Ethics Final Pt 3

An example of fraudulent financial statements is: Misrepresentation of events, transactions, and other significant events in the financial statements Failure to provide adequate documentation to support financial statements assertions Aggressive accounting for transactions, events, or other significant matters Misappropriation of assets

A

Circular 230 requires that a tax preparer avoid taking a frivolous position. A Frivolous position is defined as a position that has what percentage or less chance of succeeding? 20% 10% 40% 50%

A

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

A

The Committee of Sponsoring Organizations of the Treadway Committee (COSO) analyzed the financial reporting of public companies during the 1998-2007 periods when business failures due to accounting fraud were high and found that: Top management was frequently involved in the fraud with the CEO and/or CFO being the most frequently involved The most common fraud technique involved understating expenses The audit committee always sanctioned the fraud A minority of audit reports issued during the fraud period contained unqualified audit opinions

A

The McKesson and Robbins, Inc. Scandal of 1938 brought about what reforms by the American Institute of Accountants (Now the AICPA) The adoption of audit standards requiring that auditors verify accounts receivable and inventory. The mandatory fingerprinting of all corporate officers. The adoption of audit standards that require auditors to extensively test the company's system of Revenue Recognition. The stockholders having the right to vote on the company's auditors.

A

The Tax Inversion case deals with: Whether IFRS should be used for all subsidiaries following an acquisition Whether IFRS should replace U.S. GAAP Whether a quality reviewer should be chosen from outside the company Whether a tax inversion should occur

A

The best explanation why the fraud at Tyco was not discovered and acted on is: Failure of the corporate governance system External auditors told management to let the fraud go Tyco management hid the fraud from the auditors The fraud was not material

A

The name of the term used to describe issues that are important enough to merit attention from those responsible for oversight over financial reporting is commonly called: Significant deficiency Recklessness Material weakness Negligence

A

The report provided by PwC to Billy Muldoon, CFO, identified which material weaknesses? Inadequate controls over financial reporting 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

A

Which of the following would eliminate the ability of a plaintiff to prevail under Rule 10b-5? No reliance by the plaintiff on the financial statements a factual misrepresentation the intent to deceive, manipulate, or defraud damages suffered

A

Which of the below is the only accepted Source of GAAP in the USA? The Financial Accounting Standards Board Pronouncements Incorrect The SEC's Staff Accounting Bulletins (SAB) The Accounting Standards Codification The IRS Revenue Rulings

C

Which of the following Legal Decisions resulted in the AICPA requiring mandatory engagement letters for all financial statement engagements? The Ultramares v Touch Case The Bylie V. Arthur Young Case 1136 Tenants Corp V. Max Rothenberg Murphy V. B D O Seidman LLP

C

Which of the following is not part of the fraud triangle? Incentives Opportunity Materiality Rationalization

C

Which of the following was not a factor in Donald Cressey's theory of Fraud causation known as the Fraud Triangle? Opportunity Rationalization Mental Pathology Financial Pressure

C

Which of the following is NOT something external auditors are expected to do in looking for fraud? Assessing the control environment of the organization Evaluating internal controls Considering audit risk and materiality Evaluating management's commitment to serve the public interest

D

You have a conflict of interest because you do the tax and audit work for both Smith Company and their biggest competitor, Jones Company. Under Circular 230 what are you required to do if you want to work on both companies what should you do? Disclose the conflict of interest and get both clients to waive the conflict. Nothing, this sort of thing happens all the time. Disclose the conflict of interest in writing and get both clients to waive the conflict in writing and keep the written waiver for 7 years after you cease work. Disclose the conflict of interest in writing and get both clients to waive the conflict in writing and keep the written waiver for 3 years after you cease work.

D

You have taken a position on a client's tax return that you believe has a 40% or better chance of succeeding. Such a position is considered to : To be a Frivolous Position To be a Reasonable Position, that must be disclosed on the return to avoid penalties. To have substantial authority, but must be disclosed to avoid penalties To have substantial authority which does not require additional disclosure to avoid penalties

D

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

B

Which term means a person knew or should have known that their actions were likely to cause harm? Negligence Recklessness Strict Liability Intent

B

ASC 605, ASC 606 and Sec Staff Accounting Bulletin 104 primarily deal with what major problem faced by auditors? Goodwill Revenue Recognition The Concept of "Fair Value" Documenting Audit Work papers

B

In the Miller Energy Resources case, the SEC found that: Held the auditors were not liable because they exercised due care and professional skepticism. Held the auditors liable because they failed to gather sufficient, competent evidential matter to assess the value of assets on the financial statements. Held the auditors liable because they colluded with management to misrepresent the value of assets on the financial statements. The auditors were not liable because they met all professional standards.

B

Misstatements in the financial statements are most likely to occur when there are: Omission of the auditor's report Omission of notes to the financial statements Failure to disclose major estimates made in the financial statements Failure to disclose major judgments made in the financial statements

B

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

B

Rule 10b-5 of the Securities Exchange Act of 1934 makes it unlawful for a CPA to engage in each of the following activities except: Employ any device, scheme, or artifice to defraud Omit a material fact necessary for the financial statements to present fairly financial position, results of operations, and cash flows Engage in any act, practice, or course of business to commit fraud or deceit in connection with the purchase or sale of a security Make an untrue statement of material fact or omit a material fact necessary in order to make the statement made, in the light of the circumstances under which they were made, not misleading

B

The Accountant Tax Client Privilege has two major exceptions where the privilege does not apply. They are: When the client is a relative or where you is the work for free Criminal matters and tax shelter matters Unfiled Returns and Cases in tax court All of the above

B

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

B

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

B

The legal liability of the auditors in the Joker & Wild case can best be described as resulting from: Liability for gross negligence that constituted fraud No liability because the auditor's performed their duties in accordance with GAAS Liability for failing to assess current market values of inventory Improper accounting for transactions involving management override

B

This case was one of the most significant California cases in history as regards liability for auditors arising out of negligence. This case generally limited liability for negligence in performing audits to parties with privity. The Ultramares Decision Bily v. Arthur Young & Co. (1992)Correct Evrin v. Mann Frankfort Stein The Dred Scott Decision

B

Under Circular 230, which percentage probability of success is permissible but will require disclosure on the return to avoid penalties if it does not prevail. 10% to 20 % 20% to 40 % 40% to 50 % Greater than 50%

B

You have a new client. Upon reviewing his prior years return you discover that his prior return has a major error and if it is corrected the client will owe an additional $5,000 in taxes plus penalties and interest. The client refuses to amend the prior year's return. Your ethical duties require you to: Terminate your relationship with the client Notify the client of the error and potential penalties and interest that he might have to pay if he gets caught by the IRS. Simply notify the client of the error and ask him if he wants you to amend the return. To amend the return and if he refuses to sign it and send it to the IRS, then you must send it to the IRS and notify them of the error.

B

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

C

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

C

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

C

In the case of Phar-Mor v. Coopers & Lybrand the auditors were found guilty of fraud because The 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 The auditors were grossly negligent and had a blatant disregard for the truth The auditors were not independent and conspired with management to steal funds

C

The COSO Study of 347 cases of Fraudulent Financial reporting which occurred from 1998 to 2007 found which of the below to be the most common fraud technique, having occurred in 60 % of the frauds studied? Improper Disclosure Over or understated Inventories Improper Revenue Recognition Capitalization of expenses

C

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

C

The case which deals with assigning a quality review partner to an audit is: ZZZZ Best Imperial Valley Community Bank Medicis Pharmaceutical Rooster, Hen, Footer and Burger

C

The following are specific procedures that auditors must do to find fraud according to GAAP pronouncements: Do a test of transactions for cash disbursements Do a proof of cash Observe inventories and confirm accounts receivable Do an intensive transactional test of at least 100 transactions to determine the propriety of revenue recognition

C

The framework of COSO's Enterprise Risk Management can best be characterized as: Incorporate enhanced internal control principles into enhanced corporate governance Incorporate enhanced audit sampling procedures in the testing of internal controls Incorporate enhanced corporate governance into internal control principles Incorporate enhanced audit sampling procedures in substantive testing

C

The objective of an engagement quality review is to: Assess how an audit has been conducted and the appropriateness of the audit opinion Assess the firm's own quality controls and the appropriateness of the audit opinion Assess how an audit has been conducted and the firm's own quality control procedures Assess whether materiality has been properly evaluated

C

The primary accounting issue in the Wetherford International case is: Fraudulent recording of revenues on sales to customers Fraudulent use of company resources by top management for personal purposes Fraudulent inflation of earnings using deceptive income tax accounting Fraudulent inflation of inventory to reduce losses on the income statement

C

The second leading cause of Financial Statement fraud according to studies of SEC enforcement actions is: Revenue Recognition Issues Problems with Inventory valuations Improper or missing disclosure Overstating Goodwills

C

What asset is most likely to be stolen in cases of occupational fraud? Inventory Property Plant and Equipment Cash Intellectual Property

C

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

D

ASU 2014 -2 was issued on January 16, 2014 and deals with goodwill. It allows Small Companies to elect To Amortize Goodwill over ten years or less if the primary asset acquired had a shorter life. to test for impairment only if a triggering event occurs To immediately write off goodwill A and B Above

D

An auditor concludes that a client has committed an illegal act that has not been properly accounted for or disclosed. The auditor is most likely to withdraw from the engagement when the: Auditor is precluded from obtaining sufficient competent evidence about the illegal act Illegal act has an effect on the financial statements that is both material and direct Auditor cannot reasonably estimate the effect of the illegal act on the financial statements Client refuses to take the remedial steps deemed necessary by the auditors

D

Audit Procedures should always be done at the client's office because: You want to get access to middle management and other employees to get tips relating to fraud You want the audit to act as a deterrent to the employees being audited You get to review the physical facilities - which could result in significant observations For all of the above reasons

D

Auditors are required to communicate with the audit committee all but which of the following: Going concern issues Whether the auditor expects to modify the opinion Any disagreements with management The procedures followed to comply with generally accepted auditing standards

D

Embezzlers often have the following characteristics They are the best liked person on the office They are the last person an untrained manager would suspect They are less likely to be tattooed, more likely to be religious and are usually in more stable relationships than the typical felon All of the above

D

Expense reimbursement Frauds are: Second only to billing fraud as a source of asset misappropriation Are usually very material Can reflect on the integrity of key management people A and C above

D

Gathering and objectively evaluating audit evidence requires the auditor to consider: Whether an unmodified opinion should be issued Whether a modified opinion should be issued Whether the evidence is adequate to complete the audit Whether the evidence is competent and sufficient enough to render an audit opinion

D

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

D

In gathering audit evidence, the accessibility of information may be a factor thereby influencing which judgment trigger? Confirmation Overconfidence Anchoring Availability

D

In the Nucorp Case the auditors were able to prevail by showing that the Auditor didn't have duty to the 3rd party That the Statute of Limitations had expired Auditors work was performed as it should have been That the plaintiff's losses were due to other events and would have been incurred regardless of whether the audit was incorrect

D

In the U.S., if the auditor can demonstrate having performed services with the same degree of skill and judgment possessed by others in the profession, it can be said to have exercised: Prudence Scienter Nonfeasance Due Care

D

Section 302 of the Sarbanes-Oxley Act requires: Management's report on internal controls Auditor's independent report Auditor's assessment of management's report on internal controls Management's certification of the financial statements

D

The ACFE studies imply that Fraud Accounts for approximately what percentage of the Gross National Product? 2 to 4 % 8 to 10 % 3 to 6% 5 to 7 %

D

The Caremark Opinion was precedent setting for directors obligations involved violations of Medicare's anti-referral law was by the Delaware Court of Chancery and ruled that directors have affirmative fiduciary obligation to ensure adequate information and reporting systems exist Did all of the above

D

The Dodd Frank legislation: Required companies to have claw back rules in order to be listed on the stock exchange Allowed for claw backs of bonuses and profits from stock sales for only the CFO and CEO Encouraged whistleblowers by requiring that the SEC must pay whistleblowers 10 to 30 percent of monetary sanctions imposed A and C Above

D

The McKesson and Robbins, Inc. Scandal of 1938 brought about what reforms by the Securities and Exchange Commission The requirement that Public Companies have audit committees The requirement that the appointment of the auditors requires shareholder approval The adoption of audit standards that require auditors to extensively test the company's system of Revenue Recognition A and B above

D

The ethical dilemma in the TransWays' case can best be described as: The external auditors are being blocked by the client in attempting to verify accounting treatment of oil drilling services The Director of International Accounting questions the revenue recognition for oil drilling overseas Gross negligence on behalf of the auditors to account for oil inventory Whether payments made to customs officials are can be properly recorded as facilitating payments

D

The major reason for an engagement letter from an accountant's viewpoint is: To narrowly define the scope of the work to be done in order to limit liability and prevent what your instructor refers to as "engagement creep" To set forth the rates to be charged in order to eliminate any confusion by the parties To set forth which entities or entities will be liable for the accountant's fees All of the above are major reasons to have an engagement letter.

D

The most frequent way fraud is detected is by: Internal Audit Procedures External Auditors discovering Fraud Document Reconciliation by management Tips from employees and others

D

Which of the following is NOT an element of the auditor's responsibility of the AICPA's auditor's report for nonpublic companies? States the auditor's responsibility to express an opinion on the financial statements States the audit provides reasonable assurance that the statements are free of material misstatement States audit provides reasonable basis for the opinion States the audit evaluates the overall financial statement presentation

D

The Private Securities Reform Act (PSLRA) increased the auditors' liability from proportionate liability to Joint and Severable Liability in cases where the auditor did not have Scienter. True False

F

Sarbanes Oxley provides that an individual may be fined or imprisoned for up to 20 years for altering, destroying concealing, or falsifying any record, with the intent to impair the use of the record in a governmental investigation or proceeding. True False

T

Some states have modified the Ultramares Doctrine and allowed liability for negligence to be upheld by third parties if the auditor had actually foreseen or reasonably could have foreseen reliance on the audit report by that third parties. True False

T

The Sarbanes Oxley legislation requires every publically listed company to have a company Ethics Policy for key financial employees. True or False

T

The Sarbanes Oxley legislation requires every publicly listed company to have a company Ethics Policy for key financial employees. True False

T

Under Circular 230 it is prohibited to prepare a tax return or an amended tax return for a contingent fee. True False

T

Willfully failing to e-file a tax return when the practitioner is required to do so by federal tax laws can be considered incompetent or disreputable conduct by the IRS under Circular 230. True False

T