ACG 445 Final Exam | Questions with Verified Answers

ACG 445 Final Exam | Questions with Verified Answers Which of the following is NOT something external auditors are expected to do in looking for fraud? A. Considering audit risk and materiality B. Evaluating management's commitment to serve the public interest C. Assessing the control environment of the organization D. Evaluating internal controls If the financial statements are not materially misstated, the auditor should give a(an): A. Unmodified opinion B. Qualified opinion C. Modified opinion D. Adverse opinion An example of fraudulent financial statements is: A. Failure to provide adequate documentation to support financial statements B. Misrepresentation of events, transactions, and other significant events in the financial statements C. Aggressive accounting for transactions, events, or other significant matters D. Misappropriation of assets Misstatements in the financial statements can result from: A. Illegal acts improperly recorded B. Fraud C. Errors D. All of the above Misstatements in the financial statements are most likely to occur when there are: A. Omission of notes to the financial statements B. Failure to disclose major estimates made in the financial statements C. Omission of the auditor's report D. Failure to disclose major judgments made in the financial statements The auditor's responsibility with regard to illegal acts is greatest when: A. The illegal acts have a direct and immaterial effect on financial statement amounts B. Illegal acts exist regardless of the effects on the financial statements C. The illegal acts have an indirect and material effect on financial statement amounts D. The illegal acts have a direct and material effect on financial statement amounts The first step for an auditor who concludes an illegal act exists is to: A. Bring the matter to the attention of the SEC B. Assess the impact of the illegal act on the auditor's opinion C. Assess the impact of the illegal act on the financial statements D. Bring the matter to the attention of the audit committee An auditor concludes that a client has committed an illegal act that has not been properly accounted for or disclosed. The auditor is most likely to withdraw from the engagement when the: A. Client refuses to take the remedial steps deemed necessary by the auditors B. Auditor is precluded from obtaining sufficient competent evidence about the illegal act C. Illegal act has an effect on the financial statements that is both material and direct D. Auditor cannot reasonably estimate the effect of the illegal act on the financial statements The Private Securities Litigation Reform Act imposes additional requirements on public companies reporting to the SEC and their auditors when: A. The failure to correct for the action is reasonably expected to warrant a departure from the standard audit report B. Senior management and the board have not acted properly to correct for the act C. The illegal act has a material effect on the financial statements D. All of the above are additional requirements Auditors are responsible to detect and correct errors when they are: A. Material B. Due to an illegal act C. Management fails to correct for the error D. Material or immaterial 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: A. It is to comply with the Private Securities Litigation Reform Act B. It is allowed for under the Dodd-Frank Financial Reform Act C. It is reported to the SEC under Section 10A of the Securities Exchange Act D. It protects the auditor's accounting for fraud and illegal acts The purpose of the fraud triangle is to identify: A. The causes of when there is a lack of independence in performing an audit B. The causes of when the audit opinion should be qualified C. The causes of illegal acts D. The causes of and reasons for fraud when there may be intentional misstatements or omissions of amounts or disclosures in the financial statements The difference between errors in the financial statements as compared to fraud is: A. Fraud is always an intentional act designed to deceive another party B. An error is always an intentional act designed to deceive another party C. An error always leads to a qualification of the auditors' opinion D. Fraudulent financial reporting is always material in amount Which of the following is NOT a pressure that might lead to fraud? A. Desire to maximize the value of stock options B. Meet financial analysts' earnings expectations C. Budget pressures D. Ability to carry out the fraud All of the following are in a position to commit fraud except: A. External auditors who audit the financial statements B. Top management who can override internal controls C. Employees who have access to assets D. All of the above are in a position to commit fraud All of the following tend to be rationalizations for fraud except: A. All companies use aggressive accounting techniques B. The employee will be fired unless s/he goes along with the fraud C. We are correcting a temporary problem that will not exist in the future D. We need to protect the shareholders and keep the stock price high The best explanation why the fraud at Tyco was not discovered and acted on is: A. The fraud was not material B. Failure of the corporate governance system C. Tyco management hid the fraud from the auditors D. External auditors told management to let the fraud go Which of the following elements were NOT part of the fraud at Tyco? A. Benefits given to certain members of the board of directors to secure their silence about the fraud B. Related party transactions that were not adequately disclosed C. Corporate assets used by members of top management for personal purposes D. Setting up special-purpose-entities to keep debt off Tyco's books What is enterprise risk management (ERM)? A. A process, effected by an entity's board of directors, management, and other personnel designed to identify potential events that may affect the entity and to manage risk within its risk appetite B. A process by which compliance with laws and regulations can be assessed C. A process designed to identify material events that may affect the financial statements and to manage risk within the entity's risk appetite D. A process of evaluating internal controls to ensure operations are carried out efficiently and effectively Which of the following is NOT one of the communications that should be made by external auditors to the audit committee? A. Threats to auditor independence and related safeguards to mitigate those threats B. The nature and scope of significant assumptions C. Significant deficiencies in audit procedures D. Accounting estimates The auditors' responsibility to communicate findings with respect to fraud can best be summarized as: A. Communicate to the SEC the existence of fraud but not the amount involved B. Communicate to the audit committee the existence of fraud but not the amount involved C. Communicate to the SEC both material and immaterial amounts of fraud that are detected D. Communicate to the audit committee both material and immaterial amounts of fraud that are detected Which of the following is an element of ERM? A. Aligning risk appetite and whether fraud has occurred B. Control environment C. Audit risk assessment D. Reducing operational surprises and losses Which of the following is not one of the evaluations of the control environment of an organization?, A. Whether sound integrity and ethical values, particularly of top management, are developed and understood B. Whether management's philosophy and operating style promote effective internal control over financial reporting C. Whether the company has an anonymous hot line D. Whether the Board or audit committee understands and exercises oversight responsibility over financial reporting and internal control The Committee of Sponsoring Organizations of the Treadway Committee (COSO) analyzed the financial reporting of public companies during the periods when business failures due to accounting fraud were high and found that: A. The most common fraud technique involved understating expenses B. The audit committee always sanctioned the fraud C. Top management was frequently involved in the fraud with the CEO and/or CFO being the most frequently involved D. A minority of audit reports issued during the fraud period contained unqualified audit opinions Which of the following is not part of the fraud triangle? A. Materiality B. Incentives C. Rationalizations The key element that protects an auditor against common law liability is: A. Adherence to generally accepted auditing standards (GAAS) B. Maintain confidentiality of client information C. Adherence to generally accepted accounting principles (GAAP) D. Compliance with threats and safeguards approach Which of the following is NOT one of the four stages in an audit-related dispute? A. Auditors legal liability leads to financial settlement B. Legal process resolves the dispute C. Losses are linked to material misstatements of financial statements D. Events arise that create losses for the users of the financial statements 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: A. Common law B. Business law C. Tort law D. Statutory law 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. The concept of contractual privity would no longer be important C. Financial liability would occur when scienter was proven D. All possible third party users of financial statements must be anticipated 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 that have been named by the client C. Expands an accountant's legal liability to all possible users of the audited financial statements D. Limits an accountant's legal liability to only those parties with which it has a privity relationship In Tenants Corp v. Max Rothenberg, the auditors were held legally liable for: A. Write-up work B. Gross negligence C. Ordinary negligence D. Deficient tax work 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 and Exchange Act of 1934 B. Sarbanes-Oxley Act of 2002 C. Securities Act of 1933 D. Private Securities Litigation Reform Act of 1995 The accounting issue(s) in the Crazy Eddie case were: A. Inflating inventory and net income B. Off-balance sheet entities C. Capitalizing costs that should have been expensed D. Accelerating revenues into earlier periods In establishing that the third party relied on the financial statements, one factor that works against plantiffs' establishing such reliance is: A. Damages or loss suffered by the plaintiff would not have occurred regardless of whether the audited financial statements were misstated B. Negligence did not exist C. Fraud did not exist D. 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 a valid defense to legal liability under the Securities Act of 1933? A. Due diligence defense B. Non-negligence defense C. Materiality defense D. Lack of causation defense 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: A. The management intentionally deceived the auditors B. The CPA rebuts the allegations C. The damages were incurred to a third party that was not signatory to the contract D. The CPA can shift the burden of proof to the investors Under the Securities Act of 1933, accountants who assist in the preparation of the registration statement are civilly liable if the registration statement: A. Omits information that if not given makes the facts stated misleading B. Contains untrue statements of material fact C. Omits material facts required by statue or regulation D. All of the above In Grant Thornton v. Prospect High Income Fraud, Grant used each of the following points to defend itself against legal liability except: A. Liability for fraudulent misrepresentations runs only to those whom the auditor knows and intends to influence, all of which was not proven B. There was no evidence of a casual connection between Grant's alleged misrepresentation and the funds' alleged injury C. There was no evidence of the loss suffered by the plantiffs D. There was no evidence of actual and justifiable reliance In Grant Thornton v. Prospect High Income Fund, the Texas Supreme Court held: A. Auditors were not liable for accurate accounting to anyone who reads and relies upon the audit report B. Auditors are not guarantors of accurate and reliable financial statements C. Auditors were not liable for ordinary negligence D. Management is responsible for the financial statements The Securities Act of 1933: A. Regulates which services may be performed for the publicly- traded company by an audit firm B. Regulates the auditing of financial statements for publicly-traded companies C. Regulates the initial offering of securities D. Limits the financial liability of independent auditors except in the case of gross negligence The unique aspect of auditors' legal liability in the Rosenblum v. Adler ruling is: A. Auditors could be held liable for fraud to all reasonably foreseeable third parties B. Auditors could be held liable for ordinary negligence to all reasonably foreseeable third parties C. Auditors should be able to detect all deceit by management D. Auditors could be held liable for gross negligence to all reasonably foreseeable third parties An audit engagement letter: A. Formalizes the relationship between the auditor and the client for a specific engagement B. Offers an auditor's services to a client C. Details the SEC's expectations for the audit firm for a specific engagement D. Is required by generally accepted auditing standards (GAAS) Which of the following is NOT one of the defenses an auditor can use against third party lawsuits for fraud? A. The third party was not in contractual privity B. The auditor did not have a duty to the third party C. The third party did not suffer a loss D. The third party was negligent When courts find accountants liable for constructive fraud, the implication is that: A. Auditors should be able to detect all deceit by management B. Auditors should always be liable when investors lose money due to deceit C. Accountants may be liable for fraud even when they had no knowledge of deceit D. Accountants may be held liable even to third parties to whom they did not have a duty 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: A. Fraud B. Negligence C. Constructive Fraud D. Scienter 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: A. Knowledge by the accountant that the financial statements are to be used for a particular purpose B. Some action by the accountant linking him or her to the third party that provides evidence of the accountant's understanding of intended reliance C. The intention of the third party to rely on those statements D. The identity of the third party must be directly known to the auditor The Ultramares v. Touche case of 1933 held that a cause of action based on negligence could not be maintained by a third party who was not in contractual privity; however, it did leave open the possibility that: A. Third parties who used the financial statements may sue B. Third parties may sue in the case of fraud or constructive fraud C. Third parties that were "foreseeable" may sue for ordinary negligence D. Third parties may sue if one of the parties in contractual privity allowed it to A privity relationship means that: A. A party's financial liability is limited B. A party may be a user of the financial statements C. A party has a contractual obligation D. A party may sue if fraud has taken place 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: A. Due Care B. Scienter C. Nonfeasance D. Prudence Which of the following would normally be considered sufficient to demonstrate due care on the part of the auditor? A. 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) C. The auditor had its work reviewed by another audit firm D. No omissions or misstatements have been found in the client's financial statements Who linked earnings management to an excessive zeal to project smoother earnings from year to year that casts a pall over the quality of the underlying numbers? A. Warren Buffet B. Lynn Turner C. Arthur Levitt D. Thomas E. McKee Which of the following is NOT a motivation to manage earnings? A. To maximize employee bonuses B. To smooth net income over time C. Companies try to meet or beat Wall Street earnings projections in order to grow market capitalization and increase the value of stock options D. Avoid the consequences of violating debt covenants Which of the following is NOT considered "earnings management?" A. Management emphasizes achieving long-term results to meet financial goals B. "Earnings management" is done to project smoother earnings from year to year C. Management uses "cookie-jar reserves each year" D. Executives manipulate the earnings in order to match their predetermined target Which of the following author(s) emphasize(s) a "purposeful act by management in pursuit of its own self-interests as might be the case when earnings are manipulated to get the stock price up in advance of the exercise of stock options?" A. Dechow and Skinner B. Healy and Wahlen C. Schipper D. Thomas E. McKee Which technique was used by both WorldCom and Waste Management to manage earnings? A. Accelerating the recording of revenue into an earlier period B. Manipulating asset net valuation amounts to minimize operating expenses for a period C. Delaying needed repairs to a later period D. All of the above were used