Chapter 6, Chapter 7, Chapter 8

The SEC requires stealth restatements to be: Disclosed only in periodic reports Disclosed only in an 8-K report or amended 10-K/A or 10-Q/A Increased to more 50% of restatements Disclosed in ten business days after determination of need for restatement Learning Objective: 07-06 Explain the causes and effects of financial restatements.

??Disclosed only in an 8-K report or amended 10-K/A or 10-Q/A The SEC defines a stealth restatement as one that is disclosed only in periodic reports and not in the 8-K or amended periodic report such as a 10-K/A or 10-Q/A. The percentage of stealth restatements has hold steady at about 50 percent for the past few years.

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

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

Kelly and Jordan are writing a term paper together on the concept of "faithful representation" in the financial statements. Kelly is assigned the task of defining it in the context of an amount being an estimate. Which of the following statements should NOT be used by Kelly in her description? Good faith attempt to gather evidence to support the amount Clear disclosure of an amount as an estimate The nature and limitations of the estimating process Error free procedures in selecting and applying an appropriate process for developing the estimate

A. Good faith attempt to gather evidence to support the amount auditors shouldnt rely on good faith

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

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

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

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

Which of the following partnerships that Enron created eventually lead to its demise? JEDI Cactus Chewco Ironman

c. Chewco

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

The concept that earnings management might align with conservative versus aggressive reporting is known as the: Earnings judgment Earnings accruals Earnings continuum Earnings manipulations

c. Earnings continuum

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

Servant leaders: Advocate a perspective that leaders have a responsibility to serve their followers by helping them to achieve followers' goals Servant leadership is the flip side of authentic leadership Promote a culture that enhances organizational outcomes Help followers to fulfill their needs by modeling ethical values, attitudes and behaviors

Help followers to fulfill their needs by modeling ethical values, attitudes and behaviors The basic premise of servant leadership is leaders should put the needs of followers before their own needs. Servant leaders use collaboration and persuasion to influence followers rather than coercion and control.

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

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

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 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]

Which of the following is NOT an attribute of internal audit leadership according to Chambers? Honesty Objectivity Accountability Trustworthiness

Objectivity Chambers identifies seven attributes of internal audit leadership as a standard for ethical behavior including honesty, courageousness, accountability, empathy, trustworthiness, respect, and proactiveness.

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 Giving Voice to Values framework distinguishes between organizational and individual values because: Organizational values are internal to each individual while individual values are highly visible within the organization Organizational values are highly visible within the organization while individual values are internal to the very core of individuals Organizational values are influenced by ethical leadership while individual values are influenced by perceptions of organizational values Organizational values create perceptions of ethical leadership while individual values are innate to the individual

Organizational values are highly visible within the organization while individual values are internal to the very core of individuals

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

If a company is managing its earnings, which of the ethical theories are they most likely following? Rights Fairness Egoism Virtue

c. Egoism

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)

All of the following are examples of "Recording revenue too soon or of questionable quality" except: Recording sales that lack economic substance Recording revenue when future services remain to be provided Recording revenue before shipment or before the customer's unconditional acceptance Recording revenue even though the customer is not obligated to pay

Recording sales that lack economic substance

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

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

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

"Cookie jar reserves" can best be described as: Buying a lot of chocolate chip cookies, storing them for when you have a hunger attack, and then releasing them into your stomach Overstating or understating allowances and reversing amounts in the future to smooth out net income over time Accelerating the recording of revenues into an earlier year than is warranted Delaying the recording of expenses to a later year to boost income in the current year Learning Objective: 07-04 Describe the devices used to manage earnings.

The objective of using cookie-jar-reserves is to smooth net income over time.

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

The best definition of a financial restatement is: A company, either voluntarily or under prompting by its auditors or regulators, revises its public financial information that was previously reported A company, either voluntarily or under prompting by its auditors or regulators, revises its public financial information for the current period An adjustment of financial information due to an error correction All are part of the definition

a. A company, either voluntarily or under prompting by its auditors or regulators, revises its public financial information that was previously reported

The leadership style of management at Krispy Kreme can best be summed up as: Aggressively sought to manage earnings using round-trip transactions Pressured auditors to overlook material misstatements in the financial statements Encouraged employees to engage in deception and fraud through franchisees All of the above

a. Aggressively sought to manage earnings using round-trip transactions

To be an ethical leader, executives must also: Attend to cultivating ethics and be an ethical person Attend to client's interest and be a moral person Serve in followership roles Serve as servant leaders

a. Attend to cultivating ethics and be an ethical person

Bobek et al. found that nonpartners are more likely to perceive the ethical environment of their firm as strong when they: Believe they have a meaningful role in shaping and maintaining the ethical environment of their firms Believe ethical leaders consider their interests in firm decision making Are included in firm decision making Have a high frequency of receiving mentoring

a. Believe they have a meaningful role in shaping and maintaining the ethical environment of their firms

An unusual aspect of the Green Mountain case is it included: Conference calls that provided earnings guidance to shareholders and analysts were used to mask a financial fraud Desire to meet or beat analysts' earnings expectations led to manipulation of receivables balances Company violated the Sarbanes- Oxley Act PricewaterhouseCoopers knew about inflated inventory values

a. Conference calls that provided earnings guidance to shareholders and analysts were used to mask a financial fraud

Which of the following authors(s) link earnings management to choices made in determining earnings that may comprise aggressive, but acceptable, accounting estimates and judgments, as compared to fraudulent practices that are clearly intended to deceive others? Dechow and Skinner Healy and Wahlen Schipper Thomas E. McKee Learning Objective: 07-02 Explain what earnings management seeks to accomplish.

a. Dechow and Skinner Dechow and Skinner offer their own view that a distinction should be made between making choices in determining earnings that may comprise aggressive, but acceptable, accounting estimates and judgments, as compared to fraudulent accounting practices that are clearly intended to deceive others.

The main difference between a discretionary and nondiscretionary accrual is: Discretionary accruals are items that management has full control over Discretionary accruals are based on changes in the fundamental performance of the firm Discretionary accruals arise from transactions considered normal for the firm Discretionary accruals always lead to an increase in earnings

a. Discretionary accruals are items that management has full control over

Which of the following was not true according to the Enron case? Fastow developed the concept of buying up oil and gas companies to establish SPEs Fastow worked to structure ventures that met the conditions under GAAP to keep the partnership activities off Enron's books and on the separate books of the partnership Fastow created SPEs that borrowed money from banks and transferred it to Enron in a sale of an operating asset no longer need by Enron The SPE created by Fastow enabled Enron to keep debt off its books while benefiting from transfer and use of the cash borrowed by the SPE Learning Objective: 07-05 Explain the workings of financial shenanigans.

a. Fastow developed the concept of buying up oil and gas companies to establish SPEs

De Cremer and Tenbrunsel characterize ethical leadership in part as: Intention to demonstrate normatively appropriate conduct Environment that promotes transformational leadership Influencing followers to always adhere to leaders' goals for the organization Environment that promotes servant leadership

a. Intention to demonstrate normatively appropriate conduct

An authentic leader: Is focused on building short- term shareholder value, not in just beating quarterly estimates Is focused on controlling management's desires to beat quarterly estimates Empowers employees to make choices after discussing them with leaders Acts consistently with norms of behavior

a. Is focused on building short-term shareholder value, not in just beating quarterly estimates

One result of earnings management is: It brings into question the quality of earnings It uses a non-GAAP financial measure to manipulate earnings EBITDA does not reflect GAAP earnings It improves shareholder returns over time

a. It brings into question the quality of earnings

A unique aspect of the story of ethical leadership illustrated by Diem-Thi Le is that: Le's working papers were altered by her supervisor Le's audit opinion was changed from modified to unmodified Le's whistleblowing complaint did not lead to retaliation Le was fired from her job

a. Le's working papers were altered by her supervisor

Which technique was used by both WorldCom and Waste Management to manage earnings? Manipulating asset net valuation amounts to minimize operating expenses for a period Accelerating the recording of revenue into an earlier period Delaying needed repairs to a later period All of the above were used Learning Objective: 07-02 Explain what earnings management seeks to accomplish.

a. Manipulating asset net valuation amounts to minimize operating expenses for a period well-publicized ways of managing earnings during the period of financial fraud in the early 2000s were: (1) by using aggressive accounting techniques such as capitalizing costs that should have been expensed (e.g., WorldCom accounted for its line costs as capital expenditures rather than expensing them against revenue); and (2) by establishing or altering the elements of an estimate to achieve a desired goal (e.g., Waste Management's lengthening of the useful lives on trash hauling equipment to slow down depreciation each year).a.

All of the following are examples of "Boosting Income with One-Time Gains" except: Recording sales that lack economic substance Boosting profits by selling undervalued assets Including investment income or gains as part of revenue Including investment income or gains as a reduction in operating expenses Recording sales that lack economic substance Learning Objective: 07-04 Describe the devices used to manage earnings.

a. Recording sales that lack economic substance

Which of the following earnings management techniques were not used in the Lucent Technologies, Inc.'s case? Shifting current revenue to a later period Boosting income with one-time gains Recording revenue too soon or of questionable quality Shifting current expenses to a later or earlier period

a. Shifting current revenue to a later period Learning Objective: 07-05 Explain the workings of financial shenanigans.

Inherent risk refers to: The possibility that a material misstatement will occur within the reporting company's accounting information system The possibility that a material misstatement that has occurred will not be detected on a timely basis by the company's control system The possibility that a material misstatement that has occurred will not be caught be the independent auditor's testing The possibility that a material misstatement will occur in the financial statements Learning Objective: 07-03 Discuss how earnings management judgments are made.

a. The possibility that a material misstatement will occur within the reporting company's accounting information system

Arel et al. in their study of ethical leadership, the internal audit function, and moral intensity on a decision to record a questionable entry found that: There is a joint influence of ethical leadership and internal audit quality on accountants' willingness to book a questionable entry There is a joint influence of internal audit quality and tone at the top on accountants' willingness to book a questionable entry Ethical leadership does not influence accountants' willingness to book a questionable entry Internal audit quality does not influence accountants' willingness to book a questionable entry

a. There is a joint influence of ethical leadership and internal audit quality on accountants' willingness to book a questionable entry

What was the original motivation by FASB on SPEs? To establish a mechanism to encourage companies to invest in needed assets while keeping related debt of its books To keep the large amount of debt off the books To sell non-producing assets to the SPE To select which assets to sell to the SPEs affecting the gain Learning Objective: 07-05 Explain the workings of financial shenanigans.

a. To establish a mechanism to encourage companies to invest in needed assets while keeping related debt of its books

The statement about leadership attributed to John Maxwell is: Visions are not simple goals, but rather ways of seeing the future that implicitly or explicitly entail some notion of the good Principle-centered leaders build greater, more trusting and communicative relationships with others in the workplace Leaders lead by example not based on what they say Leaders always follow the law even if it deviates from ethical action

a. Visions are not simple goals, but rather ways of seeing the future that implicitly or explicitly entail some notion of the good

Selection-socialization bias in audit firms pertains to: Whether a firm hires and promotes individuals who fit into the prevailing firm culture and whether individuals unable to fit leave Whether a firm fires individuals who do not fit into the prevailing firm culture Whether individuals choose to work for a particular firm Effective leadership and followership

a. Whether a firm hires and promotes individuals who fit into the prevailing firm culture and whether individuals unable to fit leave

The Harrison Industries case deals with: Using non-GAAP measures of earnings Acceptability of recording unpaid severance accruals Using EBITDA to obscure earnings All of the above. Learning Objective: 07-04 Describe the devices used to manage earnings.

b. Acceptability of recording unpaid severance accruals

The results of Morris's study of the influence of authentic leadership and ethical firm culture on auditor behavior is: A significant positive correlation exists between authentic leadership and dysfunctional audit behaviors A significant negative correlation exists between authentic leadership and dysfunctional audit behaviors Audit seniors more frequently prematurely sign off on audit work than under-report time Audit seniors act on their own values regardless of their perceptions of the firm culture

b. A significant negative correlation exists between authentic leadership and dysfunctional audit behaviors

Leadership in accounting is different than leadership in most other organizations because: Accountants are regulated by state board of accountancy Accountants are expected to place the public interest above all else Accountants are obligated to follow a strict code of ethics Accountants are answerable to firm management, not their clients

b. Accountants are expected to place the public interest above all else

Your professor asks you to consider whether earnings management can be justified by arguing that the net benefits of managing earnings exceeds any harms that may occur. The professor is asking you to apply what reasoning methods to make the analysis? Egoism Act utilitarianism Rule utilitarianism Virtue

b. Act utilitarianism

In Brennan and Kelly's study of the factors that influence propensity or willingness to blow the whistle among audit trainees, the authors identified each of the following factors except: Audit firm organizational structures Audit firm ethical leadership Personal characteristics of whistleblowers Situational variables

b. Audit firm ethical leadership

Which of the following was not a technique used by Enron to manage earnings? Used reserves to increase earnings when reported amounts were too low Deliberately overstated the allowance for uncollectibles and adjusted it downward in future years Used mark-to-market estimates to inflate earnings in violation of GAAP Selected which operating assets to "sell" to the SPEs, affecting the gain on transfer and earnings effect Learning Objective: 07-05 Explain the workings of financial shenanigans.

b. Deliberately overstated the allowance for uncollectibles and adjusted it downward in future years

Which of the following authors(s) focus(es) on "management's intent to deceive the stakeholders by using accounting devices to positively influence reported earnings?" Dechow and Skinner Healy and Wahlen Schipper Thomas E. McKee Learning Objective: 07-02 Explain what earnings management seeks to accomplish.

b. Healy and Wahlen positiveLY heaLY focus on management's intent to deceive the stakeholders by using accounting devices to influence reported earnings positively.

Ethical leadership failure can be caused by: Lines of communication are blurred Ignoring ethical boundaries within a company Organizational factors promote unethical action All of the above

b. Ignoring ethical boundaries within a company

Accountants may hesitate to record a questionable entry if they know: Internal audit is likely to detect the possible error Internal audit is likely to detect the inappropriate financial reporting practices Internal audit is likely to communicate it to the external auditors Internal audit is likely to blow the whistle on inappropriate financial reporting practices

b. Internal audit is likely to detect the inappropriate financial reporting practices

The ethical dilemma in the Research Triangle Software Innovations case can best be summed up as: Should an auditor share information about a client with a nonaudit member of the firm? Is it appropriate to select an audit client's ERP software for a different advisory services client? Should the audit firm recommend its own ERP software package to an audit client? Is it appropriate to engage in ERP management advisory services for an audit client?

b. Is it appropriate to select an audit client's ERP software for a different advisory services client?

Who linked earnings management to an excessive zeal to project smoother earnings from year to year that casts a pall over the quality of the underlying numbers? Warren Buffet Arthur Levitt Thomas E. McKee Lynn Turner Learning Objective: 07-01 Describe the motivation for earnings management.

b. Levitt This quote by former SEC chair Arthur Levitt from "The Numbers Game" links the practice of "earnings management" to an excessive zeal to project smoother earnings from year to year that casts a pall over the quality of the underlying numbers.

In Bobek's study of the effect of gender on decision-making of public accounting professionals, it was found that: Males were more likely than females to concede to the client's demands in an audit condition Males were less likely than females to concede to the client's demand in an audit condition Males are more likely than females to use an intuitionist approach in decision making Males were less likely to concede to the client's demands on a tax condition than an audit condition

b. Males were less likely than females to concede to the client's demand in an audit condition

Which of the following is NOT considered "earnings management?" "Earnings management" is done to project smoother earnings from year to year Management emphasizes achieving long-term results to meet financial goals Management uses "cookie-jar reserves each year" Executives manipulate the earnings in order to match their predetermined target

b. Management emphasizes achieving long-term results to meet financial goals

In surveys of managers, which technique to manage earnings was considered most acceptable? Changing inventory valuation in order to influence earnings Accounting manipulation Manipulating operating decisions Establishing cookie jar reserves

b. Manipulating operating decisions They also found that, in general, the respondents thought manipulating earnings via operating decisions (e.g., purposefully delaying making needed repairs to a subsequent year) was more ethically acceptable than manipulation by accounting methods

Trevino et al. believe ethical leaders possess each of the following two traits: Moral follower and moral servant Moral person and moral manager Moral person and moral employee Moral person and transformational leader

b. Moral person and moral manager

Ponemon hypothesized that there is a correlation between: Moral intensity and subordinates' personal characteristics and decision- making styles Organizational culture and subordinates' personal characteristics and decision- making styles Culture of the organization and leadership style Leadership style and followership

b. Organizational culture and subordinates' personal characteristics and decision-making styles

Leaders who engage in unethical behaviors create a context supporting: Cognitive dissonance Parallel deviance Moral intensity Leader perseverance

b. Parallel deviance

The accounting shenanigan used in the Dell Computer case can best be described as: Recording revenue from exclusivity payments too soon or of questionable quality Shifting current revenue from exclusivity payments to a later period Shifting future expenses to the current period as a special charge Shifting current expenses to a later period

b. Shifting current revenue from exclusivity payments to a later period

With respect to ethical leadership, the issue in the Cumberland Lumber case can best be characterized as: The relationship between the chief internal auditor and CEO The leadership style of the CEO and culture of the company The leadership style of the chief internal auditor and tone at the top The relationship between an audit client and management advisory services client

b. The leadership style of the CEO and culture of the company

Needles suggests that making judgments about what earnings management is becomes difficult because: It depends on management's intentions There is no clear limit beyond which a choice is clearly unethical A perfectly routine accounting estimate may be illegal and unethical All of the above

b. There is no clear limit beyond which a choice is clearly unethical

Accruals are potentially troublesome because: They can lead to giving an unmodified audit opinion when it should have been modified They provide an opportunity to manage earnings through aggressive or more conservative estimations They always lead to fraud in financial statements They provide an opportunity to shift debt off the books by setting up an SPE

b. They provide an opportunity to manage earnings through aggressive or more conservative estimations

Price believes that ethical failures in leaders are: Typically, volitional rather than cognitive Typically, cognitive rather than volitional Caused by deficiencies in internal controls Caused by considering the interests of parties outside their group of followers

b. Typically, cognitive rather than volitional

To hold employees accountable to ethical standards, moral managers: Walk the talk of leadership Use reward systems to encourage ethical performance Strive to do what is right regardless of the consequences of one's actions All of the above

b. Use reward systems to encourage ethical performance

What is the SEC's position on companies that communicate with investors on social media? It is illegal to do so It is legal so long as companies inform investors which outlets they intend to use It is legal so long as the postings are restricted to Facebook There are no limitations on companies communicating through social media Learning Objective: 07-01 Describe the motivation for earnings management.

b. it is legal so long as companies inform investors which outlets they intend to use

Which of the following is NOT required of management under Section 302 of the SOX? Review their disclosure controls and procedures quarterly Identify key control exceptions and determine which are internal control deficiencies Assess each internal control deficiency's impact on the audit report Identify and report significant control deficiencies on material weaknesses to the audit committee and independent auditor Learning Objective: 07-03 Discuss how earnings management judgments are made.

c. Assess each internal control deficiency's impact on the audit report The essence of Section 302 of the Sarbanes-Oxley Act states that the CEO and CFO are directly reponsible for the accuracy, documentation and submission of all financial reports as well as the internal control structure to the SEC. Under Section 302 of SOX, companies are required to (1) review their disclosure controls and procedures quarterly, (2) identify all key control exceptions and determine which are internal control deficiencies, (3) assess each deficiency's impact on the fair presentation of their financial statements, and (4) identify and report significant control deficiencies or material weaknesses to the audit committee of the board of directors and to the company's independent auditor.

Each of the following is a common revenue recognition device to manage earnings except: Multiple deliverables Channel stuffing Buy and hold Round tripping

c. Buy and hold

In the CVS acquisition of Longs Drug, the SEC concluded that the purchase price accounting (PPA) was not in compliance with GAAP because: The amount did not reflect current use of Longs personal property at the acquisition date CVS used an overly-aggressive technique to value Longs CVS did not account for its use of Long's assets to generate revenue after the acquisition date All of the above

c. CVS did not account for its use of Long's assets to generate revenue after the acquisition date

Transformational leaders: Empower employees to act based on their ethical goals and values Follow what top management sets as its goals for the organization Causes change in individuals and social systems Connect the follower's behavior to the collective identity of the organization

c. Causes change in individuals and social systems

You work for a company that always pushes the envelope with respect to reporting revenues and expenses. You often disagree with the company because its approach to reporting these amounts cannot be justified from a GAAP perspective. You are upset and are considering whether this is a company that has a culture you want to be part of. Which of the following best characterizes the ethical issues of concern? Rights Theory Moral blindness Ethical Dissonance Materiality Learning Objective: 07-01 Describe the motivation for earnings management.

c. Ethical Dissonance

The Sino-Forest case centered around the: Acceleration of revenue due to channel stuffing arrangements Use of cookie jar reserves to manage earnings Existence of assets Contingent liabilities due to forestry fires

c. Existence of assets (whether the trees the clients were showing them were actually the clients property)

According to Mesmer-Magnus and Viswesvaran, organizational employees have three options to address an unsatisfactory situation faced within an organization. These include: Exit the organization, voice discontent, discuss matters with the board of directors Exit the organization, remain silent, report the matter to the external auditors Exit the organization, remain silent, voice discontent Exit the organization, blow the whistle, report the matter to the authorities

c. Exit the organization, remain silent, voice discontent

It can be said about followership that: Followership is the same as leadership Followership and servant leadership are the same Followership is the flip side of leadership Followers are always transformational leaders

c. Followership is the flip side of leadership

Organizational dissidence in audit firms is created when: Client interests are placed ahead of the public interest Firm interests are placed ahead of the public interest Individual values do not fit into expectations of the firm Individual values lead to firms changing their values to achieve greater socialization

c. Individual values do not fit into expectations of the firm The dissidence that is created when individual values do not fit into the expectations of the firm might lead the individual to alter behavior to conform to firm norms, the firing of the individual from the firm, or her voluntary departure.

A good example of antisocial behavior is: Dennis Kozlowski's use of corporate resources for personal purposes Betty Vinson's decisions to go along with financial wrongdoing Jeff Skilling's policy of "rank and yank" Whistleblowing by Cynthia Cooper

c. Jeff Skilling's policy of "rank and yank"

Motivations to smooth net income over time include each of the following except: Maximize bonuses and stock option values Steady increase in earnings each year Minimize overall taxes Make it appear managers are doing better than they really are

c. Minimize overall taxes

Auditors need to be attuned to the red flags that fraud may exist because: Materiality judgments are based on red flags identifying possible material misstatements Audit opinions must be withdrawn when red flags indicate fraud may exist Overly-aggressive accounting and outright manipulation of earnings may exist All of the above

c. Overly-aggressive accounting and outright manipulation of earnings may exist

With respect to leadership in the accounting profession, it might be said that: Ethical judgment is more important than how one makes decisions Partners must exhibit moral imagination through ethical perception of what it means to be ethical, professional, and successful Partners must exhibit ethical decision making through ethical sensitivity to the needs of one's firm How one makes decisions is more important than ethical leadership

c. Partners must exhibit ethical decision making through ethical sensitivity to the needs of one's firm

The Ethical Leadership Scale developed by Kelly and Early identify each of the following measures of leadership: Personal ethical competence, ethical leadership, and ethical standards Personal ethical competence, ethical standards, and ethical organization Personal ethical competence, ethical leadership, and ethical organization Ethical leadership, moral intensity, and ethical culture

c. Personal ethical competence, ethical leadership, and ethical organization

There are several aspects of the Enron fraud that are dealt with directly in SOX further connecting Enron to reform in the accounting profession. Which of the following is true? SOX permitted the provision of internal audit service for audit clients Off-balance-sheet financing activities were prohibited for all companies Related-party transactions require disclosure in the notes Cookie jar reserves must be disclosed in the notes

c. Related-party transactions require disclosure in the notes

An essential element in creating an ethical environment in an audit firm is: Socialization of employees Moral intensity of the situation Responsible leadership of the firm Firm values, behavior and attitudes

c. Responsible leadership of the firm

Sarah's concern in the Solutions Network case is: Expenses were delayed at year-end to manage earnings Revenue was recorded at year-end before the agreement with the customer was finalized Revenue was accelerated into an earlier period through channel stuffing Off-balance sheet entities were not disclosed

c. Revenue was accelerated into an earlier period through channel stuffing "We can't recognize revenue immediately, Paul, since we agreed to buy similar software from DSS," Sarah Young stated. "That's ridiculous," Paul Henley replied. "Get your head out of the sand, Sarah, before it's too late."

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 are manipulated to get the stock price up in advance of the exercise of stock options?" Dechow and Skinner Healy and Wahlen Schipper Thomas E. McKee

c. Schipper Schipper defines it as a "purposeful intervention in the external reporting process, with the intent of obtaining some private gain (as opposed to, say, merely facilitating the neutral operation of the process)."

The ethical environment within an accounting firm is created through adherence to the: AICPA Code of Professional Conduct Rules and regulations of the SEC Stated values and management practices Moral intensity and management practices

c. Stated values and management practices

The SEC's complaint in its case against GE included a charge that the company: Used off-balance sheet entities to manipulate earnings Falsified inventory values to inflate earnings Used non-GAAP measures to meet EPS estimates Used EBITDA to obscure reported earnings

c. Used non-GAAP measures to meet EPS estimates

A common method used to smooth net income over time is: Accelerate revenue into earlier periods Delay expenses into later periods Using accrual of operating expenses and future adjustments Using nonrecurring items to increase earnings in one year and reduce it later on

c. Using accrual of operating expenses and future adjustments

The auditors in the Tier One Bank case were investigated by the SEC because it: Failed to obtain sufficient competent evidential matter to support audit conclusions Failed to exercise the appropriate level of care in its audit Failed to exercise the proper degree of professional skepticism All of the above Learning Objective: 07-03 Discuss how earnings management judgments are made.

d. All of the above

Each of the following is a finding of a survey of CFOs about their perceptions of earnings quality except: CFOs believe that earnings are high quality when they are sustainable and backed by actual cash flows CFOs believe that reporting discretion has declined over time, and that current standards somewhat restrain reporting high quality earnings CFOs estimate that roughly 20 percent of firms manage earnings and the typical misrepresentation for such firms is about 10 percent of reported EPS CFOs estimate that income increasing and income decreasing devices to manage earnings show a 50:50 split Learning Objective: 07-02 Explain what earnings management seeks to accomplish.

d. CFOs estimate that income increasing and income decreasing devices to manage earnings show a 50:50 split On definition, CFOs believe that earnings are high quality when they are sustainable and backed by actual cash flows. CFOs believe that reporting discretion has declined over time, and that current GAAP standards are somewhat of a constraint in reporting high-quality earnings. The 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 EPS. CFOs believe that 60 percent of earnings management is income-increasing, and 40 percent is income-decreasing, somewhat in contrast to the expected heavy emphasis on income-increasing results but consistent with the intertemporal setting up of accruals in settings like cookie-jar reserves and big baths

Which of the following is NOT an earnings management technique? Failing to write down or write off impaired assets Releasing questionable reserves into income Failing to record expenses and related liabilities when future obligations remain Creating an allowance for uncollectible accounts and adjusting it at year end Learning Objective: 07-05 Explain the workings of financial shenanigans.

d. Creating an allowance for uncollectible accounts and adjusting it at year end

It can be said that ethical leaders exhibit each of the following traits except for: Ethical leaders understand the need for respect, openness and trust Ethical leaders aim to empower others to achieve success based on right action Ethical leaders take responsibility for their actions and are accountable Ethical leaders encourage behaviors whereby employees do what the leaders say

d. Ethical leaders encourage behaviors whereby employees do what the leaders say

Debbie and Steve are discussing a lecture given by their ethics professor after class one day. The professor said that misstatements of earnings are always unethical. Debbie agrees with this situation but Steve does not. What statement might Steve make to best support his point of view? It depends on whether the misstatements were made deliberately It depends on whether a user relied on the financial statements It depends on whether the statements lead to a modified or unmodified opinion All are valid statements for Steve to support his point of view

d. It depends on whether the misstatements were made deliberately

In the Matrixx Initiatives v. Siracusano case, the Supreme Court adopted the position about materiality that: It should always be determined only through qualitative evaluations It should always be determined through quantitative evaluations It should always be determined by considering whether the amount affects past financial statements It should be determined by considering whether the total mix of information would be viewed by a reasonable investor as possibly accepting judgment

d. It should be determined by considering whether the total mix of information would be viewed by a reasonable investor as possibly accepting judgment

Followership, servant leaders, and authenticity all share the following common characteristic: Values-based leadership Sensitivity to ethical dilemmas Adherence to organizational norms even if it means compromising one's values Leader ethicality

d. Leader ethicality

Ethical leadership competence refers to: Leaders' ability to deal with moral problems in an autonomous way Leaders' ability to deal with moral problems in an automatic way Leaders' ability to set the tone of the organization as an ethical one Leaders' ability to develop problem-solving and decision-making skills

d. Leaders' ability to develop problem-solving and decision-making skills

Which of the following was NOT one of the schemes used by Beazer Homes to manipulate its earnings? Improper recording of revenue on sale-leaseback transactions Fraudulently increased land inventory expense accounts to reduce earnings Over-reserving of house cost-to- complete expenses to increase reported earnings in earlier periods Recording revenue from roundtrip transactions prematurely

d. Recording revenue from roundtrip transactions prematurely

The key question raised by the facts of the Rhody Electronics case is: Should the client be allowed to determine what appears in the financial statements? Should audit firms develop tax shelter arrangements for wealthy clients? Should audit firms discuss their audit opinions with clients? Should the client be able to influence the audit procedures followed by the firm?

d. Should the client be able to influence the audit procedures followed by the firm?

Which of the following was not an accounting issue in the Sunbeam case? Cookie jar reserves Channel stuffing Bill and hold sales Swap transactions

d. Swap transactions

Taylor and Curtis studied the complex relationships in accounting firms that influence an individual's decision to report an ethical violation and found at the center of these potentially conflicting layers of commitment lies: Auditor perceived professional identity Ethical leadership Seriousness of the violation The ethical violation itself and the individual's personal reaction to it

d. The ethical violation itself and the individual's personal reaction to it

Which of the following is NOT a qualitative factor when assessing materiality? A misstatement that changes a loss into income or vice versa The existence of statutory or regulator reporting requirements that affect materiality thresholds The potential effect of the misstatement on trends, especially trends in profitability The use of simplistic numerical thresholds and rules of thumb

d. The use of simplistic numerical thresholds and rules of thumb

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?" Dechow and Skinner Healy and Wahlen Schipper Thomas E. McKee

d. Thomas E. McKee

Which of the following is NOT a motivation to manage earnings? Companies try to meet or beat Wall Street earnings projections in order to grow market capitalization and increase the value of stock options Avoid the consequences of violating debt covenants To smooth net income over time To maximize employee bonuses

d. To maximize employee bonuses

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