Ethics Chapter 5-6 Homework Questions

PCAOB Standard 7 addresses engagement quality reviews and have as its objectives to:

Assess how an audit has been conducted and the appropriateness of the audit opinion
Assess the firm’s own quality controls and the appropriateness of the audit opinion
Assess how an audit has been conducted and the firm’s own quality control procedures
Assess whether materiality has been properly evaluated

Assess how an audit has been conducted and the firm’s own quality control procedures

The case which deals with assigning a quality review partner to an audit is:

ZZZZ Best
Imperial Valley Community Bank
Busy Season Planning
Rooster, Hen, Footer and Burger

Busy Season Planning

The best explanation why the fraud at Tyco was not discovered and acted on is:

Failure of the corporate governance system
External auditors told management to let the fraud go
Tyco management hid the fraud from the auditors
The fraud was not material

Failure of the corporate governance system

Which of the following is the most likely reason for an auditor to issue a modified opinion with a qualification?

Inability to gather any sufficient relevant information to form the basis for the opinion
Misstatements that are material and pervasive
Going concern issue
Misstatements that are material but not pervasive

Misstatements that are material but not pervasive

Which of the following is not one of the reporting standards of GAAS that guides auditors in formulating the audit opinion?

The financial statements have followed GAAP
Consistency in the application of GAAP
Adequate disclosures exist in the statements
Gathering sufficient audit evidence to warrant an opinion

Gathering sufficient audit evidence to warrant an opinion

The auditors’ determination of whether the financial statements "present fairly" is based on:

Whether the users are able to assess the reliability of the financial statements
Whether the statements have been prepared in accordance with the same GAAP used from one year to another
Whether the auditor has been able to gather sufficient evidence to warrant the statement that the financial statements present fairly
Whether the accounting principles used are appropriate in the circumstances

Whether the accounting principles used are appropriate in the circumstances

Typically, when a going concern issue exists the auditor should:

Issue an unmodified opinion with an emphasis-of-matter paragraph
Issue a modified opinion and explain the reasons for the going concern issue
Issue a disclaimer of opinion
Withdraw from the engagement

Issue an unmodified opinion with an emphasis-of-matter paragraph

In the ZZZZ best case, Barry Minkow was charged with:

A fraudulent insurance restoration scam
Insider trading on Lennar stock
Stealing from a San Diego church
Overcharging a LA housewife for carpet cleaning services

A fraudulent insurance restoration scam

PCAOB Auditing Standard No.16 requires the auditor to communicate with the audit committee all but:

Going concern issues
Whether the auditor expects to modify the opinion
Any disagreements with management
The procedures followed to comply with generally accepted auditing standards

The procedures followed to comply with generally accepted auditing standards

Section 302 of the Sarbanes-Oxley Act requires:

Management’s report on internal controls
Auditor’s independent report
Auditor’s assessment of management’s report on internal controls
Management’s certification of the financial statements

Management’s certification of the financial statements

An example of fraudulent financial statements is:

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

Misrepresentation of events, transactions, and other significant events in the financial statements

Which of the following is NOT addressed in the Diamond Foods case?

Accounting for payments to walnut growers
Matching revenues with the proper period
Depreciation of almond trees
Misleading the external auditors

Depreciation of almond trees

In the Imperial Valley Community Bank case, each of the following were reasons for the going concern issue except:

The magnitude of loan losses
Insufficient equity capital
Operating losses over an extended period of time
Questions about the collectability of outstanding loans

Operating losses over an extended period of time

Which of the following elements were NOT part of the fraud at Tyco?

Benefits given to certain members of the board of directors to secure their silence about the fraud
Corporate assets used by members of top management for personal purposes
Setting up special-purpose-entities to keep debt off Tyco’s books
Related party transactions that were not adequately disclosed

Setting up special-purpose-entities to keep debt off Tyco’s books

PCAOB Auditing Standard No.16 requires the auditor to communicate with the audit committee all but:

Significant accounting policies and practices
Critical accounting practices and policies
Significant unusual transactions
The procedures followed by the auditor in evaluating evidence

The procedures followed by the auditor in evaluating evidence

Which of the following is an element of the introductory paragraph of an auditor’s report under AICPA standards?

Identifies the type of opinion the auditor is giving
Identifies the entity, financial statements being audited and time period
Identifies audit testing and procedures used
Identifies the generally accepted auditing standards followed in conducting the audit

Identifies the entity, financial statements being audited and time period

Which of the following is NOT a pressure that might lead to fraud?

Desire to maximize the value of stock options
Budget pressures
Meet financial analysts’ earnings expectations
Ability to carry out the fraud

Ability to carry out the fraud

PCAOB Standard 14 addresses audit results and requires:

Auditor’s evaluation of internal controls
Auditor’s determination of whether the auditor has obtained sufficient appropriate evidence
Auditor’s evaluation of the applicable financial reporting framework
Auditor’s independence

Auditor’s determination of whether the auditor has obtained sufficient appropriate evidence

When would it be appropriate for an auditor to withdraw from an engagement?

In order to avoid issuing an adverse opinion
When that auditor cannot observe the taking of inventory or is unable to confirm receivables
When the auditor concludes that management cannot be trusted
When the auditor has overbooked too much work

When the auditor concludes that management cannot be trusted

The Committee of Sponsoring Organizations of the Treadway Committee (COSO) analyzed the financial reporting of public companies during the 1998-2007 periods when business failures due to accounting fraud were high and found that:

Top management was frequently involved in the fraud with the CEO and/or CFO being the most frequently involved
The most common fraud technique involved understating expenses
The audit committee always sanctioned the fraud
A minority of audit reports issued during the fraud period contained unqualified audit opinions

Top management was frequently involved in the fraud with the CEO and/or CFO being the most frequently involved

The auditor’s responsibility with regard to illegal acts is greatest when:

The illegal acts have an indirect and material effect on financial statement amounts
The illegal acts have a direct and material effect on financial statement amounts
The illegal acts have a direct and immaterial effect on financial statement amounts
Illegal acts exist regardless of the effects on the financial statements

The illegal acts have a direct and material effect on financial statement amounts

Misstatements in the financial statements can result from:

Errors
Fraud
Illegal acts improperly recorded
All of the above

All of the above

Which of the following is an element of ERM?

Reducing operational surprises and losses
Aligning risk appetite and whether fraud has occurred
Control environment
Audit risk assessment

Reducing operational surprises and losses

In the Loyalty and Fraud Reporting case, Ethan Lester pressured his friend Vic Jensen to:

Misappropriate funds from the company
Cover up Ethan’s fraud
Be silent and not report Ethan’s fraud to the audit committee
Give an unmodified audit report

Cover up Ethan’s fraud

If the financial statements are not materially misstated, the auditor should give a(an):

Unmodified opinion
Modified opinion
Adverse opinion
Qualified opinion

Unmodified opinion

One difference between the AICPA auditor’s report and that of the PCAOB is:

The PCAOB report is not signed by the auditor
The AICPA report is not signed by the auditor
The PCAOB report does not have section headings
Both reports are the same

The PCAOB report does not have section headings

In which of the following circumstances would a qualified opinion be appropriate?

The statements are not in conformity with generally accepted accounting principles regarding stock options plans and but does not have pervasive effect on the financial statements
The statements are not in conformity with generally accepted accounting principles regarding stock options plans and has pervasive effect on the financial statements
The auditor has been unable to obtain sufficient competent evidential matter
The principal auditors decide to withdraw from the engagement due to distrust of management

The statements are not in conformity with generally accepted accounting principles regarding stock options plans and but does not have pervasive effect on the financial statements

The Tax Inversion case deals with:

Whether IFRS should be used for all subsidiaries following an acquisition
Whether IFRS should replace U.S. GAAP
Whether a quality reviewer should be chosen from outside the company
Whether a tax inversion should occur

Whether IFRS should be used for all subsidiaries following an acquisition

Which of the following is not true of "reasonable assurance"?

The auditors have exercised due care
The audit opinion is a guarantee that material misstatements have been identified
The audit has been properly planned and supervised
The auditors have followed GAAS

The audit opinion is a guarantee that material misstatements have been identified

Under which of the following set of circumstances might the auditors disclaim an opinion?

The financial statements contain a departure from generally accepted accounting principles, the effect of which is material
The auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion
There has been a material change between periods in the method of the application of accounting principles
Differences with management that lead to trust issues on the part of the auditor

The auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion

Confidential client information can be disclosed outside the entity without violating the AICPA Code of Professional Conduct in each of the following situations except when:

It is reported to the SEC under Section 10A of the Securities Exchange Act
It is to comply with the Private Securities Litigation Reform Act
It protects the auditor’s accounting for fraud and illegal acts
It is allowed for under the Dodd-Frank Financial Reform Act

It protects the auditor’s accounting for fraud and illegal acts

Which of the following is not correct about materiality?

The concept of materiality recognizes that some matters are more important for fair presentation of financial statements
Materiality judgments are made in light of surrounding circumstances and necessarily involve quantitative and qualitative judgments
Materiality should be predictable from audit to audit so that the readers of financial statements know what constitutes materiality
An auditor’s consideration of materiality is influenced by the auditor’s perception of the need of the readers of the financial statements

Materiality should be predictable from audit to audit so that the readers of financial statements know what constitutes materiality

Which of the following is not one of the evaluations of the control environment of an organization?

Whether management’s philosophy and operating style promote effective internal control over financial reporting
Whether sound integrity and ethical values, particularly of top management, are developed and understood
Whether the Board or audit committee understands and exercises oversight responsibility over financial reporting and internal control
Whether the company has an anonymous hot line

Whether the company has an anonymous hot line

Which of the following is not a consideration in determining a measure of materiality?

Risks of material misstatements due to fraud
Quantitative assessment of the importance of the difference of opinion with client management on an accounting issues
Qualitative assessment of the importance of the difference of opinion with client management on an accounting issues
Importance of audit committee in the organization

Importance of audit committee in the organization

All of the following tend to be rationalizations for fraud except:

We need to protect the shareholders and keep the stock price high
All companies use aggressive accounting techniques
The employee will be fired unless s/he goes along with the fraud
We are correcting a temporary problem that will not exist in the future

The employee will be fired unless s/he goes along with the fraud

Gathering and objectively evaluating audit evidence requires the auditor to consider:

Whether an unmodified opinion should be issued
Whether a modified opinion should be issued
Whether the evidence is adequate to complete the audit
Whether the evidence is competent and sufficient enough to render an audit opinion

Whether the evidence is competent and sufficient enough to render an audit opinion

Which of the following is NOT an element of the auditor’s responsibility of the AICPA’s auditor’s report?

States the auditor’s responsibility to express an opinion on the financial statements
States the audit provides reasonable assurance that the statements are free of material misstatement
States audit provides reasonable basis for the opinion
States the audit evaluates the overall financial statement presentation

States the audit evaluates the overall financial statement presentation

The primary accounting issue in the Royal Ahold case is:

Fraudulent recording of revenues on sales to customers
Fraudulent use of company resources by top management for personal purposes
Fraudulent inflation of promotional allowances to increase operating income
Fraudulent inflation of inventory to reduce losses on the income statement

Fraudulent inflation of promotional allowances to increase operating income

Auditors are responsible to detect and correct errors when they are:

Material
Material or immaterial
Due to an illegal act
Management fails to correct for the error

Material

The auditors’ responsibility to communicate findings with respect to fraud can best be summarized as:

Communicate to the audit committee the existence of fraud but not the amount involved
Communicate to the audit committee both material and immaterial amounts of fraud that are detected
Communicate to the SEC the existence of fraud but not the amount involved
Communicate to the SEC both material and immaterial amounts of fraud that are detected

Communicate to the audit committee both material and immaterial amounts of fraud that are detected

The difference between errors in the financial statements as compared to fraud is:

An error is always an intentional act designed to deceive another party
Fraud is always an intentional act designed to deceive another party
An error always leads to a qualification of the auditors’ opinion
Fraudulent financial reporting is always material in amount

Fraud is always an intentional act designed to deceive another party

Which of the following is NOT something external auditors are expected to do in looking for fraud?

Assessing the control environment of the organization
Evaluating internal controls
Considering audit risk and materiality
Evaluating management’s commitment to serve the public interest

Evaluating management’s commitment to serve the public interest

Which of the following is not part of the fraud triangle?

Incentives
Opportunity
Materiality
Rationalization

Materiality

Audit documentation is critical to evidence gathering because:

It demonstrates that an audit has been conducted
It demonstrates professional skepticism
It substitutes for making audit judgments and estimates
All of the above

It demonstrates professional skepticism

Which of the following is the most likely reason for an auditor to issue an adverse opinion?

Inability to gather any sufficient relevant information to form the basis for the opinion
Misstatements that are material and pervasive
Going concern issue
Misstatements that are material but not pervasive

Misstatements that are material but not pervasive

The SEC is concerned that auditors don’t pay enough attention to qualitative factors affecting materiality because:

Qualitative factors may cause quantitatively small misstatements to become material
Quantitative factors are not always useful
Quantitative factors cannot be accumulated to assess overall materiality
All are of concern to the SEC

Qualitative factors may cause quantitatively small misstatements to become material

All of the following are in a position to commit fraud except:

Employees who have access to assets
Top management who can override internal controls
External auditors who audit the financial statements
All of the above are in a position to commit fraud

External auditors who audit the financial statements

The title of the PCAOB auditor’s report is:

Independent Auditor’s Report
Report of the Independent Registered Audit Firm
Auditor’s Report on Management’s Financial Statements
Auditor’s Report on Internal Controls

Report of the Independent Registered Audit Firm

Which of the following is not an element of COSO Enterprise Risk Management?

Enhancing risk response decisions
Reducing operating surprises and losses
Seizing opportunities
Improving deployment of information technology

Improving deployment of information technology

Which of the following summarizes the essence of general standards of GAAS?

Quality of professionals that perform an audit
Criteria used to judge whether the audit has met quality requirements
The standards that guide auditors in issuing the audit report
Whether the auditor obtained sufficient competent evidential matter to render an opinion

Quality of professionals that perform an audit

Which of the following audit deficiencies was identified most often in a study by the Center for Audit Quality of SEC imposed sanctions?

Failure to gather sufficient competent evidence
Failure to exercise due care
Insufficient level of professional skepticism
Failure to obtain adequate evidence related to management representations

Failure to gather sufficient competent evidence

Misstatements in the financial statements are most likely to occur when there are:

Omission of the auditor’s report
Omission of notes to the financial statements
Failure to disclose major estimates made in the financial statements
Failure to disclose major judgments made in the financial statements

Omission of notes to the financial statements

Which of the following is NOT one of the most common audit deficiencies identified in PCAOB inspections?

Inadequate internal controls over financial reporting
Lack of independent audits
Lack of due care
Inability to exercise the appropriate level of professional skepticism

Lack of independent audits

Bill Young’s ethical dilemma was:

Whether the loan loss reserves of the bank were understated
Whether to file a whistle-blower’s complaint with the SEC under Dodd-Frank
Whether to commit fraud to cover up stealing from the company
Whether to inform management or the regulatory authorities of illegal acts of an audit client

Whether to inform management or the regulatory authorities of illegal acts of an audit client

The Private Securities Litigation Reform Act imposes additional requirements on public companies reporting to the SEC and their auditors when:

The illegal act has a material effect on the financial statements
Senior management and the board have not acted properly to correct for the act
The failure to correct for the action is reasonably expected to warrant a departure from the standard audit report
All of the above are additional requirements

All of the above are additional requirements

Some critics claim the usefulness of the audit report is limited because:

Auditors do not examine management’s estimates and judgments
Language in the audit report relies on subjective evaluations such as what is meant by "reasonable"
Transactions examined are based on sampling and other techniques to limit choices of which transactions to audit
All of the above may create doubts about usefulness

Language in the audit report relies on subjective evaluations such as what is meant by "reasonable"

The main reason the PCAOB has charged Chinese affiliates of U.S. audit firms with failing to provide sufficient documentary evidence of audits of Chinese companies listed on U.S. exchanges is:

Audit firms are unable to gather sufficient competent evidential matter
Audit firms are not knowledgeable enough about Chinese accounting standards
Chinese regulatory agencies can be uncooperative in providing access to PCAOB regarding their inspections of audit documents
Chinese regulatory agencies conduct inspections of the audit documents of the firms

Chinese regulatory agencies can be uncooperative in providing access to PCAOB regarding their inspections of audit documents

Because of the risk of material misstatement due to improper management representations, an audit of financial statements in accordance with GAAS should be performed with:

Objective judgment
Professional skepticism
Internal controls
Due diligence

Professional skepticism

The purpose of the fraud triangle is to identify:

The causes of when the audit opinion should be qualified.
The causes of and reasons for fraud when there may be intentional misstatements or omissions of amounts or disclosures in the financial statements.
The causes of when there is a lack of independence in performing an audit.
The causes of illegal acts.

The causes of and reasons for fraud when there may be intentional misstatements or omissions of amounts or disclosures in the financial statements.

Which of the following is NOT one of the communications that should be made by external auditors to the audit committee?

Accounting estimates
Threats to auditor independence and related safeguards to mitigate those threats
Significant deficiencies in audit procedures
The nature and scope of significant assumptions

Significant deficiencies in audit procedures

A payment made to induce a foreign government official to do something they might not otherwise be required to do is a:

Bribe
Asset misappropriation
Facilitating Payment
Legal Payment

Bribe

With respect to U.S. GAAP, the SEC’s approach to determining whether International Financial Reporting Standards (IFRS) should be allowed for and/or replace GAAP can be described as:

Transparency
Comparability
Convergence
Condorsement

Condorsement

Which of the following is NOT a valid defense to legal liability under the Securities Act of 1933?

Materiality defense
Non-negligence defense
Due diligence defense
Lack of causation defense

Non-negligence defense

When an auditor acts so carelessly in the application of professional standards that it implies a reckless disregard for the standards of due care is referred to as:

Scienter
Fraud
Constructive fraud
Negligence

Constructive fraud

A payment made to foreign government officials to ensure that they do what is expected given their job requirements can be characterized as a:

Bribe
Asset misappropriation
Facilitating Payment
Legal Payment

Facilitating Payment

Which of the following is NOT one of the four stages in an audit-related dispute?

Events arise that create losses for the users of the financial statements
Losses are linked to material misstatements of financial statements
Legal process resolves the dispute
Auditors legal liability leads to financial settlement

Auditors legal liability leads to financial settlement

Which of the following is NOT a requirement of Section 10A of the Securities Exchange Act of 1934 for auditors of public companies with respect to illegal acts?

Determine whether it is likely that an illegal act has occurred
Determine what the possible effect of the illegal act is on the financial statements
Determine whether management participated in the illegal act
Inform management and assure that the audit committee knows about any material illegal act that has been detected

Determine whether management participated in the illegal act

Under the 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 fact
Omits material facts required by statute or regulation
Omits information that if not given makes the facts stated misleading
All of the above

All of the above

The fraud at Satyam involved:

Related party transactions, fictitious revenue and falsified bank account balances
Related party transactions, impaired assets and off-balance sheet entities
Impaired assets, falsified bank account and facilitating payments
Fictitious revenue, contingent liabilities and facilitating payments

Related party transactions, fictitious revenue and falsified bank account balances

The term "true and fair view" tends to be a replacement for _________ used in the U.S.

Full and fair
Present fairly
Representational faithfulness
Economic substance

Present fairly

The key element that protects an auditor against common law liability is:

Adherence to generally accepted accounting principles (GAAP)
Adherence to generally accepted auditing standards (GAAS)
Compliance with threats and safeguards approach
Maintain confidentiality of client information

Adherence to generally accepted auditing standards (GAAS)

What is a worrisome consequence under the joint and several liability principle?

Each negligent party is liable for the portion of the damages for which it is responsible
All negligent parties are always liable for damages
Only the negligent party considered to have "deep pockets" is held liable for damages
Each negligent party could be held liable for the total of damages suffered

Each negligent party could be held liable for the total of damages suffered

Under the Securities Act of 1933 and the Securities and Exchange Act of 1934, accountants may be subject to criminal penalties for:

Obstruction of justice
Securities fraud
Willful violations of the securities acts
Violations of internal controls

Willful violations of the securities acts

The IFAC Global Code of Ethics is similar to the AICPA Code in each of the following areas except it doesn’t:

Require acting in accordance with the public interest
Address threats to independence
Identify safeguards to mitigate threats to independence
Establish state boards of accountancy to regulate standards

Establish state boards of accountancy to regulate standards

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?

Securities Act of 1933
Private Securities Litigation Reform Act of 1995
Securities and Exchange Act of 1934
Sarbanes-Oxley Act of 2002

Private Securities Litigation Reform Act of 1995

The section of SOX that requires management to prepare a report on its internal controls is:

Section 302
Section 404
Section 808
Section 10A(b)

Section 404

Gray uses Hofstede’s cultural values that were discussed in Chapter 1 to:

Set forth accounting values that can be used to define a country’s cultural foundation with respect to financial reporting
Set forth corporate governance provisions that define an ethical organization culture
Define what is meant by the public interest in accounting
Define what is meant by internal controls over financial reporting in a cultural context

Set forth accounting values that can be used to define a country’s cultural foundation with respect to financial reporting

The FCPA requires all SEC registrants to have each of the following except:

Maintain internal accounting controls
Ensure all transactions are authorized by management and recorded properly
Maintain information systems that prevent fraudulent activities that violate the FCPA
Maintain adequate books and records to fairly reflect an issuer’s transactions and disposition of assets

Maintain information systems that prevent fraudulent activities that violate the FCPA

An audit engagement letter:

Offers an auditor’s services to a client
Is required by generally accepted auditing standards (GAAS)
Details the SEC’s expectations for the audit firm for a specific engagement
Formalizes the relationship between the auditor and the client for a specific engagement

Formalizes the relationship between the auditor and the client for a specific engagement

The "particularity" provision in the PSLRA allows a plaintiff to:

Sue the auditor
Assert scienter
Sue management
Assert privity

Assert scienter

In establishing that the third party relied on the financial statements, one factor that works against plaintiffs’ establishing such reliance is:

Fraud did not exist
Damages or loss suffered by the plaintiff would not have occurred regardless of whether the audited financial statements were misstated
Damages or loss suffered by the plaintiff would have occurred regardless of whether the audited financial statements were misstated
Negligence did not exist

Damages or loss suffered by the plaintiff would have occurred regardless of whether the audited financial statements were misstated

The legal liability of the auditors in the Autonomy case can best be described as resulting from:

Liability for gross negligence that constituted fraud
No liability because the firms were not sued by Autonomy
Liability for failing to inform creditors of a nonexistent bank account carried on Autonomy’s books
Improper accounting for a merger transaction between Hewlett-Packard and Autonomy

No liability because the firms were not sued by Autonomy

The Securities and Exchange Act of 1934:

Limits the financial liability of independent auditors except in the case of gross negligence
Requires the filing of audited annual statements and reviewed quarterly statements
Regulates the initial offering financial statements of securities
Regulates which services may be performed for a publicly-traded company by an audit firm

Requires the filing of audited annual statements and reviewed quarterly statements

The Securities Act of 1933:

Regulates the auditing of financial statements for publicly-traded companies
Limits the financial liability of independent auditors except in the case of gross negligence
Regulates the initial offering of securities
Regulates which services may be performed for a publicly-traded company by an audit firm

Regulates the initial offering of securities

The difference between the United Kingdom Bribery Act and the FCPA in the U.S. is:

The UK Bribery Act permits bribery as well as facilitating payments
The UK Bribery Act prohibits both bribery and facilitating payments
The FCPA permits both bribery and facilitating payments
There are no differences between the two laws

The UK Bribery Act prohibits both bribery and facilitating payments

The Restatement (Second) of Torts Approach:

Expands an accountant’s legal liability to third parties identified by the client as intended recipients of work
Limits an accountant’s legal liability to only those parties with which it has a privity relationship
Limits an accountant’s legal liability to only those parties that have been named by the client
Expands an accountant’s legal liability to all possible users of the audited financial statements

Expands an accountant’s legal liability to third parties identified by the client as intended recipients of work

The unique aspect of auditors’ legal liability in the Rosenblum v. Adler ruling is:

Auditors could be held liable for ordinary negligence to all reasonably foreseeable third parties
Auditors could be held liable for gross negligence to all reasonably foreseeable third parties
Auditors could be held liable for fraud to all reasonably foreseeable third parties
Auditors should be able to detect all deceit by management

Auditors could be held liable for ordinary negligence to all reasonably foreseeable third parties

Which of the following is NOT a cultural factor identified in Gray’s Model?

Professionalism
Flexibility
Conservatism
Secrecy

Flexibility

The international body responsible for developing and issuing high-quality ethical standards and other pronouncements for professional accountants for use around the world is:

International Organization of Securities Commissions
International Accounting Standards Board
International Ethics Board
International Ethics Standards Board for Accountants

International Ethics Standards Board for Accountants

In Heinrich Müller: Big-Four Whistleblower, Müller had an ethical dilemma because:

Confidential tax documents demonstrate the firm was engaged in illegal firm-arranged tax avoidance deals
Confidential tax documents indicate the client violated the law by taking advantage of tax advantaged investment
His supervisor ordered him to commit tax fraud
His supervisor was engaged in tax fraud

Confidential tax documents demonstrate the firm was engaged in illegal firm-arranged tax avoidance deals

The accounting issue(s) in the Crazy Eddie case were:

Accelerating revenues into earlier periods
Inflating inventory and net income
Capitalizing costs that should have been expensed
Off-balance sheet entities

Inflating inventory and net income

The Con-Way case deals with legal liabilities due to:

Bribery of foreign government officials
Fraudulent financial statements
Facilitating payments to government agents
Bribery of U.S. government officials

Bribery of foreign government officials

The name of the international securities body that facilitates a country’s choice to regulate the use and application of IFRS is:

International Accounting Standards Board
International Federation of Accountants
International Organization of Securities Commissions
International Securities and Exchange Commission

International Organization of Securities Commissions

Under the Private Securities Litigation Reform Act (PSLRA), if an auditor concludes that an illegal act with a material effect on the financial statements has been reported to, but not dealt with by senior management, the auditor should next report his/her conclusions to:

The Securities and Exchange Commission
The company’s board of directors
The office of the controller/comptroller for the appropriate state
The Federal Bureau of Investigation

The company’s board of directors

The Richards & Co. case raises questions for the quality review partner because the client had:

Accelerated revenue into an earlier period without proper documentation
Delayed expenses into a later period through the use of reserves
Violated the Foreign Corrupt Practices Act
Recorded supplier-provide credits as revenue with the promise of purchasing merchandise from that supplier

Recorded supplier-provide credits as revenue with the promise of purchasing merchandise from that supplier

A "particularized" allegation requires establishing:

Strong circumstantial evidence of conscious misbehavior
Strong circumstantial evidence of recklessness
Facts showing the defendant had both motive and opportunity to commit securities fraud
All of the above

All of the above

Kay and Lee performed an audit required for Holligan Industries to extend a loan with Second National Bank & Trust. Kay and Lee may be liable for:

Second National Bank & Trust declining to extend the loan
Ordinary negligence to the bank that loaned money to Holligan because the firm did not discover improper accounting for revenue and assets
Gross negligence to the bank that loaned money to Holligan because the firm did not discover improper accounting for receivables and inventory
Holligan declaring bankruptcy without a going-concern emphasis of matter

Gross negligence to the bank that loaned money to Holligan because the firm did not discover improper accounting for receivables and inventory

In the case of Equity Funding, the audit client:

Fraudulently recorded inventories that did not in fact exist
Inflated its earnings by recording fictitious sales of insurance policies
Moved liabilities off the balance sheet by using thousands of subsidiaries
Recorded inventory below cost, therefore understating costs of goods sold and overstating net income

Inflated its earnings by recording fictitious sales of insurance policies

The Private Securities Litigation Reform Act of 1995 applies the practice of ______ to auditor liability determinations.

Risk assessment
Joint and several liability
Particularized standard
Proportionate liability

Proportionate liability

What argument can be made that SOX may not be effective in reducing fraud?

It is not as stringent as international standards
The SEC has many laws for many years that have not seemed to make much of a difference
The penalties under Sarbanes-Oxley are especially stringent, so it may not be enforced
Civil and criminal penalties are not effective in preventing financial fraud

The SEC has many laws for many years that have not seemed to make much of a difference

In the Vertical Pharmaceuticals case, Deloitte & Touche was sued because:

Vertical claimed the firm’s false accusations of fraudulent conduct led to the withdrawal of another public company’s planned acquisition of Vertical
Deloitte failed to issue an audit report on a timely basis thereby leading to the withdrawal by another public company’s planned acquisition of Vertical
Vertical claimed Deloitte committed fraud in its audit of Vertical
Deloitte issued a modified opinion (adverse) on Vertical’s financial statements thereby leading to the withdrawal by another public company’s planned acquisition of Vertical

Vertical claimed the firm’s false accusations of fraudulent conduct led to the withdrawal of another public company’s planned acquisition of Vertical

PCAOB inspections of U.S. audit firms operating in China creates challenges because:

China requires the PCAOB to come to China to do their inspections
The SEC has to work through the China Securities Regulatory Commission to facilitate inspections of U.S. audit firms operating in China
China refuses to cooperate on any level with the SEC
The SEC requires that U.S. audit firms operating in China transmit all work papers to the U.S. audit firm’s headquarters before an inspection can take place

The SEC has to work through the China Securities Regulatory Commission to facilitate inspections of U.S. audit firms operating in China

The U.S. Supreme Court ruled in Ernst & Ernst v. Hochfelder that:

A private cause of action for damages does not come under rule 10b-5 in the absence of any allegation of scienter
The auditor engaged in an act in connection with the purchase or sale of a security that caused the loss to the plaintiff
Breach of duty is not required to establish fraud
The auditor has no legal liability for fraud to third parties

A private cause of action for damages does not come under rule 10b-5 in the absence of any allegation of scienter

In Grant Thornton v. Prospect High Income Fund, Grant used each of the following points to defend itself against legal liability except:

There was no evidence of a causal connection between Grant’s alleged misrepresentation and the funds’ alleged injury
There was no evidence of actual and justifiable reliance
There was no evidence of the loss suffered by the plaintiffs
Liability for fraudulent misrepresentations runs only to those whom the auditor knows and intends to influence, all of which was not present

There was no evidence of the loss suffered by the plaintiffs

In Grant Thornton v. Prospect High Income Fund, the Texas Supreme Court held:

Auditors were not liable for accurate accounting to anyone who reads and relies upon the audit report
Auditors were not liable for ordinary negligence
Auditors are not guarantors of accurate and reliable financial statements
Management is responsible for the financial statements

Auditors were not liable for accurate accounting to anyone who reads and relies upon the audit report

Which of the following is NOT an affirmative defense for those violating the FCPA?

The payment is lawful under the written laws of the foreign country
The payment can be made for reasonable and bona fide expenditures
A and B are both affirmative defenses
None of the above

A and B are both affirmative defenses

When courts find accountants liable for constructive fraud, the implication is that:

Auditors should always be liable when investors lose money due to deceit
Accountants may be liable for fraud even when they had no knowledge of deceit
Auditors should be able to detect all deceit by management
Accountants may be held liable even to third parties to whom they did not have a duty

Accountants may be liable for fraud even when they had no knowledge of deceit

The problem of a compliance approach in implementing global standards is that it can result in:

Achieving informal compliance without considering ethical consequences
Achieving a true and fair view with respect to the auditor’s report
Achieving a dual system of boards of directors
Achieving formal compliance without considering ethical consequences

Achieving formal compliance without considering ethical consequences

The Credit Alliance v. Arthur Andersen & Co. case established three tests that must be satisfied for holding auditors liable for negligence to third parties. All of the following are tests described except:

Knowledge by the accountant that the financial statements are to be used for a particular purpose
The intention of the third party to rely on those statements
Some action by the accountant linking him or her to the third party that provides evidence of the accountant’s understanding of intended reliance
The identity of the third party must be directly known to the auditor

The identity of the third party must be directly known to the auditor

Under section 302 of the SOX the financial statement certifying officials must include in their certification that:

A list of all deficiencies in the internal controls and information on any fraud that involves employees who are involved with internal activities has been created
The auditors are responsible for the internal controls and have evaluated and reported on them
All changes in internal controls or related factors that could have a negative effect on the internal controls have been made
The audit report was unmodified

A list of all deficiencies in the internal controls and information on any fraud that involves employees who are involved with internal activities has been created

The legal precedent that evolves from legal opinions issued by judges in deciding a case and guides judges in deciding similar cases in the future is referred to as:

Business law
Tort law
Common law
Statutory law

Common law

Which of the following is NOT one of the defenses an auditor can use against third party lawsuits for fraud?

The third party was not in contractual privity
The auditor did not have a duty to the third party
The third party was negligent
The third party did not suffer a loss

The third party was not in contractual privity

Which of the following would normally be considered sufficient to demonstrate due care on the part of the auditor?

The auditor had its work reviewed by another audit firm
The auditor cites adherence to generally accepted auditing standards (GAAS)
No omissions or misstatements have been found in the client’s financial statements
The auditor signs a statement expressing its unmodified opinion as to the fairness of the financial statements

The auditor cites adherence to generally accepted auditing standards (GAAS)

In the Advanced Battery Technologies case, the opinion of the court:

Held the auditors legally liable because they failed to exercise due care and to demonstrate professional skepticism
Held the auditors legally liable because they failed to gather sufficient, competent evidential matter to warrant the expression of an opinion
Held the auditors not legally liable because the plaintiff could not plead with particularity that the audit work was so deficient as to amount to no audit at all
Held the auditors were not legally liable because they met all professional standards

Held the auditors not legally liable because the plaintiff could not plead with particularity that the audit work was so deficient as to amount to no audit at all

The executives of McKesson and Robbins Pharmaceuticals were able to steal about $2.9 million in 1939 because:

Its auditors did not follow the generally accepted auditing standards (GAAS) at the time
The independent audit of financial statements was not required at the time
Physical inspection of inventory was not performed by the auditors
The auditors were not independent and conspired with management to steal the funds

Physical inspection of inventory was not performed by the auditors

The International Federation of Accountants (IFAC) Policy Position Paper #4 A Public Interest Framework for the Accountancy Position addresses:

Bribery on an international level
High standards of ethical behavior and professional judgment required in the accountancy profession
Internal control to prevent fraud
Corporate governance systems

High standards of ethical behavior and professional judgment required in the accountancy profession

A privity relationship means that:

A party may be a user of the financial statements
A party may sue if fraud has taken place
A party’s financial liability is limited
A party has a contractual obligation

A party has a contractual obligation

The defendant-auditors in the Anjoorian case argued, in their defense, that:

To be found guilty to third parties, the court must find that an accountant had contemplated a specific transaction for which the financial statement will be used and that no such transaction was contemplated.
The plaintiff’s theory of damages did not meet the foreseen legal criteria
They had no liability to the client because the client did not rely on the audited financial statements
They followed generally accepted auditing standards

To be found guilty to third parties, the court must find that an accountant had contemplated a specific transaction for which the financial statement will be used and that no such transaction was contemplated.

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

Prudence
Scienter
Nonfeasance
Due Care

Due Care

Under the Securities Act of 1933, if damages were incurred and there was a material misstatement or omission in the financial statements, the CPA will most likely lose the lawsuit unless:

The management intentionally deceived the auditors
The damages were incurred to a third party that was not a signatory to the contract
The CPA can shift the burden of proof to the investors
The CPA rebuts the allegations

The CPA rebuts the allegations