Question 1

\"Cookie jar reserves\" can best be described as:    Buying a lot of chocolate chip cookies, storing them for when you have a hunger attack, and then releasing them into your stomach    Overstating or understating allowances and reversing amounts in the future to smooth out net income over time    Accelerating the recording of revenues into an earlier year than is warranted    Delaying the recording of expenses to a later year to boost income in the current year

Accepted Answer

Overstating or understating allowances and reversing amounts in the future to smooth out net income over time

Question 2

The North Face case deals with materiality and how auditors employ that metric in an audit. The following are all true except:    North Face accounted for barter transactions with full normal margin recognized    Crawford devised the 1997 barter transaction so that it was just beneath the materiality threshold    Crawford followed the GAAP methods that Deloitte suggested    Deloitte proposed an adjusting entry for the 1997 barter transaction, but \"passed\" on it as immaterial

Accepted Answer

Crawford followed the GAAP methods that Deloitte suggested

Question 3

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 4

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 5

The concept that earnings management might align with conservative versus aggressive reporting is known as the:    Earnings judgment    Earnings accruals    Earnings continuum    Earnings manipulations

Accepted Answer

Earnings continuum

Question 6

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 7

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 information that was previously reported

Question 8

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 9

Your professor asks you to consider whether earnings management can be justified by arguing that the net benefits of managing earnings exceeds any harms that may occur. The professor is asking you to apply what reasoning methods to make the analysis?    Egoism    Act utilitarianism    Rule utilitarianism    Virtue

Accepted Answer

Act utilitarianism

Question 10

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 11

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 12

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 13

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 14

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 15

A common method used to smooth net income over time is:    Accelerate revenue into earlier periods    Delay expenses into later periods    Using accrual of operating expenses and future adjustments    Using nonrecurring items to increase earnings in one year and reduce it later on

Accepted Answer

Using accrual of operating expenses and future adjustments

Question 16

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

Accepted Answer

Chewco

Question 17

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 18

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 19

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 20

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 21

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 22

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 23

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 24

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 25

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 26

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 27

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 28

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 29

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 30

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 31

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 32

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 33

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 34

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 35

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 36

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 37

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 revenue after the acquisition date

Question 38

Which of the following author(s) define(s) earnings management as \"reasonable and legal management decision making and reporting intended to achieve stable and predictable financial results?\"    Dechow and Skinner    Healy and Wahlen    Schipper    Thomas E. McKee

Accepted Answer

Thomas E. McKee

Question 39

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 40

Who distinguished between earnings manipulation and earnings management?    Hopwood et al.    Thomas E. McKee    Arthur Levitt    Belverd Needles

Accepted Answer

Hopwood et al.

Question 41

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 42

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 43

In the Matrixx Initiatives v. Siracusano case, the Supreme Court adopted the position about materiality that:    It should always be determined only through qualitative evaluations    It should always be determined through quantitative evaluations    It should always be determined by considering whether the amount affects past financial statements    It should be determined by considering whether the total mix of information would be viewed by a reasonable investor as possibly accepting judgment

Accepted Answer

It should be determined by considering whether the total mix of information would be viewed by a reasonable investor as possibly accepting judgment

Question 44

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 45

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 46

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 47

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 48

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 49

Each of the following is a finding of a survey of CFOs about their perceptions of earnings quality except:    CFOs believe that earnings are high quality when they are sustainable and backed by actual cash flows    CFOs believe that reporting discretion has declined over time, and that current standards somewhat restrain reporting high quality earnings    CFOs estimate that roughly 20 percent of firms manage earnings and the typical misrepresentation for such firms is about 10 percent of reported EPS    CFOs estimate that income increasing and income decreasing devices to manage earnings show a 50:50 split

Accepted Answer

CFOs estimate that income increasing and income decreasing devices to manage earnings show a 50:50 split

Question 50

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

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