Each of the following is a safeguard that helps to mitigate threats to independence
except for:
A. Safeguards created by the profession, legislation, or regulation
B. Safeguards implemented by the attest client, such as a tone at the top
C. Safeguards developed to ensure independence when performing nonattest services
D. Safeguards implemented by the firm, including policies and procedures to
implement regulatory requirements
Answer:
The “Milton Manufacturing” case illustrates:
A. What can go wrong when a company sets a policy that potentially harms one area of
its operations
B. How the failure to exercise professional skepticism can cloud objective judgment
C. The pressure that can be placed on accountants by top management
D. All of these
Answer:
The ethics rules that applies solely to those who conduct an audit of a client entity is:
A. Independence
B. Objectivity
C. Integrity
D. All of these
Answer:
In the Capitalization versus Expensing case the main ethical issue is whether Gloria
Hernandez should
A. Capitalize or expense $1 million of expenditures
B. Report her superiors actions to the CEO
C. Talk to the Audit Committee
D. Become a whistle blower
Answer:
The Groupon case deals with all but the following issues?
A. Improperly estimated customer returns
B. Improper recognition of gross revenue
C. Used a new innovative metric of “Adjusted Consolidated Segment Operating
Income”
D. Blamed material weakness on their auditors EY
Answer:
If a company is seeking out views of different accounting firms until they find one with
a desired accounting treatment, it would be called _____.
A. Low-balling
B. Under bidding
C. Opinion shopping
D. Option pricing
Answer:
The country with the highest Uncertainty Avoidance is
A. United States
B. United Kingdom
C. India
D. China
Answer:
The best definition of a financial restatement is:
A. A company, either voluntarily or under prompting by its auditors or regulators,
revises its public financial information that was previously reported
B. A company, either voluntarily or under prompting by its auditors or regulators,
revises its public financial information for the current period
C. An adjustment of financial information due to an error correction
D. All are part of the definition
Answer:
What are the fiduciary obligations of the board of directors?
A. Maximize profits for the company and its shareholders
B. Give excessive executive compensation
C. Safeguard the organization’s resources and interests of the company’s stakeholders
D. Allow high risk accounting practices
Answer:
Under section 302 of the Sarbanes-Oxley Act of 2002, the financial statement certifying
officials must include in their certification that
A. A list of all deficiencies in the internal controls and information on any fraud that
involves employees who are involved with internal activities has been created
B. The auditors are responsible for the internal controls and have evaluated and
reported on them
C. All changes in internal controls or related factors that could have a negative effect
on the internal controls have been made
D. All of these
Answer:
The accounting issue in the Cubbies Cable case with respect to cable installations costs
is closest to the accounting issue in which case?
A. Enron
B. Gemstar TV Guide
C. Xerox
D. WorldCom
Answer:
An internal accountant should always consider taking each the following steps after
exhausting all avenues of appeal within the organization when there is a difference of
opinion with top management on an accounting or financial reporting matter except for
A. Inform the SEC
B. Terminate employment with the entity
C. Seek legal advice before taking any action
D. All of these
Answer:
Egoists maintain a general principle of the following sort:
A. “One ought always act in others’ interest”
B. “One ought always act in one’s and others’ interests”
C. “One ought always act in peer group’s interest”
D. “One ought always act in one’s own interest”
Answer:
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. Bribe
B. Asset misappropriation
C. Facilitating Payment
D. Legal Payment
Answer:
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 entity, financial statements being audited and time period
C. Identifies audit testing and procedures used
D. Identifies the generally accepted auditing standards followed in conducting the audit
Answer:
In the Matrixx Initiatives v. Siracusano case, the Supreme Court adopted the position
about materiality that
A. It should always be determined only through qualitative evaluations
B. It should always be determined through quantitative evaluations
C. It should always be determined by considering whether the amount affects past
financial statements
D. It should be determined by considering whether the total mix of information would
be viewed by a reasonable investor as possibly accepting judgment
Answer:
The method of ethical reasoning that does not deal with making decisions after
considering the interests of others is:
A. Egoism
B. Enlightened Egoism
C. Utilitarianism
D. Rights Theory
Answer:
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
Answer:
The most important values included in corporate values statements include:
A. Pursuit of self-interests
B. Commitment to beating the competition
C. Diversity
D. Integrity and ethical behavior
Answer:
Debbie and Steve are discussing a lecture given by their ethics professor after class one
day. The professor said that misstatements of earnings are always unethical. Debbie
agrees with this situation but Steve does not. What statement might Steve make to best
support his point of view?
A. It depends on whether the misstatements were made deliberately
B. It depends on whether a user relied on the financial statements
C. It depends on whether the statements lead to a modified or unmodified opinion
D. All are valid statements for Steve to support his point of view
Answer:
An accountant who blows the whistle on financial wrongdoing by his/her employer by
going outside the entity violates:
A. The due care principle
B. Confidentiality
C. One’s reliability obligation
D. All of these
Answer:
Yvonne is preparing a tax return for Jack. Jack wants to claim his nephew as a
dependent even though he does not meet the criteria. Jack says if Yvonne does not list
his nephew as a dependent, he will fire her and find a new tax accountant. Yvonne
refuses because it is illegal to claim a dependent that does not meet the qualifications.
Based on Yvonne’s decision, she is likely reasoning in which stage of Kohlberg’s moral
development model?
A. Stage 2
B. Stage 3
C. Stage 4
D. Stage 5
Answer:
Which case in the text of the chapter illustrates the danger of a CPA accepting loans
from an audit client?
A. Tyco International
B. Enron
C. Adelphia
D. ESM Government Securities
Answer:
Which of the following is NOT a qualitative factor when assessing materiality?
A. A misstatement that changes a loss into income or vice versa
B. The existence of statutory or regulator reporting requirements that affect materiality
thresholds
C. The potential effect of the misstatement on trends, especially trends in profitability
D. The use of simplistic numerical thresholds and rules of thumb
Answer:
Which of the following is an example of opinion shopping by a company?
A. Changing auditors due to the quality of work by the auditors
B. Changing auditors due to wanting a different accounting treatment than required by
the external auditor
C. Changing auditors due to the size of the audit fees
D. Changing auditors due to conflicts over the nature and scope of the audit
Answer:
As a manager in her firm, Lucy concerns herself with the effectiveness of internal
controls. Her main focus is how efficient and effective the company’s internal controls
are over time. Which component of internal control is Lucy engaging in?
A. Risk assessment
B. Control activities
C. Control environment
D. Monitoring
Answer:
The rules under IFRS for property, plant, and equipment differ from U.S. GAAP
because:
A. U.S. GAAP allows for the revaluation of property, plant, and equipment
B. IFRS allows for the revaluation of property, plant, and equipment
C. U.S. GAAP allows for recovery of revaluation amounts
D. IFRS prohibits the revaluation of property, plant, and equipment
Answer:
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
Answer:
What argument can be made that Sarbanes-Oxley may not be effective in reducing
fraud?
A. It is not as stringent as international standards
B. The SEC has had many laws for many years that have not seemed to make much of
a difference
C. The penalties under Sarbanes-Oxley are especially stringent, so it may not be
enforced
D. Civil and criminal penalties are not effective in preventing financial fraud
Answer:
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
B. Facilitate international investment
C. Provide a foundation for professional judgment and support the implementation of
international financial reporting standards (IFRS)
D. Facilitate the enforcement of IFRS
Answer:
The Rosenblum case ruling was of concern to the accounting profession because it
implied that
A. Full joint and several liability would be reinstated
B. All possible third party users of financial statements must be anticipated
C. The concept of contractual privity would no longer be important
D. Financial liability would occur when scienter was a factor
Answer:
Good ethics is important on a global level because
A. There needs to be a mechanism to punish companies that violate ethical standards
outside their home country
B. International enforcement of IFRS depends on ethical behavior in the accounting
and financial reporting process
C. Multinational companies should strive to act ethically in all activities whether at
home or abroad
D. All of these
Answer:
Susie, a newly graduated BBA in accounting, has started job with the state budgeting
office. Susie has responsibility over travel expenses expense accounts. The state has a
travel policy stating that a state employee may be reimbursed up to $90 per night for a
hotel room and up to $40 per day for meals, as long as the employee turns in food
receipts. On the first expense account Susie works on the employee has a hotel receipt
for $130 a night but no food expenses. Susie processes the reimbursement for $90. The
employee becomes irate as his reading of the travel policy is that he can be reimbursed
for $130 a night for hotel and food with a receipt. The employee claims this has never
been a problem in the past and has always been reimbursed $130 a night whether for
hotel only or both hotel and food.
Discuss which ethical theory supports Susie and the employee’s take on the travel
policy. Which would you choose and why?
Answer:
Steve is quickly moving up in the accounting department of RAC Inc. It is year-end; he
has just received news that the estimates of the estimated useful life and savage values
were wrong and must be changed. Of course, that changes the depreciation expense and
accumulated depreciation. Steve calls his wife to explain why he will be late again.
Now is he is pondering a comment his wife made. She said “I’m no accountant; but
after four years, you would think that the company could get it right how its estimates
affect expenses and the relevant accounts.” How might Steve interpret his wife’s
statement from an ethical perspective in the context of the facts?
Answer:
The school board has received a bomb threat claiming that a bomb would be detonated
at noon on Monday at the high school. The threat was received by the school board at 8
pm on Sunday night. The school met and tried to decide how to handle the threat,
keeping in mind the obligations to students, parents, and the public. The school board
came up with three alternative solutions.
1) Do nothing as a majority of the time bomb threats to schools are a hoax.
2) Call off school at the high school on Monday. Have an announcement made on the
10 pm Sunday news announcing that a water main is broken. (Some members of the
board feel that such an announcement of the breaking water main will prevent copycat
threats.)
3) Call off school at the high school on Monday. Have an announcement made on the
10 pm Sunday news announcing that a bomb threat had been received.
Discuss which ethical theory supports each alternative. Which would you choose and
why?
Answer:
A school district decided to add an ethics officer to its administration. The district had
watched how often the district was dealing with ethically sensitive situations. After
doing research into how many organizations used an ethics officer and the desired
education and background for such an officer, the district advertised for a person with
the following qualifications: education in accounting, finance, or criminal justice; CPA
preferred; and experience with compliance or audits. The district hired a person with a
CPA license, degree in accounting and experience as an internal auditor doing
compliance audits.
At the press conference to introduce the new ethics officer, a local news reporter
pointedly asked about the candidate’s background. The ethics officer stated as a CPA he
knew how to handle ethical issues and he had the highest integrity. The reporter decided
to a little more background research before writing the article. The state board of public
accountancy of that state maintained an online database for the public to verify that a
CPA was currently licensed. When the reporter could not find the ethics officer as a
currently licensed CPA, he called the district and the ethics officer for a comment.
What should the district and ethics officer do? Use the ethical decision making model to
defend your answer.
Answer:
Zynga makes free-to-play games and gets revenue from the sale of virtual goods for
things like extending play sessions, personalizing game environments, accelerating
game progress and sending gifts to friends. The company experienced deep declines in
its user base during 2011-2013. At one point, plaintiffs in a lawsuit charged that Zynga
executives falsely pumped up revenue and prospects so that insiders and underwriters
could dump $593 million in personally-held stock.
The lawsuit alleges that the company changed its accounting methods shortly before the
initial public offering to inflate short term earnings while executives hid emerging
problems. Assuming the charges are true, do you believe Zynga management engaged
in earnings management? How do you evaluate the ethics of its actions?
Answer:
A young man by the name of Mr. Hicks works at an accounting firm which has a
written ethics code of conduct. The code specifically outlines the duties and obligations
that every employee must follow without question. One of rules states that every
accountant should not lie under any circumstances.
Last week Mr. Hicks sent out a finalized tax return to the Wrong client. The Wrong
client called Mr. Hicks and informed him that he was sending the tax return back to him
overnight. Meanwhile the Right client called Mr. Hicks and wanted to know where the
tax return was. Mr. Hicks told the Right client that he sent it to the wrong address and
he will send out the return the next day. The Right client was irritated and called the
partner of the firm.
The partner scolded Mr. Hicks and wanted to know why he told the client he sent the
return to the wrong address. The partner said he should have told the client that the
return was in the 2nd partner review or some other excuse to cover up the mistake. Mr.
Hicks explained that the ethics code of conduct specifically states that he should not lie
under any circumstances and he was just following his ethical duty. The partner grinned
and told Mr. Hicks that the next time this happens, he should consult with the partner
first.
Using the ethical decision making model and ethical theories, justify the positions of
either the partner, Mr. Hicks or an alternative solution.
Answer:
Campus Fast is a new audit client. Client Fast uses public WiFi to place and deliver
restaurant take out for students at the Up and Coming State University. Campus Fast
was founded by three highly ambitious MBA students at the university. The business
plan is to find a buyer or place an IPO of the company by graduation in two years. The
founders expect to pay off all student loans, take a tour around the world and then start
another company. In order for the business plan to work on the timeline for graduation,
the business must meet highly ambitious earnings numbers. Additionally, the company
is dealing with two situations that the founders would like to keep from the auditors:
1) The company has been using free, unsecured public WiFi to take orders via the
Internet. The customer may pay via the Internet. Several students, who all happen to be
members of the same student organization on campus, are claiming that using Campus
Fast has allowed their identity to be stolen. One student is claiming that she had
$12,000 of charges on her credit card to the unsecured Internet site of Campus Fast.
Management plans to pay off the complaining students and keep the true liability off the
balance sheet. The reason is Campus Fast is concerned that an interested buyer may
become concerned about the unsecured site and might get scared by the student
complaints.
2) The company guarantees fast delivery. It has offered to pay any speeding or other
moving violation tickets to its delivery drivers. Unfortunately one of the drivers was
involved in an accident due to running a red light. The passenger in the other car is in
critical condition and the intensive care unit in the hospital. 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. Attorneys for the injured party are
threatening to sue and publicize the situation. 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.
Using the internal control framework from SAS 55, 98, COSO and Enterprise Risk
Management, assess the internal controls at Campus Fast and risk environment.
Answer:
Sarah is an audit senior with Childs, Maxwell and Weaver, LLP. Sarah specializes in
auditing loan loss reserve for financial institution clients. This current year she has
noticed that two of her financial institution clients in town have written loans off to a
loan customer, Mr. T (fictional name to protect the guilty). Mr. T is well known in town
as a highly successful real estate developer and businessman with many different
business dealings. As Sarah is auditing her third financial institution client in town, she
notices that the bank has loans of $3.5 million outstanding to Mr. T. The current loan
loss reserve could not cover the losses on Mr. T’s loans. Sarah has recommended a
significant increase to the loan loss reserve account. The client will not discuss
increasing the loan loss reserve. Ms. Childs, senior partner on the audit, wants to know
how the audit firm can justify the increase loan loss reserve account. What can and
should Sarah disclose about Mr. T?
Answer:
Internal controls, an internal audit function, and an audit committee are all elements of
a strong corporate governance system. How should an external auditor evaluate these
elements in making a risk assessment? What are the ethical signs that each system is
operating as intended?
Answer:
An Internet Company has a chance to expand its business into a developing country.
This chance would make money for its shareholders, as it would be the first Internet
Company allowed in the country. However, the conditions demanded by the country is
that the Internet Company must turn over to the government the history of Internet sites
visited by its citizens. Additionally the Internet Company must also censor Internet sites
requested through the search engine. In the United States and other countries, the
Internet Company would not monitor, censor, or turn over a history of Internet sites to
any government.
What should the Internet Company do? Use ethical theories and ethical decision
making model to back up your decision.
Answer:
As part of a required ethics course, students were required to take an online 90 minute
ethics final. Facing graduation and many pressures with starting new jobs and moving,
the students worked together to complete the final. Since the essays were all closely
worded the same, the instructor could determine that some sort of cheating on the ethics
exam had taken place. Using ethical decision making model, what should the school,
instructor and students do? Would the suggested solution be different if the school had
an honor code?
Answer:
A student states that as long as the auditor has followed all applicable laws, then the
auditor has been ethical. Do you agree? Why or why not?
Answer:
As an executive in a mid-sized manufacturing firm, Cal finds himself thrown together
with Harry, who works for a different unit of the firm. He and Harry are in the same
community; their children are in the same schools; they often show up at the same
social functions; and they play golf together fairly frequently.
One day, to Cal’s deep dismay, he hears that Harry had been implicated in some
financial irregularities at work. The issues while serious leave some room for doubt.
There is reason to think Harry got ensnared by regulations, though he may have
afterwards tried to cover up that entanglement by being less than forthright. Cal has
heard from Harry that he was uncomfortable with the way he handled one of the
contentious matters. Using Kohlberg’s model of moral development, explain what Cal
should do with the information he has discovered about Harry.
Answer: