Accounting Ethics Unit 5
Match each condition for the fraud with the proper example: 1) Pressure 2) Opportunity 3) Rationalization A) Meet financial analyst's earnings and estimates B) ineffective internal controls C) One time request
1 <-> A 2 <-> B 3 <-> C
each of the following has a role to play in developing financial statement form and content requirements: (check all that apply) 1) SEC 2) The company under audit 3) The audit firm 4) NYSE 5) PCAOB
1) SEC 4) NYSE 5) PCAOB
which of the following are factors for disclosing critical audit matters? 1) The nature and extent of audit effort required to address the matter 2) The professional qualifications of the auditor to address the matters 3) The auditors assessment of the risk of material misstatement 4) The degree of auditor judgment related to areas in the financial statements
1) The nature and extent of audit effort required to address the matter 3) The auditors assessment of the risk of material misstatement 4) The degree of auditor judgment related to areas in the financial statements
as stated in the audit report, the auditors responsibilities include: (check all that apply) 1) an overview of how the audit was performed 2) Express an opinion on the financial statements 3) conduct an audit in accordance with GAAS 4) prepare the statements 5) Express an opinion on the internal controls 6) an overview of judgments made and conclusions reached
1) an overview of how the audit was performed 2) Express an opinion on the financial statements 3) conduct an audit in accordance with GAAS 6) an overview of judgments made and conclusions reached
what is the purpose of the auditors assessment of the control environment? (check all that apply) 1) assess whether management's operating style is affective 2) assess whether top management ethical values are understood 3) support the independent auditor's opinion
1) assess whether management's operating style is affective 2) assess whether top management ethical values are understood
what should be included in management representations? (check all that apply) 1) disclosures of any deficiencies in internal controls 2) confirmation of providing auditor access to relevant information 3) certifications sent to the SEC 4) Communications with the audit committee about internal control weaknesses 5) affirmation that management has performed an assessment of the internal controls
1) disclosures of any deficiencies in internal controls 2) confirmation of providing auditor access to relevant information 5) affirmation that management has performed an assessment of the internal controls
what is the goal of the audit committee's evaluation of fraud risk and management's oversight responsibilities? (check all that apply) 1) ensure that management fulfills it's responsibilities 2) support communications with the external auditor about fraud 3) meet SEC reporting requirements 4) serve as a deterrent to senior management engaging in fraud
1) ensure that management fulfills it's responsibilities 4) serve as a deterrent to senior management engaging in fraud
to meet the general responsibilities related to the quality of professionals who perform an audit, an auditor should: 1) exercise due care in the performance of the audit and preparation of the report 2) need not exercise any professional Skepticism 3) have adequate technical training and proficiency 4) take up the audits of only those businesses who's owners are personally known to the auditor 5) maintain independence in mental attitude
1) exercise due care in the performance of the audit and preparation of the report 3) have adequate technical training and proficiency 5) maintain independence in mental attitude
how did Michael Hudson the former assistant treasurer at Frisch's restaurant commit fraud? 1) forged vendor statements 2) delayed the recording of expenses 3) program the company payroll computer to pay himself additional funds 4) recorded revenue for product that never shipped
1) forged vendor statements 3) program the company payroll computer to pay himself additional funds
which management attitudinal risk factors indicate fraudulent financial reporting may exist? (check all that apply) 1) management failing to correct known significant deficiencies or material weaknesses in internal control on a timely basis 2) A practice by management of committing to analysts, creditors, and other third parties to achieve aggressive or unrealistic forecasts 3) ignorance of securities regulations 4) Financial management's participation in selecting Accounting Principles
1) management failing to correct known significant deficiencies or material weaknesses in internal control on a timely basis 2) A practice by management of committing to analysts, creditors, and other third parties to achieve aggressive or unrealistic forecasts
factors that might lead to fraud include: (Check all that apply) 1) meet financial analyst's earnings projections 2) personal pressures 3) egoism 4) internal budget pressures 5) inadequate knowledge of the rules 6) inefficient audits
1) meet financial analyst's earnings projections 2) personal pressures 3) egoism 4) internal budget pressures
The Tyco Board of Directors violated the corporate governance system by: (check all that apply) 1) not disclosing related party relationships 2) doing business with the company 3) manipulating the Tyco's system of internal controls 4) stealing money from the company 5) maintaining independence from the audit committee
1) not disclosing related party relationships 2) doing business with the company 3) manipulating the Tyco's system of internal controls 4) stealing money from the company
emphasis of matter issues that might be addressed in the audit report include: 1) outstanding litigation 2) subsequent events 3) internal controls 4) going concern 5) compliance of statements with GAAP
1) outstanding litigation 2) subsequent events 4) going concern
what conditions generally exist when fraud occurs by management? (check all that apply) 1) rationalizing the fraud act 2) failed audit 3) pressure or incentive to commit fraud 4) persistent operating losses 5) opportunity to commit fraud
1) rationalizing the fraud act 3) pressure or incentive to commit fraud 5) opportunity to commit fraud
how can risk management culture be improved? (check all that apply) 1) senior management and the board should adopt internal control procedures 2) commitment to integrity and ethical values 3) evaluating the culture of the organization 4) engage the external auditors to develop the systems
1) senior management and the board should adopt internal control procedures 2) commitment to integrity and ethical values
audit committee communications should address the following matters: (check all that apply) 1) significant unusual transactions 2) significant accounting policies and practices 3) significant changes that auditors made to the process used to develop critical accounting estimates 4) critical accounting policies and practices 5) critical accounting estimates 6) critical audit procedures followed
1) significant unusual transactions 2) significant accounting policies and practices 4) critical accounting policies and practices 5) critical accounting estimates
The financial statements and notes should be informative of matters that may affect: (check all that apply) 1) user understandings 2) The audit opinion 3) materiality 4) internal controls
1) user understandings 2) The audit opinion
internal controls can help to reduce fraud involved in cash receipts by: 1) reporting fraud to the Board of Directors 2) eliminating opportunities to commit fraud 3) segregating responsibilities 4) eliminating pressures to commit fraud
2) eliminating opportunities to commit fraud 3) segregating responsibilities
Internal controls can help to reduce fraud involving cash receipts by 1) eliminating pressures to commit fraud 2) eliminating opportunities to commit fraud 3) segregation of responsibilities 4) reporting fraud to the Board of Directors
2) eliminating opportunities to commit fraud 3) segregation of responsibilities
when should auditors bring matters relating to fraud to the attention of the appropriate level of management? (check all that apply) 1) after being informed of the possibility by the SEC 2) fraud may cause a material misstatement in the financial statements 3) if the audit committee fails to act on the notification of possible fraud 4) after a minor misappropriation of assets is discovered
2) fraud may cause a material misstatement in the financial statements 4) after a minor misappropriation of assets is discovered
for each critical audit matter (CAM), the auditor should: (select all that apply) 1) disclose which audit partner signed off on CAM 2) identify the CAM 3) describe how the CAM was addressed in the audit
2) identify the CAM 3) describe how the CAM was addressed in the audit
Which financial or profitability risk factors might motivate fraud? (check all that apply) 1) estimates and judgments are made in the financial statements 2) inability to generate cash flows 3) unclear accounting or regulatory requirements 4) recurring operating losses
2) inability to generate cash flows 4) recurring operating losses
audit procedures selected are design to: (check all that apply) 1) form an opinion on the statements 2) satisfy risk assessment concerns 3) evaluate audit committee responsibilities 4) obtain evidential matter 5) support auditor judgments
2) satisfy risk assessment concerns 4) obtain evidential matter 5) support auditor judgments
rationalizations given for fraud include: (check all that apply) 1) Shareholders expect us to do it 2) lack of internal controls 3) aggressive accounting is acceptable 4) keep the stock price high 5) it is a temporary fix
3) aggressive accounting is acceptable 4) keep the stock price high 5) it is a temporary fix
which of the following are elements of the risk assessment done by auditors? (check all that apply) 1) contact the SEC about any violations 2) discuss with management any differences of opinion it had with the predecessor auditor on accounting issues 3) assessing the integrity of key management personnel 4) discuss with management why the previous auditors were fired 5) Communications with the predecessor auditor
3) assessing the integrity of key management personnel 5) Communications with the predecessor auditor
The expression of an opinion by the auditors is based on an audit in accordance with _________.
GAAS
as part of its oversight mission, the PCAOB aims to improve the quality of US public company audits by evaluating auditors assessment of companies _________, as required by SOX
ICFR
True or false: The auditor's assessment of fair presentation depends on whether the information presented in the statements is classified and summarized in a reasonable manner.
TRUE
True or false: the auditors assessment of fair presentation depends on whether the information presented in the statements is classified and summarized in a reasonable manner
True
unmodified opinions can be given on the audit of the financial statements when a) Financial statements fairly present the financial position b) auditor is unable to obtain sufficient appropriate evidence on which to base the opinion c) differences exist with management on GAAP issues d) management has met all of its responsibilities
a) Financial statements fairly present the financial position
In an audit, the auditor has a requirement to address risk assessment with respect to: a) The design and performance of audit procedures to respond to assessed risks b) whether the standards close the expectation gap c) The role and responsibilities of the audit committee in preventing fraud d) ensuring that no fraud occurred for the period under audit
a) The design and performance of audit procedures to respond to assessed risks
auditors are responsible to detect and correct errors when they are: a) material b) material or immaterial c) Due to an illegal act d) management fails to correct the error
a) material
what rationalization did Dennis Kozlowski use in the Tyco fraud? a) my predecessors did it b) it was a one time fix c) shareholders sanction it d) aggressive accounting is acceptable
a) my predecessors did it
In the Qwest communications case, the fraud was caused by management's a) pressure on employees to meet earning targets b) deflating expense amounts c) failure to follow GAAS d) lack of professional competence
a) pressure on employees to meet earning targets
The link between the ICFR and the audit of financial statements is a) The audit reports do not have to include any references to ICFR b) The audit of ICFR should be integrated with the audit of financial statements c) assessment of ICFR's is optional while audit opinions are required d) ICFR is only required when a modified opinion is given
b) The audit of ICFR should be integrated with the audit of financial statements
The auditor's responsibility with regard to illegal acts is greatest when: a) The illegal acts have an indirect and material effect on financial statement amounts b) The illegal acts have a direct and material effect on financial statement amounts c) The illegal acts have a direct and immaterial effect on financial statement amounts d) illegal acts exist regardless of the effects on the financial statements
b) The illegal acts have a direct and material effect on financial statement amounts
misappropriation of assets can be reduced by: a) reporting fraud to the auditors b) establishing internal controls to safeguard assets c) creating ethical standards to prevent it d) eliminating the opportunity to commit fraud
b) establishing internal controls to safeguard assets
audit committee responsibilities for fraud risk assessment include: a) Report unresolved matters to the SEC b) evaluate management's identification of fraud risks c) consider any Dodd-Frank reporting responsibilities d) discuss fraud risk assessment with external auditors
b) evaluate management's identification of fraud risks
audit committee responsibilities for fraud risk assessment include: a) Report unresolved matters to the SEC b) evaluate management's identification of fraud risks c) discuss fraud risk assessment with external auditors d) consider any Dodd-Frank reporting responsibilities
b) evaluate management's identification of fraud risks
some critics claim the usefulness of the audit report is limited because: a) auditors do not examine management's estimates and judgments b) language in the audit report relies on subjective evaluations such as what is meant by "reasonable" c) transactions examined are based on sampling and other techniques to limit choices of which transactions to audit d) auditor's examine all the companies transactions
b) language in the audit report relies on subjective evaluations such as what is meant by "reasonable"
auditors render an independent opinion on the financial statements prepared by a) The PCAOB b) management c) The audit firm d) The SEC
b) management
which of the following is the most likely reason for an auditor to issue an adverse opinion? a) inability to gather any sufficient relevant information to form the basis for the opinion b) misstatements that are material and pervasive c) going concern issue d) misstatements that are material but not pervasive
b) misstatements that are material and pervasive
when should an auditor give an unmodified opinion? a) differences exist with management over financial reporting issues b) statements present fairly financial position, results of operations, and cash flow's c) statements were prepared by management d) there are no internal control concerns
b) statements present fairly financial position, results of operations, and cash flow's
Dennis Kozlowski's rationalization for committing fraud at Tyco was a) The auditors didn't care b) to keep up with the masters of the universe c) The Board of Directors approved it d) because he could get away with it
b) to keep up with the masters of the universe
what is enterprise risk management (ERM)? a) The process of evaluating internal controls to ensure operations are carried out efficiently and effectively b) A process designed to identify material events that may affect the financial statements and to manage risk within the entities risk appetite c) A process affected by an entity's Board of Directors, management, and other personnel designed to identify potential events that may affect the entity and to manage risk within it's risk appetite d) A process by which compliance with laws and regulations can be assessed
c) A process affected by an entity's Board of Directors, management, and other personnel designed to identify potential events that may affect the entity and to manage risk within it's risk appetite
which of the following elements were NOT part of the fraud at Tyco? a) benefits given to certain members of the Board of Directors to secure their silence about the fraud b) corporate assets used by members of top management for personal purposes c) Setting up special purpose entities to keep that off Tyco's books d) related party transactions that were not adequately disclosed
c) Setting up special purpose entities to keep that off Tyco's books
Due Care requires a) Independence in mental attitude b) an opinion whether such care has been exercised c) diligence and competence d) an opinion whether the statements conform to GAAP
c) diligence and competence
The former CEO at Qwest communications, Joseph Nacchio, often displayed which red flag in the fraud triangle? a) had a poor attitude b) purchased expensive homes in multiple countries c) focused only on meeting revenue targets d) had a gambling addiction
c) focused only on meeting revenue targets
all of the following tend to be rationalizations for fraud except: a) we need to protect the shareholders and keep the stock price high b) all companies use aggressive accounting techniques c) the employee will be fired unless he goes along with the fraud d) we are correcting a temporary problem that will not exist in the future
c) the employee will be fired unless he goes along with the fraud
The auditor should communicate asset misappropriation's to a) The SEC b) The offending employee c) those charged with governance d) attorneys to determine legal obligations
c) those charged with governance
auditors are required to communicate with the audit committee for all but which of the following: a) significant accounting policies and practices b) critical accounting practices and policies c) significant unusual transactions d) The procedures followed by the auditor in evaluating evidence
d) The procedures followed by the auditor in evaluating evidence
which of the following is NOT something external auditors are expected to do in looking for fraud? a) assessing the control environment of the organization b) evaluating internal controls c) considering audit risk and materiality d) evaluating management's commitment to serve the public interest
d) evaluating management's commitment to serve the public interest
Michael Hudson, the former assistant treasurer at Frisch's restaurant, exhibited which pressure that should have been a red flag in the fraud triangle? a) had a poor attitude b) focused on stock price only c) purchased expensive cars d) had a gambling problem
d) had a gambling problem
The responsibility for preventing and detecting fraud belongs to whom? a) The internal auditor b) The IRS c) The external auditor d) The AICPA e) management
e) management
audit committee communications should include critical accounting policies and practices and critical accounting _________.
estimates
discussions with predecessor auditors about accounting and financial reporting differences with management are part of ________ ____________.
risk assessment