Question 1

The Harrison Industries case deals with:    Using non-GAAP measures of earnings  Acceptability of recording unpaid severance accruals  Using EBITDA to obscure earnings  All of the above.

Accepted Answer

Acceptability of recording unpaid severance accruals

Question 2

One result of earnings management is:    It brings into question the quality of earnings  It uses a non-GAAP financial measure to manipulate earnings  EBITDA does not reflect GAAP earnings  It improves shareholder returns over time

Accepted Answer

It brings into question the quality of earnings

Question 3

The best way to characterize the role of Sherron Watkins in the downfall of Enron is:    She directed the internal auditors to examine numerous transactions that led to the discovery of the fraud  She gave in to the pressure of Andy Fastow to go along with materially misstated financial statements  She was sent to jail even though she cooperated with the government in its case against Enron  She tried to alert Ken Lay about the accounting scandal at Enron

Accepted Answer

She tried to alert Ken Lay about the accounting scandal at Enron

Question 4

Which technique was used by both WorldCom and Waste Management to manage earnings?    Manipulating asset net valuation amounts to minimize operating expenses for a period  Accelerating the recording of revenue into an earlier period  Delaying needed repairs to a later period  All of the above were used

Accepted Answer

Manipulating asset net valuation amounts to minimize operating expenses for a period

Question 5

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?\"    Dechow and Skinner  Healy and Wahlen  Schipper  Thomas E. McKee

Accepted Answer

Schipper

Question 6

Accruals are potentially troublesome because:    They can lead to giving an unmodified audit opinion when it should have been modified  They provide an opportunity to manage earnings through aggressive or more conservative estimations  They always lead to fraud in financial statements  They provide an opportunity to shift debt off the books by setting up an SPE

Accepted Answer

They provide an opportunity to manage earnings through aggressive or more conservative estimations

Question 7

In surveys of managers, which technique to manage earnings was considered most acceptable?    Changing inventory valuation in order to influence earnings  Accounting manipulation  Manipulating operating decisions  Establishing cookie jar reserves

Accepted Answer

Manipulating operating decisions

Question 8

The accounting shenanigan used in the Dell Computer case can best be described as:    Recording revenue from exclusivity payments too soon or of questionable quality  Shifting current revenue from exclusivity payments to a later period  Shifting future expenses to the current period as a special charge  Shifting current expenses to a later period

Accepted Answer

Shifting current revenue from exclusivity payments to a later period

Question 9

Each of the following is a common revenue recognition device to manage earnings except:    Multiple deliverables  Channel stuffing  Buy and hold  Round tripping

Accepted Answer

Buy and hold

Question 10

An unusual aspect of the Green Mountain case is it included:    Conference calls that provided earnings guidance to shareholders and analysts were used to mask a financial fraud  Desire to meet or beat analysts\' earnings expectations led to manipulation of receivables balances  Company violated the Sarbanes-Oxley Act  PricewaterhouseCoopers knew about inflated inventory values

Accepted Answer

Conference calls that provided earnings guidance to shareholders and analysts were used to mask a financial fraud

Question 11

Which of the following is NOT an earnings management technique?    Failing to write down or write off impaired assets  Releasing questionable reserves into income  Failing to record expenses and related liabilities when future obligations remain  Creating an allowance for uncollectible accounts and adjusting it at year end

Accepted Answer

Creating an allowance for uncollectible accounts and adjusting it at year end

Question 12

You work for a company that always pushes the envelope with respect to reporting revenues and expenses. You often disagree with the company because its approach to reporting these amounts cannot be justified from a GAAP perspective. You are upset and are considering whether this is a company that has a culture you want to be part of. Which of the following best characterizes the ethical issues of concern?    Rights Theory  Moral blindness  Ethical Dissonance  Materiality

Accepted Answer

Ethical Dissonance

Question 13

Which of the following was not pointed to by the SEC as a motivation for fraud in the Xerox case?    Xerox misled investors by polishing its reputation on Wall Street and to boost the company\'s stock price  Xerox top management overrode the internal control to manipulate earnings  Xerox failed to disclose GAAP violations that led to acceleration in the recognition of approximately $3 billion in equipment revenues  Xerox recognized a greater amount of revenue on leases in early years than warranted and didn\'t break out revenues that should have been deferred and recognized in future years

Accepted Answer

Xerox top management overrode the internal control to manipulate earnings

Question 14

Which of the following earnings management techniques were not used in the Lucent Technologies, Inc.\'s case?    Shifting current revenue to a later period  Boosting income with one-time gains  Recording revenue too soon or of questionable quality  Shifting current expenses to a later or earlier period

Accepted Answer

Shifting current revenue to a later period

Question 15

Which of the following is NOT a motivation to manage earnings?    Companies try to meet or beat Wall Street earnings projections in order to grow market capitalization and increase the value of stock options  Avoid the consequences of violating debt covenants  To smooth net income over time  To maximize employee bonuses

Accepted Answer

To maximize employee bonuses

Question 16

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?    It depends on whether the misstatements were made deliberately  It depends on whether a user relied on the financial statements  It depends on whether the statements lead to a modified or unmodified opinion  All are valid statements for Steve to support his point of view

Accepted Answer

It depends on whether the misstatements were made deliberately

Question 17

The main difference between a discretionary and nondiscretionary accrual is:    Discretionary accruals are items that management has full control over  Discretionary accruals are based on changes in the fundamental performance of the firm  Discretionary accruals arise from transactions considered normal for the firm  Discretionary accruals always lead to an increase in earnings

Accepted Answer

Discretionary accruals are items that management has full control over

Question 18

Kelly and Jordan are writing a term paper together on the concept of \"faithful representation\" in the financial statements. Kelly is assigned the task of defining it in the context of an amount being an estimate. Which of the following statements should NOT be used by Kelly in her description?    Good faith attempt to gather evidence to support the amount  Clear disclosure of an amount as an estimate  The nature and limitations of the estimating process  Error free procedures in selecting and applying an appropriate process for developing the estimate

Accepted Answer

Good faith attempt to gather evidence to support the amount

Question 19

Which of the following was NOT one of the schemes used by Beazer Homes to manipulate its earnings?  Improper recording of revenue on sale-leaseback transactions    Fraudulently increased land inventory expense accounts to reduce earnings  Over-reserving of house cost-to-complete expenses to increase reported earnings in earlier periods  Recording revenue from roundtrip transactions prematurely

Accepted Answer

Recording revenue from roundtrip transactions prematurely

Question 20

There are several aspects of the Enron fraud that are dealt with directly in SOX further connecting Enron to reform in the accounting profession. Which of the following is true?  SOX permitted the provision of internal audit service for audit clients    Off-balance-sheet financing activities were prohibited for all companies  Related-party transactions require disclosure in the notes  Cookie jar reserves must be disclosed in the notes

Accepted Answer

Related-party transactions require disclosure in the notes

Question 21

Which of the following partnerships that Enron created eventually lead to its demise?    JEDI  Cactus  Chewco  Ironman

Accepted Answer

Chewco

Question 22

Which of the following authors(s) link earnings management to choices made in determining earnings that may comprise aggressive, but acceptable, accounting estimates and judgments, as compared to fraudulent practices that are clearly intended to deceive others?    Dechow and Skinner  Healy and Wahlen  Schipper  Thomas E. McKee

Accepted Answer

Dechow and Skinner

Question 23

In the CVS acquisition of Longs Drug, the SEC concluded that the purchase price accounting (PPA) was not in compliance with GAAP because:    The amount did not reflect current use of Longs personal property at the acquisition date  CVS used an overly-aggressive technique to value Longs  CVS did not account for its use of Long\'s assets to generate revenue after the acquisition date  All of the above

Accepted Answer

CVS did not account for its use of Long\'s assets to generate

Question 24

Which of the following was not true according to the Enron case?    Fastow developed the concept of buying up oil and gas companies to establish SPEs  Fastow worked to structure ventures that met the conditions under GAAP to keep the partnership activities off Enron\'s books and on the separate books of the partnership  Fastow created SPEs that borrowed money from banks and transferred it to Enron in a sale of an operating asset no longer need by Enron  The SPE created by Fastow enabled Enron to keep debt off its books while benefiting from transfer and use of the cash borrowed by the SPE

Accepted Answer

Fastow developed the concept of buying up oil and gas companies to establish SPEs

Question 25

Which of the following was not an accounting issue in the Sunbeam case?    Cookie jar reserves  Channel stuffing  Bill and hold sales  Swap transactions

Accepted Answer

Swap transactions

Question 26

Needles suggests that making judgments about what earnings management is becomes difficult because:    It depends on management\'s intentions  There is no clear limit beyond which a choice is clearly unethical  A perfectly routine accounting estimate may be illegal and unethical  All of the above

Accepted Answer

There is no clear limit beyond which a choice is clearly unethical

Question 27

Inherent risk refers to:    The possibility that a material misstatement will occur within the reporting company\'s accounting information system  The possibility that a material misstatement that has occurred will not be detected on a timely basis by the company\'s control system  The possibility that a material misstatement that has occurred will not be caught be the independent auditor\'s testing  The possibility that a material misstatement will occur in the financial statements

Accepted Answer

The possibility that a material misstatement will occur within the reporting company\'s accounting information system

Question 28

The best definition of a financial restatement is:    A company, either voluntarily or under prompting by its auditors or regulators, revises its public financial information that was previously reported  A company, either voluntarily or under prompting by its auditors or regulators, revises its public financial information for the current period  An adjustment of financial information due to an error correction  All are part of the definition

Accepted Answer

A company, either voluntarily or under prompting by its auditors or regulators, revises its public financial

Question 29

Which of the following is NOT required of management under Section 302 of the SOX?    Review their disclosure controls and procedures quarterly  Identify key control exceptions and determine which are internal control deficiencies  Assess each internal control deficiency\'s impact on the audit report  Identify and report significant control deficiencies on material weaknesses to the audit committee and independent auditor

Accepted Answer

Assess each internal control deficiency\'s impact on the audit report

Question 30

The SEC requires stealth restatements to be:    Disclosed only in periodic reports  Disclosed only in an 8-K report or amended 10-K/A or 10-Q/A  Increased to more 50% of restatements  Disclosed in ten business days after determination of need for restatement

Accepted Answer

Disclosed only in an 8-K report or amended 10-K/A or 10-Q/A

Question 31

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?    Warren Buffet  Arthur Levitt  Thomas E. McKee  Lynn Turner

Accepted Answer

Arthur Levitt

Question 32

The Sino-Forest case centered around the:    Acceleration of revenue due to channel stuffing arrangements  Use of cookie jar reserves to manage earnings  Existence of assets  Contingent liabilities due to forestry fires

Accepted Answer

Existence of assets

Question 33

All of the following are examples of \"Boosting Income with One-Time Gains\" except:    Recording sales that lack economic substance  Boosting profits by selling undervalued assets  Including investment income or gains as part of revenue  Including investment income or gains as a reduction in operating expenses

Accepted Answer

Recording sales that lack economic substance

Question 34

The SEC\'s complaint in its case against GE included a charge that the company:    Used off-balance sheet entities to manipulate earnings  Falsified inventory values to inflate earnings  Used non-GAAP measures to meet EPS estimates  Used EBITDA to obscure reported earnings

Accepted Answer

Used non-GAAP measures to meet EPS estimates

Question 35

What is the SEC\'s position on companies that communicate with investors on social media?    It is illegal to do so  It is legal so long as companies inform investors which outlets they intend to use  It is legal so long as the postings are restricted to Facebook  There are no limitations on companies communicating through social media

Accepted Answer

It is legal so long as companies inform investors which outlets they intend to use

Question 36

Which of the following has NOT been found to be a measure of a non-GAAP financial metric?    Earnings before depreciation and amortization  Operating income before certain non-recurring expense or revenue items  EBITDA  GAAP earnings

Accepted Answer

Earnings before depreciation and amortization

Question 37

Which of the following is NOT one of the techniques used by Gemstar TV Guide International in its accounting fraud?    Created cookie jar reserves of advertising revenue to smooth net income  Engaged in round trip transactions  Used channel stuffing to accelerate the recording of revenue into earlier periods  Inflated advertising revenue from nonmonetary and barter transactions

Accepted Answer

Used channel stuffing to accelerate the recording of revenue into earlier periods

Question 38

Motivations to smooth net income over time include each of the following except:    Maximize bonuses and stock option values  Steady increase in earnings each year  Minimize overall taxes  Make it appear managers are doing better than they really are

Accepted Answer

Minimize overall taxes

Question 39

The main accounting issues in the Nortel Networks case were:    Premature revenue recognition and hidden cash reserves  Capitalization of operating expenses and hidden cash reserves  Premature revenue recognition and off-balance-sheet entities  Capitalization of operating expenses and off-balance-sheet entities

Accepted Answer

Premature revenue recognition and hidden cash reserves

Question 40

Which of the following authors(s) focus(es) on \"management\'s intent to deceive the stakeholders by using accounting devices to positively influence reported earnings?\"    Dechow and Skinner  Healy and Wahlen  Schipper  Thomas E. McKee

Accepted Answer

Healy and Wahlen

Question 41

What was the original motivation by FASB on SPEs?    To establish a mechanism to encourage companies to invest in needed assets while keeping related debt of its books  To keep the large amount of debt off the books  To sell non-producing assets to the SPE  To select which assets to sell to the SPEs affecting the gain

Accepted Answer

To establish a mechanism to encourage companies to invest in needed assets while keeping related debt of its books

Question 42

Accruals that are based on estimated changes in fundamental economic performance of the firm are:    Discretionary accruals  Nondiscretionary accrual  Operating accruals  Cookie jar accruals

Accepted Answer

Nondiscretionary accrual

Question 43

Which of the following is NOT a qualitative factor when assessing materiality?    A misstatement that changes a loss into income or vice versa  The existence of statutory or regulator reporting requirements that affect materiality thresholds  The potential effect of the misstatement on trends, especially trends in profitability  The use of simplistic numerical thresholds and rules of thumb

Accepted Answer

The use of simplistic numerical thresholds and rules of thumb

Question 44

In the Hertz fraud, the company tried to explain its use of non-GAAP financial measures by:    Comparing them to aggressive but ethical measurements  Comparing the validity of the amounts to pre-tax GAAP income  Having a conference call with financial analysts to explain their position  Correcting problems in internal controls

Accepted Answer

Comparing the validity of the amounts to pre-tax GAAP income

Question 45

All of the following are examples of \"Recording revenue too soon or of questionable quality\" except:    Recording sales that lack economic substance  Recording revenue when future services remain to be provided  Recording revenue before shipment or before the customer\'s unconditional acceptance  Recording revenue even though the customer is not obligated to pay

Accepted Answer

Recording sales that lack economic substance

Question 46

Which of the following was not a technique used by Enron to manage earnings?    Used reserves to increase earnings when reported amounts were too low  Deliberately overstated the allowance for uncollectibles and adjusted it downward in future years  Used mark-to-market estimates to inflate earnings in violation of GAAP  Selected which operating assets to \"sell\" to the SPEs, affecting the gain on transfer and earnings effect

Accepted Answer

Deliberately overstated the allowance for uncollectibles and adjusted it downward in future years

Question 47

The auditors in the Tier One Bank case were investigated by the SEC because it:    Failed to obtain sufficient competent evidential matter to support audit conclusions  Failed to exercise the appropriate level of care in its audit  Failed to exercise the proper degree of professional skepticism  All of the above

Accepted Answer

All of the above

Question 48

If a company is managing its earnings, which of the ethical theories are they most likely following?    Rights  Fairness  Egoism  Virtue

Accepted Answer

Egoism

Question 49

Vorhies identities four perspectives to help CPAs identify key internal control exceptions under the Sarbanes Oxley Act (SOX) including:     An internal control deficiency caused by accounting manipulations  A large variance in an accounting estimate compared with the actual determined amount  A misstatement that changes a loss into income or vice versa  All were identified

Accepted Answer

A large variance in an accounting estimate compared with the actual determined amount

Question 50

Sarah\'s concern in the Solutions Network case is:    Expenses were delayed at year-end to manage earnings  Revenue was recorded at year-end before the agreement with the customer was finalized  Revenue was accelerated into an earlier period through channel stuffing  Off-balance sheet entities were not disclosed

Accepted Answer

Revenue was accelerated into an earlier period through channel stuffing

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