Chp 10-Smartbook
The Sarbanes-Oxley (SOX) Act of 2002 prohibited accounting firms from performing certain specific nonaudit services to their audit clients, including: More than one may apply. tax compliance and advisory services "expert" services internal auditing services financial information systems design and implementation
"expert" services internal auditing services financial information systems design and implementation
Sometimes events subsequent to the balance sheet date would have a material impact on the balance sheet or income statement. Which of these fall into that category and therefore should be described in the notes to the financial statements? More than one may apply. Decisions by management to begin serving new product markets and/or geographic locations Agreement to enter into a business combination Issuance of a large amount of capital stock Restructuring of long-term debt
Agreement to enter into a business combination Issuance of a large amount of capital stock Restructuring of long-term debt
Corporate governance includes concerns about: business ethics and social responsibility. the responsibilities of the board of directors. equitable treatment of all stakeholders. disclosures and transparency. All of these answers are correct.
All of these answers are correct.
Firms that issue registered securities are required to file, with the SEC on an annual basis, which of the following? An annual report. A form 10-K. A set of financial statements. All of these are mandatory annual SEC filings for firms that have issued registered securities.
All of these are mandatory annual SEC filings for firms that have issued registered securities.
In an independent auditor's report, what is the topic of the separate page that normally follows the three-paragraph financial statement audit opinion? A description of the nature and extent of the work the auditor has completed for the company An adverse opinion that lists all of the errors and misrepresentations the auditor found in the financial statements An internal control audit, which addresses the effectiveness of the company's internal control over financial reporting A guarantee that the financial statements are free from fraudulent transactions and errors
An internal control audit, which addresses the effectiveness of the company's internal control over financial reporting
What led to the passage of the Sarbanes-Oxley Act in 2002? More than one may apply. Certain CEOs, CFOs, auditors, investors, investment bankers, and others were engaging in outright fraud. Greed and arrogance in the business sector contributed to a stock market boom during the late 1990s. Financial accounting and reporting processes were being stretched beyond the limits of general acceptability. Businesses were being regulated too tightly by government entities.
Certain CEOs, CFOs, auditors, investors, investment bankers, and others were engaging in outright fraud. Greed and arrogance in the business sector contributed to a stock market boom during the late 1990s. Financial accounting and reporting processes were being stretched beyond the limits of general acceptability.
Assume that Ellis Inc. reported basic earnings per share and cash dividends per share of $3.00 and $1.20, respectively, for Year 1 and that in Year 2, the firm had a 2-for-1 stock split. In the annual report for Year 2, earnings per share (EPS) and dividends per share (DPS) for Year 1 should be reported as: EPS = $3.00 / 2 = $1.50 DPS = $1.20 / 2 = $0.60 EPS = $3.00 (not restated) DPS = $1.20 / 2 = $0.60 EPS = $3.00 x 2 = $6.00 DPS = $1.20 x 2 = $2.40 EPS = $3.00 / 2 = $1.50 DPS = $1.20 (not restated)
EPS = $3.00 / 2 = $1.50 DPS = $1.20 / 2 = $0.60
Assume that Mason Inc. reported basic earnings per share and cash dividends per share of $6.00 and $2.10, respectively, for Year 1 and that in Year 2, the firm had a 3-for-1 stock split. In the annual report for Year 2, earnings per share (EPS) and dividends per share (DPS) for Year 1 should be reported as: EPS = $6.00 / 3 = $2.00 DPS = $2.10 (not restated) EPS = $6.00 / 3 = $2.00 DPS = $2.10 / 3 = $0.70 EPS = $6.00 x 3 = $18.00 DPS = $2.10 x 3 = $6.30 EPS = $6.00 (not restated) DPS = $2.10 / 3 = $0.70
EPS = $6.00 / 3 = $2.00 DPS = $2.10 / 3 = $0.70
True or False The management's statement of responsibility explains that the responsibility for the financial statements lies with the external auditor, who expresses an opinion about the financial statements of the company.
False
The Wall Street Reform and Consumer Protection Act of 2010 is commonly referred to as the Dodd-(Oscar/Frank/George) Act.
Frank
What information about the intangible asset goodwill would be included in notes to the financial statements? More than one may apply. Reductions in the cost of goodwill due to impairment losses The estimated value of the firm's public relations efforts and charitable activities The cost of other acquisition-related intangibles and the methods used to amortize them The method of recognizing its initial cost, arising from business acquisitions
Reductions in the cost of goodwill due to impairment losses The cost of other acquisition-related intangibles and the methods used to amortize them The method of recognizing its initial cost, arising from business acquisitions
Identify an example of an accounting change that is disclosed in an annual report. Shifting the current portion of a long-term debt to the current liabilities Changing the cost of inventory when the seller has provided cash discount Changing the retained earnings account due to previous year's error discovered in the current year Switching from the straight-line method of depreciation to the declining-balance method of depreciation
Switching from the straight-line method of depreciation to the declining-balance method of depreciation
What is included in corporate governance? More than one may apply. The company's sense of business ethics and social responsibility The decisions made by human resource managers in determining who to hire for entry-level positions The responsibilities of the board of directors and its various committees The company's structures, control mechanisms, rules, and regulations
The company's sense of business ethics and social responsibility The responsibilities of the board of directors and its various committees The company's structures, control mechanisms, rules, and regulations
How should information about a company's stock purchase plan be reported in notes to the financial statements? More than one may apply. The nature of the plan should be disclosed. Stock option grants should be backdated if the market price of the stock was lower within the past three months. Stock purchase plans should be accounted for under the fair value method. The potential dilution of equity should be disclosed.
The nature of the plan should be disclosed. Stock purchase plans should be accounted for under the fair value method. The potential dilution of equity should be disclosed.
What information about depreciation is usually disclosed in notes to the financial statements? More than one may apply. The range of useful lives assumed for broad categories of asset types The total amount of depreciation the company has reported during the past five or ten years The company's method of reporting depreciation: straight-line, units-of-production, or sum-of-the-years'-digits. The amount of depreciation the company reported in the previous fiscal period
The range of useful lives assumed for broad categories of asset types The company's method of reporting depreciation: straight-line, units-of-production, or sum-of-the-years'-digits.
What does corporate governance encompass? More than one may apply. The strategies, behaviors, and actions of the company and its directors, managers, and employees A set of structures, control mechanisms, rules, and regulations that all directors, officers, and employees must follow Issues concerning full and fair disclosure and the equitable treatment of stakeholders The five-year (or longer) summary of financial data in the notes to the financial statements
The strategies, behaviors, and actions of the company and its directors, managers, and employees A set of structures, control mechanisms, rules, and regulations that all directors, officers, and employees must follow Issues concerning full and fair disclosure and the equitable treatment of stakeholders
Identify the correct statements about notes that are an integral part of the financial statements. More than one may apply. They include a narrative section called management's discussion and analysis (MD&A). They help users of the financial statements to make informed decisions and judgments. They contain important disclosures that are not contained in the financial statements themselves. They include a description of the firm's activities for the year.
They help users of the financial statements to make informed decisions and judgments. They contain important disclosures that are not contained in the financial statements themselves.
True or False The notes are an integral part of the financial statement, because they contain disclosures that are not contained in the financial statements themselves.
True
What requirements did the Dodd-Frank Act impose on companies? More than one may apply. Companies must disclose in their annual 10-K reports any "Changes in and Disagreements with Accountants on Accounting and Financial Disclosure." Companies must have periodic shareholder advisory votes on executive compensation (the so-called "say on pay" mandate). Companies must disclose why they have chosen to have either the same person or separate people serve as the CEO and board chair. All board compensation committees must be comprised solely of independent directors.
Companies must have periodic shareholder advisory votes on executive compensation (the so-called "say on pay" mandate). Companies must disclose why they have chosen to have either the same person or separate people serve as the CEO and board chair. All board compensation committees must be comprised solely of independent directors.
During a particular year, if a firm acts as a guarantor of the indebtedness of another entity, the firm that is acting as the guarantor needs to disclose this information as what type of accounting change? Events subsequent to the balance sheet date Segment information Contingencies and commitments A business combination
Contingencies and commitments
In which situations could an auditor issue a qualified opinion on a company's financial statements? More than one may apply. When the financial statements are misrepresented, misstated, and do not present fairly in all material respects the financial position and results of operations When the financial statements are presented fairly in all material respects and are in conformity with the generally accepted accounting principles When there is a material deviation from generally accepted accounting principles that affects only a part of the financial statements When the scope of the audit is restricted, preventing the auditor from performing an essential audit work
When there is a material deviation from generally accepted accounting principles that affects only a part of the financial statements When the scope of the audit is restricted, preventing the auditor from performing an essential audit work
While auditing an entity's financial statements, the auditor finds that the financial statements are misrepresented, misstated, and do not present fairly in all material respects the financial position and results of operations of the reporting entity. In such a scenario, the auditor will issue a(n) Blank______ opinion. clean adverse unqualified qualified
adverse
Management's statement of responsibility: explains that the entity's financial statements are the responsibility of the entity's auditors. states that the financial statements are free of significant error. affirms that management is responsible for assuring adherence to internal control policies and procedures. guarantees that the firm has operated in a highly ethical manner.
affirms that management is responsible for assuring adherence to internal control policies and procedures.
If the payment made for the acquisition of net assets is more than the fair value of the net assets, the excess amount is recorded Blank______. as profit, and it is added to the retained earnings account balance of the acquiring company as loss, and it is deducted from the retained earnings account balance of the acquiring company as goodwill, and it is amortized every year using the straight-line method as goodwill, and it is evaluated for possible impairment losses
as goodwill, and it is evaluated for possible impairment losses
A firm's independent auditors have the responsibility to: ascertain the firm's profit potential. uncover all fraudulent activities. assess the firm's accounting policies. Correct assess management's discussion and analysis.
assess the firm's accounting policies.
Most corporate annual reports present a summary of financial data for at least five years; items frequently included in the summary include: More than one may apply. average assets wages payable at year end earnings as a percentage of sales dividends per share average stockholders' equity working capital at year end earnings per share long-term debt property, plant, and equipment (net) book value per share of common stock
average assets average stockholders' equity book value per share of common stock dividends per share earnings as a percentage of sales earnings per share long-term debt property, plant, and equipment (net) working capital at year end
Some of the key financial shenanigans related to the income statement that have occurred in recent years (as identified by Schilit and Perler) include: More than one may apply. boosting income using one-time or unsustainable activities. recording revenue too soon. recording bogus revenue. recording expenses paid in advance as asset. shifting current expenses to a later period. shifting current income to a later period.
boosting income using one-time or unsustainable activities. shifting current expenses to a later period. shifting current income to a later period. recording revenue too soon. recording bogus revenue.
Reports issued by accounting firms that clearly communicate to the user that the firms are not providing any form of assurance about the fairness of the financial statements are called (review/compilation/audit) reports.
compilation
The Sarbanes-Oxley (SOX) Act of 2002: More than one may apply. created the Public Company Accounting Oversight Board (PCAOB). requires CEOs and CFOs to attest (in front of a notary) to the correctness of their company's financial statements. was aimed primarily to curtail the misbehavior of senior management of corporate entities. banned the provision of all consulting services performed by companies' independent auditors.
created the Public Company Accounting Oversight Board (PCAOB). requires CEOs and CFOs to attest (in front of a notary) to the correctness of their company's financial statements. was aimed primarily to curtail the misbehavior of senior management of corporate entities.
Some of the significant policies that are frequently described in the notes to the financial statements of publicly traded companies include details concerning: More than one may apply. earnings per share of common stock. depreciation methods. employee benefit (pension and post-retirement) plans. bad debt estimation techniques. basis of consolidation.
earnings per share of common stock. depreciation methods. employee benefit (pension and postretirement) plans. basis of consolidation.
The impact of changing price levels on amounts reported in financial statements is: reported as a separate item on the balance sheet. accomplished by reporting assets at their replacement cost. required to be described in the notes to the financial statements. encouraged, but not required to be described in the notes to the financial statements.
encouraged, but not required to be described in the notes to the financial statements.
An audit conducted in accordance with generally accepted auditing standards includes each of the following except: evaluation of the efficiency and effectiveness of management. planning and performance of the audit to obtain reasonable assurance that the financial statements are free of material misstatements. assessment of the accounting principles used and significant estimates made by management. examination, on a test basis, of evidence supporting the amounts and disclosures in the financial statements.
evaluation of the efficiency and effectiveness of management.
The component that is treated as a reduction of net pension expense is:
expected return on plan assets.
The notes to the financial statements: are not an integral part of the financial statements. usually disclose the amount of the company's bad debts expense. explain the significant accounting policies of the company. describe management's product development plans for the coming year.
explain the significant accounting policies of the company.
The independent auditors' report usually: includes an opinion that the financial statements are correct. refers to the quality of the company's products or services. includes an opinion that the financial statements present fairly, in all material respects, financial information about the company. Correct presents a "clean bill of health" for the company.
includes an opinion that the financial statements present fairly, in all material respects, financial information about the company.
In an independent auditor's report, the (introductory/scope/opinion) paragraph identifies the financial statements that were audited and briefly describes the responsibilities of both management and the auditors with respect to the financial statements.
introductory
Some of the significant policies that are frequently described in the notes to the financial statements of publicly traded companies include details concerning: More than one may apply. inventory valuation methods. income taxes. stock option and stock purchase plans. goodwill and acquisition-related intangibles. product warranties.
inventory valuation methods. income taxes. stock option and stock purchase plans. goodwill and acquisition-related intangibles.
Examples of subsequent events that frequently have a material impact on the balance sheet or income statement and thus should be described in the notes to the financial statements include the: More than one may apply. issuance of a large amount of capital stock issuance of a large amount of long-term debt. switch from the FIFO to LIFO inventory cost-flow assumption. sale of a significant part of the company's assets.
issuance of a large amount of capital stock issuance of a large amount of long-term debt. sale of a significant part of the company's assets.
Segment disclosures for publicly traded companies are generally required for: More than one may apply. lines of business. major customers. race and ethnicity. geographic territories.
lines of business. major customers. geographic territories.
When a company's financial report consists of immaterial misstatements or adjustments made in normal course of business, the company is required to simply revise the financial statements and notes that were previously filed with the Securities and Exchange Commission, and such revision is called a Blank______. little f restatement Big R restatement Big F restatement little r restatement
little r restatement
In an independent auditor's report, the (introductory/scope/opinion) paragraph normally uses language such as "present fairly, in all material respects" and "in conformity with U.S. generally accepted accounting principles."
opinion
A business segment is a group of the firm's business activities that has a common denominator. The components of each business segment are identified and defined by management. Segments may reflect: More than one may apply. organizational structure reporting requirement manufacturing processes product line groups industries served
organizational structure manufacturing processes product line groups industries served
Copies of public documents filed by publicly traded corporations can be obtained either from the corporation or from the SEC, including the most recent: More than one may apply. operating budget prospectus registration statement Form 10-K
prospectus registration statement Form 10-K
Stockholders who do not attend the annual general meeting may return a (prospectus/tender/proxy), which gives another person (usually a director of the corporation) the right to vote the stockholder's shares in accordance with their wishes.
proxy
Many firms include in the notes management's statement of (ethics/responsibility/accountability), which explains that the responsibility for the financial statements lies with the management of the firm, not the (internal/external/bank) auditor and certified public accountants who express an opinion about the (fairness/accuracy/precision) with which the financial statements present the financial condition and results of operations of the company.
responsibility external fairness
In an independent auditor's report, the (introductory/scope/opinion) paragraph describes the nature and extent of the auditors' work and refers to the need to obtain reasonable assurance about whether the financial statements are free of material misstatement.
scope
The key components of net pension expense include: More than one may apply. service cost. pension plan benefit payments. expected return on plan assets. interest cost of the projected benefit obligation.
service cost. expected return on plan assets. interest cost of the projected benefit obligation.
The notes to the financial statements: include a great deal of detailed information that is potentially useful only to a financial analyst making a detailed appraisal of the future prospects of the entity. are not an integral part of the financial statements. are used by many entities to hide information from the reader of the financial statements by including in the notes information that should be shown in detail on the financial statements themselves. should be referred to if more than a cursory, and perhaps misleading impression of a firm's financial position and its results of operations is to be achieved.
should be referred to if more than a cursory, and perhaps misleading impression of a firm's financial position and its results of operations is to be achieved.
Reasons for the difference between the statutory income tax rate and the company's effective tax rate may include the effects of: More than one may apply. the statutory tax rate variations in certain industries. state income taxes. non-U.S. income taxed in other countries. special treatment given to certain items for tax purposes. tax benefits associated with export sales. the company's noncompliance with tax laws.
state income taxes. non-U.S. income taxed in other countries. special treatment given to certain items for tax purposes. tax benefits associated with export sales.
The Sarbanes-Oxley Act (SOX) of 2002 does not specifically prohibit an independent auditor from performing the following non-audit function(s) for an audit client: financial information systems design and implementation. internal audit outsourcing services. tax services. "expert" services.
tax services.
The most powerful corporate governance legislation to date has been: the regulation of inventory management practices by the SEC. the creation of the American Institute of Certified Public Accountants. the Sarbanes-Oxley Act (SOX) of 2002. Corporate Ethics Code of 2007.
the Sarbanes-Oxley Act (SOX) of 2002.
When an entity changes its accounting from one generally accepted method to another generally accepted method: Multiple Choice financial statements of all prior years must be restated to maintain comparability. the dollar effect of the change on both the balance sheet and income statement must be disclosed. accounting changes like this are not permitted. an explanatory note stating that the change was approved by the Financial Accounting Standards Board is required.
the dollar effect of the change on both the balance sheet and income statement must be disclosed.
Significant accounting policies are described in the notes to the financial statements because: there isn't enough space for them to be included in the captions of the financial statements. if the accrual basis of accounting is used, "matching" of revenues and expenses may not take place. the reader must be aware of which of the alternative generally accepted accounting practices have been used. details concerning the reporting entity's accounting information system and data processing methods must be disclosed.
the reader must be aware of which of the alternative generally accepted accounting practices have been used.
In 2004, a rather strict interpretation of Section 404 of SOX was implemented. As a result, all public registrants have since been required to: More than one may apply. thoroughly document, test, and take responsibility for the effectiveness of their accounting and financial reporting safeguards. include with all 10-K filings an independent auditors' opinion on the effectiveness of the company's internal control systems. include a separate "Management's Report on Internal Control over Financial Reporting" with all 10-K filings. hold open hearings in a public equity tribunal concerning any shareholder claims of corporate mismanagement prior to the AGM
thoroughly document, test, and take responsibility for the effectiveness of their accounting and financial reporting safeguards. include with all 10-K filings an independent auditors' opinion on the effectiveness of the company's internal control systems. include a separate "Management's Report on Internal Control over Financial Reporting" with all 10-K filings.
Common examples of accounting changes include: More than one may apply. changing the method to amortize the goodwill that arises from acquisition of another business. those necessitated by FASB codification updates that require companies to adopt new accounting methods. switching from the FIFO to LIFO inventory cost-flow assumption. switching from the percent of credit sales method to the aging of accounts receivable method for estimating bad debts.
those necessitated by FASB codification updates that require companies to adopt new accounting methods. switching from the FIFO to LIFO inventory cost-flow assumption.
An accounting firm provides a compilation report Blank______. when the firm finds that there is a material change from a prior accounting period in the application of an accounting principle to indicate that the firm has a substantial doubt about the entity's ability to continue as a going concern when it gives an opinion on the fair presentation of the financial statements of a small business to clearly communicate to the user that the firm is not providing any form of assurance about the fairness of the financial statements
to clearly communicate to the user that the firm is not providing any form of assurance about the fairness of the financial statements
What are some of the key note disclosures frequently reported regarding income taxes? More than one may apply. A reconciliation of the statutory income tax rate with the company's effective tax rate A comprehensive list of the company's income sources throughout the fiscal year An explanation of the deferred taxes resulting from differences between the fiscal year in which an expense or revenue is reported for book purposes and the fiscal year in which it is reported for tax purposes A geopolitical comparison of the income taxes assessed against the company relative to the rates that would have applied in other nations
A reconciliation of the statutory income tax rate with the company's effective tax rate An explanation of the deferred taxes resulting from differences between the fiscal year in which an expense or revenue is reported for book purposes and the fiscal year in which it is reported for tax purposes
Identify the scenarios that describe contingencies and commitments that need to be disclosed in the annual report. More than one may apply. A decision made to switch from the straight-line to the double-declining balance depreciation method A situation where the company has agreed to act as a guarantor of the indebtedness of another entity A merger that the company has made with another firm A potential loss that might arise from a pending lawsuit
A situation where the company has agreed to act as a guarantor of the indebtedness of another entity A potential loss that might arise from a pending lawsuit
When employees have an opportunity to purchase shares of their company's common stock at a discount from market value, what is this fringe benefit called? A stock option plan A stock purchase plan An unrestricted stock issuance A stock option-pricing model
A stock purchase plan
Identify the section of an annual report where the reporting entity discloses the non-GAAP financial measures and key performance indicators used to assess the entity's financial and operating results. Notes to financial statements Management's statement of responsibility Letters of management Management's discussion and analysis
Management's discussion and analysis
What circumstances frequently require departures from the standard auditors' report? More than one may apply. An immaterial change during the year in the estimated amount of warranty expense Basing the opinion in part on the work of another auditor Uncertainties about a significant event that would have affected the financial statements if the outcome could have been estimated A material change from a prior accounting period in the application of an accounting principle Substantial doubt about the entity's ability to continue as a going concern Delivering an opinion that has been prepared entirely by just one auditor
Basing the opinion in part on the work of another auditor A material change from a prior accounting period in the application of an accounting principle Uncertainties about a significant event that would have affected the financial statements if the outcome could have been estimated Substantial doubt about the entity's ability to continue as a going concern
When a company's financial report consists of material errors, it is required to completely reissue the full set of financial statements and related note disclosures that were previously filed with the Securities and Exchange Commission, and such reissue is called a little r restatement Big F restatement little f restatement Big R restatement
Big R restatement
How did the Sarbanes-Oxley Act of 2002 (SOX) lead to a dramatic decrease in Big R restatements being filed in recent years? More than one may apply. Businesses adopted more reliable methods of financial reporting. Businesses adopted tighter internal controls. A more effective regulatory environment became the "new normal" in accounting and auditing. The new regulations made it impossible for companies to "cook the books."
Businesses adopted more reliable methods of financial reporting. Businesses adopted tighter internal controls. A more effective regulatory environment became the "new normal" in accounting and auditing.
Identify the correct statements about the method used for accounting mergers and acquisitions. More than one may apply. If the payment made for the acquisition of net assets is more than their fair value, the excess amount is recorded as goodwill. The acquiring company records the acquisition of net assets at their book value at the date of acquisition. The acquiring company records the acquisition of net assets at their fair value at the date of acquisition. If there is any goodwill recognized during acquisition, the goodwill needs to be evaluated annually for possible impairment losses.
If the payment made for the acquisition of net assets is more than their fair value, the excess amount is recorded as goodwill. The acquiring company records the acquisition of net assets at their fair value at the date of acquisition. If there is any goodwill recognized during acquisition, the goodwill needs to be evaluated annually for possible impairment losses.
In addition to expressing an audit opinion on the company's financial statements and related note disclosures, (independent/internal) auditors are required to express an opinion on the effectiveness of the company's (external/internal) control systems.
Independent Internal
What other type of audit is conducted in conjunction with the audit of financial statements? Payroll audit Bookkeeping audit Tax audit Internal control audit
Internal control audit
Which of the following is the proper paragraph sequence for an independent Auditor's Report? Opinion, scope, summary. Introduction, scope, opinion. Introduction, opinion, scope. Scope, introduction, opinion.
Introduction, scope, opinion.
Which of these are significant accounting policies that should be included in notes to the financial statements? More than one may apply. Property taxes Inventory valuation method Depreciation method Basis of consolidation Stock option and stock purchase plans Earnings per share of common stock
Inventory valuation method Depreciation method Basis of consolidation Stock option and stock purchase plans Earnings per share of common stock
Identify a true statement regarding management's discussion and analysis (MD&A) provided in a company's annual report. It provides analysis about each and every financial statement item and presents the analysis in the same sequence of the financial statements. It explains that the responsibility for the fair presentation of financial statements lies with the management of the firm. It discloses non-GAAP financial measures and key performance indicators used to assess the company's financial and operating results. It includes disclosures regarding changes in the application of accounting principles made by the firm.
It discloses non-GAAP financial measures and key performance indicators used to assess the company's financial and operating results.
