C) the external auditors
D) the PCAOB
13) Who is responsible for hiring, paying, and overseeing the work done by a company’s external
auditors?
A) management
B) the audit committee of the board of directors
C) the company’s internal auditors
D) the United States Congress
14) Who hires a company’s external auditors?
A) management
B) the audit committee of the board of directors
C) the company’s internal auditors
D) the United States Congress
15) Who is responsible for giving an opinion on whether or not a company’s financial statements
fairly present the company’s financial position and results of operations?
A) management
B) the board of directors
C) the external auditors
D) the PCAOB
16) Who is responsible for regulating the auditing profession?
A) management
B) the board of directors
C) the external auditors
D) the PCAOB
17) Who must approve any rules set by the PCAOB?
A) the SEC
B) the IRS
C) the United States Congress
D) no one, because the PCAOB is autonomous
18) As a result of the Sarbanes-Oxley Act (SOX) ________.
A) managers don’t need to know as much about accounting because audits are more effective
now
B) fewer accountants are needed because their work is now done by the PCAOB.
C) all managers need some basic understanding of accounting principles
D) all accounting fraud has been eliminated
19) Who created the PCAOB?
A) the Financial Accounting Standards Board (FASB)
B) the American Institute of Certified Public Accountants (AICPA)
C) the United States Congress
D) the Internal Revenue Service (IRS)
20) What does PCAOB stand for?
A) Public Certified Accountants Oversight Board
B) Public Company Accounting Oversight Board
C) Private Certified Accountants Oversight Board
D) Private Company Accounting Oversight Board
21) The SOX Act requires external auditors ________.
A) provide information-processing consulting services
B) to form an audit committee which includes the CEO
C) to be a member of the executive committee
D) to report to the client’s audit committee rather than the client’s management team
22) The SOX Act requires ________.
A) the executives to be CPAs
B) the external auditors to prepare as well as audit their client’s financial statements
C) a report on the effectiveness of the company’s internal controls be included with its annual
report
D) executive compensation no longer be tied to earnings
23) The SOX Act requires ________.
A) the CEO and the CFO to certify the annual financial statements
B) the external auditors to prepare, as well as audit, their client’s financial statements
C) financial statements be audited by two independent external auditors each year
D) executive compensation no longer be tied to earnings
24) The Sarbanes-Oxley Act of 2002 includes stronger rules regarding auditor independence.
25) The PCAOB has the charge of overseeing the auditing profession.
26) The PCAOB has the charge of overseeing the SEC and FASB.
27) What is the purpose of the PCAOB and why was it established?
28) What are some of the new responsibilities of management required by the Sarbanes-Oxley
Act of 2002?
29) What are some of the new responsibilities of the board of directors required by the
Sarbanes-Oxley Act of 2002?
30) What are some of the new responsibilities of the external auditors required by the Sarbanes-
Oxley Act of 2002?
31) Match each group with its new responsibilities required by the SOX Act. Each item is to be
used only once.
a. management
b. board of directors
c. external auditors
d. PCAOB
_____ 1. must oversee the auditing profession
_____ 2. must establish an audit committee
_____ 3. must establish an avenue for reporting fraudulent activities anonymously
_____ 4. must maintain independence and assess the company’s internal control system
Learning Objective 11-6
1) Which of the following is an indication of good corporate governance?
A) A company has a board of directors with highly qualified members who are independent of
the management team.
B) A company has an audit committee that reports directly to the company’s CFO.
C) A company has a board of directors that delegates all major financial decisions to
management.
D) The company has the external auditors prepare, as well as audit, its financial statements.
2) An important factor in good corporate governance is ________.
A) an ethical climate set by top management
B) an audit committee that reports directly to the company’s CFO
C) a board of directors that delegates all major financial decisions to management
D) a board of directors whose members all have financial backgrounds
3) Which of the following is an indication of good corporate governance?
A) A company has a board of directors made up entirely of the company’s top managers, who
have the most comprehensive knowledge of the company’s business.
B) A company has a set of financial statements that is simple and easy to understand.
C) A company has an information processing system that was designed by its external auditors.
D) A company has an audit committee that reports directly to the company’s CFO.
4) Which of the following is an indication of good corporate governance?
A) A company has a board of directors made up entirely of the company’s top managers, who
have the most comprehensive knowledge of the company’s business.
B) A company’s annual report includes 170 pages of notes written by a Harvard PhD.
C) A company’s external auditors are independent enough to stand up to the company’s
executives on any given accounting issue.
D) The company has the external auditors prepare, as well as audit, its financial statements.
5) An indication of good corporate governance ________.
A) is a board of directors with highly qualified directors who are independent of the management
team
B) is a set of financial statements that are transparent
C) is the hiring of independent external auditors who will stand up to the executives on any given
accounting issue
D) all of these
6) Corporate governance describes how a firm governs itself and is executed by the board of
directors.
7) Good corporate governance requires the financial statements to be prepared by independent
external auditors.
8) A good place to find out about a company’s corporate governance is the company’s Web site.
9) Name two characteristics of good corporate governance.
10) Team Instructions: Divide the class into teams of three or four people. Each team member
should work the following problem separately outside of class. Then give the students time in
class to compare answers with their teammates and put together a final correct copy of the
problem. Each team should turn in only one copy of the problem for grading, along with a copy
of the annual report that it used. All team members will receive the same grade.
Provide students with copies of real merchandising companies’ annual reports, or give students
the Web addresses of real merchandising companies and ask them to print out and submit the
annual reports. All team members should work with the same company’s annual report.
Answer the following questions using the annual report assigned to your team:
1. What is the name of your company?
2. Find management’s report on internal control over financial reporting. What page is it on?
3. Who does it say is responsible for establishing and maintaining an adequate internal control
system?
4. Does management say that the company’s internal controls are effective? If your answer is
“No,” briefly describe the deficiencies.
5. Has management’s report on internal control over financial reporting been audited?
6. Who signed management’s report on internal control over financial reporting? What are their
positions in the company?
1. ____________________________________
2. ____________________________________
7. Find the company’s auditors’ report(s). (There might be two separate reports, or they might be
combined into a single report) What page(s) are they on?
8. To whom is the auditors’ report addressed?
9. What are the names of the specific financial statements that the auditors have examined?
1. ____________________________________
2. ____________________________________
3. ____________________________________
4. ____________________________________
10. According to the auditors’ report, the audit was conducted in accordance with standards set
by whom?
11. Do the auditors say that the financial statements are perfect?
12. Does the auditors’ report mention the management report on internal control?
13. Find a list of the members of your company’s board of directors. What page is it on?
14. How many people are on the board of directors?
15. How many of the people on the board do NOT work for the company?
16. Are the company’s corporate governance policies on the Web? If so, where?
Learning Objective 11-7
1) What is a difference between U.S. GAAP and IFRS?
A) U.S. GAAP allow LIFO and IFRS do not.
B) U.S. GAAP allow FIFO and IFRS do not.
C) U.S. GAAP allow double-declining-balance depreciation and IFRS do not.
D) U.S. GAAP require accrual basis and IFRS does not.
2) IFRS are more ________.
A) rule based than U.S.GAAP
B) principle based than U.S. GAAP
C) restrictive than U.S. GAAP
D) accrual based than U.S. GAAP
3) IFRS ________.
A) have more standards than U.S.GAAP
B) have more detailed guidance than U.S. GAAP
C) will be required for all U.S. by 2012
D) are more principle based than U.S. GAAP
4) U.S. GAAP differs from IFRS in that U.S. GAAP ________.
A) allow long-term assets to be adjusted up to fair market values
B) require both probable and reasonably possible contingent liabilities to be recorded
C) allow FIFO
D) do not allow internally generated intangible assets to be recorded
5) IFRS differ from U.S.GAAP, in that IFRS ________.
A) allow long-term assets to be adjusted up to fair market values
B) require only probable contingent liabilities to be recorded
C) allow LIFO
D) do not allow internally generated intangible assets to be recorded
6) The accounting for property, plant and equipment is the same under U.S. GAAP and IFRS.
7) Unlike U.S. GAAP, IFRS do not allow for alternative accounting methods.
8) U.S. GAAP is more rule-based than IFRS.
9) Discuss the difference between U.S. GAAP and IFRS in terms of rule-based versus principle-
based approaches to accounting.
10) Describe how U.S. GAAP differ from IFRS in the way inventory may be recorded.
11) Describe how IFRS differ from U.S. GAAP in accounting for impairments of long-term
assets.