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Financial Accounting, 4e (Kemp)

Chapter 6   The Challenges of Accounting: Standards, Internal Control, Audits, Fraud, and Ethics

 

6.1   Understand the importance of US GAAP and how it differs from accounting standards in other countries (IFRS)

 

1) For inventory costing purposes, GAAP and IFRS differ in that GAAP allows the use of FIFO, whereas IFRS prohibits the use of FIFO.

Answer:  FALSE

Diff: 1

Question Type:  Concept

 

2) The process CPAs use to confirm that financial reports conform to GAAP is called a review.

Answer:  FALSE

Diff: 1

Question Type:  Concept

 

3) U.S. GAAP has been organized into what is called the Accounting Standards Codification.

Answer:  TRUE

Diff: 1

Question Type:  Concept

 

4) Currently, most European countries are using International Financial Reporting Standards.

Answer:  TRUE

Diff: 1

Question Type:  Concept

 

5) The U.S. is now using International Financial Reporting Standards instead of the old GAAP system.

Answer:  FALSE

Diff: 1

Question Type:  Concept

 

6) IFRS is considered a principles-based system, while U.S. GAAP is considered a rules-based system.

Answer:  TRUE

Diff: 2

Question Type:  Concept

 

 

7) For accounting information to be useful it must be all of the following EXCEPT:

  1. A) reliable.
  2. B) understandable.
  3. C) economical.
  4. D) relevant.

Answer:  C

Diff: 1

Question Type:  Concept

8) The government agency that approves U.S. GAAP is the:

  1. A) Senate.
  2. B) Department of Commerce.
  3. C) Department of the Treasury.
  4. D) Securities and Exchange Commission.

Answer:  D

Diff: 1

Question Type:  Concept

 

9) U.S. GAAP’s overriding principles of accounting are written by the:

  1. A) FASB.
  2. B) SEC.
  3. C) IRS.
  4. D) IASB.

Answer:  A

Diff: 1

Question Type:  Concept

 

10) IFRS are developed by the:

  1. A) European Union.
  2. B) Financial Accounting Standards Board.
  3. C) International Accounting Standards Board.
  4. D) International Monetary Fund.

Answer:  C

Diff: 1

Question Type:  Concept

 

11) The International Accounting Standards Board was formed in:

  1. A) 2001.
  2. B) 1991.
  3. C) 1981.
  4. D) 1971.

Answer:  A

Diff: 1

Question Type:  Concept

 

 

12) In terms of valuation, U.S. GAAP generally uses ________, while IFRS generally uses ________.

  1. A) market values, historical values
  2. B) historical values, historical values
  3. C) historical values, market values
  4. D) market values, market values

Answer:  C

Diff: 1

Question Type:  Concept

13) The process CPAs use to confirm that financial reports conform to GAAP is known as a(n):

  1. A) examination.
  2. B) audit.
  3. C) review.
  4. D) confirmation.

Answer:  B

Diff: 1

Question Type:  Concept

 

14) Contingent liabilities are ________ under GAAP, and ________ under IFRS

  1. Recorded if probable
  2. Recorded if possible

III. Recorded if reasonably estimated

  1. A) GAAP I and II; IFRS I or II
  2. B) GAAP I or III; IFRS I and II
  3. C) GAAP I; IFRS I and III
  4. D) GAAP I and III; IFRS I

Answer:  D

Diff: 1

Question Type:  Concept

 

15) Under US GAAP and IFRS, research and development costs are:

  1. Research costs are expensed as incurred
  2. Development costs are expensed as incurred

III. Research costs are capitalized and amortized over time

  1. Development costs are capitalized and amortized over time.
  2. A) GAAP I and II; IFRS II and III
  3. B) GAAP I and IV; IFRS III and IV
  4. C) GAAP I and II; IFRS I and IV
  5. D) GAAP II and III; IFRS II and III

Answer:  C

Diff: 1

Question Type:  Concept

 

 

6.2   Understand the importance and role of internal control

 

1) An organization’s employees are responsible for the design and implementation of the internal control system.

Answer:  FALSE

Diff: 1

Question Type:  Concept

 

2) One objective of an internal control system is to safeguard the assets of a company.

Answer:  TRUE

Diff: 1

Question Type:  Concept

 

3) Ensuring compliance with laws and regulations is an example of what following GAAP can do for a company.

Answer:  FALSE

Diff: 1

Question Type:  Concept

4) According to the text, there are three key elements that affect an organization’s internal control system.

Answer:  FALSE

Diff: 1

Question Type:  Concept

 

5) Management and staff attitudes toward internal control are an important part of control activities.

Answer:  FALSE

Diff: 1

Question Type:  Concept

 

6) The ongoing process that identifies and analyzes potential problems in an organization and takes steps to reduce those problems is risk assessment.

Answer:  TRUE

Diff: 1

Question Type:  Concept

 

7) Separation of duties is part of the control environment of an internal control system.

Answer:  FALSE

Diff: 1

Question Type:  Concept

 

8) The delegation of authority and responsibility is part of the control environment of an internal control system.

Answer:  TRUE

Diff: 1

Question Type:  Concept

 

9) Two or more people must work together to commit fraud.

Answer:  FALSE

Diff: 1

Question Type:  Concept

 

10) A properly designed internal control system can guarantee that fraud will not occur.

Answer:  FALSE

Diff: 1

Question Type:  Concept

 

11) In large companies, it may not be cost effective to properly segregate duties.

Answer:  FALSE

Diff: 1

Question Type:  Concept

12) Internal control is a comprehensive system that helps an organization do all of the following EXCEPT:

  1. A) safeguard assets.
  2. B) safeguard liabilities.
  3. C) operate efficiently and effectively.
  4. D) ensure compliance with applicable laws and regulations.

Answer:  B

Diff: 1

Question Type:  Concept

 

13) Internal control systems:

  1. A) are the same from company to company.
  2. B) are regulated by the Securities and Exchange Commission.
  3. C) vary from company to company.
  4. D) guarantee the safeguard of assets.

Answer:  C

Diff: 1

Question Type:  Concept

 

14) Which element of internal control deals with establishing procedures for things such as handling of incoming checks?

  1. A) Monitoring
  2. B) Control environment
  3. C) Control activities
  4. D) Risk assessment

Answer:  C

Diff: 1

Question Type:  Concept

 

 

15) Which element of internal control deals with the oversight of the internal control system?

  1. A) Monitoring
  2. B) Control environment
  3. C) Information and communication
  4. D) Risk assessment

Answer:  A

Diff: 1

Question Type:  Concept

 

16) Which element of internal control deals with the establishment of a company’s policies?

  1. A) Control environment
  2. B) Control activities
  3. C) Information and communication
  4. D) Risk assessment

Answer:  B

Diff: 1

Question Type:  Concept

17) Which element of internal control deals with a company having large amounts of cash on hand?

  1. A) Control environment
  2. B) Control activities
  3. C) Information and communication
  4. D) Risk assessment

Answer:  D

Diff: 1

Question Type:  Concept

 

18) Properly supervising employees would be an example of what element of internal control?

  1. A) Control environment
  2. B) Control activities
  3. C) Information and communication
  4. D) Risk assessment

Answer:  B

Diff: 1

Question Type:  Concept

 

19) Establishing a hierarchy to let all management and employees know what is going on in a company would be an example of what element of internal control?

  1. A) Risk assessment
  2. B) Monitoring
  3. C) Information and communication
  4. D) Control environment

Answer:  C

Diff: 1

Question Type:  Concept

 

20) Details that support business transactions make up what is called:

  1. A) internal control.
  2. B) monitoring.
  3. C) risk assessment.
  4. D) an audit trail.

Answer:  D

Diff: 1

Question Type:  Concept

 

21) Which of the following would NOT be considered a control activity?

  1. A) Keeping accounting records
  2. B) Having written job descriptions
  3. C) Not having employees take vacations
  4. D) Changing passwords regularly

Answer:  C

Diff: 2

Question Type:  Concept

22) Which of the following would NOT be considered part of the control environment?

  1. A) Having integrity and ethical values
  2. B) Assessing chances of fraud
  3. C) Having competent workers
  4. D) Having a leadership philosophy

Answer:  B

Diff: 2

Question Type:  Concept

 

23) Which of the following would NOT be considered part of monitoring in an internal control system?

  1. A) Having an audit trail
  2. B) Assessing performance of the system
  3. C) Locating weakness of the system
  4. D) Management involvement

Answer:  A

Diff: 2

Question Type:  Concept

 

24) Which of the following would be considered a part of control activities in an internal control system?

  1. A) Having large quantities of cash on hand
  2. B) Separation of duties
  3. C) Having a leadership philosophy
  4. D) Locating weaknesses in an internal control system

Answer:  B

Diff: 1

Question Type:  Concept

 

25) Having security measures, proper authorization channels, and restricted access to assets is an example of what element of internal control?

  1. A) Control environment
  2. B) Control activities
  3. C) Information and communication
  4. D) Risk assessment

Answer:  B

Diff: 1

Question Type:  Concept

 

26) Which of the following items is NOT a limit to the effectiveness of internal control systems in an organization?

  1. A) Properly designed controls
  2. B) Collusion
  3. C) Costs exceed benefits
  4. D) Overriding controls

Answer:  A

Diff: 2

Question Type:  Concept

27) A disgruntled employee who convinces another to steal from the company is an example of:

  1. A) collusion.
  2. B) monitoring.
  3. C) the control environment.
  4. D) control activities.

Answer:  A

Diff: 1

Question Type:  Application

 

28) A distracted employee who fails to properly follow procedures is an example of:

  1. A) the control environment.
  2. B) control activities.
  3. C) monitoring.
  4. D) internal control limitations.

Answer:  D

Diff: 1

Question Type:  Application

 

29) Utilization of an electronic theft detection system is an example of:

  1. A) security measures.
  2. B) the control environment.
  3. C) monitoring.
  4. D) risk assessment.

Answer:  A

Diff: 1

Question Type:  Application

 

30) When a company has one person post cash receipts, and another person deliver the deposit, this is an example of:

  1. A) restricted access.
  2. B) proper
  3. C) separation of duties.
  4. D) internal control limitations.

Answer:  C

Diff: 1

Question Type:  Application

 

31) Requiring a manager to sign off on purchases of $100 or more is an example of:

  1. A) restricted access.
  2. B) proper authorization.
  3. C) an audit trail.
  4. D) internal control limitations.

Answer:  B

Diff: 1

Question Type:  Application

32) A good internal control system does which of the following?

  1. A) Guarantees the efficiency and effectiveness of operations
  2. B) Reduces the risk of undetected errors
  3. C) Provides absolute assurance that no errors will occur
  4. D) Guarantees that fraud will be prevented

Answer:  B

Diff: 1

Question Type:  Concept

 

33) Which of the following items is NOT a limit to the effectiveness of internal controls?

  1. A) Poorly defined controls
  2. B) Managers overriding controls
  3. C) Not separating duties in departments
  4. D) Making sure employees are less distracted on the job

Answer:  D

Diff: 1

Question Type:  Concept

 

34) A company may be limited in their internal control procedures because the cost of hiring enough people to implement the procedures:

  1. A) outweighs the benefits of the system.
  2. B) has nothing to do with the effectiveness of the internal control system.
  3. C) can prevent collusion.
  4. D) can limit employee distractions.

Answer:  A

Diff: 1

Question Type:  Concept

 

35) A requirement that customers receive a receipt is an example of:

  1. A) monitoring.
  2. B) information and communication.
  3. C) control activities.
  4. D) risk assessment.

Answer:  C

Diff: 1

Question Type:  Application

 

36) A requirement that employees go on vacation is an example of:

  1. A) monitoring.
  2. B) information and communication.
  3. C) control activities.
  4. D) A and C are both correct.

Answer:  C

Diff: 1

Question Type:  Application

37) An audit trail:

  1. A) requires employees to take an annual vacation.
  2. B) limits the number of employees who have access to company assets.
  3. C) consists of business documents and records that provide evidence of transactions.
  4. D) requires the use of security cameras and alarm systems.

Answer:  C

Diff: 1

Question Type:  Concept

 

38) Risk assessment:

  1. A) is an ongoing process.
  2. B) identifies and analyzes risk.
  3. C) varies from company to company.
  4. D) includes all of the above.

Answer:  D

Diff: 1

Question Type:  Concept

 

 

6.3   Define fraud and describe the different types of fraud in business

 

1) In a broad sense, fraud is the use of deception or trickery for personal gain.

Answer:  TRUE

Diff: 1

Question Type:  Concept

 

2) Fraud is always committed against an organization.

Answer:  FALSE

Diff: 1

Question Type:  Concept

 

3) An organization’s employees are usually responsible for fraud that is committed by a business organization.

Answer:  FALSE

Diff: 1

Question Type:  Concept

 

4) The Fraud Triangle is used to show the connection of the factors necessary to commit fraud by or against an organization.

Answer:  TRUE

Diff: 1

Question Type:  Concept

 

5) Living beyond one’s means is an example of perceived opportunity.

Answer:  FALSE

Diff: 1

Question Type:  Concept

 

6) Bob was passed over for a raise; when he took $20 from the register, saying “they owe me” – this is an example of perceived pressure.

Answer:  FALSE

Diff: 1

Question Type:  Application

7) Fraud is most likely to occur when 2 of the 3 elements of the fraud triangle are present.

Answer:  FALSE

Diff: 1

Question Type:  Concept

 

8) When an employee overbills  the company for business related expenses, this is an example of a disbursement scheme.

Answer:  TRUE

Diff: 1

Question Type:  Application

 

 

9) Marla has a gambling addiction. She may have a perceived pressure to commit fraud.

Answer:  TRUE

Diff: 1

Question Type:  Application

 

10) The goal of overstating earnings by using fraud is to:

  1. A) deflate the amount of taxes the corporation pays.
  2. B) overstate the cost of goods sold.
  3. C) help increase the stock price of the company.
  4. D) overstate receivables.

Answer:  C

Diff: 1

Question Type:  Concept

 

11) Fraudulent financial reporting typically involves:

  1. A) management.
  2. B) employees.
  3. C) the board of directors.
  4. D) the stockholders.

Answer:  A

Diff: 1

Question Type:  Concept

 

12) In order to overstate earnings, a company can:

  1. A) overstate expenses and overstate revenue.
  2. B) overstate receivables and understate payables.
  3. C) understate unearned revenue and understate property, plant and equipment.
  4. D) understate expenses and understate revenue.

Answer:  B

Diff: 2

Question Type:  Application

 

13) An overstatement of earnings can inflate a company’s stock price and may also be used to:

  1. A) deflate the amount of taxes the corporation pays.
  2. B) avoid paying raises to employees.
  3. C) ensure larger bonuses to upper management at year-end.
  4. D) avoid paying dividends to stockholders.

Answer:  C

Diff: 1

Question Type:  Concept

 

14) The primary form of fraud committed against an organization is usually done by:

  1. A) management.
  2. B) employees.
  3. C) stockholders.
  4. D) boards of directors.

Answer:  B

Diff: 1

Question Type:  Concept

 

15) ________ embezzlement is a form of fraud committed against an organization.

  1. A) Management
  2. B) Employee
  3. C) Stockholder
  4. D) Board of directors

Answer:  B

Diff: 1

Question Type:  Concept

 

16) Embezzlement usually involves the misappropriation of business:

  1. A) equity by an employee.
  2. B) liabilities by an employee.
  3. C) assets by an employee.
  4. D) information by an employee.

Answer:  C

Diff: 2

Question Type:  Concept

 

17) If an employee overbills a company for travel, this would be considered a(n):

  1. A) disbursement scheme.
  2. B) expense scheme.
  3. C) cash register scheme.
  4. D) check tampering scheme.

Answer:  B

Diff: 1

Question Type:  Application

 

18) If an employee gives a false refund and pockets the cash, this would be considered a(n):

  1. A) disbursement scheme.
  2. B) expense scheme.
  3. C) cash register scheme.
  4. D) check tampering scheme.

Answer:  C

Diff: 1

Question Type:  Application

 

19) By definition, an employee who tricks a company into giving up cash for an invalid reason has engaged in a(n):

  1. A) disbursement scheme.
  2. B) expense scheme.
  3. C) cash register scheme.
  4. D) check tampering scheme.

Answer:  A

Diff: 1

Question Type:  Concept

 

20) If an employee receives a check from a customer, endorses it and then cashes it, this would be

considered a(n):

  1. A) disbursement scheme.
  2. B) expense scheme.
  3. C) cash register scheme.
  4. D) check tampering scheme.

Answer:  D

Diff: 1

Question Type:  Application

 

21) An employee may embezzle by taking bribes or kickbacks from:

  1. A) suppliers.
  2. B) customers.
  3. C) both suppliers and customers.
  4. D) stockholders of the company.

Answer:  C

Diff: 1

Question Type:  Concept

 

22) Granting customers a lower sales price for something that benefits you in return would be an example of a:

  1. A) disbursement scheme.
  2. B) bribe or kickback.
  3. C) cash register scheme.
  4. D) check tampering scheme.

Answer:  B

Diff: 1

Question Type:  Application

 

 

23) Receiving something from a supplier in exchange for authorizing payments for goods not delivered to the employer would be an example of a:

  1. A) cash receipts scheme.
  2. B) cash register scheme.
  3. C) bribe or kickback.
  4. D) check tampering scheme.

Answer:  C

Diff: 1

Question Type:  Application

24) Cash register schemes are a form of:

  1. A) employee embezzlement.
  2. B) bribe.
  3. C) fraudulent financial reporting.
  4. D) management fraud.

Answer:  A

Diff: 1

Question Type:  Concept

 

25) Receiving favors from a supplier by turning a blind eye to the delivery of inferior goods is a form of:

  1. A) cash register scheme.
  2. B) bribe.
  3. C) fraudulent financial reporting.
  4. D) management fraud.

Answer:  B

Diff: 1

Question Type:  Application

 

26) An employee who pockets cash received from a customer without recording the transaction is an example of a(n):

  1. A) disbursement scheme.
  2. B) expense scheme.
  3. C) cash register scheme.
  4. D) check tampering scheme.

Answer:  C

Diff: 1

Question Type:  Application

 

27) Overbilling the company for parking fees or cab fare would be examples of:

  1. A) disbursement schemes.
  2. B) expense schemes.
  3. C) cash register schemes.
  4. D) check tampering schemes.

Answer:  B

Diff: 1

Question Type:  Application

 

28) Recording assets that the company does NOT possess is an example of:

  1. A) management fraud.
  2. B) employee fraud.
  3. C) collusion.
  4. D) embezzlement.

Answer:  A

Diff: 1

Question Type:  Application

29) Which of the following is NOT part of the Fraud Triangle?

  1. A) Realization
  2. B) Perceived opportunity
  3. C) Rationalization
  4. D) Perceived pressure

Answer:  A

Diff: 1

Question Type:  Concept

 

30) The chance to commit a fraud, conceal it, and avoid punishment is an example of:

  1. A) realization.
  2. B) perceived opportunity.
  3. C) rationalization.
  4. D) perceived pressure.

Answer:  B

Diff: 1

Question Type:  Concept

 

31) Finding good reasons for doing things that we REALLY know are wrong is an example of:

  1. A) realization.
  2. B) perceived opportunity.
  3. C) rationalization.
  4. D) perceived pressure.

Answer:  C

Diff: 1

Question Type:  Concept

 

32) Committing a fraud because of a drug habit or living beyond your means is an example of:

  1. A) realization.
  2. B) perceived opportunity.
  3. C) rationalization.
  4. D) perceived pressure.

Answer:  D

Diff: 1

Question Type:  Application

 

 

33) Committing a fraud because of easy access to a company’s assets is an example of:

  1. A) realization.
  2. B) perceived opportunity.
  3. C) rationalization.
  4. D) perceived pressure.

Answer:  B

Diff: 1

Question Type:  Application

34) If an employee has a low incentive to commit fraud, the employee does NOT have:

  1. A) realization.
  2. B) perceived opportunity.
  3. C) rationalization.
  4. D) perceived pressure.

Answer:  D

Diff: 1

Question Type:  Concept

 

35) Committing a fraud because of a gambling addiction is related to what part of the Fraud Triangle?

  1. A) Realization
  2. B) Perceived opportunity
  3. C) Rationalization
  4. D) Perceived pressure

Answer:  D

Diff: 1

Question Type:  Application

 

36) Committing a fraud because the employee feels “I deserve a pay raise. The company owes this to me” is related to what part of the Fraud Triangle?

  1. A) Realization
  2. B) Perceived opportunity
  3. C) Rationalization
  4. D) Perceived pressure

Answer:  C

Diff: 1

Question Type:  Application

 

37) ________ can be reduced through a good system of internal control.

  1. A) Realization
  2. B) Perceived opportunity
  3. C) Rationalization
  4. D) Perceived pressure

Answer:  B

Diff: 1

Question Type:  Concept

 

38) The factor that would make a person feel forced to steal money because of high medical bills would be:

  1. A) realization.
  2. B) perceived opportunity.
  3. C) rationalization.
  4. D) perceived pressure.

Answer:  D

Diff: 1

Question Type:  Application

39) The factor that might make a person steal money because “The company has more than its fair share,” would be:

  1. A) realization.
  2. B) perceived opportunity.
  3. C) rationalization.
  4. D) perceived pressure.

Answer:  C

Diff: 1

Question Type:  Application

 

40) Attempting to justify your actions is an example of:

  1. A) realization.
  2. B) perceived opportunity.
  3. C) rationalization.
  4. D) perceived pressure.

Answer:  C

Diff: 2

Question Type:  Concept

 

41) “I didn’t steal the money, I only borrowed it until I can pay it back” is an example of:

  1. A) realization.
  2. B) perceived opportunity.
  3. C) rationalization.
  4. D) perceived pressure.

Answer:  C

Diff: 2

Question Type:  Application

 

42) Removing any of the components of the Fraud Triangle:

  1. A) ensures that fraud will be eliminated.
  2. B) makes it more likely that fraud will increase.
  3. C) has no impact on the occurrence of fraud.
  4. D) makes it less likely that fraud will occur.

Answer:  D

Diff: 1

Question Type:  Concept

 

43) As it relates to accounting fraud, which of the following BEST describes “perceived pressure”?

  1. A) An element of the fraud triangle in which the employee feels a need to obtain cash or other assets
  2. B) An element of the fraud triangle in which the employee justifies his or her actions
  3. C) An element of the fraud triangle in which the employee believes there is a chance to commit and conceal fraud
  4. D) Intentional misrepresentation of the financial statements

Answer:  A

Diff: 1

Question Type:  Concept

44) Joe was overlooked for a promotion and decides to embezzle money because he feels like he deserved that raise. This is an example of, respectively:

  1. A) perceived opportunity, perceived pressure.
  2. B) perceived pressure, rationalization.
  3. C) perceived opportunity, rationalization.
  4. D) rationalization, perceived pressure.

Answer:  B

Diff: 1

Question Type:  Application

 

45) Larry is concerned that the company won’t meet expected earnings, so he overstates revenues, telling himself “it’s for a good reason!” This is an example of, respectively:

  1. A) perceived pressure, rationalization.
  2. B) perceived opportunity, rationalization.
  3. C) rationalization, perceived pressure.
  4. D) perceived opportunity, perceived pressure.

Answer:  A

Diff: 1

Question Type:  Application

 

46) Ron notices that there are no safeguards over company inventory, and tells himself that the company is probably going to write the inventory off as obsolete anyway. However, he doesn’t really need the inventory. Because there is no ________, Ron is less likely to commit fraud.

  1. A) perceived pressure
  2. B) rationalization
  3. C) perceived opportunity
  4. D) internal controls

Answer:  A

Diff: 1

Question Type:  Application

 

 

47) Sydney just found out that her dog needs an expensive operation. Sydney is a trusted employee in a small firm, and she knows that nobody double checks her deposits. However, her moral beliefs do not allow her to take advantage of the lack of controls. Because there is no _________, Sydney is less likely to commit fraud.

  1. A) perceived pressure
  2. B) rationalization
  3. C) perceived opportunity
  4. D) financial motivation

Answer:  B

Diff: 1

Question Type:  Application

48) Bill works a minimum wage job. Due to a drug habit, he is always short on funds; additionally, he feels underpaid, and says to himself the the company owes him. Bill knows that the company has security cameras placed above each register, and will do surprise cash counts throughout each shift; therefore, because there is no __________, Bill is less likely to commit fraud.

  1. A) perceived pressure
  2. B) rationalization
  3. C) perceived opportunity
  4. D) internal controls

Answer:  C

Diff: 1

Question Type:  Application

 

6.4   Know what a Certified Public Accountant (CPA) does

 

1) Audits confirm the validity and reliability of accounting information.

Answer:  TRUE

Diff: 1

Question Type:  Concept

 

2) Generally Accepted Auditing Standards are developed by the Securities and Exchange Commission.

Answer:  FALSE

Diff: 1

Question Type:  Concept

 

3) Certified Public Accountants perform external audits of a company to confirm that the financial statements are fairly presented according to GAAP.

Answer:  TRUE

Diff: 1

Question Type:  Concept

 

 

4) A qualified opinion is the best type of audit opinion.

Answer:  FALSE

Diff: 1

Question Type:  Concept

 

5) A disclaimer of opinion may be considered a red flag by investors.

Answer:  TRUE

Diff: 1

Question Type:  Concept

 

6) The agency that requires financial audits of publicly traded companies is the:

  1. A) Financial Accounting Standards Board.
  2. B) Securities and Exchange Commission.
  3. C) Federal Government.
  4. D) Internal Revenue Service.

Answer:  B

Diff: 1

Question Type:  Concept

7) The audit opinion that all companies try to achieve is a(n):

  1. A) disclaimer of opinion.
  2. B) qualified opinion.
  3. C) adverse opinion.
  4. D) unqualified opinion.

Answer:  D

Diff: 1

Question Type:  Concept

 

8) The audit opinion issued when there are material misstatements in the financial statements is the:

  1. A) disclaimer of opinion.
  2. B) qualified opinion.
  3. C) adverse opinion.
  4. D) unqualified opinion.

Answer:  C

Diff: 1

Question Type:  Concept

 

9) The audit opinion  issued when the financial statements are fairly presented without exception is the:

  1. A) disclaimer of opinion.
  2. B) qualified opinion.
  3. C) adverse opinion.
  4. D) unqualified opinion.

Answer:  D

Diff: 1

Question Type:  Concept

 

10) The audit opinion issued when the auditors are unable to express an opinion is the:

  1. A) disclaimer of opinion.
  2. B) qualified opinion.
  3. C) adverse opinion.
  4. D) unqualified opinion.

Answer:  A

Diff: 1

Question Type:  Concept

 

11) The audit opinion issued when the auditors are taking exception to a specific treatment of accounting information is the:

  1. A) disclaimer of opinion.
  2. B) qualified opinion.
  3. C) adverse opinion.
  4. D) unqualified opinion.

Answer:  B

Diff: 1

Question Type:  Concept

12) Another name for a “clean” audit opinion is a(n):

  1. A) disclaimer of opinion.
  2. B) qualified opinion.
  3. C) adverse opinion.
  4. D) unqualified opinion.

Answer:  D

Diff: 1

Question Type:  Concept

 

13) Another name for an “except for” audit opinion is a(n):

  1. A) disclaimer of opinion.
  2. B) qualified opinion.
  3. C) adverse opinion.
  4. D) unqualified opinion.

Answer:  B

Diff: 1

Question Type:  Concept

 

14) Certified public accountants are licensed by the:

  1. A) state.
  2. B) SEC.
  3. C) the college or university from which they earned their accounting degree.
  4. D) AICPA.

Answer:  A

Diff: 1

Question Type:  Concept

 

15) What is an audit opinion?

  1. A) Prepared by management, this is a written evaluation of the quality of work done by the independent accountants.
  2. B) Prepared by the independent accountants, this is a written evaluation of the company’s financial statements.
  3. C) Prepared by management, this is a written evaluation of the quality of work done by the internal accountants.
  4. D) Prepared by the independent accountants, this is a written evaluation of the goods or services offered for sale by the company.

Answer:  B

Diff: 1

Question Type:  Concept

 

16) A qualified opinion is issued when which of the following occurs?

  1. A) The auditors have taken exception to an accounting application.
  2. B) The auditors find the financial statements to be fairly presented in accordance with GAAP.
  3. C) The auditors were unable to gather the necessary information to issue a clean opinion.
  4. D) A and C are both instances when a qualified opinion is issued.

Answer:  D

Diff: 1

Question Type:  Concept

17) Under which circumstance would an adverse opinion NOT be issued?

  1. A) The financial statements are not fairly presented according to GAAP.
  2. B) The auditor lacks independence.
  3. C) There are material misstatements in the financial statements.
  4. D) All of the above would lead to an adverse opinion.

Answer:  B

Diff: 1

Question Type:  Concept

 

18) A bank would look at an audit opinion prior to making a loan, in order to determine:

  1. A) whether or not fraud has been committed in the company.
  2. B) whether or not they can rely on the financial statements.
  3. C) whether or not the net income is on par with industry standards.
  4. D) whether or not the company is in compliance with regulations.

Answer:  B

Diff: 1

Question Type:  Application

 

 

6.5   Know the legal and ethical responsibilities of an accountant, including the requirements of the Sarbanes-Oxley Act (SOX)

 

1) The Public Company Accounting Oversight Board (PCAOB) reports to the SOX.

Answer:  FALSE

Diff: 1

Question Type:  Concept

 

2) Many states require CPAs to participate in continuing education that deals with ethics.

Answer:  TRUE

Diff: 1

Question Type:  Concept

 

3) Behaving ethically and behaving legally are the same.

Answer:  FALSE

Diff: 1

Question Type:  Concept

 

4) Ethical conduct refers to how society requires people to act.

Answer:  FALSE

Diff: 1

Question Type:  Concept

 

5) A person who reports unethical behavior is called a whistleblower.

Answer:  TRUE

Diff: 1

Question Type:  Concept

 

6) The Sarbanes-Oxley Act requires a company’s stockholders to be more responsible.

Answer:  FALSE

Diff: 1

Question Type:  Concept

7) The Sarbanes-Oxley Act only applies to publicly traded companies.

Answer:  TRUE

Diff: 1

Question Type:  Concept

 

8) According to SOX, external auditors may report to either upper management or an audit committee.

Answer:  FALSE

Diff: 1

Question Type:  Concept

 

 

9) Persons who report unethical behavior are known as:

  1. A) snitches.
  2. B) whistleblowers.
  3. C) enforcers.
  4. D) writers of codes of ethics.

Answer:  B

Diff: 1

Question Type:  Concept

 

10) In response to a large number of high profile cases involving accounting fraud, the U. S. Congress in 2002 passed the:

  1. A) Internal Revenue Fraud Act.
  2. B) Securities and Exchange Commission Fraud Act.
  3. C) Sarbanes-Oxley Act.
  4. D) Federal Reserve Act.

Answer:  C

Diff: 1

Question Type:  Concept

 

11) The Sarbanes-Oxley act applies to:

  1. A) all corporations.
  2. B) all partnerships.
  3. C) all publicly traded companies.
  4. D) international companies doing business in the United States.

Answer:  C

Diff: 1

Question Type:  Concept

 

12) Under SOX, the external auditors must now report to:

  1. A) the management of the company being audited.
  2. B) an audit committee.
  3. C) the Securities and Exchange Commission.
  4. D) the Public Company Accounting Oversight Board.

Answer:  B

Diff: 1

Question Type:  Concept

13) Under SOX, the Chief Executive Officer and Chief Financial Officer must sign off on:

  1. A) all annual reports by the company.
  2. B) all quarterly reports by the company.
  3. C) all annual and quarterly reports by the company.
  4. D) the external auditor’s opinion.

Answer:  C

Diff: 2

Question Type:  Concept

 

 

14) Under Sarbanes-Oxley, those officers signing off on the reports must have evaluated the company’s internal control within the previous:

  1. A) 90 days.
  2. B) six months.
  3. C) nine months.
  4. D) year.

Answer:  A

Diff: 2

Question Type:  Concept

 

15) One of the biggest factors in implementing SOX was:

  1. A) reviewing the financial reports.
  2. B) establishing internal control procedures.
  3. C) disclosing deficiencies in internal controls.
  4. D) the cost of implementing the system.

Answer:  D

Diff: 2

Question Type:  Application

 

16) Kat Neese is an accountant at S&C Co. She suspects that her boss is making illegal adjustments to the accounting records after she gives them to him. If Kat doesn’t say anything or report her suspicions, she has:

  1. A) committed a crime.
  2. B) protected the company from a lawsuit.
  3. C) protected the stockholders.
  4. D) committed an unethical act.

Answer:  D

Diff: 2

Question Type:  Application

 

6.6   Know the difference between book value and market value of stockholders’ equity

 

1) Book value reports the past while market value focuses on the future.

Answer:  TRUE

Diff: 1

Question Type:  Concept

 

2) US GAAP uses the cost principle and is less conservative than international standards.

Answer:  FALSE

Diff: 1

Question Type:  Concept

3) Book value and market value refer to the same thing in regards to a company’s stock.

Answer:  FALSE

Diff: 1

Question Type:  Concept

 

4) Market value is the amount stockholders could expect to receive if they were to sell their stock.

Answer:  TRUE

Diff: 1

Question Type:  Concept

 

5) Sassycat, Inc. has a reported book value of $2 million and a market value of $10 million. This means that the company is valuing its stock at 5 times what shareholders are willing to pay.

Answer:  FALSE

Diff: 1

Question Type:  Application

 

6) ________ represents what a business was paid for its stock plus the profits that have been retained in the business.

  1. A) Historical value
  2. B) Market value
  3. C) Replacement value
  4. D) Book value

Answer:  D

Diff: 1

Question Type:  Concept

 

7) Using U.S. GAAP, book value typically ________ market value.

  1. A) is equal to
  2. B) is lower than
  3. C) is higher than
  4. D) bears no relationship to

Answer:  B

Diff: 1

Question Type:  Concept

 

8) Using IFRS, book value typically ________ market value.

  1. A) is closer to
  2. B) is lower than
  3. C) is higher than
  4. D) bears no relationship to

Answer:  A

Diff: 2

Question Type:  Concept

 

 

9) ________ represents what future owners will pay present owners for their business.

  1. A) Book value
  2. B) Market value
  3. C) Replacement value
  4. D) Future value

Answer:  B

Diff: 1

Question Type:  Concept

10) Renoir, Inc. has a reported book value of $20 million; however, the market value of Renoir’s stock is $64 million. This means:

  1. A) the company is not reporting its assets correctly on the Balance Sheet.
  2. B) the market thinks the company is overvalued.
  3. C) the market thinks the company is worth over three times what the Balance Sheet reports.
  4. D) the CEO should get a raise.

Answer:  C

Diff: 2

Question Type:  Application

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Description Financial Accounting, 4e (Kemp) Chapter 6 The Challenges of Accounting: Standards, Internal Control, Audits, Fraud, and Ethics 6.1 Understand the importance of US GAAP and how it differs from accounting standards in other countries (IFRS) 1) For inventory costing purposes, GAAP and IFRS differ in that GAAP allows the use of FIFO, whereas IFRS prohibits the use of FIFO. Answer: FALSE Diff: 1 Question Type: Concept 2) The process CPAs use to confirm that financial reports conform to GAAP is called a review. Answer: FALSE Diff: 1 Question Type: Concept 3) U.S. GAAP has been organized into what is called the Accounting Standards Codification. Answer: TRUE Diff: 1 Question Type: Concept 4) Currently, most European countries are using International Financial Reporting Standards. Answer: TRUE Diff: 1 Question Type: Concept 5) The U.S. is now using International Financial Reporting Standards instead of the old GAAP system. Answer: FALSE Diff: 1 Question Type: Concept 6) IFRS is considered a principles-based system, while U.S. GAAP is considered a rules-based system. Answer: TRUE Diff: 2 Question Type: Concept 7) For accounting information to be useful it must be all of the following EXCEPT: A) reliable. B) understandable. C) economical. D) relevant. Answer: C Diff: 1 Question Type: Concept 8) The government agency that approves U.S. GAAP is the: A) Senate. B) Department of Commerce. C) Department of the Treasury. D) Securities and Exchange Commission. Answer: D Diff: 1 Question Type: Concept 9) U.S. GAAP’s overriding principles of accounting are written by the: A) FASB. B) SEC. C) IRS. D) IASB. Answer: A Diff: 1 Question Type: Concept 10) IFRS are developed by the: A) European Union. B) Financial Accounting Standards Board. C) International Accounting Standards Board. D) International Monetary Fund. Answer: C Diff: 1 Question Type: Concept 11) The International Accounting Standards Board was formed in: A) 2001. B) 1991. C) 1981. D) 1971. Answer: A Diff: 1 Question Type: Concept 12) In terms of valuation, U.S. GAAP generally uses ________, while IFRS generally uses ________. A) market values, historical values B) historical values, historical values C) historical values, market values D) market values, market values Answer: C Diff: 1 Question Type: Concept 13) The process CPAs use to confirm that financial reports conform to GAAP is known as a(n): A) examination. B) audit. C) review. D) confirmation. Answer: B Diff: 1 Question Type: Concept 14) Contingent liabilities are ________ under GAAP, and ________ under IFRS Recorded if probable Recorded if possible III. Recorded if reasonably estimated A) GAAP I and II; IFRS I or II B) GAAP I or III; IFRS I and II C) GAAP I; IFRS I and III D) GAAP I and III; IFRS I Answer: D Diff: 1 Question Type: Concept 15) Under US GAAP and IFRS, research and development costs are: Research costs are expensed as incurred Development costs are expensed as incurred III. Research costs are capitalized and amortized over time Development costs are capitalized and amortized over time. A) GAAP I and II; IFRS II and III B) GAAP I and IV; IFRS III and IV C) GAAP I and II; IFRS I and IV D) GAAP II and III; IFRS II and III Answer: C Diff: 1 Question Type: Concept 6.2 Understand the importance and role of internal control 1) An organization’s employees are responsible for the design and implementation of the internal control system. Answer: FALSE Diff: 1 Question Type: Concept 2) One objective of an internal control system is to safeguard the assets of a company. Answer: TRUE Diff: 1 Question Type: Concept 3) Ensuring compliance with laws and regulations is an example of what following GAAP can do for a company. Answer: FALSE Diff: 1 Question Type: Concept 4) According to the text, there are three key elements that affect an organization’s internal control system. Answer: FALSE Diff: 1 Question Type: Concept 5) Management and staff attitudes toward internal control are an important part of control activities. Answer: FALSE Diff: 1 Question Type: Concept 6) The ongoing process that identifies and analyzes potential problems in an organization and takes steps to reduce those problems is risk assessment. Answer: TRUE Diff: 1 Question Type: Concept 7) Separation of duties is part of the control environment of an internal control system. Answer: FALSE Diff: 1 Question Type: Concept 8) The delegation of authority and responsibility is part of the control environment of an internal control system. Answer: TRUE Diff: 1 Question Type: Concept 9) Two or more people must work together to commit fraud. Answer: FALSE Diff: 1 Question Type: Concept 10) A properly designed internal control system can guarantee that fraud will not occur. Answer: FALSE Diff: 1 Question Type: Concept 11) In large companies, it may not be cost effective to properly segregate duties. Answer: FALSE Diff: 1 Question Type: Concept 12) Internal control is a comprehensive system that helps an organization do all of the following EXCEPT: A) safeguard assets. B) safeguard liabilities. C) operate efficiently and effectively. D) ensure compliance with applicable laws and regulations. Answer: B Diff: 1 Question Type: Concept 13) Internal control systems: A) are the same from company to company. B) are regulated by the Securities and Exchange Commission. C) vary from company to company. D) guarantee the safeguard of assets. Answer: C Diff: 1 Question Type: Concept 14) Which element of internal control deals with establishing procedures for things such as handling of incoming checks? A) Monitoring B) Control environment C) Control activities D) Risk assessment Answer: C Diff: 1 Question Type: Concept 15) Which element of internal control deals with the oversight of the internal control system? A) Monitoring B) Control environment C) Information and communication D) Risk assessment Answer: A Diff: 1 Question Type: Concept 16) Which element of internal control deals with the establishment of a company’s policies? A) Control environment B) Control activities C) Information and communication D) Risk assessment Answer: B Diff: 1 Question Type: Concept 17) Which element of internal control deals with a company having large amounts of cash on hand? A) Control environment B) Control activities C) Information and communication D) Risk assessment Answer: D Diff: 1 Question Type: Concept 18) Properly supervising employees would be an example of what element of internal control? A) Control environment B) Control activities C) Information and communication D) Risk assessment Answer: B Diff: 1 Question Type: Concept 19) Establishing a hierarchy to let all management and employees know what is going on in a company would be an example of what element of internal control? A) Risk assessment B) Monitoring C) Information and communication D) Control environment Answer: C Diff: 1 Question Type: Concept 20) Details that support business transactions make up what is called: A) internal control. B) monitoring. C) risk assessment. D) an audit trail. Answer: D Diff: 1 Question Type: Concept 21) Which of the following would NOT be considered a control activity? A) Keeping accounting records B) Having written job descriptions C) Not having employees take vacations D) Changing passwords regularly Answer: C Diff: 2 Question Type: Concept 22) Which of the following would NOT be considered part of the control environment? A) Having integrity and ethical values B) Assessing chances of fraud C) Having competent workers D) Having a leadership philosophy Answer: B Diff: 2 Question Type: Concept 23) Which of the following would NOT be considered part of monitoring in an internal control system? A) Having an audit trail B) Assessing performance of the system C) Locating weakness of the system D) Management involvement Answer: A Diff: 2 Question Type: Concept 24) Which of the following would be considered a part of control activities in an internal control system? A) Having large quantities of cash on hand B) Separation of duties C) Having a leadership philosophy D) Locating weaknesses in an internal control system Answer: B Diff: 1 Question Type: Concept 25) Having security measures, proper authorization channels, and restrict...
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