Sally is the only student from a foreign country in an Auditing class. On the day of the
midterm exam, Sally asks the teacher whether she could use a dictionary to translate
English words to her native tongue so she can better understand the questions. What do
you think the instructor should do if she follows the ethical principle of justice?
A. Allow Sally to use the dictionary since she is at a disadvantage
B. Not allow Sally to use the dictionary because she should know enough English to
get by
C. Allow the other students to bring in some tool to give them an advantage
D. None of these
Answer:
Utilitarian philosophers are divided into two types: act utilitarian and
A. Rule utilitarian
B. Individual utilitarian
C. Ethical utilitarian
D. Benefit utilitarian
Answer:
The most important duty of public accounting is to the:
A. Securities Exchange Commission
B. Current stockholders
C. Management
D. Investing public
Answer:
Adverse opinions are preceded by a separate paragraph that should meet 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. Entitled “Basis for Adverse Opinion”
Answer:
If a client refuses to accept an auditors’ report that has been modified, the public
accounting firm should withdraw from the engagement and give its reasons in writing
to the board of directors except when:
A. The auditor is unable to obtain sufficient appropriate evidence about a suspected
illegal act
B. The client fails to account for or disclose properly a material amount connected with
an illegal act
C. The auditor is unable to estimate amounts involved in an illegal act
D. The auditor is unable to observe the physical inventory
Answer:
Typically, when a going concern issue exists the auditor should:
A. Issue an unmodified opinion with an emphasis-of-matter 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 these
Answer:
The SEC’s position on independence can best be characterized as:
A. Proscribing certain financial interests with the client
B. Proscribing certain business relationships with the client
C. Restricting the provision of certain nonaudit services to audit clients
D. All of these
Answer:
Which of the following is not an element of the auditor’s responsibility 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
Answer:
In the U.S., the word “reserve” always means:
A. Impairment
B. A market value adjustment
C. Provision
D. A depreciation write-down
Answer:
In the Imperial Valley Thrift & Loan case, each of the following were reasons for the
going concern issue except for:
A. The magnitude of loan losses
B. Insufficient equity capital
C. Operating losses over an extended period of time
D. Questions about the collectability of outstanding loans
Answer:
Which of the following is not a consideration in determining a measure of materiality?
A. Risks of material misstatements due to fraud
B. Quantitative assessment of the importance of the difference of opinion with client
management on an accounting issues
C. Qualitative assessment of the importance of the difference of opinion with client
management on an accounting issues
D. Importance of audit committee in the organization
Answer:
A unique aspect of the HealthSouth case discussed in the text of this chapter is:
A. The external auditors failed to assess whether the internal controls operated as
intended
B. Top management certified that the financial statements were accurate
C. The external auditors violated the independence standards because they were
involved in a business venture with members of top management
D. Top management hyped the stock price to increase the value of their stock options
Answer:
Each of the following is an ethical issue in business except for:
A. Honesty and fairness
B. Independence
C. Conflicts of interest
D. Fraud
Answer:
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 and reasons for fraud 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 these.
Answer:
IFRS tends to be more ____________ than U.S. GAAP.
A. rules-based
B. principles-based
C. consistent
D. accurate
Answer:
What is a worrisome consequence under the joint and several liability principle?
A. 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. Only the negligent party considered to have “deep pockets” is held liable for
damages
D. Each negligent party could be held liable for the total of damages suffered
Answer:
The primary accounting issue in the Royal Ahold case is:
A. Fraudulent recording of revenues on sales to customers
B. Fraudulent use of company resources by top management for personal purposes
C. Fraudulent inflation of promotional allowances to increase operating income
D. Fraudulent inflation of inventory to reduce losses on the income statement
Answer:
Which of the following relationships do not impair CPA-auditor independence?
A. Financial relationships with the client
B. Business relationships with the client
C. Family relationships whereby an immediate family member holds a
decision-making position with the client
D. Relationships where a best friend serves in a financial reporting oversight role with
the client
Answer:
The ancient Greeks thought of the virtues as characteristics of behavior that:
A. Could lead to a good life
B. Make up the ‘six pillars of character”
C. Support the rights theory
D. All of these
Answer:
Rest’s “Four Component Model of Morality” can best be described as:
A. A description of the values that influence ethical decision making
B. A model of the relationship between ethical action and one’s level of moral
development
C. A model of moral judgment based on one’s possession of certain virtues of behavior
D. All of these
Answer:
The reason some people are concerned about the possibility for earnings management
under IFRS is:
A. The principles-based system might lead preparers of financial statements to try and
justify earnings by applying a substance over form concept
B. The principles-based system might lead preparers of financial statements to try and
justify specific accounting outcome based on commercial drivers
C. It is more difficult to make materiality judgments
D. It is more difficult to implement a set of generally accepted accounting and financial
reporting standards
Answer:
According to CLSA Corporate Governance Watch 2012:
A. India’s corporate governance score declined by three percentage points from 2010 to
2012
B. China’s corporate governance score increased by four percentage points from 2010
to 2012
C. Singapore had the highest corporate governance score
D. All of these
Answer:
The actions of Diem-Thi Li best illustrate
A. System 1 thinking
B. System 2 thinking
C. Moral blindness
D. Pursuit of self-interests
Answer:
The SEC v. Zurich Financial Services case deals with:
A. Zurich’s use of finite reinsurance transactions to inflate improperly financial
performance
B. Zurich’s use of false insurance invoices to inflate revenues
C. Failure of Zurich’s board of directors to carry out its fiduciary duties
D. Failure of the auditors to exercise the degree of care and professional skepticism
expected in an audit
Answer:
Which of the following was not pointed to by the SEC as a motivation for fraud in the
Xerox’s case?
A. Xerox misled investors by polishing its reputation on Wall Street and to boost the
company’s stock price.
B. Xerox top management overrode the internal control to manipulate earnings.
C. Xerox failed to disclose GAAP violations that led to acceleration in the recognition
of approximately $3 billion in equipment revenues.
D. 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.
Answer:
The difference between provisions and reserves can best be characterized as:
A. Provisions are liabilities recognized by charges against profit whereas a reserve is
an element of shareholders’ equity
B. Provisions are an element of shareholders’ equity whereas a reserve is a liability
recognized by charges against profit
C. Provisions reduce assets to net realizable value whereas reserves are liabilities
recognized by charges against profit
D. Reserves always reduce profits
Answer:
Under the Private Securities Litigation Reform Act, if an auditor concludes that an
illegal act with a material effect on the financial statements has been reported to, but not
dealt with by senior management, the auditor should then report his/her conclusions to
A. The Securities and Exchange Commission
B. The company’s board of directors
C. The office of the controller/comptroller for the appropriate state
D. The Federal Bureau of Investigation
Answer:
Michael Josephson, founder of the Josephson Institute of Ethics, is credited for
developing
A. Book of virtues
B. Care and response orientation
C. Six Pillars of Character
D. Rights theory
Answer:
Assume the external auditor of a client entity also served on the client’s board of
directors. What aspect of independence would be violated?
A. The auditor may be exposed to an intimidation threat by the client
B. The auditor is involved in a business relationship with the client
C. The auditor serves in a management decision making position with the client
D. All of these
Answer:
The following is a similarity between the AICPA Code of Professional Ethics and the
IFAC Code:
A. To engage in whistleblowing when the audit client refuses to make recommended
changes in the financial report
B. To report to the audit committee all differences in opinion on accounting matters
C. To identify threats to independence and develop safeguards to mitigate the threats
D. All of these
Answer:
Kohlberg’s model suggests that a person
A. is morally developed early in life and will not change
B. continues to change decision priorities with education and experiences
C. may change up or down one stage upon becoming an adult
D. may only go backwards through the stages upon becoming an adult
Answer:
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. Scienter
B. Fraud
C. Constructive fraud
D. Negligence
Answer:
Assume you are an ethical person and feel uncomfortable about the way your company
is reporting earnings. You believe it is deliberately overstated. If you want to bring your
concerns to upper management, in which person-organization fit is it most likely that
you will do so?
A. High organizational ethics, low individual ethics
B. Low organizational ethics, high individual ethics
C. Low organizational ethics, low individual ethics
D. High organizational ethics, high individual ethics
Answer:
Kevin Lowe’s ethical dilemma in the Eating Time case can best be described as whether
to:
A. Date another staff member of the CPA firm
B. Inform his supervisor about a lack of diligence of other staff accountants
C. Quit his job because he can’t meet the firm’s expected quality of work
D. Devote time on an audit and not charge it to the job
Answer: