Chapter 6 A strong system of internal controls should provide a high level

Document Type
Test Prep
Book Title
Financial Accounting: A Bridge to Decision Making 6th Edition
Authors
Robert W. Ingram, Thomas L. Albright
219
Chapter 6--Full and Fair Reporting
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220 Chapter 6
TRUE/FALSE
1. Generally accepted accounting principles (GAAP) are standards developed by the U. S. Treasury
Department to identify appropriate accounting and reporting procedures.
2. The Securities and Exchange Commission (SEC) requires public corporations to provide annual
financial reports to stockholders.
3. The Securities and Exchange Commission (SEC) is the primary organization for setting
accounting standards for businesses in the United States.
4. Relevance and comparability are considered to be the two primary qualities that make accounting
information useful.
5. The audit report provides notice of the auditor's guarantee as to the accuracy and
completeness of the accompanying financial information.
6. Accounting rules generally assume an organization is a going concern.
7. Record-keeping responsibilities should be assigned to the same person who has physical control
over company resources whenever possible.
8. A strong system of internal controls should provide a high level of protection of a company’s
information systems.
9. Accountants prepare, manage and interpret the company’s employment policies and practices.
Full and Fair Reporting 221
10. A company should be able to rely on its disaster recovery plan to restore its computer systems.
11. Regulations and standards are important because they standardize format and content of financial
statements.
12. Form 10K Reports are NOT required to be filed by corporations if they provide annual audited
financial statements.
13. The General Accounting Office (GAO) is the agency that oversees accounting practices at the
State and Local levels.
14. A Statement of Financial Accounting Standards is the official guideline for accounting procedures
that is prepared and maintained by the Internal Revenue Service.
15. Objectives of financial reporting provide an overall purpose of financial reports.
16. Periodic measurement relates to the tests that auditors perform on the accounting records.
17. A major purpose of internal controls is to ensure compliance with regulations and laws
18. Background checks done on prospective employees are usually required by the Board of Directors.
222 Chapter 6
19. Only top management should be allowed to receive copies of a company’s annual report.
20. Audits are performed by CPA’s who are employed by the company’s accounting department.
21. A strong system of internal controls will guarantee that employees can be trusted.
MULTIPLE CHOICE
1. External decisions makers:
a.
are CPA’s who perform the company’s audit
b.
rely on financial statements for information
c.
sell stock to brokerage houses
d.
are responsible to the shareholders
2. Corporations are required to provide annual financial reports to stockholders by order of
a.
the U.S. Congress
b.
the Securities Exchange Act of 1934
c.
the New York Stock Exchange
d.
the company’s Board of Directors
3. The SEC is responsible for overseeing
a.
external financial reporting by publicly traded companies
b.
financial reporting by government agencies
c.
the audits of the Fortune 500 companies
d.
the civil and criminal prosecution of government officials
4. Fair presentation means that the financial statements are prepared
a.
in conformity with GAAS
b.
in conformity with GAAP
c.
in conformity with the IRS code
d.
without any errors or omissions
Full and Fair Reporting 223
5. Government authorities use accounting information to:
a.
determine taxes owed by businesses
b.
determine if a company is a going concern
c.
determine number of employees in a company
d.
use it in a census
6. The Securities Act of 1933 required most corporations to:
a.
provide annual reports to investors
b.
file income tax returns
c.
file registration statements prior to going public
d.
hire minority workers
7. The SEC can:
a.
halt trading of a company’s stock
b.
force a company to pay dividends
c.
hire and fire managers
d.
close a company down
8. Accounting regulations protect the interests of external decisions makers by:
a.
publishing books on regulatory procedures
b.
allowing them access to the company’s books and records
c.
making sure that companies pay taxes
d.
requiring companies to follow reporting standards
9. The agency authorized by law to establish and enforce accounting standards in the U. S. is the:
a.
CPA
b.
FASB
c.
SEC
d.
IRS
10. The Financial Accounting Standards Board
a.
is a private organization that currently sets accounting standards for businesses in the
United States
b.
is a governmental organization that issues Statements of Accounting Standards
c.
sets accounting standards for both businesses and state and local governments
d.
was established by the U.S. Congress
224 Chapter 6
11. The FASB developed the conceptual framework to provide guidance in the development of
a.
auditing standards
b.
financial statements
c.
accounting standards
d.
hiring practices
12. Which of the following is a step in the FASB Standard-Setting Process:
a.
accounting issues are identified
b.
exposure draft is issued
c.
public hearings are held
d.
all of the above are steps in the process
13. The document that describes a proposed accounting standard is the:
a.
discussion memorandum
b.
exposure draft
c.
recognition statement
d.
SEC Memorandum
14. The list that identifies information that should be contained in financial statements is known as
the:
a.
elements of financial statements
b.
recognition and measurement criteria
c.
relevance and reliability characteristics
d.
qualitative characteristics
15. The agency responsible establishing standards for State and Local government is the:
a.
GASB
b.
FASB
c.
GAO
d.
SEC
16. The conceptual framework of the FASB:
a.
provides guidance in the development of accounting standards
b.
proposes legislation to protect creditors
c.
governs the size of a company’s Board of Directors
d.
follows rules established by the Internal Revenue Service
Full and Fair Reporting 225
17. The "periodic measurement" concept is important in that
a.
cash flow from operations will always be larger than net income
b.
the accounting records cannot be accurate without it
c.
the FASB Standard-Setting process is dependent on it
d.
it provides for timely reporting of financial information that is needed for effective
decision making
18. Which of the following criteria relates directly to information that should be contained in financial
statements?
a.
qualitative criteria
b.
relevant criteria
c.
neutral and verifiable criteria
d.
recognition and measurement criteria
19. The two primary qualities that result in accounting information being useful are:
a.
recognition and measurement criteria
b.
summary and accuracy
c.
exposure and responsiveness
d.
relevance and reliability
20. Which of the following is NOT included in a corporate annual report:
a.
letter from the President or CEO
b.
summary of selected business data
c.
budget for upcoming year
d.
financial statements
21. The Magellan Corporation recently acquired a specialized piece of machinery costing $350,000
and having a six-year expected useful life. The company's bookkeeper properly recorded the
expenditure as an asset. Which of the following is the conceptual basis for the manner in which the
bookkeeper recorded the transaction?
a.
going concern
b.
operating activity
c.
periodic measurement
d.
cash basis accounting
226 Chapter 6
22. The Rhinestone Company is finding it increasingly difficult to develop products that its customers
want to buy. Furthermore, the firm's ability to produce their products at costs and prices that
customers will accept is increasingly a problem. The company has experienced increasing losses
during each of the last four years. These facts suggest that this company may not
a.
be generating as much net income as it is generating cash flow
b.
be able to continue as a going concern
c.
be properly providing periodic measurement to interested parties
d.
be engaging in legal activities
23. In accounting, the term "going concern" means that an organization is
a.
operating effectively and efficiently
b.
expected to continue operating indefinitely
c.
regularly earning a profit
d.
generating both positive cash flow and profits
24. Qualitative characteristics that would make accounting information useful include
a.
revenues and expenses reported on the income statement
b.
an outside audit
c.
understandability and usefulness
d.
preparation of a statement of cash flows
25. Management’s discussion and analysis:
a.
provides an overview of a company’s financial performance
b.
predicts the company’s stock price in the upcoming year
c.
guarantees the financial results
d.
assumes the position of leadership
26. A(n) ________ provides a systematic investigation of a company’s financial records and
procedures
a.
inquiry
b.
internal control system
c.
compilation
d.
audit
Full and Fair Reporting 227
27. Attestation occurs when:
a.
the company issues stock
b.
an auditor affirms the fairness of presentation of the financial statements
c.
managers become certified
d.
a contract is signed
28. The Public Companies Accounting Oversight Board (PCAOB):
a.
develops generally accepted auditing standards
b.
controls the AICPA
c.
regulates upper management
d.
provides accountants to companies to evaluate the financial statements
29. The issuance of quarterly financial statements by a company is an example of which of the
following concepts?
a.
going concern
b.
accrual accounting
c.
periodic measurement
d.
transformation process
30. Internal controls are important in a company to ensure:
a.
longevity as a going concern
b.
proper distribution of dividends
c.
that financial data is accurate
d.
increase in assets
31. Which of the following statements about internal control is NOT true?
a.
internal control consists of procedures designed to protect an organization's assets
b.
internal control ensures the reliability of an organization's accounting records
c.
internal controls reduce the likelihood of error, omission or misstatement
d.
internal control applies only to companies that use computerized accounting systems
32. Examples of internal control procedures include all of the following EXCEPT
a.
accounting records should be verified independently
b.
record-keeping responsibilities should be separated from physical control over resources
c.
limit access to accounting records to top management
d.
use of pre-numbered documents and forms
228 Chapter 6
33. The procedures designed to protect assets and ensure the accuracy of accounting records are
known as
a.
internal controls
b.
closing the books
c.
auditing standards
d.
accounting principles
34. Good internal controls might help to prevent which of the following events?
a.
incorrectly recording a $10,480 purchase at $14,080
b.
losing $20,000 of merchandise to theft
c.
entering both sides of a transaction as debits
d.
all the above might be prevented by proper internal controls
35. The purpose of internal controls is to
a.
ensure that production of goods and services will meet market demand
b.
protect assets and ensure the accuracy of accounting information
c.
ensure that tax returns will be filed in a timely manner
d.
ensure that there will be no fraud or errors in the accounting system
36. Electronic tagging of merchandise inventory, use of surveillance equipment, and cash registers are
all examples of
a.
computer system controls
b.
human resources controls
c.
internal controls
d.
external controls
37. The establishment of an environment of ethical conduct within a business can accomplished by:
a.
managers setting the tone by acting with integrity
b.
establishing an audit committee
c.
periodic performance reviews of all employees
d.
all of the above answers are correct
38. A code of ethics:
a.
ensures acting above the law
b.
is an abatement of moral hazards
c.
is not needed if a company has an annual audit
d.
spells out acceptable and expected behavior
Full and Fair Reporting 229
39. Securing of merchandise in warehouses or locked cases is an example of:
a.
computer system control
b.
human resources control
c.
physical control
d.
insecurity issues
ESSAY
1. The terms GAAP, audit, and CPA are interrelated. Define and describe each term and discuss their
interrelationship.
230 Chapter 6
2. The going concern concept is an important facet of the process of accounting measurement.
Define the term and discuss why it is an important concept. Use one or two examples to illustrate.
3. Define and describe the periodic measurement concept and discuss how it affects accounting.
Full and Fair Reporting 231
4. Define internal control and identify four controls that are important for use in accounting systems.
5. What is meant by the term "accounting standards"? What organizations are involved in setting
such standards?
6. The conceptual framework was developed by the Financial Accounting Standards Board (FASB).
For what reason was it developed? Identify its major components and briefly describe each.
232 Chapter 6
7. Define and discuss the major objectives of financial reporting.
8. Ethical behavior involves treating individuals and companies fairly and providing full disclosure
of information that might affect decision making. Identify four (4) stakeholders and describe the
business relationship(s) that would be important between each stakeholder and the company.

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