5-94 . Disclosing an item in one year but not in the next year B. The potential effect of the misstatement on trends. SAS No. or non-existent agreements.Audit Responsibilities and Accounting Fraud 14. The best definition of a financial restatement is: A. Internal control requirements under generally accepted auditing standards B. Created cookie jar reserves of advertising revenue to smooth net income. 5-95 . More ethical management D. One of the major costs of restatements is the amount of time between the restatement announcement and the final resolution of the restatement. either voluntarily or under prompting by its auditors or regulators. either voluntarily or under prompting by its auditors or regulators. C. Engaged in round trip transactions whereby Gemstar paid money to a third party to advertise its services and capitalized that cost while the third party used Gemstar's funds to buy advertising from Gemstar. In the Glass Lewis survey of financial statements. disputed. A company. An adjustment of financial information due to an error correction D. Bright line rules are useful in making materiality judgments. 15.Chapter 05 . The disclosure provided on restatements is not adequate. Identifying materiality amounts based on both quantitative and qualitative factors C. revises its public financial information for the current period C. D. A company. Relaxation of materiality standards by the SEC 17. B. Recorded revenue under expired. Each of the following techniques was used by Gemstar TV Guide International in its accounting fraud: A. D. and the company recorded 100% of that amount as revenue while capitalizing the cost of its advertising payments. The SEC Advisory Committee on Improvements in Financial Reporting identified each of the following as a view of equity and credit analysts about investor's views on materiality and financial statement restatements except for: A. revises its public financial information that was previously reported B. B. C. Bright line rules are not really useful in making materiality judgments. and properly reported this as licensing and advertising revenue. Inflated advertising revenue by improperly recording and reporting revenue amounts from multiple-elements transactions. a somewhat surprising possible cause of the decline in restatements in 2008 may have been due to: A. All are part of the definition 16. B. Shifting Current Revenue to a later period B. C. Fastow developed the concept of buying up oil and gas companies to increase Enron's reserves for future sale. B. Creating an allowance for uncollectible accounts and adjusting it at year end. 5-96 . Boosting income with one-time gains C.Chapter 05 . D. C. D. Inc. which equated business success with meeting long-term earnings target. and CFO Romeril. Xerox failed to disclose GAAP violations that led to acceleration in the recognition of approximately $3 billion in equipment revenues. Xerox recognized a greater amount of revenue on leases in early years than warranted and didn't break out revenues that should have been deferred and recognized in future years.'s case? A. C. Releasing questionable reserves into income. Which of the following is NOT mentioned in the Xerox's case? A. D. The SPE created by Fastow enabled Enron to keep debt off its books while benefiting from transfer and use of the cash borrowed by the SPE. Which of the following is NOT true according to Enron's case? A. 20. 19. Recording revenue too soon or of questionable quality D.Audit Responsibilities and Accounting Fraud 18. Fastow worked to structure ventures that met the conditions under GAAP to keep the partnership activities off Enron's books and on the separate books of the partnership. Which of the following earnings management techniques are NOT presented in Lucent Technologies. Fastow created SPE that borrowed money from banks and transferred to Enron in a sale of an operating asset no longer needed by Enron. Shifting current expenses to a later or earlier period 21. Failing to record expenses and related liabilities when future obligations remain. Which of the following is NOT an earnings management technique? A. B. Failing to write down or write off impaired assets. The ethical tone at the top set by CEOs Allaire and Thomas. Xerox misled investors by polishing its reputation on Wall Street and to boost the company's stock price. Xerox prorated the portion of the lease payments that represents the fee for repair services and copier supplies over the term of lease against the financing income. Xerox leases met the criteria under SFAS No. D. Enron had a cutthroat system and encouraged a "yes" culture. 13 to be accounted for as "sales-type" lease. What is the culture at Enron that is discussed in the case? A.Audit Responsibilities and Accounting Fraud 22. Inc. the goal was to remove the bottom 20% of each group every year. Used mark-to-market estimates to inflate earnings in violation of GAAP. Which of the following earnings management techniques are NOT presented in Lucent Technologies. 23. All of the above. Xerox recognized financing revenue when it is earned over the life of the lease. B. C.'s case? A. less any residual value the equipment is expected to retain once the lease expires. D. Recording revenue too soon or of questionable quality D. affecting the gain on transfer and earnings effect. Shifting current expenses to a later or earlier period 25. D.Chapter 05 . Xerox recognized the fair value of the equipment leased as income in the period the lease is delivered. B. 5-97 . C. Selected which operating assets to "sell" to the SPEs. Xerox used the "ROE" method which pulled forward a porting of finance income and recognized it immediately as equipment revenue and the "margin normalization" method which pulled forward a portion of service income and recognized it immediately as equipment revenue. Deliberately over stated the allowance for uncollectible and adjusted it downward in future years. C. Shifting Current Revenue to a later period B. Employees worked later and later. Used reserves to increase earnings when reported amounts were too low. Employees were evaluated in groups. Which of the following is NOT a technique used by Enron to manage earnings? A. What did Xerox's top management do that violated GAAP? A. 24. B. Boosting income with one-time gains C. The best way to characterize the role of Sherron Watkins in the downfall of Enron is: A. B.Chapter 05 . Ironman 27. 28. To select which assets to sell to the SPEs affecting the gain. To establish a mechanism to encourage companies to invest in needed assets while keeping related debt of its books. She directed the internal auditors to examine numerous transactions that led to the discovery of the fraud B. Chewco D. She was sent to jail even though she cooperated with the government in its case against Enron D. What is the original motivation by FASB on SPEs? A. Off-balance-sheet financing activities must be disclosed in the notes to the financial statements. Prohibiting the provision of internal audit service for audit clients. Related-party transactions require disclosure in the notes. C. All of the above.Audit Responsibilities and Accounting Fraud 26. D. C. 29. D. There are several aspects of Enron fraud that are dealt with directly in SOX further connecting Enron to reform in the accounting profession. JEDI B. To sell non-producing assets to the SPE. She gave in to the pressure of Andy Fastow to go along with materially misstated financial statements C. Which of the following is true? A. To keep the large amount of debt off the books. Cactus C. B. Which of the following partnership that Enron created eventually lead Enron to an end? A. She tried to alert Ken Lay about the accounting scandal at Enron 5-98 . auditors. Recording revenue even though the customer is not obligated to pay. C. All of the following are examples of "Boosting Income with One-Time Gains" except for: A. "Too many corporate managers. C.Audit Responsibilities and Accounting Fraud 30. Delaying the recording of expenses to a later year to boost income in the current year. Accelerating the recording of revenues into an earlier year than is warranted. All of the above 31. Buying a lot of chocolate chip cookies. D. storing them for when you have a hunger attack. 33. Barry Minkow B. B. Bernie Ebbers D. The basic ethical principle violated by Andy Fastow in his role as Enron's CFO and involvement with SPEs was: A. B. 32. Including investment income or gains as part of revenue. The expression. He failed to exercise due care in setting up SPEs C. "Cookie jar reserves" can best be described as: A. Boosting profits by selling undervalued assets. C. and then releasing them into your stomach. B. Jerry Seinfeld C. Recording sales that lack economic substance. D. He lied to top management about what he was doing for the SPEs B. D.Chapter 05 . Recording revenue when future services remain to be provided. Including investment income or gains as a reduction in operating expenses. He had a conflict of interests in his dual roles D. Overstating or understating allowances and reversing amounts in the future to smooth out net income over time. Recording revenue before shipment or before the customer's unconditional acceptance. Recording sales that lack economic substance. Arthur Levitt 5-99 . All of the following are examples of "Recording revenue too soon or of questionable quality" except for: A. 34. and analysts are participants in a game of nods and winks" is attributable to: A. The misstatements represented 10% of pre-tax income. 5-100 . companies charge warranty costs to operating expense in the year of sale. C. The company's auditor.S. which was not considered material. who was Xerox's auditor? A. All reporting companies are required to include in their annual reports a report of management on the company's internal control over financial reporting. The company employed aggressive accounting practices to enhance its earnings. Which of the following is NOT an earnings management technique? A. D. 37. B. B. Recording sales that lack economic substance D. Refusal to write-off permitting and/or project costs on impaired or abandoned landfills. Ernst & Young B. 38. Including investment income or gains as part of revenue 36. Deloitte & Touche C. Recording revenue the customer is obligated to pay B. Recording revenue when future services remain to be provided C. Non-GAAP method of capitalization interest on landfill development costs. C. Only U. Arthur Andersen D. The presentation of pro forma information is now required. Which of the following is NOT true? A. 2002. Arthur Andersen. C. Congress passed the "Sarbanes-Oxley Act" on July 30. companies are subject to the disclosure requirements of the Act. The company used the gain to offset unrelated operating expenses which was not in conformity with GAAP. KPMG 39. Which of the following is NOT addressed in the Waste Management's case? A. D.Chapter 05 .Audit Responsibilities and Accounting Fraud 35. had engaged in improper professional conduct. D. In the Xerox case. Under the accrual method. B. Which of the following is NOT an aggressive accounting practice? A. Failure to properly accrue for tax and self-insurance expense. New audit standards include a prohibition against independent auditors providing many non-audit services and mandatory audit partner rotation. Schilit C. Earnings management reflects a conscious choice by management to smooth earnings over time and it does not include devices designed to "cook the books." This statement is from: A. McKee 5-101 . A utilitarian perspective C. It creates a more stable and predictable earnings stream by smoothing net income. PCAOB protects the public interest by oversight of independent audits. Which of the following is NOT McKee's explanation of "earnings management"? A. reliable and transparent financial statements. PCAOB was established before the accounting scandal of Enron. Who identifies seven common financial shenanigans? A. D. Levitt D.Audit Responsibilities and Accounting Fraud 40. Schipper B. 41. PCAOB stands for Public Company Accounting Oversight Board. D. "Earnings management either ignores or does not consider the rights of the investors and creditors to receive accurate. A virtue perspective B. B.Chapter 05 . A rights perspective D. It is a reasonable and legal management decision making and reporting intended to achieve stable and predictable financial results." 43. Which of the statement regarding PCAOB is NOT true? A. A materiality perspective 42. C. B. PCAOB assumes the peer review function over registered CPA firms. C. A smooth net income by choice does not reflect what investors and creditors need or want to know since it masks true performance. Bargain purchase option leases D.Chapter 05 . Which of the following is NOT a motivation to manage earnings in the Lucent Technology case? A. the leases Xerox had signed met the criteria under SFAS No.Audit Responsibilities and Accounting Fraud 44. Meet internal sales target D. Operating leases C. Recording revenue on software systems transactions in an earlier period than when obligated to buy the same in a later period C. The swap transactions used in the Solutions Network case to manage earnings can best be described as: A. Meet predictions of outside securities analysts C. Going to a swap meet and capitalizing purchases instead of expensing them immediately against swap revenue B. 13 to be accounted for as: A. Sales-type leases 45. Recording as operating revenue on onetime gains from the sale of underperforming assets 5-102 . Capital leases B. Premature revenue recognition and off-balance-sheet entities D. Using a cookie jar reserve to delay the recording of revenue into a later period D. Realize revenue B. In the Xerox case. Premature revenue recognition and hidden cash reserves B. Obtain sales bonus 46. Capitalization of operating expenses and hidden cash reserves C. The main accounting issues in the Nortel Networks case were: A. Capitalization of operating expenses and off-balance-sheet entities 47. Pressure/Incentives B.Chapter 05 . The Big Bath Theory 5-103 . D. Gemstar TV Guide C. Enron B. Profit can be deferred if initial revenue exceeds future costs. The accounting rule for deferring profit on a sale-leaseback agreement such as the one dealt with in the Florida Transportation case can best be described as: A. Opportunity C. C. WorldCom 49. Lease capitalization C. Xerox D. Percentage of completion method D. the company tried to manipulate earnings through the use of which accounting technique? A. Profit can be deferred if the upfront costs exceed future revenues. B.Audit Responsibilities and Accounting Fraud 48. 51. Materiality 50. The element of the fraud triangle most directly dealt with in the Excello Telecommunications case is: A. Rationalization D. The seller-lessee can defer profit on a sale-leaseback transaction if the seller retains substantially all of the use of the property through the leaseback. Cookie jar reserves B. The accounting issue in the Cubbies Cable case with respect to cable installations costs is closest to the accounting issue in which case? A. In the Sweat Hog Construction case. The seller-lessee can defer profit on a sale-leaseback transaction if the seller gives up substantially all of the use of the property through the leaseback. he did the best that he could to save the company from certain bankruptcy D. Which of the following was not an accounting issue in the Sunbeam case? A. Scienter 55. there never was an intent to defraud C. Scienter D. Privity B. Channel stuffing C. Due care 54. While some of his actions may have turned out to be wrong. His actions were protected by attorney-client privilege B. Answers will vary 5-104 . The former CEO of Vivendi Universal. Jean-Marie Messier. The legal issue in the Altris Software v PricewaterhouseCoopers case that failed to be proved by the plaintiffs was: A. He adhere to the business judgment rule and met his fiduciary obligations Essay Questions 56.Audit Responsibilities and Accounting Fraud 52.Chapter 05 . While some of his actions may have turned out to be wrong. Cookie jar reserves B. Making false and misleading statements in a court trial C. The legal issue in the CellCyte Genetics Corporation case was: A. Swap transactions 53. Bill and hold sales D. Making false and misleading statements in several SEC filings B. Ordinary negligence C. Explain when earnings management may be an ethical practice. Privity D. used as his defense in the case that: A. Answers will vary 58. Answers will vary 62. Answers will vary 61. The amount and size of earnings restatements were relatively high in the early and mid2000s. Answers will vary 59. Explain each of the seven financial shenanigans described by Schilit. Select either the Xerox or Lucent frauds described in the chapter and explain the accounting techniques used to commit fraud. Use the fraud triangle to evaluate the actions by those in top management at Enron as the accounting fraud unfolded. Answers will vary 5-105 . Be sure to give an example of each one. Discuss all the factors an auditor should consider in making a materiality judgment. Answers will vary 60. Many of the cases discussed in the chapter address the issue of swap transactions.Chapter 05 .Audit Responsibilities and Accounting Fraud 57. Explain the reasons that these instances were frequent and amounts high during that period of time. What is a swap transaction? What criteria should be used to determine how and when to record revenue on swap transactions? Describe the facts of any one case in the book with respect to proper recording for revenue in swap transactions. Answers will vary 64. Assume you were in Sherron Watkins' position and you informed Ken Lay that the company might implode as a result of the accounting scandal. Lay told you he would take no steps to act on your concerns. he has just received news that the estimates of the estimated useful life and salvage values were wrong and must be changed. It is yearend. Now is he is pondering on a comment his wife made. 5-106 . you would think that the company could get done how its estimates affect expenses and those other accounts.Chapter 05 . deontology." What might the company be doing and what should Steve do from an ethical reasoning view? The Company is probably managing earnings. but after four years. Steve may get to choose to be anonymous. Steve may also want to discuss the matter with the audit committee. that changes the depreciation expense and accumulated depreciation. Steve calls his wife to explain why he will be late again. Answers will vary 65. Steve is quickly moving up in the accounting department of RAC Inc. Steve can reason from rights. Explain how and why the quality of financial reporting is an underlying issue in the frauds discussed in the chapter. or virtue theories. The quality of financial reporting is an important issue in the chapter. After an investigation by the lawyers who said there was nothing to worry about.Audit Responsibilities and Accounting Fraud 63. She said "I'm no accountant. Steve must choose from refusing to assist the company in managing earnings (and probably lose his job) and blowing the whistle. Of course. Answers will vary 66. Use the relevant elements of the decision making model described in chapter 2 including stakeholder and ethical considerations and decide on a course of action for Watkins. If the Company has a Hotline. Evaluate the ethics at Enron and by those in top management with respect to its operations and accounting and financial reporting techniques. utilitarianism. principles based C. rules-based B. C. accurate 3. D.S. 2. A common set of accounting standards on an international level can help to achieve each of the following except for: A. Facilitate the understandability of financial reports prepared outside the home country of a potential investor. Tend to be rules-based than objectives-oriented standards B. May present enforcement problems C. B. Provide a foundation for professional judgment and support the implementation of international standards of Auditing (ISAs). IFRS tends to be more ____________ than U.Chapter 05 . Facilitate the enforcement of IFRS and (ISAs). A. All of the above 5-107 . One problem of a more principles-based system that was pointed out in an SEC study is that they: A. Provide a foundation for professional judgment and support the implementation of international financial reporting standards (IFRS). GAAP.Audit Responsibilities and Accounting Fraud Chapter 08 International Financial Reporting: Ethics and Corporate Governance Considerations Multiple Choice Questions 1. consistent D. Use bright-line tests D. Be based on an improved and consistently applied conceptual framework B. Minimize exceptions from the standards D.Audit Responsibilities and Accounting Fraud 4. Clearly state the accounting objective of the standard C. Minimize the detail and structure so that the standard can be operationalized and applied on a consistent basis 5-108 . The SEC study of a principles-based system identifies each of the following characteristics that should guide standards setting except for: A.Chapter 05 . The convergence of IFRS with GAAP 8. The adoption of IFRS in the U. GAAP B.Audit Responsibilities and Accounting Fraud 5. IOSCO can facilitate the cross-border exchange of information to facilitate compliance with IFRS C. 117 B. C. foreign companies that list their stock on the New York Stock Exchange must: A. Use IFRS in their financial statements C.Chapter 05 . C. 200 5-109 . 6. A series of steps to be taken by FASB to adopt IFRS in the U.S. 150 C. dollars D.S.. Either reconcile their statements to U.S. Given that IFRS is not currently required in the U.S. D. The translation of foreign-based currency statements to U.S. 167 D. GAAP or use IFRS D. A map of the highways and freeways to take to drive from Texas to California.S. The SEC roadmap refers to: A.S. The number of countries that are expected to adopt IFRS as their home country standards by 2011 is: A. All of the above 9. Use their home country GAAP in their financial statements listed on the NYSE 7. B. A timetable for adoption of IFRS in the U. The use of home country standards in the U. IOSCO can facilitate the cross-border exchange of information to facilitate compliance with securities laws and regulations D.S. One benefit that may derive from the Memorandum of Understanding is that: A. Reconcile the financial statements in their home country GAAP to U. The International Organization of Securities Commissions (IOSCO) can facilitate the development of IFRS B. A series of steps to be taken by the SEC to adopt IFRS in the U. The concept of "improve and adopt" refers to: A.S. B. S. The principles that underlie U. and European Union to adopt one set of accounting standards B. The agreement that ended World War II 11. The rules that are part of the U. The rules that are part of the U. The commitment of FASB and the International Accounting Standards Board (IASB) to adopt one set of accounting standards C.Chapter 05 . One concern with U.S. Professional judgment in applying the present fairly concept 13. All of the above 5-110 . GAAP and international accounting standards D. The relatively more principles-based IFRS standards requires each of the following except for: A.S. The Norwalk agreement refers to: A.S.S. GAAP can become rules-based exercises during implementation B. The commitment of FASB and IASB to the convergence of U. Dictates the standards to be followed in preparing financial statements under IFRS B. The IASB Framework for the Preparation and Presentation of Financial Statements: A. Serves as a guide to resolving accounting issues that are not addressed directly in a standard D.S. system are not based on an underlying conceptual framework D. The principles that underlie U. system are not based on any principles 12. The commitment of the U. GAAP identified by Schipper is: A. Professional judgment at both the transaction and financial statement levels D.S. Professional judgment in applying the true and fair view override C. Requires an entity to use its judgment in developing and applying and accounting policy that results in information that is relevant and reliable C. Professional judgment based on the substance over form concept B. GAAP do not provide any implementation guidance C.Audit Responsibilities and Accounting Fraud 10. The principles-based system might lead preparers of financial statements to try and justify earnings by applying a substance over form concept. The joint conceptual framework identifies the concept of representational faithfulness as an element of relevance in determining useful information C. B. D. B. C. The principles-based system might lead preparers of financial statements to try and justify specific accounting outcome based on commercial drivers.Chapter 05 . It is more difficult to implement a set of generally accepted accounting and financial reporting standards. The joint conceptual framework identifies the concept of representational faithfulness as an element of reliability in determining useful information B. Capitalizing lease payments at their present values to record an expense instead of an asset C. 16.Audit Responsibilities and Accounting Fraud 14. All of the above 5-111 . Emphasizing form over substance D. The FASB and IASB joint conceptual framework differs from the U. It is more difficult to make materiality judgments. Lease standards in the U. can be manipulated to achieve the desired goal of: A. conceptual framework in that: A. The FASB and IASB joint conceptual framework project has as its objective: A. 15.S. The replacement of a rules-bases system with a principles-based approach to accounting and financial reporting standards. C. The reason some people are concerned about the possibility for earnings management under IFRS is: A. The developing of a single set of generally accepted accounting and financial reporting standards.S. The developing of a sound foundation for developing future accounting standards. The replacement of existing FASB and IASB separate conceptual framework projects. Capitalizing lease payments at their present values to record an asset instead of an expense B. The joint conceptual framework considers representational faithfulness as a foundational element of useful information 17. D. The joint conceptual framework excludes representational faithfulness from the determination of useful information D. GAAP allows for the revaluation of property. the word "reserve" always means: A. Provisions are an element of shareholders' equity whereas a reserve is a liability recognized by charges against profit C. The rules under IFRS for property. Impairment B..S. Understate net assets and equity B. Record amounts to get tax deductions 5-112 . Record amounts in the name of prudence D. The difference between provisions and reserves can best be characterized as: A. Overstate net assets and equity C. plant. GAAP because: A. IFRS allows for the revaluation of property. A depreciation write-down 20. Deliberately measures an asset at an unreasonably low value C. Sets up unnecessarily high provisions D. Provisions reduce assets to net realizable value whereas reserves are liabilities recognized by charges against profit D. Each of the following can be a motivation to record a secret reserve except for: A. plant.Chapter 05 . and equipment differ from U. Reserves always reduce profits 21. Sets up unnecessarily low provisions 22. A "secret" or "hidden" reserve can occur when a company does one or more of the following except for: A.S. In the U.S. Provision D. and equipment B. and equipment C.S. U. IFRS prohibits accelerated methods of depreciation 19. Fails to recognize an asset in its balance sheet B.Audit Responsibilities and Accounting Fraud 18. U. A market value adjustment C. plant. Provisions are liabilities recognized by charges against profit whereas a reserve is an element of shareholders' equity B. GAAP permits the LIFO method of valuation D. Those entities with public accountability that publish general purpose financial statements B.S. Those that conform to IFRS in effect at the current reporting date D. cost method only for IFRS for SMEs B. It is probable that an outflow of economic benefits will be required to settle the obligation C.Audit Responsibilities and Accounting Fraud 23. Capitalizing borrowing costs if certain criteria are met for full-IFRS. The provisions footnote in the Siemens Annual Report presented in the chapter requires recognition in the balance sheet when each of the following criteria is met except for: A. Cost or revaluation method for full-IFRS. Any of the above can be used based on the judgment of the accountants 5-113 . Those entities without public accountability that publish general purpose financial statements C. Those that conform to IFRS in effect in the subsequent reporting period C. The company has a present legal or constructive obligation as a result of a past event B. cost or revaluation for IFRS for SMEs C. Those entities that use IFRS in their general purpose financial statements D. Those entities that use U. expensing of all research and development costs as incurred for SMEs D. Expensing of all research and development costs as incurred for full-IFRS and capitalizing and amortizing development costs that meet specific criteria. Those that conform to the home country standards B. Accounting policies that should be used in the first period of IFRS adoption should be: A. expensing all borrowing costs for IFRS for SMEs 26. It is reasonably possible that an outflow of economic benefits will be required to settle the obligation D. Revaluation method for full-IFRS. Each of the following is an example of the difference between application of full-IFRS and IFRS for SMEs except for: A.Chapter 05 . The term "small and medium-sized" entities in the IASB's pronouncement on IFRS for Small and Medium-sized Entities (SMEs) defines SMEs as: A. A reliable estimate can be made of the amount of the obligation 24. GAAP in their general purpose financial statements 25. Certification of financial statements by CEOs and CFOs B. Family ownership of Chinese entities C. The comply or explain principle refers to: A. Compliance with the Sarbanes-Oxley Act 28. Explain any gaps between existing corporate governance practices and IFRS requirements D. A separate audit committee and a board of directors B. All of the above 31. One feature of corporate governance in Germany that makes it stand out when compared to the U. the board that carries out management directives for the benefit of various stakeholder groups is: A. Work with the managing board in running day-to-day operations D. Explain any gaps between existing corporate governance practices and recommendations by authoritative bodies/pronouncements C. Blockholders of Chinese entities D. State investors in Chinese entities B. A dual board of directors system D. Manage the enterprise for the benefit of various stakeholder groups B. The Management Board B. Work with the auditors in their review of financial statements C. The Board of Governors D. The Board of Trustees 29. Certification of corporate governance practices by CEOS and CFOs 5-114 . The primary role of the Supervisory Board is to: A. The Supervisory Board C.Audit Responsibilities and Accounting Fraud 27.Chapter 05 . Oversee and advise the Managing Board on policy matters 30.S. A unitary board of directors system C. is: A. A distinguishing characteristic(s) of corporate governance in China is the importance of: A. Under a dual board system. Conflicts of interest should be avoided and. Allowing shareholders the right of redress for violations of their rights D. A large industrial group may own shares in an Indian entity D. All of the above 5-115 . The member body is prohibited by law or regulation from complying with certain parts of the Code and does not comply with all other parts of the code D. The member body is prohibited by law or regulation from complying with certain parts of the Code and complies with all other parts of the code C. they should be reported to the CEO C. Relatively minor gifts can be made if normal and customary B.Audit Responsibilities and Accounting Fraud 32.Chapter 05 . Timely and accurate disclosure of all material matters regarding the corporation and its financial situation 35. The Tata Group's code of ethics contains each of the following provisions except for: A. A distinguishing characteristic(s) of corporate governance in India is the importance of: A. if they exist. Adoption of the unitary model of board of directors C. The code prohibits the use of confidential information without the explicit approval of management D. Family ownership of Indian entities C. A member body of the International Federation of Accountants (IFAC) should follow the provisions in the Code of Ethics for Professional Accountants (IFAC Code) when each of the following exists except for: A. Promote transparent and efficient markets B. A member body of IFAC applies less stringent standards than those stated in the IFAC Code B. Some government ownership of Indian entities B. The OECD Principles of Corporate Governance contain each of the following recommendations except for: A. Insider information can be used as long as it is approved by management 34. All of the above 33. The report states in the scope paragraph that the selection of audit procedures requires the exercise of professional judgment including the assessment of the risks of material misstatements. GAAS C.S. GAAS differ significantly D. ISAs are the same as U.S. Local laws or regulations differ from or conflict with. Which of the following statements is most accurate with respect to the similarity between ISAs and U. Local laws or regulations are the same as ISAs 37. whether due to error or fraud B. To obtain reasonable assurance IFRS internationally D.S. ISAs are quite similar to U. C.Chapter 05 . GAAS? A. audit reports include all of the following except for: A. International Standards of Auditing (ISAs) should be used by members of IFAC unless: A. ISAs have replaced U. All of the above 39. ISAs and U. To obtain reasonable assurance whether the financial statements are prepared in accordance with GAAP in the U. GAAS B. They conflict with IFRS D. The opinion paragraph can be couched in either the words present fairly or a true and fair view C. The auditor evaluates audit evidence to do which of the following? A.S.S. Differences between international audit report language and language in U. the standards of the International Auditing and Assurances Board (IAASB) C. A separate paragraph is provided for those entities required by law to report on compliance with legal and regulatory requirements D. GAAS 38.S.Audit Responsibilities and Accounting Fraud 36. The report acknowledges management's responsibility for the financial statements 5-116 . To obtain reasonable assurance about whether the financial statements give a true or fair view or are presented fairly B.S. They conflict with the auditing standards in the home country B. It is used to determine which international auditing standards should be used. 41. Parmalat B. The trigger event that led to the disclosure of the scandal at Parmalat was: A. One way to characterize the term "true and fair view" is that: A.Audit Responsibilities and Accounting Fraud 40. B. B. The Board failed to meet its obligations with respect to compliance procedures at Siemens C. 43. Almost €4 billion of company funds that were supposed to be held in an account at Bank of America did not exist. It is a governing criterion by which financial statements are to be judged. Parmalat officers violated the Foreign Corrupt Practices Act.Chapter 05 . Satyam C. It is used to assess whether the entity has met the comply or explain provisions in corporate governance codes. The Board failed to adequately supervise the auditors of Siemens D. Bat-A-Bing Construction D. The company sold sour milk. The case that deals with conflicts between management and the board of directors and the role of family members in various business entities is: A. The Board created a corporate culture that contributed toward tolerating and even rewarding bribery 42. Siemens Aktiengesellschaft case. C. All of the above. C. The company stuffed the channels with product that it eventually was not purchased by customers. D. each of the following charges were made against the company's Managing Board except for: A. Enron 5-117 . D.S. The Board failed to ensure that Siemens met the U. In the SEC v. regulatory and anti-bribery provisions of the Foreign Corrupt Practices Act B. are there any concerns that regulators and standard setters should have about moving towards the adoption of IFRS in the U. Explain why you think the authors of studies cited in the text were concerned about whether a principles-based approach to standard setting might lead to earnings management. Unapproved claims C. From a U. A. The failure of the company to adhere to SEC rules and the accounting for proved reserves D.? Why are they concerns? 47. The failure of the company to properly account for oil exploration costs B.Audit Responsibilities and Accounting Fraud 44.S. The Bat-A-Bing case deals with which of the following accounting issues. Proved reserves B. Contractual allowances D. 5-118 . The failure of the company to adhere to provisions of the Foreign Corrupt Practices Act C. perspective. All of the above 45. Franchise revenue Essay Questions 46.Chapter 05 . The primary accounting issue in the Royal Dutch Shell case is: A.S. S.Chapter 05 . Full-IFRS permits the revaluation of property. In the U. Why do you think IFRS for SMEs does not permit revaluation while full-IFRS does? Are these inconsistent requirements? 50. evaluate whether you think the U.S. system is preferable or the German system.Audit Responsibilities and Accounting Fraud 48. 5-119 .. Explain the role of ethics and virtue-based principles in evaluating whether financial information faithfully represents economic phenomena. and equipment while IFRS for SMEs does not. the cost method (less amortization) must be used. with those in Germany? Where differences exist. is it possible to justify the use of the revaluation technique? Be sure to describe relevant concepts in answering this question.S. 49. plant. From a conceptual framework perspective. Compare and contrast corporate governance provisions in the U. Why do you think this may be the case? 5-120 . It has been said that there is more conformity in international auditing standards around the world than on international financial reporting standards.S. what is such a code trying to accomplish? 53.Chapter 05 . Why is it important to have a Global Code of Ethics for professional accountants around the world? That is.Audit Responsibilities and Accounting Fraud 51. In China and India different ownership groups often play a role much more important than these groups play in the U. Describe the different ownership patterns in China and India. Why do you think these groups have a larger role to play? Are there any concerns about the fact that they play such a larger role? 52. 55. In some countries the laws and regulations play a much bigger role in establishing accounting and financial reporting standards than in the U.Audit Responsibilities and Accounting Fraud 54. Consider the discussion in the chapter about establishing one set of accounting standards and comment on whether you think there should be one set of educational standards for accounting students at educational institutions in countries that comply with IFRS. Discuss the difficulties that may arise on an international level in the process of developing IFRS given the varying influences of governments and regulators in the national standard setting process.Chapter 05 . Should there be a uniform CPA (Chartered Accountants) Exam for all such students? Why or why not? 5-121 .S. Provide a foundation for professional judgment and support the implementation of international standards of Auditing (ISAs). accurate 3. A. A common set of accounting standards on an international level can help to achieve each of the following except for: A.Audit Responsibilities and Accounting Fraud Chapter 08 International Financial Reporting: Ethics and Corporate Governance Considerations Answer Key Multiple Choice Questions 1. GAAP. consistent D.S. All of the above 5-122 . C. Use bright-line tests D. Tend to be rules-based than objectives-oriented standards B. rules-based B. Provide a foundation for professional judgment and support the implementation of international financial reporting standards (IFRS). IFRS tends to be more ____________ than U. D. B. May present enforcement problems C. Facilitate the enforcement of IFRS and (ISAs). Facilitate the understandability of financial reports prepared outside the home country of a potential investor. 2. One problem of a more principles-based system that was pointed out in an SEC study is that they: A.Chapter 05 . principles based C. S. Minimize exceptions from the standards D. B.S.S. A series of steps to be taken by the SEC to adopt IFRS in the U. foreign companies that list their stock on the New York Stock Exchange must: A. GAAP or use IFRS D. Minimize the detail and structure so that the standard can be operationalized and applied on a consistent basis 5. The translation of foreign-based currency statements to U. A series of steps to be taken by FASB to adopt IFRS in the U.Audit Responsibilities and Accounting Fraud 4.S. Given that IFRS is not currently required in the U.S. C.S.S.Chapter 05 . Use their home country GAAP in their financial statements listed on the NYSE 7. B. D. The use of home country standards in the U. A map of the highways and freeways to take to drive from Texas to California.. GAAP B. Use IFRS in their financial statements C. C. Clearly state the accounting objective of the standard C. The concept of "improve and adopt" refers to: A. A timetable for adoption of IFRS in the U. The SEC roadmap refers to: A. Be based on an improved and consistently applied conceptual framework B. dollars D. The adoption of IFRS in the U. The SEC study of a principles-based system identifies each of the following characteristics that should guide standards setting except for: A. 6.S. Either reconcile their statements to U. The convergence of IFRS with GAAP 5-123 .S. Reconcile the financial statements in their home country GAAP to U. The International Organization of Securities Commissions (IOSCO) can facilitate the development of IFRS B. 200 10. One concern with U. GAAP can become rules-based exercises during implementation B. The commitment of the U.S. The commitment of FASB and IASB to the convergence of U. All of the above 9. The commitment of FASB and the International Accounting Standards Board (IASB) to adopt one set of accounting standards C. One benefit that may derive from the Memorandum of Understanding is that: A. The principles that underlie U.S. 167 D.Chapter 05 . GAAP do not provide any implementation guidance C. The principles that underlie U.S.S. The rules that are part of the U.S.S. system are not based on any principles 5-124 .Audit Responsibilities and Accounting Fraud 8. GAAP and international accounting standards D. IOSCO can facilitate the cross-border exchange of information to facilitate compliance with IFRS C. GAAP identified by Schipper is: A. The agreement that ended World War II 11. 150 C. The rules that are part of the U. IOSCO can facilitate the cross-border exchange of information to facilitate compliance with securities laws and regulations D. system are not based on an underlying conceptual framework D. 117 B. The number of countries that are expected to adopt IFRS as their home country standards by 2011 is: A. and European Union to adopt one set of accounting standards B.S. The Norwalk agreement refers to: A. The developing of a single set of generally accepted accounting and financial reporting standards. The IASB Framework for the Preparation and Presentation of Financial Statements: A. D. D. The developing of a sound foundation for developing future accounting standards. The replacement of existing FASB and IASB separate conceptual framework projects. The relatively more principles-based IFRS standards requires each of the following except for: A. 5-125 . Professional judgment in applying the present fairly concept 13.Chapter 05 . The FASB and IASB joint conceptual framework project has as its objective: A. It is more difficult to implement a set of generally accepted accounting and financial reporting standards. The replacement of a rules-bases system with a principles-based approach to accounting and financial reporting standards.Audit Responsibilities and Accounting Fraud 12. The principles-based system might lead preparers of financial statements to try and justify specific accounting outcome based on commercial drivers. It is more difficult to make materiality judgments. Serves as a guide to resolving accounting issues that are not addressed directly in a standard D. Requires an entity to use its judgment in developing and applying and accounting policy that results in information that is relevant and reliable C. Professional judgment based on the substance over form concept B. All of the above 14. The principles-based system might lead preparers of financial statements to try and justify earnings by applying a substance over form concept. Professional judgment at both the transaction and financial statement levels D. Dictates the standards to be followed in preparing financial statements under IFRS B. 15. B. C. C. Professional judgment in applying the true and fair view override C. The reason some people are concerned about the possibility for earnings management under IFRS is: A. B. conceptual framework in that: A. plant.S. Capitalizing lease payments at their present values to record an asset instead of an expense B. IFRS prohibits accelerated methods of depreciation 19. A depreciation write-down 5-126 . the word "reserve" always means: A. GAAP because: A. All of the above 18. plant. and equipment C. A market value adjustment C. Emphasizing form over substance D. Capitalizing lease payments at their present values to record an expense instead of an asset C. GAAP permits the LIFO method of valuation D. The rules under IFRS for property.S.Audit Responsibilities and Accounting Fraud 16. plant. U.S. The joint conceptual framework identifies the concept of representational faithfulness as an element of reliability in determining useful information B.Chapter 05 .. Provision D. The joint conceptual framework identifies the concept of representational faithfulness as an element of relevance in determining useful information C. In the U. U. and equipment differ from U. The joint conceptual framework excludes representational faithfulness from the determination of useful information D.S. The joint conceptual framework considers representational faithfulness as a foundational element of useful information 17. GAAP allows for the revaluation of property. The FASB and IASB joint conceptual framework differs from the U.S. Lease standards in the U. Impairment B. can be manipulated to achieve the desired goal of: A.S. IFRS allows for the revaluation of property. and equipment B. The provisions footnote in the Siemens Annual Report presented in the chapter requires recognition in the balance sheet when each of the following criteria is met except for: A. Provisions are liabilities recognized by charges against profit whereas a reserve is an element of shareholders' equity B. Reserves always reduce profits 21. A "secret" or "hidden" reserve can occur when a company does one or more of the following except for: A. Understate net assets and equity B. Record amounts to get tax deductions 23.Chapter 05 .Audit Responsibilities and Accounting Fraud 20. Deliberately measures an asset at an unreasonably low value C. Fails to recognize an asset in its balance sheet B. Each of the following can be a motivation to record a secret reserve except for: A. It is probable that an outflow of economic benefits will be required to settle the obligation C. Overstate net assets and equity C. Sets up unnecessarily high provisions D. It is reasonably possible that an outflow of economic benefits will be required to settle the obligation D. A reliable estimate can be made of the amount of the obligation 5-127 . Provisions reduce assets to net realizable value whereas reserves are liabilities recognized by charges against profit D. Provisions are an element of shareholders' equity whereas a reserve is a liability recognized by charges against profit C. Sets up unnecessarily low provisions 22. The company has a present legal or constructive obligation as a result of a past event B. Record amounts in the name of prudence D. The difference between provisions and reserves can best be characterized as: A. Chapter 05 - Audit Responsibilities and Accounting Fraud 24. The term "small and medium-sized" entities in the IASB's pronouncement on IFRS for Small and Medium-sized Entities (SMEs) defines SMEs as: A. Those entities with public accountability that publish general purpose financial statements B. Those entities without public accountability that publish general purpose financial statements C. Those entities that use IFRS in their general purpose financial statements D. Those entities that use U.S. GAAP in their general purpose financial statements 25. Each of the following is an example of the difference between application of full-IFRS and IFRS for SMEs except for: A. Cost or revaluation method for full-IFRS; cost method only for IFRS for SMEs B. Revaluation method for full-IFRS; cost or revaluation for IFRS for SMEs C. Expensing of all research and development costs as incurred for full-IFRS and capitalizing and amortizing development costs that meet specific criteria; expensing of all research and development costs as incurred for SMEs D. Capitalizing borrowing costs if certain criteria are met for full-IFRS; expensing all borrowing costs for IFRS for SMEs 26. Accounting policies that should be used in the first period of IFRS adoption should be: A. Those that conform to the home country standards B. Those that conform to IFRS in effect in the subsequent reporting period C. Those that conform to IFRS in effect at the current reporting date D. Any of the above can be used based on the judgment of the accountants 27. One feature of corporate governance in Germany that makes it stand out when compared to the U.S. is: A. A separate audit committee and a board of directors B. A unitary board of directors system C. A dual board of directors system D. Compliance with the Sarbanes-Oxley Act 5-128 Chapter 05 - Audit Responsibilities and Accounting Fraud 28. Under a dual board system, the board that carries out management directives for the benefit of various stakeholder groups is: A. The Management Board B. The Supervisory Board C. The Board of Governors D. The Board of Trustees 29. The primary role of the Supervisory Board is to: A. Manage the enterprise for the benefit of various stakeholder groups B. Work with the auditors in their review of financial statements C. Work with the managing board in running day-to-day operations D. Oversee and advise the Managing Board on policy matters 30. A distinguishing characteristic(s) of corporate governance in China is the importance of: A. State investors in Chinese entities B. Family ownership of Chinese entities C. Blockholders of Chinese entities D. All of the above 31. The comply or explain principle refers to: A. Certification of financial statements by CEOs and CFOs B. Explain any gaps between existing corporate governance practices and recommendations by authoritative bodies/pronouncements C. Explain any gaps between existing corporate governance practices and IFRS requirements D. Certification of corporate governance practices by CEOS and CFOs 32. A distinguishing characteristic(s) of corporate governance in India is the importance of: A. Some government ownership of Indian entities B. Family ownership of Indian entities C. A large industrial group may own shares in an Indian entity D. All of the above 5-129 Chapter 05 - Audit Responsibilities and Accounting Fraud 33. The Tata Group's code of ethics contains each of the following provisions except for: A. Relatively minor gifts can be made if normal and customary B. Conflicts of interest should be avoided and, if they exist, they should be reported to the CEO C. The code prohibits the use of confidential information without the explicit approval of management D. Insider information can be used as long as it is approved by management 34. The OECD Principles of Corporate Governance contain each of the following recommendations except for: A. Promote transparent and efficient markets B. Adoption of the unitary model of board of directors C. Allowing shareholders the right of redress for violations of their rights D. Timely and accurate disclosure of all material matters regarding the corporation and its financial situation 35. A member body of the International Federation of Accountants (IFAC) should follow the provisions in the Code of Ethics for Professional Accountants (IFAC Code) when each of the following exists except for: A. A member body of IFAC applies less stringent standards than those stated in the IFAC Code B. The member body is prohibited by law or regulation from complying with certain parts of the Code and complies with all other parts of the code C. The member body is prohibited by law or regulation from complying with certain parts of the Code and does not comply with all other parts of the code D. All of the above 36. International Standards of Auditing (ISAs) should be used by members of IFAC unless: A. They conflict with the auditing standards in the home country B. Local laws or regulations differ from or conflict with, the standards of the International Auditing and Assurances Board (IAASB) C. They conflict with IFRS D. Local laws or regulations are the same as ISAs 5-130 The opinion paragraph can be couched in either the words present fairly or a true and fair view C. The auditor evaluates audit evidence to do which of the following? A. GAAS C.S. whether due to error or fraud B.S. Differences between international audit report language and language in U. To obtain reasonable assurance about whether the financial statements give a true or fair view or are presented fairly B. D. The report states in the scope paragraph that the selection of audit procedures requires the exercise of professional judgment including the assessment of the risks of material misstatements. To obtain reasonable assurance whether the financial statements are prepared in accordance with GAAP in the U. All of the above. The report acknowledges management's responsibility for the financial statements 40. To obtain reasonable assurance IFRS internationally D. It is used to determine which international auditing standards should be used.S. ISAs are quite similar to U. C. GAAS B. Which of the following statements is most accurate with respect to the similarity between ISAs and U.S.S.Chapter 05 . GAAS? A.Audit Responsibilities and Accounting Fraud 37.S. audit reports include all of the following except for: A. One way to characterize the term "true and fair view” is that: A. GAAS differ significantly D. C. 5-131 . B.S. It is a governing criterion by which financial statements are to be judged. It is used to assess whether the entity has met the comply or explain provisions in corporate governance codes. All of the above 39. ISAs are the same as U. ISAs have replaced U. ISAs and U. A separate paragraph is provided for those entities required by law to report on compliance with legal and regulatory requirements D. GAAS 38. The Board failed to meet its obligations with respect to compliance procedures at Siemens C. each of the following charges were made against the company's Managing Board except for: A. regulatory and anti-bribery provisions of the Foreign Corrupt Practices Act B. 43.S. Siemens Aktiengesellschaft case. The Board failed to adequately supervise the auditors of Siemens D. The failure of the company to properly account for oil exploration costs B. Parmalat officers violated the Foreign Corrupt Practices Act. The company sold sour milk. Parmalat B. The company stuffed the channels with product that it eventually was not purchased by customers. The primary accounting issue in the Royal Dutch Shell case is: A. The case that deals with conflicts between management and the board of directors and the role of family members in various business entities is: A. Enron 44. C. The Board created a corporate culture that contributed toward tolerating and even rewarding bribery 42.Chapter 05 . D. The trigger event that led to the disclosure of the scandal at Parmalat was: A. The failure of the company to adhere to provisions of the Foreign Corrupt Practices Act C. All of the above 5-132 . Almost €4 billion of company funds that were supposed to be held in an account at Bank of America did not exist. The failure of the company to adhere to SEC rules and the accounting for proved reserves D. Satyam C. B. In the SEC v.Audit Responsibilities and Accounting Fraud 41. The Board failed to ensure that Siemens met the U. Bat-A-Bing Construction D. S. the cost method (less amortization) must be used. In the U. Explain why you think the authors of studies cited in the text were concerned about whether a principles-based approach to standard setting might lead to earnings management. Answers will vary 48. Explain the role of ethics and virtue-based principles in evaluating whether financial information faithfully represents economic phenomena. The Bat-A-Bing case deals with which of the following accounting issues. perspective.S. Answers will vary 49. Unapproved claims C.? Why are they concerns? Answers will vary 47. is it possible to justify the use of the revaluation technique? Be sure to describe relevant concepts in answering this question.Audit Responsibilities and Accounting Fraud 45. From a conceptual framework perspective.. are there any concerns that regulators and standard setters should have about moving towards the adoption of IFRS in the U. A.S.Chapter 05 . From a U. Full-IFRS permits the revaluation of property. Contractual allowances D. plant. Proved reserves B. Franchise revenue Essay Questions 46. and equipment while IFRS for SMEs does not. Why do you think IFRS for SMEs does not permit revaluation while full-IFRS does? Are these inconsistent requirements? Answers will vary 5-133 . It has been said that there is more conformity in international auditing standards around the world than on international financial reporting standards. Describe the different ownership patterns in China and India. Why do you think these groups have a larger role to play? Are there any concerns about the fact that they play such a larger role? Answers will vary 52. Answers will vary 5-134 . evaluate whether you think the U. what is such a code trying to accomplish? Answers will vary 53.Chapter 05 . with those in Germany? Where differences exist.S. Answers will vary 51. Compare and contrast corporate governance provisions in the U. Why is it important to have a Global Code of Ethics for professional accountants around the world? That is. Discuss the difficulties that may arise on an international level in the process of developing IFRS given the varying influences of governments and regulators in the national standard setting process.S. In some countries the laws and regulations play a much bigger role in establishing accounting and financial reporting standards than in the U.Audit Responsibilities and Accounting Fraud 50.S.S. In China and India different ownership groups often play a role much more important than these groups play in the U. Why do you think this may be the case? Answers will vary 54. system is preferable or the German system. Should there be a uniform CPA (Chartered Accountants) Exam for all such students? Why or why not? Answers will vary 5-135 . Consider the discussion in the chapter about establishing one set of accounting standards and comment on whether you think there should be one set of educational standards for accounting students at educational institutions in countries that comply with IFRS.Audit Responsibilities and Accounting Fraud 55.Chapter 05 .