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Chapter 9 Ethics and Financial Reporting 1. Which company is the focus of “When Is A Doughnut Hole A Real Doughnut Hole?” a. Dunkin Doughnuts b. Little Debbie Doughnuts c. Krispy Kreme Doughnuts d. Hostess Doughnuts Answer: c. Krispy Kreme Doughnuts 2. Which state was Krispy Kreme established in? a. California b. New York c. Florida d. North Carolina Answer: d. North Carolina 3. What was the chief reason why Krispy Kreme participated in illegal activities in “When Is A Doughnut Hole A Real Doughnut Hole?” a. they had to deal with undependable suppliers b. they had to meet their aggressive forecasts every quarter c. they had to manipulate the balance sheets in order to borrow money d. they had to change the ingredients in the doughnuts in exchange for bribes Answer: b. they had to meet their aggressive forecasts every quarter 4. How did Krispy Kreme manipulate their revenue in “When Is A Doughnut Hole A Real Doughnut Hole?” a. They “sold” doughnuts that did not exist b. They counted the sales to charity groups twice c. They sold doughnut making equipment to suppliers before they needed it. d. They recorded coffee sales at the same level as doughnut sales Answer: c. They sold doughnut making equipment to suppliers before they needed it. 5. The deviation from the traditional methods used to interpret an accounting rule or standard is called: a. Aggressive accounting b. Creative Accounting c. Interpretive Accounting d. Deviate Accounting Answer: b. Creative Accounting 6. The origin of creative accounting is claimed to have come from: a. Enron b. WorldCom c. Tyco d. The Producers Answer: d. The Producers 7. Which of the following is not a primary objective of financial reporting? a. makes financial decisions that relate to the firm b. help the reader determine the level of cash flows c. help the reader determine the strategic focus of the firm d. help identify the economic resources and obligations to the firm Answer: c. help the reader determine the strategic focus of the firm 8. Based on Table 9-1, the ethical perspective of utilitarian beliefs would correspond with which accounting application a. the gap between short-term and long-term benefits b. the financial records need to be accurate for everyone’s use c. each accounting decision must help the greatest number d. each accounting report must be acceptable based on accounting standards. Answer: a. the gap between short-term and long-term benefits 9. Based on Table 9-1, the ethical perspective of personal virtues would correspond with which accounting application? a. courage and integrity protect accounting’s credibility b. each accountant must be able to be comfortable with the number presented in the statements c. the financial statements reflect the ethical beliefs of the firm d. the financial statements are accurate and timely Answer: a. courage and integrity protect accounting’s credibility 10. Based on Table 9-1, the ethical perspective of individual rights would correspond with which accounting application? a. each investor has the right to review accurate financial statements b. each investor has the right to question the transparency of any financial transaction c. the firm must focus on stakeholders’ rights when making accounting decisions d. the firm must consider the impact of their employees when financial information is released Answer: c. the firm must focus on stakeholders’ rights when making accounting decisions 11. Based on Table 9-1, the ethical perspective of economic efficiency would correspond with which accounting application? a. accountants must focus on always reducing costs b. management must embrace total quality management in production and in developing financial information. c. accountants must understand the cost of inaccurate financial statements d. management must highlight efficiency benefits in the financial statements Answer: c. accountants must understand the cost of inaccurate financial statements 12. Based on Table 9-2, External Realism makes what presupposition about external financial reporting? a. All conceptual frameworks are based on a human perspective, and therefore are socially constructed. b. The financial statements are independent of the actual items they represent. c. The accountants’ ability to make valid judgments about the economic reality of the financial statements is influenced by cultural, economic, political and psychological factors. d. Information and knowledge is epistemologically objective only to the point where society can agree. Answer: b. The financial statements are independent of the actual items they represent. 13. Based on Table 9-2, Subjective Judgment makes what presupposition about external financial reporting? a. All conceptual frameworks are based on a human perspective, and therefore are socially constructed. b. The financial statements are independent of the actual items they represent. c. The accountants’ ability to make valid judgments about the economic reality of the financial statements is influenced by cultural, economic, political and psychological factors. d. Information and knowledge is epistemologically objective only to the point where society can agree. Answer: c. The accountants’ ability to make valid judgments about the economic reality of the financial statements is influenced by cultural, economic, political and psychological factors. 14. Based on Table 9-2, Conceptual Relativism makes what presupposition about external financial reporting? a. All conceptual frameworks are based on a human perspective, and therefore are socially constructed. b. The financial statements are independent of the actual items they represent. c. The accountants’ ability to make valid judgments about the economic reality of the financial statements is influenced by cultural, economic, political and psychological factors. d. Information and knowledge is epistemologically objective only to the point where society can agree. Answer: a. All conceptual frameworks are based on a human perspective, and therefore are socially constructed. 15. Based on Table 9-2, Commitment to Rationalism makes this presupposition about external financial reporting? a. All conceptual frameworks are based on a human perspective, and therefore are socially constructed. b. The financial statements are independent of the actual items they represent. c. The accountants’ ability to make valid judgments about the economic reality of the financial statements is influenced by cultural, economic, political and psychological factors. d. Information and knowledge is epistemologically objective only to the point where society can agree. Answer: d. Information and knowledge is epistemologically objective only to the point where society can agree. 16. Which of the following is a not potential conflict of interest? a. Auditor-firm b. Firm-Professional Standards c. Shareholder-Management d. Self Interest-Professional Standards Answer: b. Firm-Professional Standards 17. If an auditor has a financial interest in the firm, it would correspond to which type of conflict of interest? a. Auditor-firm b. Firm-Professional Standards c. Shareholder-Management d. Self Interest-Professional Standards Answer: d. Self Interest-Professional Standards 18. If management wanted, by any means, to make sure that a “clean audit” was presented in the firm’s annual report, it would correspond to which type of conflict of interest? a. Auditor-firm b. Firm-Professional Standards c. Shareholder-Management d. Self Interest-Professional Standards Answer: c. Shareholder-Management 19. If the CFO stated he needed to have a “clean audit” to keep his job, it would correspond to which type of conflict of interest? a. Auditor-firm b. Firm-Professional Standards c. Shareholder-Management d. Self Interest-Professional Standards Answer: a. Auditor-firm 20. Which of the following is in the first step or the getting started stage of an audit? a. The audit firm performs a risk assessment test b. The audit firm inspects the company’s computer c. The audit firm inspects the firm’s internal accounts d. The audit firm reviews the firm’s previously reported financial statements Answer: d. The audit firm reviews the firm’s previously reported financial statements 21. Which of the following occurs during the planning stage of an audit? a. The audit firm meets with the CEO b. The audit firm meets with the Board of Directors c. The audit firm inspects nonroutine transactions d. The audit firm reviews the strategic plan of the firm Answer: c. The audit firm inspects nonroutine transactions 22. Which of the following is not in the final review stage of an audit? a. The company gives the auditor a draft of the financial statements b. The auditor calls customers who owe the company money c. The audit firms tests the company’s accounting and inventory systems d. The auditor investigates related-party transactions. Answer: c. The audit firms tests the company’s accounting and inventory systems 23. The founder of which CPA firm was the first well-known auditor to address fraud a. Arthur Andersen b. Deliotte and Touche c. KPMG d. PriceWaterhouseCoopers Answer: b. Deliotte and Touche 24. When was the Securities and Exchange Commission established? a. 1929 b. 1930 c. 1931 d. 1934 Answer: d. 1934 25. In what decade were external auditors allowed to solicit clients in the United States? a. 1950s b. 1960s c. 1970s d. 1980s Answer: c. 1970s 26. What type of audit model is based on the audit firm focusing a disproportionate amount of time on high-risk areas within the firm? a. high-risk model b. risk-adverse model c. risk-exception model d. risk-based model Answer: d. risk-based model 27. Which of the following is not a question auditors should ask to help detect fraud? a. Why does the client use multiple banks? b. Why is there missing information, such as an address, on the work invoice? c. Why does the company use only cashiers’ checks for financial transactions? d. Why does the firm not rotate their suppliers? Answer: d. Why does the firm not rotate their suppliers? 28. Which of the following is not a clue that may indicate financial trouble for a firm? a. Large financial gap between sales and receivables growth b. Large financial gap between domestic and international sales c. Large financial gap between sales and inventory growth d. Heavy deficit in cash as compared to their levels of net income Answer: b. Large financial gap between domestic and international sales 29. AICPA is the short form of: a. American Inquirers of Certified Public Accountants b. All Incidents of Creative Public Accountants c. American Institute of Certified Public Accountants d. American Institute of Chartered Public Accountants Answer: c. American Institute of Certified Public Accountants 30. Which of the following is not one of the principles of the AICPA’s code of conduct? a. integrity b. due care c. scope d. trustworthiness Answer: d. trustworthiness 31. The Gramm-Leach-Bliley Act has also been called: a. the Fannie Mae Relief Act b. the Merrill Lynch Relief Act c. the Citigroup Relief Act d. the Bank of America Relief Act Answer: c. the Citigroup Relief Act 32. Which European country passed a law in 2005 that required board members to publicly disclose their salaries? a. England b. France c. Germany d. Italy Answer: c. Germany 33. Which of the following is not a firm financial statement? a. Balance Sheet b. Income Statement c. Statement of Revenue d. Statement of Cash Flows Answer: c. Statement of Revenue 34. The balance sheet is also called the a. Statement of financial performance b. Statement of assets and liabilities c. Statement of financial position d. Statement of financial security Answer: c. Statement of financial position 35. The statement that provides information pertaining to the company’s cash receipts and payments is called: a. Balance Sheet b. Income Statement c. Statement of Revenue d. Statement of Cash Flows Answer: d. Statement of Cash Flows 36. The statement that provides a summary of the firm’s net income is called: a. Balance Sheet b. Income Statement c. Statement of Revenue d. Statement of Cash Flows Answer: b. Income Statement 37. GAAP stands for: a. Greater American Accounting Practitioners b. Generally Accepted Accounting Principles c. Giant Applied Acceptable Principles d. Good Accountants Accept Punishment Answer: b. Generally Accepted Accounting Principles 38. Which of the following is not a method that can be used to manipulated financial statements? a. revenue recognition b. lease accounting c. generally accepted auditing standards d. cookie jar accounting Answer: c. generally accepted auditing standards 39. In the beginning scenario when the corporate headquarters of Krispy Kreme shipped the doughnut making equipment to the franchise owners even when they didn’t need, this was an example of which ‘tricks of the trade’ method? a. revenue recognition b. lease accounting c. one-time charges d. cookie jar accounting Answer: a. revenue recognition 40. Smoothing the earnings could be an example of which ‘tricks of the trade’ method? a. revenue recognition b. earnings management c. one-time charges d. cookie jar accounting Answer: b. earnings management 41. When Enron CEO Jeff Skilling formed partnerships with Enron which were used to reduce Enron’s debt, this was an example of which manipulated method? a. revenue recognition b. off-balance sheet items c. one-time charges d. cookie jar accounting Answer: b. off-balance sheet items 42. Krispy Kreme is the featured firm in “When Is A Doughnut Hole A Real Doughnut Hole?” a. True b. False Answer: a. True 43. Krispy Kreme has their headquarters in Boston, MA. a True Answer: b. False 44. Krispy Kreme would always set a quarterly sales target which they would always have to achieve. a. True b. False Answer: b. False 45. Krispy Kreme would try to increase revenue by forcing the franchise owners to buy dough and other ingredients before they were needed. a. True b. False Answer: b. False 46. The origin of the term creative accounting can be linked to former Enron CEO, Ken Lay. a. True b. False Answer: b. False 47. In a parody of the Nobel Prize awards, unethical managers from different firms were given awards for developing the concept of “imaginary numbers” a. True b. False Answer: a. True 48. Identifying the economic resources and obligations to the firm is one of the primary objectives of financial reporting. a. True b. False Answer: a. True 49. Identifying the relative market share position of the firm is one of the primary objectives of financial reporting. a. True b. False Answer: b. False 50. Having inaccurate financial statements that can harm society would correspond with the ethical perspective of distributive justice. a. True b. False Answer: a. True 51. Having rules and principles that are integrated to control self-interests corresponds with the ethical perspective of utilitarian beliefs. a. True b. False Answer: b. False 52. The ability to apply the Golden Rule to accounting decisions corresponds with the ethical perspective of universal rules. a. True b. False Answer: b. False 53. The Shareholder-Auditor relationship is a potential conflict of interest. a. True b. False Answer: b. False 54. The Self-Interest-Professional Standards relationship is a potential conflict of interest. a. True b. False Answer: a. True 55. The auditor investigating related-party transactions occurs during the final review stage of an audit. a. True b. False Answer: a. True 56. Arthur Andersen was the first well-known auditor to address fraud. a. True b. False Answer: b. False 57. The Securities and Exchange Commission was established during the 1940’s. a. True b. False Answer: b. False 58. AICPA stands for American Institute of Certified Public Accountants. a. True b. False Answer: a. True 59. The Gramm-Leach-Bliley Act is sometimes called the “Citigroup Relief Act” a. True b. False Answer: a. True 60. The Statement of Revenue is one of the firm’s financial statements. a. True b. False Answer: b. False 61. Raiding the Reserves is also called Cookie Jar Accounting. a. True b. False Answer: a. True 62. Earnings management is also called Income Smoothing. a. True b. False Answer: a. True 63. Why do so many illegal activities that occur within a firm relate to the manipulation of the firm’s financial statements? Answer: The firm’s financial statements are the most examined information that is released by any publicly traded firm. The firm’s financial statements highlight the financial health of the firm and can show how the firm’s current strategy is working. In addition, the firm’s financial statements can show what the firm can afford to do in the future. As a result, investors and other stakeholders put a significant weight on the information that is provided in the firm’s financial statements. When top managers are contemplating committing fraudulent acts, they always must figure a way to “get away with it”. The usual way in which they could “get away with it” is to make some kind of adjustments to the reporting of financial transactions that impact the firm’s financial statements. Therefore, in order to “cover up” the crime, the top managers must make adjustments to the firm’s financial reporting which results in misleading and inaccurate financial statements. 64. How has the role of the external auditor evolved over the years? Answer: The first major event was allowing auditors to advertise for new clients. This shifted the focus of the auditing firm from a monitoring and control mechanism for the firm to identifying their clients as revenue generators. Therefore, explosive growth in the number of clients by the auditing firms allowed for large payouts for the partners and lots of work for the auditors. However, the auditing firms quickly depended on not only obtaining new clients but protecting their existing client base at any cost. Therefore, the auditing firm would do whatever it could to please its clients even if it resulted in “aggressive accounting” The second major event was the introduction of the risk audit model since it also had a negative significant impact on the auditing process by the accounting firms. This model assumed that the majority of the operations were at a low risk and therefore the auditors would basically take the word of the management that everything was okay in these areas. Management would direct the auditors to the areas which had higher levels of risk. The underlying problem with this approach is if management was committing fraudulent acts and wanted to protect themselves, they would direct the auditors away from any transactions that could be linked to their fraudulent activities. The third major event was the passage of the Sarbanes-Oxley Act in 2002. With the passage of SOX, auditing firms had their ability to voluntary control the activities of their members limited. With the formation of the Public Company Accounting Oversight Board, the auditing firms are now under direct jurisdiction of the United States government. As a result, much stricter rules and guidelines are in place. 65. What about financial statements of privately held firms? Does fraud occur in these firms. Answer: The simple answer is that fraud can occur in any organization in which individuals have access to money or are responsible for financial transactions. It is true that privately held firms do not require external auditors for certification of their financial statements since they are not publicly traded companies. However, even though they are privately held, it does not mean that the firm does not have many stakeholders. As a result, from a stakeholder perspective, it should not matter whether the firm is publicly traded or privately held. It is the responsibility of the top mangers to present accurate, transparent financial information to those who have a vested interest in their operations. Test Bank For Understanding Business Ethics Peter Allen Stanwick, Sarah D. Stanwick 9780131735422, 9788131755365, 9781506303239, 9781452256559

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