Chapter 6

The section of SOX that requires management to prepare a report on its internal controls is: Section 302 Section 404 Section 808 Section 10A(b)

Section 404

Which of the following are an affirmative defense for those violating the FCPA? The payment is lawful under the written laws of the foreign country The payment can be made for reasonable and bona fide expenditures A and B are both affirmative defenses None of the above

A and B are both affirmative defenses Two affirmative defenses for those accused of violating the act are that the payment is lawful "under the written laws" of the foreign country, and that the payment can be made for "reasonable and bona fide expenditures."

Under section 302 of the SOX the financial statement certifying officials must include in their certification that: 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 The auditors are responsible for the internal controls and have evaluated and reported on them All changes in internal controls or related factors that could have a negative effect on the internal controls have been made The audit report was unmodified

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

When courts find accountants liable for constructive fraud, the implication is that: Auditors should always be liable when investors lose money due to deceit Accountants may be liable for fraud even when they had no knowledge of deceit Auditors should be able to detect all deceit by management Accountants may be held liable even to third parties to whom they did not have a duty

Accountants may be liable for fraud even when they had no knowledge of deceit

The problem of a compliance approach in implementing global standards is that it can result in: Achieving informal compliance without considering ethical consequences Achieving a true and fair view with respect to the auditor's report Achieving a dual system of boards of directors Achieving formal compliance without considering ethical consequences

Achieving formal compliance without considering ethical consequences

The key element that protects an auditor against common law liability is: Adherence to generally accepted accounting principles (GAAP) Adherence to generally accepted auditing standards (GAAS) Compliance with threats and safeguards approach Maintain confidentiality of client information

Adherence to generally accepted auditing standards (GAAS)

A "particularized" allegation requires establishing: Strong circumstantial evidence of conscious misbehavior Strong circumstantial evidence of recklessness Facts showing the defendant had both motive and opportunity to commit securities fraud All of the above

All of the above

Pfizer was investigated by the SEC for violating the Foreign Corrupt Practices Act (FCPA) because it allegedly: Made improper payments to foreign officials to obtain regulatory and formulary approvals Made improper payments to foreign officials to obtain sales Made improper payments to foreign officials to obtain increased prescriptions for the company's pharmaceutical products All of the above

All of the above

The Rosenblum case ruling was of concern to the accounting profession because it implied that: Full joint and several liability would be reinstated All possible third party users of financial statements must be anticipated The concept of contractual privity would no longer be important Financial liability would occur when scienter was proven

All possible third party users of financial statements must be anticipated

Which of the following is NOT one of the four stages in an audit-related dispute? Events arise that create losses for the users of the financial statements Losses are linked to material misstatements of financial statements Legal process resolves the dispute Auditors legal liability leads to financial settlement

Auditors legal liability leads to financial settlement

What argument can be made that SOX may not be effective in reducing fraud? It is not as stringent as international standards The SEC has many laws for many years that have not seemed to make much of a difference The penalties under Sarbanes-Oxley are especially stringent, so it may not be enforced Civil and criminal penalties are not effective in preventing financial fraud

Civil and criminal penalties are not effective in preventing financial fraud

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: Business law Tort law Common law Statutory law

Common law

With respect to U.S. GAAP, the SEC's approach to determining whether International Financial Reporting Standards (IFRS) should be allowed for and/or replace GAAP can be described as: Transparency Comparability Convergence Condorsement

Condorsement The current approach is dubbed "condorsement." This approach is in essence an endorsement approach that would share characteristics of the incorporation approaches with other jurisdictions that have incorporated or are incorporating IFRS into their financial reporting systems. However, during the undefined transitional period, the framework would employ aspects of the convergence approach to address existing differences between IFRS and U.S. GAAP.

In Heinrich Müller: Big-Four Whistleblower, Müller had an ethical dilemma because: Confidential tax documents demonstrate the firm was engaged in illegal firm-arranged tax avoidance deals Confidential tax documents indicate the client violated the law by taking advantage of tax advantaged investment His supervisor ordered him to commit tax fraud His supervisor was engaged in tax fraud

Confidential tax documents demonstrate the firm was engaged in illegal firm-arranged tax avoidance deals

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: Scienter Fraud Constructive fraud Negligence

Constructive fraud

In establishing that the third party relied on the financial statements, one factor that works against plaintiffs' establishing such reliance is: Fraud did not exist Damages or loss suffered by the plaintiff would not have occurred regardless of whether the audited financial statements were misstated Damages or loss suffered by the plaintiff would have occurred regardless of whether the audited financial statements were misstated Negligence did not exist

Damages or loss suffered by the plaintiff would have occurred regardless of whether the audited financial statements were misstated

Which of the following is NOT a requirement of Section 10A of the Securities Exchange Act of 1934 for auditors of public companies with respect to illegal acts? Determine whether it is likely that an illegal act has occurred Determine what the possible effect of the illegal act is on the financial statements Determine whether management participated in the illegal act Inform management and assure that the audit committee knows about any material illegal act that has been detected

Determine whether management participated in the illegal act

One feature of a corporate governance system commonly found outside the U.S. is: Unitary board of directors Dual system of boards of directors No board of directors Acceptance of facilitating payments and bribery

Dual system of boards of directors

The International Federation of Accountants (IFAC) Policy Position Paper #4 A Public Interest Framework for the Accountancy Position addresses: Bribery on an international level High standards of ethical behavior and professional judgment required in the accountancy profession Internal control to prevent fraud Corporate governance systems

High standards of ethical behavior and professional judgment required in the accountancy profession

What is a worrisome consequence under the joint and several liability principle? Each negligent party is liable for the portion of the damages for which it is responsible All negligent parties are always liable for damages Only the negligent party considered to have "deep pockets" is held liable for damages Each negligent party could be held liable for the total of damages suffered

Each negligent party could be held liable for the total of damages suffered What is a worrisome consequence under the joint and several liability principle? Each negligent party is liable for the portion of the damages for which it is responsible All negligent parties are always liable for damages Only the negligent party considered to have "deep pockets" is held liable for damages Each negligent party could be held liable for the total of damages suffered

The Restatement (Second) of Torts Approach: Expands an accountant's legal liability to third parties identified by the client as intended recipients of work Limits an accountant's legal liability to only those parties with which it has a privity relationship Limits an accountant's legal liability to only those parties that have been named by the client Expands an accountant's legal liability to all possible users of the audited financial statements

Expands an accountant's legal liability to third parties identified by the client as intended recipients of work The Restatement (Second) of the Law of Torts approach, sometimes known as Restatement 552,14 expands accountants' legal liability exposure for negligence beyond those with near privity (actually foreseen) to a small group of persons and classes who are or should be foreseen by the auditor as relying on the financial information. This is known as the foreseen third-party concept because even though there is no privity relationship, the accountant knew that that party or those parties would rely on the financial statements for a specified transaction.

A payment made to foreign government officials to ensure that they do what is expected given their job requirements can be characterized as a(n): Bribe Asset misappropriation Facilitating Payment Legal Payment

Facilitating Payment

Which of the following is NOT a cultural factor identified in Gray's Model? Professionalism Flexibility Conservatism Secrecy

Flexibility

Kay and Lee performed an audit required for Holligan Industries to extend a loan with Second National Bank & Trust. Kay and Lee may be liable for: Second National Bank & Trust declining to extend the loan Ordinary negligence to the bank that loaned money to Holligan because the firm did not discover improper accounting for revenue and assets Gross negligence to the bank that loaned money to Holligan because the firm did not discover improper accounting for receivables and inventory Holligan declaring bankruptcy without a going-concern emphasis of matter

Gross negligence to the bank that loaned money to Holligan because the firm did not discover improper accounting for receivables and inventory

In the Advanced Battery Technologies case, the opinion of the court: Held the auditors legally liable because they failed to exercise due care and to demonstrate professional skepticism Held the auditors legally liable because they failed to gather sufficient, competent evidential matter to warrant the expression of an opinion Held the auditors not legally liable because the plaintiff could not plead with particularity that the audit work was so deficient as to amount to no audit at all Held the auditors were not legally liable because they met all professional standards

Held the auditors not legally liable because the plaintiff could not plead with particularity that the audit work was so deficient as to amount to no audit at all

The accounting issue(s) in the Crazy Eddie case were: Accelerating revenues into earlier periods Inflating inventory and net income Capitalizing costs that should have been expensed Off-balance sheet entities

Inflating inventory and net income

The international body responsible for developing and issuing high-quality ethical standards and other pronouncements for professional accountants for use around the world is: International Organization of Securities Commissions International Accounting Standards Board International Ethics Board International Ethics Standards Board for Accountants

International Ethics Standards Board for Accountants

The name of the international securities body that facilitates a country's choice to regulate the use and application of IFRS is: International Accounting Standards Board International Federation of Accountants International Organization of Securities Commissions International Securities and Exchange Commission

International Organization of Securities Commissions

The FCPA requires all SEC registrants to have each of the following except: Maintain internal accounting controls Ensure all transactions are authorized by management and recorded properly Maintain information systems that prevent fraudulent activities that violate the FCPA Maintain adequate books and records to fairly reflect an issuer's transactions and disposition of assets

Maintain information systems that prevent fraudulent activities that violate the FCPA

The legal liability of the auditors in the Autonomy case can best be described as resulting from: Liability for gross negligence that constituted fraud No liability because the firms were not sued by Autonomy Liability for failing to inform creditors of a nonexistent bank account carried on Autonomy's books Improper accounting for a merger transaction between Hewlett-Packard and Autonomy

No liability because the firms were not sued by Autonomy

Which of the following is NOT a valid defense to legal liability under the Securities Act of 1933? Materiality defense Non-negligence defense Due diligence defense Lack of causation defense

Non-negligence defense [(1) the materiality defense; (2) the due diligence defense; (3) the knowledge of falsehood defense; or (4) the lack of causation defense]

How long do management and the audit committee have to act if the independent auditor reports possible illegal acts to them? One week One month Three business days One business day

One business day

The executives of McKesson and Robbins Pharmaceuticals were able to steal about $2.9 million in 1939 because: Its auditors did not follow the generally accepted auditing standards (GAAS) at the time The independent audit of financial statements was not required at the time Physical inspection of inventory was not performed by the auditors The auditors were not independent and conspired with management to steal the funds

Physical inspection of inventory was not performed by the auditors (this was not a required audit procedure at the time)

The term "true and fair view" tends to be a replacement for _________ used in the U.S. Full and fair Present fairly Representational faithfulness Economic substance

Present fairly

Which of the following is NOT one of the most relevant sources of civil liabilities for auditors charged with failing to adhere to the requirements of the laws in carrying out professional obligations? Securities Act of 1933 Private Securities Litigation Reform Act of 1995 Securities and Exchange Act of 1934 Sarbanes-Oxley Act of 2002

Private Securities Litigation Reform Act of 1995

The Private Securities Litigation Reform Act of 1995 applies the practice of ______ to auditor liability determinations. Risk assessment Joint and several liability Particularized standard Proportionate liability

Proportionate liability (The PSLRA changes the legal liability standard of auditors from joint-and-several liability to proportionate liability)

The Securities Act of 1933: Regulates the auditing of financial statements for publicly-traded companies Limits the financial liability of independent auditors except in the case of gross negligence Regulates the initial offering of securities Regulates which services may be performed for a publicly-traded company by an audit firm

Regulates the initial offering of securities

The fraud at Satyam involved: Related party transactions, fictitious revenue and falsified bank account balances Related party transactions, impaired assets and off- balance sheet entities Impaired assets, falsified bank account and facilitating payments Fictitious revenue, contingent liabilities and facilitating payments

Related party transactions, fictitious revenue and falsified bank account balances

The Securities and Exchange Act of 1934: Limits the financial liability of independent auditors except in the case of gross negligence Requires the filing of audited annual statements and reviewed quarterly statements Regulates the initial offering financial statements of securities Regulates which services may be performed for a publicly-traded company by an audit firm

Requires the filing of audited annual statements and reviewed quarterly statements

Principles-based standards differ from a rules-based approach because: Principles-based standards rely on bright-line concepts to apply accounting standards Rules-based standards rely on bright-line rules to apply accounting standards Principles-based standards set uniform goals for the application of accounting standards Rules-based standards form the basis of IFRS

Rules-based standards rely on bright-line rules to apply accounting standards

Under the rules of the Sarbanes-Oxley Act of 2002 (SOX), who must certify the public reports filed with the SEC? The independent auditor The CEO and the independent auditor The CEO and CFO The CFO and the board of directors

The CEO and CFO

Under the Securities Act of 1933, if damages were incurred and there was a material misstatement or omission in the financial statements, the CPA will most likely lose the lawsuit unless: The management intentionally deceived the auditors The damages were incurred to a third party that was not a signatory to the contract The CPA can shift the burden of proof to the investors The CPA rebuts the allegations

The CPA rebuts the allegations

The ethical dilemma in the Getaway Cruise Lines case can best be described as: The external auditors are being blocked by the client in attempting to verify accounting treatment of surplus electricity and water provided by the client to the local government The Director of International Accounting questions the requirement to provide surplus electricity and water to the local government The external auditors question the requirement to make facilitating payments to the local authorities The Director of International Accounting questions the requirement to provide surplus electricity and water and make facilitating payments to the local authorities

The Director of International Accounting questions the requirement to provide surplus electricity and water and make facilitating payments to the local authorities

PCAOB inspections of U.S. audit firms operating in China creates challenges because: China requires the PCAOB to come to China to do their inspections The SEC has to work through the China Securities Regulatory Commission to facilitate inspections of U.S. audit firms operating in China China refuses to cooperate on any level with the SEC The SEC requires that U.S. audit firms operating in China transmit all work papers to the U.S. audit firm's headquarters before an inspection can take place

The SEC has to work through the China Securities Regulatory Commission to facilitate inspections of U.S. audit firms operating in China

Which of the following would normally be considered sufficient to demonstrate due care on the part of the auditor? The auditor had its work reviewed by another audit firm The auditor cites adherence to generally accepted auditing standards (GAAS) No omissions or misstatements have been found in the client's financial statements The auditor signs a statement expressing its unmodified opinion as to the fairness of the financial statements

The auditor cites adherence to generally accepted auditing standards (GAAS)

Under the Private Securities Litigation Reform Act (PSLRA), 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 next report his/her conclusions to: The Securities and Exchange Commission The company's board of directors The office of the controller/comptroller for the appropriate state The Federal Bureau of Investigation

The company's board of directors

The Credit Alliance v. Arthur Andersen & Co. case established three tests that must be satisfied for holding auditors liable for negligence to third parties. All of the following are tests described except: Knowledge by the accountant that the financial statements are to be used for a particular purpose The intention of the third party to rely on those statements Some action by the accountant linking him or her to the third party that provides evidence of the accountant's understanding of intended reliance The identity of the third party must be directly known to the auditor

The identity of the third party must be directly known to the auditor

Which of the following is NOT one of the defenses an auditor can use against third party lawsuits for fraud? The third party was not in contractual privity The auditor did not have a duty to the third party The third party was negligent The third party did not suffer a loss

The third party was not in contractual privity (contractual privity is not necessary to bring up a lawsuit)

In Grant Thornton v. Prospect High Income Fund, Grant used each of the following points to defend itself against legal liability except: There was no evidence of a causal connection between Grant's alleged misrepresentation and the funds' alleged injury There was no evidence of actual and justifiable reliance There was no evidence of the loss suffered by the plaintiffs Liability for fraudulent misrepresentations runs only to those whom the auditor knows and intends to influence, all of which was not present

There was no evidence of the loss suffered by the plaintiffs

The Ultramares v. 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; however, it did leave open the possibility that: Third parties that were "foreseeable" may sue for ordinary negligence Third parties may sue if one of the parties in contractual privity allowed it to Third parties may sue in the case of fraud or constructive fraud Third parties who used the financial statements may sue

Third parties may sue in the case of fraud or constructive fraud

The defendant-auditors in the Anjoorian case argued, in their defense, that: To be found guilty to third parties, 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 plaintiff's theory of damages did not meet the foreseen legal criteria They had no liability to the client because the client did not rely on the audited financial statements They followed generally accepted auditing standards

To be found guilty to third parties, 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

In the Vertical Pharmaceuticals case, Deloitte & Touche was sued because: Vertical claimed the firm's false accusations of fraudulent conduct led to the withdrawal of another public company's planned acquisition of Vertical Deloitte failed to issue an audit report on a timely basis thereby leading to the withdrawal by another public company's planned acquisition of Vertical Vertical claimed Deloitte committed fraud in its audit of Vertical Deloitte issued a modified opinion (adverse) on Vertical's financial statements thereby leading to the withdrawal by another public company's planned acquisition of Vertical

Vertical claimed the firm's false accusations of fraudulent conduct led to the withdrawal of another public company's planned acquisition of Vertical

In Tenants Corp. v. Max Rothenberg, the auditors were held legally liable for: Ordinary negligence Gross negligence Deficient tax work Write-up work

Write-up work

A privity relationship means that: A party may be a user of the financial statements A party may sue if fraud has taken place A party's financial liability is limited A party has a contractual obligation

limited A party has a contractual obligation