Financial Fraudulent Reporting generally occurs in 3 ways, what are they? Show deception, misrepresentation, intentional misapplication What are unintentional acts and may involve mistakes in gathering or processing data, unreasonable accounting estimates arising from oversight or misinterpretation of facts, or mistakes in the applications of GAAP? errors What involves an incentive or pressure to commit an illegal act, a perceived opportunity to do so, and some rationalization of the act? fraud What act places additional requirements upon on public companies registered with the SEC and their auditors when the illegal act has a material effect on financial statements? Private Securities Litigation Reform Act (PSLRA) Code 1.700 of the AICPA Code of Professional Conduct prohibits CPAs from doing what? Disclosing information to outside parties (including illegal acts), unless the auditor has a legal duty to do so What are the three personality types with the most risk of committing fraud? Narcissism, Machiavellianism, Psychopathy What should should the audit committee assess about management for fraud risk management? They should evaluate management's identification of fraud risks, implementation of anti-fraud measures, and creation of appropriate tone at the top Whenever the auditor has determined that there is evidence a fraud may exist, the matter should be brought to... the attention of the appropriate level of management Section 302 of SOX requires... certification of financial statements by the CEO and CFO for public companies What are the two main type of audit reports? Unmodified or Standard Report for nonpublic companies (under AICIPA requirements) & Unqualified Report for public companies (under PCAOB requirements) What are the five main things that should be communicated between the registered public accounting firm and the audit committee of a public entity under PCAOB standards? significant accounting policies and practices, critical accounting policies and practices, critical accounting estimates, significant unusual transactions, significant difficulties What is an example of a significant difficulty encountered during an audit? An unwillingness from management to provide information needed for the audit When did the new PCAOB guidelines regarding the auditor's report on audit of financial statements when the auditor expresses an unqualified opinion go into effect?
December 15th, 2017. What is the purpose behind the PCAOB's rule for disclosing Critical Audit Matters (CAMs)? To improve audit quality For each CAM, the auditor must: identify the CAM; describe the principle considerations that led the auditor to determine that the matter is a CAM; describe how the CAM was addressed in the audit; refer to the relevant financial statement accounts or disclosures that related to CAM The PCAOB adopted new rules and amendments regarding disclosure of engagement partner and certain other participants in audits that were to be enacted when? December 15th, 2015 An auditor should give a(n) _______________ or ________________ opinion when the financial statements "present fairly" financial position, results of operations, and cash flows. unmodified or unqualified opinion What is a paragraph in auditor's report that refers to a matter appropriately represented or disclosed in the financial statements? emphasis of matter paragraph What is a paragraph included in the auditor's report that refers to a matter other than those presented or disclosed in the financial statements that the auditors deem to be relevant to users' understanding of the audit, auditor's responsibilities, or the auditor's report? other matter paragraph An auditor should give a(n) _______________ opinion when statements or data contain any departure from GAAP that has a material effect on the statements or data taken as a whole. modified opinion When should an auditor modify an opinion? When there is evidence that financial statements are materially misstated OR when there is not sufficient evidence available to say the financial statements are free from material misstatements An auditor should give a(n) ______________ opinion when the auditor concludes (based on the audit evidence obtained) that misstatements are material but not pervasive in financial statements. qualified opinion A(n) ________________ opinion would be appropriate when an auditor concludes (based on the audit evidence obtained) that misstatements are both material and pervasive in financial statements. adverse opinion A(n) ________________ opinion is issued when an auditor cannot obtain sufficient evidence on which to base an audit opinion disclaimer of opinion When would a withdrawal be appropriate from an audit engagement? if there is a significant conflict existing between management OR the auditor decides management cannot be trusted What audit concept provides that an auditor should exercise a reasonable level of care to avoid charges of negligence and possible liability to the client? reasonable assurance What audit concept recognizes that some matters are important to the fair representation of financial statements, while others are not? materiality What are the standards an independent auditor plans, conducts, and reports the results of an audit in accordance to? Generally Accepted Auditing Standards (GAAS) What are specific acts performed by the auditor to gain evidence about whether specific assertions are being met? audit procedures SOX 404 requires... registered accounting firms to assess the effectiveness of internal controls What are the 4 major stages of an audit dispute? Events that result in losses for users of the What type of law evolves from legal opinions issued by judges in deciding a case? common law What type of law reflects legislation passed at the state or federal level that establishes certain courses of conduct that must be adhered to by covered parties? statutory law What are the four basic theories of liabilities? intent, recklessness, negligence, strict liability What are some possible causes for audit failures? breach of contract, tort, deceit, and fraud Auditor must perform professional services with... due care What is called when an accountant has a contractual obligation to the client? privity relationship What must a plaintiff demonstrate to file a lawsuit against an accountant who fails to live up to the terms of their contract? economic loss, auditors breached contract, auditors failed to exercise due care, auditor's breach caused the loss What is the liability theory MOST COMMONLY referred to as an "accounting malpractice" claim? professional negligence What are the 4 elements of a professional negligence action against an accountant? duty, breach of duty, damage, causation What can be regarded as a defense to the liability of the accountant for malpractice? contributory negligence of the client What is the "middle ground" approach followed by most states which expands the class of third parties that can successfully sue auditor for negligence beyond near-privity to limited group whose reliance is (actually) foreseen, but not necessarily known to the auditor? actually foreseen third party concept What expands an accountants' legal liability for negligence to any third parties (foreseen third party) identified as intended recipients of the work? Restatement (second) of Law of Torts What allows for CPAs to prepare financial statements without the burden of submitting a compilation report? SSARS 21 Auditors were found guilty of what in Phar-Mor vs Coopers & Lybrand? fraud under both common and statutory law even though they had no intent to deceive What are a few defenses auditors can use as defense against third party lawsuits? the 3rd party was negligent, the 3rd party didn't suffer a loss, any loss to the 3rd party was caused by other events What regulates the disclosure of information in a registration statement for a new public offering of securities? Securities Act of 1933 Accountants who assist in the preparation of the registration statement are civilly liable if the registration statement: contains untrue statements of material facts or omits material facts required by statute or regulation What imposes a liability on issuer companies and others, including auditors, for losses suffered by 3rd parties when false or misleading information included in a registration statement Section 11 of 1933 Securities Act What is the term for a defense where an accountant might argue that the false or misleading information is not material and thus should not have had an impact on the purchaser's decision making process? materiality defense What is the term for a defense where an accountant proves that a reasonable investigation of the financial statements of the issuer and controlling persons was conducted? due diligence defense What regulates subsequent trading and ongoing reporting of securities sold on national stock exchange? Securities Act of 1934 What imposes liability on any person who makes a material false or misleading statement in documents filed with the SEC? Section 18 of Securities Exchange Act Section 10(b) and Rule 10b-5 does what? forbids fraud in connection with the purchase or sale of securities What amended the Securities Exchange Act of 1934 by adding Section 10A, "Audit Requirements?" Private Securities Litigation Reform Act (PSLRA) What is the term for attempting harmonize holdings of courts that led to varying standards of auditor legal liability? particularity standard What is proportionate liability? Payment by an individual defendent based on the degree of fault of the individual. What imposes duties on auditors to disclose and explain in their reports material control weaknesses and their effect on the overall audit process? PCAOB Auditing Standards No. 5 What establishes standards of acceptability of payments (facilitating/bribes) made by U.S. multinational entities to foreign government officials? Foreign Corrupt Practices Act (FCPA) What is the difference between Facilitating Payments and a Bribe? A bribe is a payment given to someone to perform an act outside of their normal range of duties where as a facilitation fee is payment made to speed up the process of a task within their normal range of duties Why would a company voluntarily self-disclose misconduct like fraud? hope that they will receive a declination of penalties (absent aggravating circumstances) What is one major approach in which financial statements are manipulated? Reporting non-GAAP earnings What deals with altering operating decisions to affect cash flows and current income for a period? operation earnings management What deals with using the flexibility in accounting standards to alter earnings numbers? accounting earnings management Why would a company take part in income smoothing? Investors are willing to pay more for stocks with steady and predictable earnings streams Which individual argued for the theory of earnings management? Thomas E McKee Among multiple surveys, one constant appeared in how managers and accountants felt about accounting decisions. What is it? Manipulating earnings via operating decisions is more ethically acceptable than manipulation by accounting methods What is the most serious operating earnings management infraction? burying scrap costs in other expenses Dichev's study found that: CFOs believe that earnings are high quality when they are sustainable or backed by actual cash flows What focuses on sales revenues or earnings expectations in light of industry and macro-economic trends? forward looking statements What is called when a company sets aside amounts of revenue in "reserve" to be taken out to boost earnings when needed in future? cookie-jar reserves How did a culture of a earnings expectations originate? Stock market awarded firms that beat analysts' forecasts and punished firms that missed earnings targets In 2013, the SEC determined that postings on sites such as Facebook and Twitter are just as good as news releases and company Web sites as long as...? companies tell investors which sites they plan to use What is a numerical measure of historical or future financial performance, financial position, or cash flows, that excludes amounts that are included in the most directly comparable measure calculated and presented in accordance with GAAP? non-GAAP financial measure Controls over non-GAAP measures should address whether: that measures are sufficiently transparent, whether a calculation is biased, and whether they are consistent from period to period An auditor has ___________ ____________ for determining whether non-GAAP financial information is properly stated no responsibility Why are accruals needed for earnings management? matching and timing problems can give a wrong financial picture of company What are items that management has full control over and is able to delay or eliminate? discretionary accruals What are items that are estimated based on changes in economic performance of the firm, and management has no control on them? non-discretionary accruals What is a method of revenue recognition allowed by US GAAP that enables companies to recognize revenue on specific items on a multi-item sale based on evidence specific to a company that the product has been delivered? vendor specific objective evidence What is the term for a series of transactions between companies that bolster the revenue of the companies involved but that, in the end, don't provide real economic benefit to either company? Round Tripping What is a deceptive business practice used by a company to inflate its sales and earnings figures by deliberately sending retailers along its distribution channel more products than they are able to sell to the public? channel stuffing What occurs when a legitimate sales order is received, processed, and ready for shipment, and the customer is not ready to receive the shipment but revenue is recognized anyways? bill and hold What are actions or omissions intended to hide or distort real financial performance or financial condition of an entity? financial shenanigans What are Schilit's 7 Common Financial Statement Shenanigans? 1. Recording Revenue too soon or of questionable quality What are some red flags auditors need to be attuned to? growth in the market share that seems unbelievable; frequent acquisitions of businesses; change in members of top management, especially the CFO What is the new five step process of revenue recognition? 1. Determine whether you have a contract What is the concern regarding accounting for revenue in the Cloud? There is subjectivity in recording revenue as either traditional revenue, licensed software, or cloud software What was the term for Enron's employee-evaluation policy as incentive to keep employees quiet? rank and yank How did Enron begin to inflate their revenue? Selling investments in gas-supply contracts and selling long-term deals to utilities where the long-term revenue was recognized immediately rather than over time What are direct links between Enron's fraud and the rules included in SOX 2002? Auditors could no longer provide internal audit services to clients and related party transactions must be disclosed in notes What is a restatement disclosed only in periodic reports and not in the 8-K, or amended periodic report such as a 10-K/A or 10-Q/A? stealth restatement What are two important characteristics of an ethical leader? They seek to empower others to achieve success by focusing on right action and also lead by example A(n) ___________ ____________ creates a strong ethics message that gets employees' attention and influences their thoughts and behaviors; cultivating the ethics and values and infuse the organization with principles that will guide the actions of all employees moral manager A(n) ___________ ____________ forms the basis of a reputation of ethical leadership and challenges the leader to convey that substance to others in the organization moral person What is a critical component of moral managers and is demonstrated through consistency, credibility, predictability, openness, respect, and fair treatment of others? building trust What develops the skills needed to deal with ethical challenges involving knowing what to say, to whom, and how to say it when a manager knows what's right in a particular situation but doesn't feel confident about how to act on his or her convictions? giving voice to values (GVV) _____________ ______________ are focused on building long-term shareholder value, not in just beating quarterly estimate authentic leaders What is a leadership approach that causes change in individuals and social system? transformational leadership Followership, servant leaders, and authenticity all share one common characteristic: leader ethicality What is the intention to demonstrate normatively appropriate conduct and to create an environment within which others will be encouraged to act ethically and discouraged from acting unethically? leader ethicality What is a perspective that leaders have a responsibility to serve their followers by helping them achieve and improve by modeling leaders' ethical values, attitudes, and behaviors that influence organization outcomes through the fulfillment of followers' needs? servant leadership What is the concept that holds that individuals look to role models in the work context, and model or imitate their behavior? social learning theory What plays a major role in whether whistleblowing will occur? the moral intensity of the situation How do males and females differ when making decisions as public accounting officials? males were less likely to concede to audit clients' wishes whereas females used a different decision making process (intuitionist approach) How can unethical leadership affect internal auditors? they can sometimes be bullied by CFOs which makes it hard to carry out ethical obligations Mesmer-Magnus and Viswesvaran found that organizational employees have three options to address an unsatisfactory situation faced within an organization, what are they? exit the organization, voice discontent, remain silent What is a sense of responsibility and readiness to support colleagues within the organization? colleague commitment Graham found that the higher the moral intensity... the more likely a person is to report fraud A(n) _____________ ________________ shows interpersonal qualities in interacting with the different stakeholders and generating fair solution responsible leader What are the three ethical qualities that ethical intelligence depends on? moral awareness, reflection skills, moral imagination What is the term for a leader's ability to handle all kinds of moral problems that may arise in an organization? ethical leadership competence What are Thornton's five levels of ethical competence? personal and professional, interpersonal, organization and societal Kelly and Earley developed three measures called The Ethical Leadership Scales, which provide a measure of...? personal ethical competence, ethical leadership, and ethical organization When would it be appropriate for an auditor to withdraw from an engagement? a. In order to avoid issuing an adverse opinion c. When the auditor concludes that management cannot be trusted Which of the following is NOT a common audit deficiency in PCAOB inspections? a. Inadequate internal controls over financial reporting b. Maintaining an independent audits Auditors are responsible to detect and correct errors when they are: a. Material a. Material The difference between errors in the financial statements as compared to fraud is: a. An error is always an intentional act designed to deceive another party b. Fraud is always an intentional act designed to deceive another party 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: a. Top management was frequently involved in the fraud with the CEO and/or CFO being the most frequently involved b. The most common fraud technique involved understating expenses c. The audit committee always sanctioned the fraud d. A minority of audit reports issued during the fraud period contained unqualified audit opinions a. Top management was frequently involved in the fraud with the CEO and/or CFO being the most frequently involved Which of the following is not an element of COSO Enterprise Risk Management? a. Enhancing risk response decisions d. Improving deployment of information technology Audit procedures are different than audit evidence because: A. Audit procedures address the competency and sufficiency of audit evidence B. Audit procedures are specific acts performed by the auditor to gather evidence about whether specific assertions are being met C. Audit procedures are specific acts to assess whether the financial statements "present fairly" D. Audit procedures do not have to be determined based on risk assessment B. Audit procedures are specific acts performed by the auditor to gather evidence about whether specific assertions are being met Gathering and objectively evaluating audit evidence requires the auditor to consider: a. Whether an
unmodified opinion should be issued d. Whether the evidence is competent and sufficient enough to render an audit opinion The title of the PCAOB auditor's report is: a. Independent Auditor's Report b. Report of Independent Registered Public Accounting Firm A defendant is liable for injuries when he acted with willfulness. Another term for willfulness is: a. Negligence d. Intent In establishing that the third party relied on the financial statements, one factor that works against plaintiffs' establishing such reliance is: a. Fraud did not exist b. Damages or loss suffered by the plaintiff would NOT have occurred regardless of whether the audited financial statements were misstated c. Damages or loss suffered by the plaintiff would have occurred regardless of whether the audited financial statements were misstated d. Negligence did not exist c. Damages or loss suffered by the plaintiff would have occurred regardless of whether the audited financial statements were misstated Which of the following is NOT one of the most relevant sources of civil liabilities for auditors charged with failing to adhere to the requirements of the laws in carrying out professional obligations? a. Securities Act of 1933 b. Private Securities Litigation Reform Act of 1995 The Rosenblum case ruling was of concern to the accounting profession because it implied that: a. Full joint and several liability would be reinstated b. All possible third party users of financial statements must be anticipated c. The concept of contractual privity would no longer be important d. Financial liability would occur when scienter was proven b. All possible third party users of financial statements must be anticipated A "particularized" allegation requires establishing: a. Strong circumstantial evidence of conscious misbehavior b. Strong circumstantial evidence of recklessness c. Facts showing the defendant had both motive and opportunity to commit securities fraud d. All of the above d. All of the above Which term refers to a person acting in a way that breaches their duty to another that causes harm? a. Negligence a. Negligence Which of the following would normally be considered sufficient to demonstrate due care on the part of the auditor? a. The auditor had its work reviewed by another audit firm b. The auditor cites adherence to generally accepted auditing standards (GAAS) c. No omissions or misstatements have been found in the client's financial statements d. The auditor signs a statement expressing its unmodified opinion as to the fairness of the financial statements b. The auditor cites adherence to generally accepted auditing standards (GAAS) The Private Securities Litigation Reform Act of 1995 applies the practice of _______ to auditor liability determinations. a. Risk assessment d. Proportionate liability The Restatement (Second) of Torts Approach: a. Expands an accountant's legal liability to third parties identified by the client as intended recipients of work b. Limits an accountant's legal liability to only those parties with which it has a privity relationship c. Limits an accountant's legal liability to only those parties that have been named by the client d. Expands an accountant's legal liability to all possible users of the audited financial statements a. Expands an accountant's legal liability to third parties identified by the client as intended recipients of work Deloitte suggests the quality of earnings from the audit perspective should consider all of the following except: a. Consider earnings components in relation to the earnings continuum b. Consider large variances in an accounting estimates compared with actual determined amounts c. Understand the sources of earnings d. Be familiar with press coverage regarding financial performance b. Consider large variances in an accounting estimates compared with actual determined amounts Motivations to smooth net income over time include each of the following except: a. Maximize bonuses and stock option values c. Minimize overall taxes In surveys of managers, which technique to manage earnings was considered most acceptable? a. Changing inventory valuation in order to influence earnings
c. Manipulating operating decisions Each of the following is a common revenue recognition device to manage earnings except: a. Multiple deliverables c. Buy and hold Which of the following is NOT a qualitative factor when assessing materiality? a. A misstatement that changes a loss into income or vice versa b. The existence of statutory or regulator reporting requirements that affect materiality thresholds c. The potential effect of the misstatement on trends, especially trends in profitability d. The use of simplistic numerical thresholds and rules of thumb d. The use of simplistic numerical thresholds and rules of thumb The Monsanto case centered around the: a.
Acceleration of revenue due to channel stuffing arrangements c. Improperly accounting for rebates Debbie and Steve are discussing a lecture given by their ethics professor after class one day. The professor said that misstatements of earnings are always unethical. Debbie agrees with this situation, but Steve does not. What statement might Steve make to best support his point of view? a. It depends on whether the misstatements were made deliberately b. It depends on whether a user relied on the financial statements c. It depends on whether the statements lead to a modified or unmodified opinion d. All are valid statements for Steve to support his point of view a. It depends on whether the misstatements were made deliberately A common method used to smooth net income over time is: a. Accelerate revenue into earlier periods c. Using accrual of operating expenses and future adjustments Which of the following is NOT an attribute of internal audit leadership according to Chambers? a. Honesty b. Objectivity Transformational leaders: a. Empower employees to act based on their ethical goals and values b. Follow what top management sets as its goals for the organization c. Causes change in individuals and social systems d. Connect the follower's behavior to the collective identity of the organization c. Causes change in individuals and social systems De Cremer and Tenbrunsel characterize ethical leadership in part as: a. Intention to demonstrate normatively appropriate conduct b. Environment that promotes transformational leadership c. Influencing followers to always adhere to leaders' goals for the organization d. Environment that promotes servant leadership a. Intention to demonstrate normatively appropriate conduct Leadership in accounting is different than leadership in most other organizations because: a. Accountants are regulated by state board of accountancy b. Accountants are expected to place the public interest above all else c. Accountants are obligated to follow a strict code of ethics d. Accountants are answerable to firm management, not their clients b. Accountants are expected to place the public interest above all else A good example of antisocial behavior is: a. Dennis Kozlowski's use of corporate resources for personal purposes b. Betty Vinson's decisions to go along with financial wrongdoing c. Jeff Skilling's policy of "rank and yank" d. Whistleblowing by Cynthia Cooper c. Jeff Skilling's policy of "rank and yank" The more intense the ethical issues, the more likely: a. Decision makers will act in accordance with their own ethical values b. Decision makers are aware of the ethical implications of their intended actions c. Organizations will foster ethical behavior d. Organizations will establish an ethical tone at the top b. Decision makers are aware of the ethical implications of their intended actions An essential element in creating an ethical environment in an audit firm is: a. Socialization of employees c. Responsible leadership of the firm The ethical dilemma in the Research Triangle Software Innovations case can best be summed up as: a. Should an auditor share information about a client with a nonaudit member of the firm? b. Is it appropriate to select an audit client's ERP software for a different advisory services client? c. Should the audit firm recommend its own ERP software package to an audit client? d. Is it appropriate to engage in ERP management advisory services for an audit client? b. Is it appropriate to select an audit client's ERP software for a different advisory services client? The results of Morris's study of the influence of authentic leadership and ethical firm culture on auditor behavior is: a. A significant positive correlation exists between authentic leadership and dysfunctional audit behaviors b. A significant negative correlation exists between authentic leadership and dysfunctional audit behaviors c. Audit seniors more frequently prematurely sign off on audit work than under-report time d. Audit seniors act on their own values regardless of their perceptions of the firm culture b. A significant negative correlation exists between authentic leadership and dysfunctional audit behaviors The KPMG tax shelter case deals with: a. The culture of the tax practice and aggressive marketing of tax shelters to wealthy clients b. The influence of independence and objectivity in selling tax shelter products to audit clients c. The use of the a realistic possibility of success opinion letter on tax shelters for clients d. The aggressiveness of tax clients in demanding the firm provide opinion letters on tax shelter products a. The culture of the tax practice and aggressive marketing of tax shelters to wealthy clients Which of the following is an element of ERM quizlet?Which of the following is an element of ERM? ERM is defined as a process, effected by an entity's board of directors, management, and other personnel and applied in strategy settings and across the enterprise, designed to identify potential events that may affect the entity and to manage risk within its risk appetite.
In which of the following circumstances would a qualified opinion not be appropriate?In which of the following circumstances would a qualified opinion not be appropriate? The auditors lack independence with respect to the audited entity. a violation of generally accepted accounting principles is sufficiently material and pervasive that a qualified opinion is not justified.
What was the original motivation by FASB on SPEs?ACCOUNTING ETHICS FINAL. |
Which term refers to a person acting in a way that breaches their duty to another that causes harm quizlet?
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