Ethics
What is the difference between earnings manipulation and earnings management
Earnings manipulation is a form of earnings management. Managers Intent and underlying motivation may be self-interest
What are some of common methods used to smooth net income over time
1) Accelerate recognition of revenue 2) Delay recognition of expenses 3) Cookie Jar Reserves
What is the distinction between rule utilitarianism and act utilitarianism
1) Act-Utilitarians examine the specific action itself versus rule and sets aside the rule only if increase in net utility to all stakeholders 2) Rule-Utilitarians: basis behavior on rules designed to promote the greatest utility and maximizes intrinsic value.
What traits are usually exhibited by ethical leaders
1) Agreeableness, conscientiousness, moral reasoning, locus of control 2) Honest, caring, principled individuals who make fair and balanced decisions, communicate, set clear standards, use rewards, practice what they preach
Why do some critics claim the usefulness of an audit report is limited
1) Auditors do not examine all the transactions 2) Language in the audit report relies on subjective evaluations such as what is meant by "reasonable" 3) Transactions examined are based on materiality and risk assessment determinations
What are the elements of internal control over financial reporting
1) Control environment 2) Risk assessment 3) Information and communication 4) Monitoring 5) Existing control activities
What are the conditions under which internal accountants eligible to become a whistleblower
1) Disclosure to the SEC is needed to prevent "substantial injury" to the financial interest of any entity or its investors 2) The whistleblower "reasonably believes" that entity is impeding investigation of the misconduct (e.g destroying documents or improperly influencing witnesses) 3) The whistleblower has first reported the violation internally and at least 120 days have passed with no action.
If there's a going concern issue, then what should the auditor do
1) Issue an unmodified opinion with an emphasis-of-matter paragraph 2) Explain the reasons for the going concern issue 3) Indicate where management's plans to deal with the going concern are addressed
What are the 6 dimensions of Thomas Jones moral intensity model
1) Magnitude of Consequences 2) Temporal Immediacy 3) Social Consensus 4) Proximity 5) Probability of Effect 6) Concentration of Effect
Rest's 4 component model of morality - know 4 components and what they reflect
1) Moral sensitivity (recognition) - individual interprets situation as moral 2) Moral judgment - individual's ethical cognition of what "ideally" ought to be done 3) Moral focus (motivation) - willingness to place ethical values ahead of nonethical values that relate to self-interest 4) Moral character - individuals do not always behave in accordance with their ethical intention because of lack of ethical character -- Rest's model is a model of the relationship between ethical action and one's level of moral development
Sections of SOX - Section 302
302 - 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
Bill and hold revenue recognition
A method of conducting sales by billing the customer on the same day as the transaction occurs, but not delivering the goods until a later date; buyer's responsibility to request that a transaction be on a bill-and-hold basis
Fraud can be defined as: A) A deliberate misrepresentation to gain an advantage over another party B) A cover-up of a mistake made in the financial statements C) An error in preparing financial statements D) All of the above
A) A deliberate misrepresentation to gain an advantage over another party
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 the above
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
The method of ethical reasoning that evaluates actions in terms of harms and benefits is: A) Act Utilitarianism B) Rights Theory C) Justice D) Virtue
A) Act Utilitarianism
Which of the following is a permitted loan to a CPA from an audit client financial institution? A) Car loan collateralized by the car B) Credit cards with a limit greater than $25,000 C) Home mortgage D) Personal loan of less than $10,000
A) Car loan collateralized by the car
Teleology deals with A) Consequences of actions B) Fairness to others C) Respecting the rights of others D) Following prescribed virtue characteristics
A) Consequences of actions
What needs to be coupled with moral motivation to act on moral judgment? A) Courage B) External pressures C) Loyalty D) Internal pressures
A) Courage
Which of the following author(s) link earnings management to choices made in determining earnings that may comprise aggressive, but acceptable, accounting estimates and judgements, as compared to fraudulent practices that are clearly intended to deceive others? A) Dechow and Skinner B) Healy and Wahlen C) Schipper D) Thomas E. Mckee
A) Dechow and Skinner
Which theory is based on doing what is right despite the consequences? A) Deontology B) Virtue ethics C) Teleology D) Egoism
A) Deontology
Virtue ethics is A) Doing what is right B) One's duty to act in a socially acceptable manner C) One's ability to meet or exceed their potential D) What one ought to do when presented with an ethical dilemma
A) Doing what is right
The method of ethical reasoning that does not deal with making decisions after considering the interest of others is: A) Egoism B) Enlightened Egoism C) Utilitarianism D) Rights Theory
A) Egoism
Deontology deals with A) Emphasizes rights of others B) Consequences of actions C) Following prescribed virtue characteristics D) Following the law as an element of ethical behavior
A) Emphasizes rights of others
Role expectation or approval from others is a motive for doing right in which stage of Kohlberg's moral reasoning? A) Fairness to others B) Obedience C) Self-chosen principles D) Law and order
A) Fairness to others
In stage 1 of Kohlberg's model, ethical reasoning is motivated by: A) Fear of punishment B) Satisfaction of one's needs C) Following the law D) Acting based on universal ethical principles
A) Fear of punishment
The cultural value of Individualism reflects A) The degree a society reinforces individual or collective achievement B) Tolerance for uncertainty and ambiguity in society C) The degree of equality between people in a society D) Whether a society has a long-term or short-term orientation
A) The degree a society reinforces individual or collective achievement
The misappropriation of assets refers to: A) The deliberate use of company assets for personal reasons B) The deliberate overstatement of financial statements C) The deliberate omission of disclosures from the statements D) All of the above
A) The deliberate use of company assets for personal reasons
A member body of the International Federation of Accountants (IFAC) should follow the provisions of the home country's code of ethics rather than the Code of Ethics for Professional Accountants (IFAC Code) when: A) The home country standards of the member body are more stringent than those in the IFAC Code. B) The member body disagrees with IFAC Code provisions C) The home country standards of the member body are less strict than those in the IFAC Code. D) All of the above
A) The home country standards of the member body are more stringent than those in the IFAC Code.
The ethical domain in accounting and auditing refers to: A) The important constituent groups affected by accounting and auditing work B) The stages of the moral development of accountants and auditors C) The decision making process followed by accountants and auditors D) All of the above
A) The important constituent groups affected by accounting and auditing work
The ethical domain in accounting and auditing refers to: A) The important constituent groups affected by accounting and auditing work B) The stages of the moral development of accountants and auditors C) The decision making process followed by accountants and auditors D) All of the above
A) The important constituent groups affected by accounting and auditing work
All of the following proof can be used in an auditor's defense against third party lawsuits for fraud except for: A) The third party was not in contractual privity B) The auditor did not have a duty to the third party C) The third party was negligent D) The third party did not suffer a loss
A) The third party was not in contractual privity
Kohlberg's model can best be described as: A) The various phases in one's moral development and related levels of moral reasoning B) A model of ethical action that is based on one's moral development C) A predictive tool to determine how a person will reason ethically based on one's moral development D) A model of age-specific levels of moral reasoning
A) The various phases in one's moral development and related levels of moral reasoning
The failure of Lehman Brothers was due in large part to: A) Use of Repo 105 Transactions B) Accelerating recording revenue into an earlier period than warranted C) Understating the allowance for loan losses D) Aggressive Valuation of marketable securities
A) Use of Repo 105 Transactions
The philosophical belief that you should judge the result, not the action (end justifies the means) is? A) Utilitarianism B) Deontology C) Justice D) Virtue ethics
A) Utilitarianism
In the Vertical Pharmaceuticals case, Deloitte & Touche was sued because A) Vertical claimed the firm's false accusations of fraudulent conduct led to the withdrawal of another public company's planned acquisition of Vertical B) 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 C) Vertical claimed Deloitte committed fraud in its audit of Vertical D) 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
A) Vertical claimed the firm's false accusations of fraudulent conduct led to the withdrawal of another public company's planned acquisition of Vertical
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 the above
A) What can go wrong when a company sets a policy that potentially harms one area of its operations
Assume you were assigned a term paper and decided to surf the web to identify a provider of papers for a fee. You chose what you thought was the best paper available. With respect to Rest's model of morality it can be said that A) Your actions lack moral sensitivity B) You are reasoning at stage 1 C) You are making judgments based on the utilitarian method D) You lack the courage of your convictions
A) Your actions lack moral sensitivity
Many critics say the biggest fault with deontological theories is A) no clear way to resolve conflicts between moral duties B) the separation of consequences from duties C) the requirement to respect people as human beings D) not being able to treat people as only a means
A) no clear way to resolve conflicts between moral duties
If you the auditor conclude an illegal act exists, what should your first step be
Assess the impact of the illegal act on the financial statements
Impaired Assets
Asset's market value falls below its carrying amount and is not expected to recover
What would an authentic leader do or emphasize
Authenticity and self-awareness
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 the above
B) A model of the relationship between ethical action and one's level of moral development
When courts find accountants liable for constructive fraud, the implication is that A) Auditors should always be liable when investors lose money due to deceit B) Accountants may be liable for fraud even when they had no knowledge of deceit C) Auditors should be able to detect all deceit by management D) Accountants may be held liable even to third parties to whom they did not have a duty
B) Accountants may be liable for fraud even when they had no knowledge of deceit
In stage 3 of Kohlberg's model, ethical reasoning is motivated by: A) Satisfaction of one's needs B) Acting in the best interests of others C) Upholding the rights, values, and legal contracts of society D) Acting based on universal principles
B) Acting in the best interests of others
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
B) All possible third party users of financial statements must be anticipated.
Each of the following characteristics describes the importance of integrity in decision making except for: A) Acting out of moral principle B) Being loyal to one's superior C) Having the courage to do the right thing D) Not subordinating professional judgement to others
B) Being loyal to one's superior
In the case of SEC v. Halliburton & KBR, the SEC charged Halliburton & KBR with A) Bribing Nigerian government officials to look the other way while the companies developed and presented fraudulent financial statements B) Bribing Nigerian government officials in order to obtain construction contracts C) Bribing Nigerian government officials to off-load merchandise at the country's piers D) All of the above
B) Bribing Nigerian government officials in order to obtain construction contracts
In the NYC Subway Death case, the reason that no bystanders helped Ki-Suck Han was probably due to: A) Moral blindness and ethical fading B) Bystander effect and moral blindness C) Blind spot and moral blindness D) Ethical fading and bystander effect
B) Bystander effect and moral blindness
Which of the following situations of a CPA's distant relatives does not impair the CPA's independence? A) CPA's parent holds a key position with an audit client. B) CPA's nephew is starting as a salesperson with an audit client. C) CPA's dependent roommate owns a material interest, and sits on the board, of an audit client. D) CPA's sister is chief counsel for an audit client.
B) CPA's nephew is starting as a salesperson with an audit client.
In the Lincoln Savings & Loan failure during the period of failures at savings and loan institutions, Lincoln was charged with: A) Stealing $300 million from shareholders B) Causing retirees to lose their life savings C) Causing employees to lose their jobs D) Engaging in a Ponzi scheme
B) Causing retirees to lose their life savings
Section 302 of the Sarbanes-Oxley Act requires that management: A) Assess the company's internal controls B) Certify the financial statements C) Disclose all executive compensation D) All of the above
B) Certify the financial statements
The auditor's' responsibility to communicate findings with respect to fraud can best be summarized as: A) Communicate to the SEC the existence of fraud but not the amount involved B) Communicate to the audit committee both material and immaterial amounts of fraud that are detected C) Communicate to the SEC both material and immaterial amounts of fraud that are detected D) Communicate to the audit committee the existence of fraud but not the amount involved.
B) Communicate to the audit committee both material and immaterial amounts of fraud that are detected
George is in the middle of a high stakes poker game when he notices what he thinks is cheating by another player. It appears to George that this player took a card from his lap and switched it with a card that he was dealt. If George is a utilitarian thinker, he should: A) Accuse the alleged cheater of cheating in front of all the other players B) Consider what might happen if he accuses the player of cheating and he is wrong C) Speak to the alleged cheater during a regularly scheduled break and tell him not to do it again D) Forget about the whole matter
B) Consider what might happen if he accuses the player of cheating and he is wrong
The motive of "duty" is most associated with . A) Egoism B) Deontology C) Utilitarianism D) Justice
B) Deontology
The difference between an error in the financial statements as compared to fraud is: A) An error is always an intentional act designed to deceive another party B) Fraud is always an intentional act designed to deceive another party C) An error always leads to a qualification of the auditor's opinion D) Fraudulent financial reporting is always material in amount
B) Fraud is always an intentional act designed to deceive another party
Which of the following author(s) focuses on "management's intent to deceive the stakeholders by using accounting devices to positively influence reported earnings"? A) Dechow and Skinner B) Healy and Wahlen C) Schipper D) Thomas E. McKee
B) Healy and Wahlen
Eddie paid an $8 restaurant check with a $10 bill. The waitress have him $12 back. The most ethical action for Eddie is to: A) Keep the extra $10 B) Inform the waitress of her overpayment C) Inform the manager of the restaurant of the overpayment D) Leave a larger tip for the waitress
B) Inform the waitress of her overpayment
Backdating of stock options is unethical because: A) It favors top executives over other company employees with respect to the number of options B) It purposefully manipulates the option criteria that determine their value C) It changes the exercise price on options to benefit top executives D) All of the above
B) It purposefully manipulates the option criteria that determine their value
Which of the following is not part of the fraud triangle? A) Opportunity B) Materiality C) Rationalization D) Incentives
B) Materiality
One problem of a more principles-based system that was pointed out in an SEC study is that they: A) Tend to be rules-based more than objectives-oriented standards B) May present enforcement problems C) Use bright-line tests D) All of the above
B) May present enforcement problems
In reference to Rest's four-component Model of Morality, which component reflects an individual's willingness to place ethical values ahead of non-ethical values that relate to self-interest? A) Moral Character B) Moral Motivation C) Moral Sympathy D) Moral Judgment
B) Moral Motivation
Rest's components of a moral model include all but A) Moral sensitivity B) Moral development C) Moral judgment D) Moral character
B) Moral development
Cookie Jar reserves can best be described as: A) Buying a lot of chocolate chip cookies, storing them for when you have a hunger attack, and then releasing them into your stomach B) Overstating or understating allowances and reversing amounting in the future to smooth out net income over time C) Accelerating the recording of revenues into an earlier year than it is warranted D) Delaying the recording of expenses to a later year to boost income in the current year
B) Overstating or understating allowances and reversing amounting in the future to smooth out net income over time
The Securities and Exchange Act of 1934 A) Limits the financial liability of independent auditors except in the case of gross negligence B) Requires the filing of audited annual statements and reviewed quarterly statements C) Regulates the initial offering financial statements of securities D) Regulates which services may be performed for a publicly-traded company by an audit firm
B) Requires the filing of audited annual statements and reviewed quarterly statements
The method of ethical reasoning that requires selecting the correct moral rule that produced the greatest benefits over harm is: A) Act Utilitarianism B) Rule Utilitarianism C) Rights Theory D) Justice
B) Rule Utilitarianism
Keesha is the CEO of a publicly-owned company. She was informed by the CFO that the company's earnings were down 30 percent from the prior year due to the recession. The company's stock price has declined by 20 percent. The CFO comes up with a scheme to hide debt and inflate revenues by selling underperforming assets to a special purpose entity affiliated with the company. Keesha is concerned about possible effects on the creditors but ultimately she agrees to the accounting. Keesha is reasoning at: A) Stage 1 B) Stage 2 C) Stage 3 D) Stage 4
B) Stage 2
In which of the following is a CPA independent in fact and appearance? A) The CPA's brother is the controller of the company being audited. B) The CPA serves on the board of a non-profit with the CFO of the company being audited. C) The CPA borrowed money for a new car from the CEO of the company being audited. D) The CPA owes an office building that he leases to the client.
B) The CPA serves on the board of a non-profit with the CFO of the company being audited.
Which of the following would normally be considered sufficient to demonstrate due care on the part of the auditor? A) The auditor had its work reviewed by another audit firm B) The auditor cites adherence to generally accepted auditing standards (GAAS) C) No omissions or misstatements have been found in the client's financial statements D) The auditor signs a statement expressing its unmodified opinion as to the fairness of the financial statements
B) The auditor cites adherence to generally accepted auditing standards (GAAS)
In which of the following circumstances would an adverse opinion be appropriate? A) An uncertainty prevents the issuance of a standard unqualified opinion B) The statements are not in conformity with generally accepted accounting principles regarding stock option plans C) The auditor has been unable to obtain sufficient competent evidential matter D) The principle auditors decide to make references to the report of another auditor who audited a subsidiary
B) The statements are not in conformity with generally accepted accounting principles regarding stock option plans
Under which of the following set of circumstances might the auditors disclaim an opinion? A) The financial statements contain a departure from generally accepted accounting principles, the effect of which is material B) There is a client scope restriction that precludes the auditors' compliance with generally accepted auditing standards C) There has been a material change between periods in the method of the application of accounting principles D) Differences with management that lead to trust issues on the part of the auditor
B) There is a client scope restriction that precludes the auditors' compliance with generally accepted auditing standards
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 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 the above
B) To identify the causes of when there may be intentional misstatements or omissions of amounts or disclosures in the financial statements
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
B) continues to change decision priorities with education and experiences
IFRS tends to be more ____________ than U.S. GAAP. A) rules-based B) principles-based C) consistent D) accurate
B) principles-based
A common requirement/effect of the commissions and contingent fees rule is: A) A CPA who accepts such a payment always violates independence B) The CPA must disclose the acceptance of such a payment to the client C) A CPA is prohibited from accepting such a form of payment when engaged in attest services for a client D) All of the above
C) A CPA is prohibited from accepting such a form of payment when engaged in attest services for a client
Which of the following would be an example of due care? A) Audit documentation only supplied by the client. B) Audit documentation is a copy of last year's workpapers. C) Audit documentation obtained by the auditor with reviews by supervisory personnel D) Audit documentation with misapplication of GAAP.
C) Audit documentation obtained by the auditor with reviews by supervisory personnel
Moral sensitivity can be summarized as A) Being able to think of others first B) Being able to identify the best course of action C) Being able to identify an ethical situation D) Being able to react quickly
C) Being able to identify an ethical situation
Which of the following immediate family members or close relatives would not have to follow the independence rules that apply to the CPA according to Interpretation 101-1? A) CPA's spouse B) CPA's spousal equivalent C) CPA's uncle D) CPA's dependents
C) CPA's uncle
When applying Utilitarianism to judge actions, what is the only thing that matters? A) Motives B) Justice C) Consequences D) Rights
C) Consequences
Section 10A of the Securities Exchange Act of 1934 establishes each of the following requirements for auditors of public companies with respect to illegal acts except for A) Determine whether it is likely that an illegal act has occurred B) Determine what the possible effect of the illegal act is on the financial statements C) Determine whether management participated in the illegal act D) Inform management and assure that the audit committee knows about any material illegal act that has been detected
C) Determine whether management participated in the illegal act
When making a donation at the local Goodwill, Martha tells the clerk that her old computer is in perfect working order when she knows it is not, just so she can deduct more on her taxes. Which theory best describes Martha's behavior? A) Utilitarianism B) Deontology C) Egoism D) Justice
C) Egoism
In the Pinto case, Ford relied on which approaches to ethical reasoning to decide on a course of action with respect to the faulty gas tank placement: A) Egoism and utilitarianism B) Enlightened egoism and rights theory C) Ethical legalism and utilitarianism D) Justice and rights theory
C) Ethical legalism and utilitarianism
The biggest problem in implementing an utilitarian approach to decision making is: A) The interest of others may be subservient to self-interests B) It fails to consider the interest of others C) It can be difficult to evaluate the consequences of actions D) It relies on moral absolutes
C) It can be difficult to evaluate the consequences of actions
The biggest problem in implementing a rights approach to decision making is: A) The interest of others may be subservient to self-interest B) It is difficult to weigh harms and benefits C) It relies on moral absolutes D) It can be difficult to determine criteria to distinguish equals from unequal claims.
C) It relies on moral absolutes
Why don't auditors prepare financial statements, as well as audit them? A) It would take away a job from the controller of the company. B) It would not eliminate errors in the financial statements. C) It would be a conflict of interest and violates ethical standards. D) It would streamline the process and be effective.
C) It would be a conflict of interest and violates ethical standards.
The ethical reasoning method that is based on treating equals, equally and unequals, unequally is: A) Enlightened egoism B) Act utilitarianism C) Justice D) Virtue
C) Justice
In surveys of managers, which technique to manage earnings was considered most acceptable? A) Changing inventory valuation in order to influence earnings B) Accounting manipulation C) Manipulating operating decisions D) Establishing cookie jar reserves
C) Manipulating operating decisions
Which of the following is not part of the fraud triangle? A) Incentives B) Opportunity C) Materiality D) Rationalization
C) Materiality
How does Gilligan evaluate the solution to Heinz's dilemma? A) Women think saving a life is more important than keeping the law. B) Men think keeping the law is more important than saving a life. C) Men tend to think in terms of justice, and women in terms of caring. D) Men misunderstand and women understand.
C) Men tend to think in terms of justice, and women in terms of caring.
Wanda is faced with an ethical dilemma. She knows her supervisor, the CFO, wants to accelerate the recoding of revenue to an earlier period to "make the numbers," but Wanda is convinced this would violate GAAP. If Wanda reasons at stage 4 of Kohlberg's model she is most likely to: A) Make a decision based on what is in her own best interests B) Consider the interests of the stakeholders but decide based on what is in her best interests C) Refuse to record the transaction as desired by the CFO D) Inform the board of directors of the difference of opinion with the CFO
C) Refuse to record the transaction as desired by the CFO
The Securities Act of 1933 A) Regulates the auditing of financial statements for publicly-traded companies B) Limits the financial liability of independent auditors except in the case of gross negligence C) Regulates the initial offering of securities D) Regulates which services may be performed for a publicly-traded company by an audit firm
C) Regulates the initial offering of securities
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) Safeguard implemented by the firm, including policies and procedures to implement regulatory requirements
C) Safeguards developed to ensure independence when performing nonattest services
Which of the following author(s) emphasize(s) a "purposeful act by management in pursuit of its own self-interests as might be the case when earnings and manipulated to get the stock price up in advance of the exercise of stock options? A) Dechow and Skinner B) Healy and Wahlen C) Schipper D) Thomas E. Mckee
C) Schipper
At which stage of Kohlberg's view on ethical development is an individual's actions influenced by group norms? A) Stage 1 B) Stage 2 C) Stage 3 D) Stage 4
C) Stage 3
In the "Heinz and the Drug" case described in the chapter, Heinz's actions falls into which of Kohlberg's stages? A) Stage 1 B) Stage 2 C) Stage 3 D) Stage 4
C) Stage 3
A client asks his accountant to ignore a mistake which overstated the accounts receivable account. The accountant decides that the accounts receivable account has to be corrected to state the correct amount. The accountant makes his decision based on his duty to society, respect for authority, and maintaining the social order. Which stage of Kohlberg' Stages of Moral Development is the accounting reasoning? A) Stage 2 B) Stage 3 C) Stage 4 D) Stage 5
C) Stage 4
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
C) Stage 4
The results of studies indicate that CPAs reason primarily at: A) Stages 1 and 2 B) Stages 2 and 3 C) Stages 3 and 4 D) Stages 4 and 5
C) Stages 3 and 4
Objectivity may be impaired when a CPA prepares a tax return for a client because: A) The CPA violates the independence rule B) The CPA violates the integrity rule C) The CPA serves in a tax advocacy position for the client D) The CPA must prepare the tax return solely based on the information provided by the client
C) The CPA serves in a tax advocacy position for the client
A CPA can accept a contingent fee in providing tax services for an attest client if: A) The CPA discloses this fact to the tax client B) The CPA receives the permission of the client to accept such a form of payment C) The CPA's tax services will be reviewed by a taxing authority D) All of the above
C) The CPA's tax services will be reviewed by a taxing authority
The Agency Theory can best be described as: A) The relationship between top management and the board of directors B) The relationship between the board of directors and shareholders C) The relationship between top management and the board of directors, and shareholders D) The relationship between the external auditors and top management
C) The relationship between top management and the board of directors, and shareholders
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 the above
C) To identify threats to independence and develop safeguards to mitigate the threats
The IFAC, IAESB and IESBA ethical principles are similar to those in the AICPA Code except for: A) Integrity B) Objectivity C) True and fair view D) Professional competence
C) True and fair view
In stage 5 of Kohlberg's model, ethical reasoning is motivated by: A) Acting in the best interests of others B) Following the law C) Upholding the rights, values, and legal contracts of society D) Acting based on universal principles
C) Upholding the rights, values, and legal contracts of society
"Do that action which will bring about the greatest good for the greatest number of people," is the basic concept of which ethical theory? A) Egoism B) Deontology C) Utilitarianism D) virtue ethics
C) Utilitarianism
Greatest good for the greatest number of people is the theory of A) Rights B) Deontology C) Utilitarianism D) Justice
C) Utilitarianism
When would it be appropriate for an auditor to withdraw from an engagement? A) In order to avoid issuing an adverse opinion. B) When that auditor cannot observe the taking of inventory or is unable to confirm receivables. C) When the management cannot be trusted. D) When the auditor has overbooked too much work
C) When the management cannot be trusted.
In the Giles and Regas case, the primary ethical issue can be stated as: A) Whether a subordinate should blow the whistle on a superior who has violated ethical policy B) Whether two staff members of the same rank should be allowed to date C) Whether a superior should become involved in a dating relationship with a subordinate D) Whether a student should renege on the acceptance of an offer from one firm after receiving an offer from a second firm
C) Whether a superior should become involved in a dating relationship with a subordinate
Under the Securities Act of 1933 and the Securities and Exchange Act of 1934, accountants may be subject to criminal penalties for: A) Obstruction of justice B) Securities fraud C) Willful violations of the securities acts D) All of the above
C) Willful violations of the securities acts
Survey of CFO's about their perceptions of earnings quality: statement 1
CFO's believe that earnings are high quality when they are sustainable and backed by actual cash flows. More specific quality characteristics include consistent reporting choices overtime and avoidance of long-term estimates. Consistent with this view, current earnings are considered to be high quality if they serve as a good guide to the long-run profits of the firm
Survey of CFO's about their perceptions of earnings quality: statement 5
CFOs believe that 60 percent of earnings management is income-increasing, and 40 percent is income-decreasing
Survey of CFO's about their perceptions of earnings quality: statement 3
CFOs believe that earnings quality would improve if reporting choices were to evolve at least partly from practice rather than being mandated from standards.
Survey of CFO's about their perceptions of earnings quality: statement 2
CFOs believe that reporting discretion has declined over time, and that current GAAP standards are somewhat of a constraint in reporting high-quality earnings. CFOs would like standard setters to issue fewer rules and converge US GAAP with IFRS to improve earnings quality.
Survey of CFO's about their perceptions of earnings quality: statement 7
CFOs caution that earnings management is difficult to unravel from the outside, but redflags point to the potential misrepresentation A) Persistent deviations between earnings and underlying cash flows B) Deviations from industry and other peer experience C) Large and unexplained accruals and changes in accruals.
Survey of CFO's about their perceptions of earnings quality: statement 4
CFOs estimate that, in any given period roughly 20 percent of firms manage earnings and the typical misrepresentation for such firms is about 10 percent of reported EPA.
What is an important part in making an ethical choice according to Kidder
Courage
Loyalty and Fraud Reporting case - Ethan Lester pressured his friend to do what
Cover up Ethan's Fraud
SOX Section 808
Covers the criminal penalties for altering documents. These penalties range fro fines to actual prison sentences for reporting false or fraudulent financial statements to the public
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"
D) "One ought always act in one's own interest"
What are the implications of reasoning at stages 3 and 4? A) A CPA unable to apply technical accounting standards is unlikely to be influenced by others. B) A CPA is unlikely to be influenced by rules or authority. C) A CPA is unlikely to be influenced or give into pressures. D) A CPA unable to apply technical accounting standards is likely to be influenced by others.
D) A CPA unable to apply technical accounting standards is likely to be influenced by others.
Agency costs refer to: A) The costs incurred in monitoring managerial performance B) The costs incurred because there is information asymmetry between the corporation and outsiders C) The costs incurred because insiders know more about a company than do outsiders D) All of the above
D) All of the above
Individuals who reason at stage 6 incorporate ethical reasoning based on: A) The morality of law and duty to the social order B) A rational calculation of benefits and harms to society C) Universal ethical principles D) All of the above
D) All of the above
Professional skepticism can best be defined as having: A) A deliberate decision making and suspension of belief B) An inquiring mind and deliberate decision-making C) Careful observation and virtue based decision making D) An inquiring mind and suspension of belief
D) An inquiring mind and suspension of belief
The biggest problem in applying virtue theory to decision making is: A) It can be difficult to evaluate the effect of virtues on others in decision making B) It relies on moral absolutes in decision making C) It can be difficult to determine virtues to distinguish equals from unequal claims in decision making D) Conflicts between virtues may make decision making more difficult
D) Conflicts between virtues may make decision making more difficult
Which of the following is a reason for an auditor to issue a qualified opinion? A) Difference of opinion with management on a presentation of financial statements in the annual report B) Difference of opinion with management on earnings estimate of material amount C) Difference of opinion with management on preferred accounting principles under GAAP D) Difference of opinion with management on material application of accounting standards
D) Difference of opinion with management on material application of accounting standards
Which of the following is the most likely reason for an auditor to issue a qualified opinion? A) Inability to gather sufficient relevant information to form the basis for the opinion B) Differences with management that lead to trust issues on the part of the auditor C) Going concern issue D) Difference of opinion with management on the application of generally accepted accounting principles
D) Difference of opinion with management on the application of generally accepted accounting principles
In the U.S., if the auditor can demonstrate having performed services with the same degree of skill and judgment possessed by others in the profession, it can be said to have exercised: A) Prudence B) Scienter C) Nonfeasance D) Due Care
D) Due Care
Which of the following is not a component of internal controls? A) Control Environment B) Information and communication systems C) Monitoring of Controls D) Independence of the audit committee
D) Independence of the audit committee
The most important duty of public accounting is to the: A) Securities Exchange Commission B) Current stockholders C) Management D) Investing public
D) Investing public
The SEC study of a principles-based system identifies each of the following characteristics that should guide standards setting except for: A) Be based on an improved and consistently applied conceptual framework B) Clearly state the accounting objective of the standard C) Minimize exceptions from the standards D) Minimize the detail and structure so that the standard can be operationalized and applied on a consistent basis
D) Minimize the detail and structure so that the standard can be operationalized and applied on a consistent basis
James Rest's model of ethical action involves four components inherent to the ethical decision-making process. Which of the following relates to a person's moral judgment A) Interpreting a situation as a moral dilemma B) Willingness to place ethical values ahead of non-ethical values C) Intention to act ethically aligning to his values D) Outcome of one's prescriptive reasoning
D) Outcome of one's prescriptive reasoning
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
D) Relationships where a best friend serves in a financial reporting oversight role with the client
Members of the audit committee are responsible for each of the following except for: A) Evaluating management's identification of fraud risks B) Assessing whether management has set the appropriate ethical tone for the organization C) Discussing with the external auditors financial reporting matters of concern D) Rendering an audit opinion after examining the entity's financial statements and internal controls
D) Rendering an audit opinion after examining the entity's financial statements and internal controls
In the Lee & Han, LLC case, Barbara Strom should: A) Report the situation to SEC under the Dodd-Frank Act. B) Change the audit workpapers to not reflect the market decline in inventory C) Discuss the matter with Kate Boller D) Report the situation to the firm's oversight or similar committee.
D) Report the situation to the firm's oversight or similar committee.
Rosie is the external auditor of Texas Two Steps, a privately-owned dance company in Texas. Rosie believes the owner of the company is skimming cash off the top. She approaches the owner who explains that the money will be replaced in the following month after he refinances his house. Rosie accepts the owner's explanation but reclassifies the expenditure as a receivable of the company from Rosie. Rosie's reasoning best reflects: A) Stage 1 B) Stage 2 C) Stage 3 D) Stage 4
D) Stage 4
Which of the following author(s) define(s) earnings management as "reasonable and legal management decision making and reporting intended to achieve stable and predictable financial results?" A) Dechow and Skinner B) Healy and Wahlen C) Schipper D) Thomas E. McKee
D) Thomas E. McKee
According to the 2012 Global fraud Study of the ACFE, the most common method of initial detection of occupational fraud is: A) Internal audit B) Management review C) External audit D) Tip
D) Tip
A CPA would violate the Due Care Principle if he/she A) Specializes in the industry of the client, even offering training class for other accounting firms on the industry B) Performs tax services for an audit client with audit committee approval C) The accounting firm uses two external partner reviews on high risk audits or clients D) Undertook a professional engagement without having the requisite background, knowledge and experience
D) Undertook a professional engagement without having the requisite background, knowledge and experience
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 A) The management intentionally deceived the auditors B) The damages were incurred to a third party that was not a signatory to the contract C) The CPA can shift the burden of proof to the investors D) the CPA rebuts the allegations
D) the CPA rebuts the allegations
What is an asset misappropriation scheme, how is it classified
Deliberate use of company assets for personal reasons
Securities Exchange Act of 1934 - what are the reporting requirements for fraud detailed out in particular in Section 10A
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 Inform management and assure that the audit committee knows about any material illegal act that has been detected
What is the ethical conflict in A Team Player case 2-1
Diane identifies a deficiency in the client's inventory system that she missed during the physical observation. Barbara suggests telling Jessica, the senior in charge, but Diane does not want to and 3 of the other 4 members agree with Diane. The group votes not to inform Jessica, but Barbara does not feel right about it. The group reminds her that they are already behind on work and do not want to seem incompetent. Jessica is a stickler for keeping to the budget and any overages cannot be billed to the client.
Moral intensity
Extent in which the severity of the moral issues affect the decision maker
What percentage of frauds are discovered by external auditors
External auditors are among the least effective controls in combating fraud, with only 3% of the fraud cases detected in this way.
What is the ethical issue in the Rite Aid inventory surplus fraud case
Former Vice Presidents lied to the company about the sale of surplus inventory when it sold it to a third party for greater amounts. Kickback profits
What is the formal name for the global code of ethics for the accounting profession
Global Code of Ethics (IFAC Code), The IFAC established the International Ethics Standards Board for Accountants (IESBA)
In the Phar-Moor case, Stan Cherelstein - how do you best describe his ethical dilemma
He found $10 million worth of check that could not be paid Told the COO to repay the losses but he never followed through He didn't start the fraud or engage in the cover up, but he has not done anything to fix it.
What did the Rusch Factors case imply
Held an accountant liable for negligence to a third party that was not in privity of contract. Rusch Factors had requested financial statements prior to granting a loan. Levin audited the statements, which showed the company solvent when it was actually insolvent. Rusche sued Restatement (Second) of the law of Torts - Actually foreseen third party
Auditing standard 14 of the PCAOB - what does it require
In the audit of financial statements, the auditor's evaluation of audit results should include the following: 1) The results of analytical procedures performed in the overall review of the financial statements 2) Misstatements accumulated during the audit, including, in particular, uncorrected misstatements 3) The qualitative aspects of the company's accounting practices 4) Conditions identified during the audit that relate to the assessment of the risk of material misstatement due to fraud 5) The presentation of the financial statements, including disclosures 6) The sufficiency and appropriateness of the audit evidence obtained`
Kohllberg's 6 stages: Level 2- Conventional
Individual becomes aware of the interests of others and one's duty to society Personal responsibility is an important consideration in decision making Stage 3 - Fairness to Others; commitment to loyalty in the relationship. role expectation or approval from others is a motive for doing the right thing. Stage 4 - Law and Order; one's duty to society, respect for authority, maintaining social order
Kohllberg's 6 stages: Level 3- Post Conventional: ethical development is an individual's actions influenced by group norms
Individual recognizes there must be a society wide basis for cooperation Orientation to principles that shape whatever laws and role systems a society may have Stage 5 - social contracts; upholding the basic rights, values, and legal contracts of society Stage 6 - universal ethical principles that everyone should follow, Kohlberg believed this stage rarely existed, Kant's categorical imperative
What does rule 10b-5 of the Securities Exchange Act of 1934 make unlawful for a CPA
Prohibits any act or omission resulting in fraud or deceit in connection with the purchase or sale of any security
Survey of CFO's about their perceptions of earnings quality: statement 6
Large majority of CFOs believe earnings misrepresentation occurs most often in an attempt to influence stock price, because of outside and inside pressure to hit earnings benchmarks and avoid adverse compensation and career consequences.
In an organization, what is the role of a leader
Managers are people who do things right, Leaders are people who do the right thing
SOX Section 404
Mandates that all publicly-traded companies must establish internal controls and procedures for financial reporting and must document, test and maintain those controls and procedures to ensure their effectiveness. CEO and CFO, attesting to the accuracy thereof, must sign annual reports
Doing Good by Being Good Case
Matt and Becca are apart of an accounting club that raised money for those affected by 'Hurricane Debits'. Matt used the money raised to buy gift cards for those affected, but Becca suspects Matt used the leftover money ($367) to pay for a vacation. He claims that money was used to pay for processing fees.
How long do frauds usually last
Median of 18 months
Cookie jar reserves
Overstating or understating allowances and reversing amounts in the future to smooth out net income over time
What is ethical relativism
Prescriptive view that different groups of people ought to have different ethical standards for evaluating acts as right or wrong
What aspects of the Enron fraud are dealt with directly in SOX
Related party transactions require disclosure in the notes
Audit partners independence may be impaired if he or she leave an audit firm and is then employed by the client - under which circumstances would they be considered not independent
Retain only office privileges with the firm
Kohllberg's 6 stages: Level 1- Preconventional
Rules are seen as something external imposed on one's self Individual is self-centered Stage 1 - obedience to rules; avoidance of punishment Stage 2 - Satisfying one's own needs (egoism); follow rules only to satisfy one's needs
Cognitive Dissonance
State of having inconsistent thoughts, beliefs, or attitudes, especially as relating to behavioral decisions and attitude change
What do we mean by the term selection-socialization bias in audit firms
The selection-socialization bias causes a firm to hire and promote individuals who fit into the prevailing firm culture and causes individuals unable to fit into that culture to leave
Smoothing income
Use of accounting techniques to level out net income fluctuations from one period to the next
