Full Test Bank Financial Disclosure & Ethics Chapter 17

Chapter 17

Multiple choice

1. Footnotes to financial statements should not be used to
2. Describe the nature and effect of a change in accounting principles
3. Identify substantial differences between book and tax income
4. Correct an improper financial statement presentation
5. Indicate bases for valuing assets
6. Assuming that none of the following have been disclosed in the financial statements, the most appropriate item for footnote disclosure is the
7. Collection of all receivables subsequent to year end
8. Revision of employees’ pension plan
9. Retirement of president of company and election of new president
10. Material decrease in the advertising budget for the coming year and its anticipated effect upon income
11. The primary responsibility for the adequacy of disclosure in the financial statements and footnotes rests with the
12. Partner assigned to the engagement
13. Auditor in charge of fieldwork
14. Staff who draft the statements and footnotes
15. Client
16. Which of the following situations would require adjustment to or disclosure in the financial statements?
17. A merger discussion
18. The application for a patent on a new production process
19. Discussions with a customer that could lead to a 40 percent increase in the client’s sales
20. The bankruptcy of a customer who regularly purchased 30 percent of the company’s output
21. Which of the following should be disclosed in the Summary of Significant Accounting Policies?
22. Composition of plant assets
23. Pro forma effect of retroactive application of an accounting change
24. Method of depreciation
25. Maturity dates of long-term debt
26. An Accounting Principles Board Opinion was concerned with disclosure of accounting policies. A singular feature of this particular opinion is that it
27. Calls for disclosure of every accounting policy followed by a reporting entity
28. Applies to immaterial items whereas most opinions are concerned solely with material items
29. Applies also to accounting policy disclosures by not-for-profit entities, whereas most opinions are concerned solely with accounting practices of profit-oriented entities
30. Prescribes a rigid format for the disclosure of policies to be reported upon
31. Which of the following should be disclosed in a Summary of Significant Accounting Policies?
    1. Depreciation method followed
    2. Types of executory contracts
    3. Claims of equity holders
    4. Amount for cumulative effect of change in accounting principle
32. Significant accounting policies may not be
33. Selected on the basis of judgment
34. Selected from existing acceptable alternatives
35. Unusual or innovative in application
36. Omitted from financial statement disclosure on the basis of judgment
37. The stock of Gates, Inc., is widely held, and the company is under the jurisdiction of the Securities and Exchange Commission. In the annual report, information about the significant accounting policies adopted by Gates should be
38. Omitted because it tends to confuse users of the report
39. Included as an integral part of the financial statements
40. Presented as supplementary information
41. Omitted because all policies must comply with the regulations of the Securities and Exchange Commission
42. The basic purpose of the securities laws of the United States is to regulate the issue of investment securities by
43. Providing a regulatory framework in those states which do not have their own securities laws
44. Requiring disclosure of all relevant facts so that investors can make informed decisions
45. Prohibiting the issuance of securities which the Securities and Exchange Commission determines are not of investment grade
46. Channeling investment funds into uses which are economically most important
47. The Securities and Exchange Commission (SEC) was established in1934 to help regulate the U.S. securities market. Which of the following statements is true concerning the SEC?
48. The SEC prohibits the sale of speculative securities.
49. The SEC regulates only securities offered for public sale.
50. Registration with the SEC guarantees the accuracy of the registrant’s prospectus.
51. The SEC’s initial influence and authority has diminished in recent years as the stock exchanges have become more organized and better able to police themselves.
52. One of the major purposes of federal security regulation is to
53. Establish the qualifications for accountants who are members of the profession
54. Eliminate incompetent attorneys and accountants who participate in the registration of securities to be offered to the public
55. Provide a set of uniform standards and test for accountants, attorneys, and others who practice before the Securities and Exchange Commission
56. Provide sufficient information to the investing public who purchases securities in the marketplace
57. Under the Securities Act of 1933, subject to some exceptions and limitations, it is unlawful to use the mails or instruments of interstate commerce to sell or offer to sell a security to the public unless
58. A surety bond sufficient to cover potential liability to investors is obtained and filed with the Securities and Exchange Commission
59. The offer is made through underwriters qualified to offer the securities on a nationwide basis
60. A registration statement has been properly filed with the Securities and Exchange Commission, has been found to be acceptable, and is in effect
61. The Securities and Exchange Commission approves of the financial merit of the offering
62. Major, Major, and Sharpe, CPA’s, are the auditors of MacLain industries. In connection with the public offering of $10 million of MacLain securities, Major expressed an unqualified opinion as to the financial statements. Subsequent to the offering, certain misstatements and omissions are revealed. Major has been sued by the purchasers of the stock offered pursuant to the registration statement, which include the financial statements audited by Major. In the ensuing lawsuit by the MacLain investors, Major will be able to avoid liability if
63. The errors and omissions were caused primarily by MacLain
64. It can be shown that at least some of the investors did not actually read the audited financial statements
65. It can prove due diligence in the audit of the financial statements of MacLain
66. MacLain had expressly assumed any liability in connection with the public offering
67. A major impact of the Foreign Corrupt Practices Act of 1977 is that registrants subject to the Securities Exchange Act of 1934 are now required to
68. Keep records which reflect the transactions and dispositions of assets and maintain a system of internal accounting controls
69. Provide access to records by authorized agencies of the federal government
70. Records all correspondence with foreign nations
71. Prepare financial statements in accordance with international accounting standards
72. The Securities and Exchange Commission’s fraud rule prohibits trading on the basis of inside information of a business corporation’s stock by
73. Officers
74. Officers and directors
75. All officers, directors, and stockholders
76. Officers, directors, and beneficial holders of 10 percent of the corporation’s stock
77. A CPA is subject to a criminal liability if the CPA
78. Refuses to turn over the working papers to the client
79. Performs an audit in a negligent manner
80. Willfully omits a material fact required to be stated in a registration statement
81. Willfully breaches the contract with the client
82. For interim financial reporting, an inventory loss from a temporary market decline in the first quarter which can reasonably be expected to be restored in the fourth quarter
    1. Should be recognized as a loss proportionately in each of the first, second, third, and fourth quarters
    2. Should be recognized as a loss proportionately in each of the first, second, and third quarters
    3. Need not be recognized as a loss in the first quarter
    4. Should be recognized as a loss in the first quarter
83. An inventory loss from a market decline occurred in the first quarter that was not expected to be restored in the fiscal year. For interim financial reporting purposes, how would the dollar amount of inventory in the balance sheet be affected in the first and fourth quarters?

First Quarter Fourth Quarter

a. Decrease No effect

b. Decrease Increase

c. No effect Decrease

d. No effect No effect

20. A segment of a business enterprise is to be reported separately when the revenues of the segment exceed 10 percent of the

a. Combined net income of all segments reporting profits

b. Total combined revenues of all segments reporting profits.

c. Total revenues of all the enterprise's industry segments.

d. Total export and foreign sales.

.

21. Footnotes to a company’s financial statements are used to

a. More fully explain certain items in the financial statements.

b. Reflect financial notes personalized by the company’s executive team.

c. Show the detail of salaries of every employee.

1. Justify fraudulent business practices.

22. The statement that “the financial statements were prepared in accordance with generally accepted accounting principles” is found in the

a. Management letter

b. Management discussion and analysis

c. Footnotes to the balance sheet.

1. Auditor’s report.
2. According to the disclosure requirements outlined in Statement of Accounting Concepts No. 5, the following is an example supplementary information that should be disclosed because it affects an area that is directly affected by existing FASB Standards
3. Management discussion and analysis.
4. Segment information.
5. Accounting policies.
6. A statement of cash flows.
7. Which of the following post-balance-sheet events would require adjustment of the accounts before issuance of the financial statements?
   1. Loss on a lawsuit, the outcome of which was deemed uncertain at year end
   2. Loss of plant as a result of fire
   3. Changes in the quoted market prices of securities held as an investment
   4. Loss on an uncollectible account receivable resulting from a customer's major flood loss
8. Norris Company settled a lawsuit in February for an amount that was significantly different from the amount that was originally accrued as an estimate of potential loss. The company’s year-end is December 31 and its financial statements are issued in March. This is an example of
9. A subsequent event that must be disclosed, but because it happened after the balance sheet date no adjustment is needed.
10. A subsequent event that provided evidence of a condition that did not exist at the balance sheet date.
11. A subsequent event that need not be disclosed because it did not occur before the company’s yearend.
12. A subsequent event that provided further evidence of conditions that existed on the balance sheet.
13. Footnote disclosure that summarizes information that does not meet the measurement and reporting requirements for presentation in a company’s financial statements, but is useful to informed readers, is required in order to meet the concept of
14. Understandability.
15. Reliability.
16. Representational faithfulness.
17. Cost/benefit.

1. Conboy Corporation disclosed in the notes to its financial statements that a significant number of its unsecured trade account receivables are with companies that operate in the same industry. This disclosure is required to inform financial statement users of the existence of
   1. Concentration of market risk.
   2. Risk of measurement uncertainty.
   3. Off-balance sheet risk of accounting loss.
   4. Concentration of credit risk.
2. The inclusion of MD&A (Management Discussion and Analysis) in annual reports is required by the
3. FASB.
4. AICPA.
5. SEC.
6. APB.
7. The Management Discussion and Analysis section of a company's annual report covers which of the following three items:
   1. Income statement, balance sheet, and statement of owners' equity.
   2. Income statement, balance sheet, and statement of cash flows.
   3. Changes in the stock price, mergers, and acquisitions.
   4. Liquidity, capital resources, and results of operations.
8. Which SEC reporting form is the normal registration statement for securities to be sold to the public?
9. Form 10.
10. Form 10-K.
11. Form 10-Q.
12. Proxy Statement.
13. Which of the following Federal Acts required the SEC to develop guidelines for all publicly traded companies to report on management’s responsibilities for, and assessment of, the internal control system?
    1. Securities Act of 1933,
    2. The Securities Exchange Act of 1934
    3. The Foreign Corrupt Practices Act of 1977
    4. The Sarbanes–Oxley Act of 2002
14. The Sarbanes-Oxley (SOX) Act of 2002 created the PCAOB. The PCAOB
15. Is primarily responsible for establishing generally accepted accounting principles.
16. Provides legal and expert services to CPA firms when they are involved in class-action law suits.
17. Oversees the conduct of acts that are intended to influence, coerce, manipulate, or mislead a CPA when he/she is preparing a company’s financial statements.
18. Oversees audits of companies whose securities are public traded.
19. A disclaimer of opinion is issued when
20. All informative disclosures have not been made in the financial statements.
21. Circumstances prevent the auditor from performing all audit procedures necessary to comply with generally accepted auditing standards.
22. The financial statements are not prepared in accordance with generally accepted accounting principles.
23. There is a potential going concern issue.
24. APB Opinion No. 28 (FASB ASC 270) indicates that
    1. The discrete view is the most appropriate approach to take in preparing interim financial reports.
    2. The same accounting principles used for the annual report should be employed for interim reports.
    3. All companies that issue an annual report should issue interim financial reports.
    4. The three basic financial statements should be presented each time an interim period is reported upon.
25. Companies should disclose which of the following in interim reports
    1. Changes in accounting principles.
    2. Seasonal revenue, cost, or expenses.
    3. Basic and diluted earnings per share
    4. All of the above
26. The discrete view of interim reporting
27. Holds that an interim period is a separate accounting period; thus, revenues and expenses should be treated as though they occurred only in one period.
28. Holds that revenues and expenses should be allocated to the various interim periods.
29. Holds that revenues and expenses should be reported as they occur.
30. Holds that an interim period is an integral part of the annual reporting period.
31. The Securities act of 1933
32. Regulates the trading of securities of publicly held companies.
33. Regulates the initial public sale and distribution of a corporation’s securities.
34. Addresses the personal duties of corporate officers.
35. Specifies information that is to be contained in a company’s annual report.
36. The Sarbanes-Oxley (SOX) Act of 2002 created the PCAOB. The PCAOB
37. Is primarily responsible for establishing generally accepted accounting principles.
38. Provides legal and expert services to CPA firms when they are involved in class-action law suits.
39. Oversees the conduct of acts that are intended to influence, coerce, manipulate, or mislead a CPA when he/she is preparing a company’s financial statements.
40. Oversees audits of companies whose securities are public traded.

Essay

1. List the building blocks to disclosure described in SFAC No. 5.
2. The scope of recognition and measurement
3. Basic financial statements
4. Areas directly affected by existing FASB standards
5. Financial reporting
6. All information useful for investment, credit, and similar decisions.
7. List and discuss the types of information commonly disclosed in the footnotes to corporate financial statements.
   1. Accounting policies. APB Opinion No. 22, “Disclosure of Accounting Policies” (See FASB ASC 235), required all companies to disclose both the accounting policies the firm follows and the methods it uses in applying those policies. Typically, companies disclose this information in a Summary of Significant Accounting Policies preceding the footnotes. Specifically, APB Opinion No. 22 required that the accounting methods and procedures involving the following be disclosed:
      1. A selection from existing acceptable alternatives.
      2. Principles and methods peculiar to the industry in which the reporting entity operates.
      3. Unusual or innovative applications of GAAP.
   2. Schedules and exhibits. —Firms typically report schedules or exhibits concerning long-term debt and income tax, for example. The purpose of supplementary schedules is to improve the understandability of the financial statements. They may be used to highlight trends, such as five-year summaries; or they may be required by FASB pronouncements, such as information on current costs.
   3. Explanations of financial statement items. —Some items require additional explanation so that users can make sense of the reported information. Pensions and postretirement benefits are two examples. Parenthetical disclosures are contained on the face of the financial statements (usually on the balance sheet). They are generally used to describe the valuation basis of a particular financial statement element but also may provide other kinds of information, such as the par value and number of shares authorized and issued for various classes of a company’s stock
   4. General information about the company. —Occasionally, firms face events that may impact their financial performance or position but cannot yet be recognized on the financial statements. In that case, investors have an interest in learning this information as soon as possible. Information concerning subsequent events and contingencies are two examples.
8. List and discuss the recognition criteria for the two types of subsequent events.
9. The AICPA recently redrafted the majority of the auditing sections in the Codification of
   • • 1. Form an opinion on whether the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework.
       2. In order to form that opinion, conclude whether he or she has obtained reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error.
       3. Evaluate whether the financial statements are prepared, in all material respects, in accordance with the requirements of the applicable financial reporting framework. This evaluation should include consideration of the qualitative aspects of the entity’s accounting practices, including indicators of possible bias in management’s judgments.
       4. Evaluate whether, in view of the requirements of the applicable financial reporting framework the financial statements adequately disclose the significant accounting policies selected and applied.
       5. The evaluation about whether the financial statements achieve fair presentation should also include consideration of the following:
10. In most cases an audit will result in the issuance of an unmodified opinion List and discuss the paragraphs contained in a standard unmodified audit option and how they differ from previous requirements.
    • • 1. Introductory Paragraph—This paragraph identifies the company being audited and identifies each financial statement including the date or period covered. This paragraph has been changed to include a reference to the notes of the financial statements.
        2. Management’s Responsibility Paragraph—Expanded from previous requirements to include language that management is responsible for the fair presentation of the financial statements and is also responsible for the design, implementation, and maintenance of the internal controls that are relevant to the financial reporting process. This section now includes the new heading Management’s Responsibility for the Financial Statements.
        3. Auditor’s Responsibility Paragraph—Expanded to include language that the procedures performed depend on auditor’s judgment, including risk assessment. There is an additional requirement to state that the internal controls over financial reporting are considered to design appropriate audit procedures, but that the auditor does not express an opinion on the effectiveness of the internal controls. This section includes the new heading Auditor’s Responsibility.
        4. Auditor’s Opinion—This paragraph is unchanged from previous requirements to state that the financial statements are presented fairly in accordance with generally accepted accounting principles This section will include the new heading Opinion.
11. In the event the auditor cannot satisfy the criteria necessary to issue an unmodified audit opinion, he or she will issue a modified opinion. What are the types of modified opinions and what is that decision dependent upon?
    1. The nature of the matter giving rise to the modification (that is, whether the financial statements are materially misstated or, in the case of an inability to obtain sufficient appropriate audit evidence, may be materially misstated).
    2. The auditor’s professional judgment about the pervasiveness of the effects or possible effects of the matter on the financial statements.
       • • 1. Are not confined to specific elements, accounts, or items of the financial statements;
           2. If they are so confined, represent or could represent a substantial proportion of the financial statements; or
           3. In regard to disclosures, are fundamental to users’ understanding of the financial statements.

The auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are material but not pervasive to the financial statements, or

The auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, but the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be material but not pervasive.

1. In April 2013, the FASB issued Accounting Standards Update 2013-07, Presentation of Financial Statements (Topic 205): Liquidation Basis of Accounting.
   1. Define the term liquidation as used in this pronouncement.
   2. What information does the ASU require to be disclosed by entities subject to its provisions?
2. What information is required to be included in the Management Discussion and
3. Define market risk and the types of market risk to be disclosed in item &a of a company’s MD&A.
4. Interest rates
5. Currency exchange rates
6. Commodity prices
7. Equity prices
8. How is the quantitative information about market risk–sensitive instruments to be disclosed according to the SEC?
9. Tabular presentation of fair value information and contract terms relevant to determining future cash flows, categorized by expected maturity dates.
10. Sensitivity analysis expressing the potential loss in future earnings, fair values, or cash flows from selected hypothetical changes in market rates and prices.
11. Value at risk disclosures expressing the potential loss in future earnings, fair values, or cash flows from market movements over a selected period and with a selected likelihood of occurrence.
12. What are the purposes of the letter to stockholders?
13. Is responsible for preparation and integrity of statements.
14. Has prepared statements in accordance with GAAP.
15. Has used their best estimates and judgment.
16. Maintains a system of internal controls.
17. List and explain the three types of financial analysts.
18. Discuss the general purposes of:
    1. The Securities Act of 1933
    2. The Securities Exchange Act of 1934
    3. The Foreign Corrupt Practices Act of 1977
19. Discuss three general provisions of the Sarbanes-Oxley Act.
20. The establishment of accounting standards. —The SEC is authorized to recognize as generally accepted accounting principles those that are established by a standard-setting body that meet all of the criteria within the Sarbanes-Oxley Act, which include requirements that the standard-setting body:
21. Discuss the general requirements of Sections 404(a) and 404(b) of the Sarbanes-Oxley Act.
22. Discuss the framework for analysis that may be used in the resolution of ethical dilemmas.
23. List the six criteria identified by the Anderson report and are indicative of effective auditor performance.
24. Safeguard the public’s interest.
25. Recognize the CPA’s paramount role in the financial reporting process.
26. Help ensure quality performance and eliminate substandard performance.
27. Help ensure objectivity and integrity in public service.
28. Enhance the CPA’s prestige and credibility.
29. Provide guidance as to proper conduct
30. List the four sections of the AICPA Code of Professional Conduct.

Principles. —the standards of ethical conduct stated in philosophical terms.

Rules of conduct. —minimum standards of ethical conduct.

Interpretations. —interpretations of the rules by the AICPA Division of Professional Ethics.

1. In January 2014, the AICPA’s Professional Ethics Executive Committee (PEEC) approved a revised AICPA Code of Professional Conduct that restructures the Code to improve its readability and converges the Code with international standards. The revised Code contains three sections. Part 1 contains the rules of conduct and interpretations that are applicable to members in public practice. For AICPA members in public practice who provide attest services to clients, there is a conceptual framework for independence that focuses on the specific threats to independence and certain examples of threats associated with a specific relationship or circumstance are identified. What are these identified threats? How should a public practice member deal with other threats?

• Adverse interest threat. The threat that an AICPA member will not act with objectivity because the member’s interests are in opposition to the interests of an attest client.
• Familiarity threat. The threat that, because of a long or close relationship with an attest client, an AICPA member will become too sympathetic to the attest client’s interests or too accepting of the attest client’s work or product.
• Management participation threat. The threat that an AICPA member will take on the role of attest client management or otherwise assume management responsibilities for an attest client.
• Undue influence threat. The threat that an AICPA member will subordinate his or her judgment to that of an individual associated with an attest client or any relevant third party due to that individual’s reputation or expertise, aggressive or dominant personality, or attempts to coerce or exercise excessive influence over the member.

In other cases, not covered by these specific examples, an AICPA member is to use a threat and safeguards approach.