Financial Accounting, 1e Chapter 6: Ethics, Internal Control, and IFRS Test Item File

Financial Accounting, 1e Chapter 6: Ethics, Internal Control, and IFRS Test Item File 6.0-1 Some accounting professionals believe that GAAP may have contributed to the accounting scandals as early as the 1990 s. Answer: True LO: 6-0 EOC Ref: Introduction 6.0-2 The fallout of Phar-Mor s fraud resulted in the company filing for bankruptcy. Answer: True LO: 6-0 EOC Ref: Introduction 6.1-1 Ethics is defined as principles of right and wrong. Answer: True LO: 6-1 EOC Ref: Vocabulary 6.1-2 A code of behavior defines the standards of behavior that all members of an organization are expected to follow. Answer: True LO: 6-1 EOC Ref: Vocabulary

6.1-3 In dealing with ethics, saying Do as I say, not as I do does NOT work very well. Answer: True LO: 6-1 EOC Ref: Case 1 6.1-4 In the Enron case, numerous officials of Enron were convicted of fraud. Answer: True LO: 6-1 EOC Ref: Introduction 6.1-5 In the Adelphia case, the company did NOT have to file for bankruptcy. Answer: False LO: 6-1 EOC Ref: Introduction 6.1-6 Persons who report unethical behavior are known as: A. snitches. B. whistleblowers. C. enforcers. D. writers of codes of ethics. LO: 6-1 EOC Ref: Case 1

6.1-7 Whistleblowers must be allowed to report ethics violations: A. by giving their name in their report, no matter what the consequences. B. but only with the support of another witness. C. by giving their name in their report, yet without fear of punishment or retaliation. D. anonymously, without fear of punishment or retaliation. Answer: D LO: 6-1 EOC Ref: Case 1 6.1-8 A code of ethics should be: A. verbal and communicated to all members of the organization. B. written and provided to potential new employees. C. enforced. D. written, communicated, and enforced. Answer: D LO: 6-1 EOC Ref: Case 1 6.1-9 Honesty, fairness, and integrity are all a part of: A. ethical law. B. ethical behavior. C. accounting law. D. GAAP principles. LO: 6-1 EOC Ref: Case 1

6.1-10 GAAP s overriding principles of accounting are written by the: A. FASB. B. SEC. C. IRS. D. federal government. Answer: A LO: 6-1 EOC Ref: Case 1 6.1-11 Many accountants believe that the profession needs to: A. keep the system called GAAP as it is. B. return GAAP to a system of overriding principles. C. enlarge GAAP s scope of rules. D. be more specific to specific situations. LO: 6-1 EOC Ref: Case 1 6.2-1 In a broad sense, fraud is the use of deception or trickery for personal gain. Answer: True EOC Ref: Vocabulary 6.2-2 Fraud is always committed against an organization. Answer: False EOC Ref: Vocabulary

6.2-3 Fraud is one of the less perpetrated business crimes today. Answer: False 6.2-4 An organization s employees are usually responsible for fraud that is committed by a business organization. Answer: False 6.2-5 The goal of overstating earnings by using fraud is: A. to deflate the amount of taxes the corporation pays. B. to overstate the cost of goods sold. C. that it may help to increase the stock price of the company. D. to overstate receivables. 6.2-6 Fraudulent financial reporting typically involves: A. management. B. employees. C. the board of directors. D. the stockholders. Answer: A

6.2-7 In order to overstate earnings, a company can: A. overstate expenses and overstate revenue. B. overstate receivables and understate payables. C. understate unearned revenue and understate property, plant and equipment. D. understate expenses and understate revenue. 6.2-8 Besides using an overstatement of earnings to inflate a company s stock price, overstating earnings may also be used to: A. deflate the amount of taxes the corporation pays. B. avoid paying raises to employees. C. ensure larger bonuses to upper management at year-end. D. avoid paying dividends to stockholders. 6.2-9 The primary form of fraud committed against an organization is usually done by: A. management. B. employees. C. stockholders. D. boards of directors.

6.2-10 embezzlement is a form of fraud committed against an organization. A. Management B. Employee C. Stockholder D. Board of director EOC Ref: Case 1 6.2-11 Embezzlement usually involves the misappropriation of business: A. equity by an employee. B. liabilities by an employee. C. assets by an employee. D. information by an employee. 6.2-12 If an employee overbills a company for travel, this would be considered a(n): A. disbursement scheme. B. expense scheme. C. cash register scheme. D. check tampering scheme.

6.2-13 If an employee gives a false refund and pockets the cash, this would be considered a(n): A. disbursement scheme. B. expense scheme. C. cash register scheme. D. check tampering scheme. 6.2-14 By definition, an employee who tricks a company into giving up cash for an invalid reason has engaged in a(n): A. disbursement scheme. B. expense scheme. C. cash register scheme. D. check tampering scheme. Answer: A 6.2-15 If an employee receives a check from a customer, endorses it and then cashes it, this would be considered a(n): A. disbursement scheme. B. expense scheme. C. cash register scheme. D. check tampering scheme. Answer: D

6.2-16 An employee may embezzle by taking bribes or kickbacks from: A. suppliers. B. customers. C. both suppliers and customers. D. stockholders of the company. 6.2-17 Granting customers a lower sales price for something that benefits you in return would be an example of a: A. disbursement scheme. B. bribe or kickback. C. cash register scheme. D. check tampering scheme. 6.2-18 An employee authorizing payments to a supplier for goods not delivered to the employer would be an example of a: A. disbursement scheme. B. bribe or kickback. C. cash register scheme. D. check tampering scheme Answer: A

6.2-19 Cash register schemes are a form of: A. employee embezzlement. B. bribe. C. fraudulent financial reporting. D. management fraud. Answer: A 6.2-20 Receiving favors from a supplier by turning a blind eye to the delivery of inferior goods is a form of: A. embezzlement. B. bribe. C. fraudulent financial reporting. D. management fraud. 6.2-21 Establishing fake companies, then having the company pay for goods or services that will never be delivered, and then intercepting and cashing the checks would be an example of a(n): A. employee embezzlement scheme. B. expense scheme. C. cash register scheme. D. check tampering scheme. Answer: A

6.2-22 An employee who pockets cash received from a customer without recording the transaction is an example of a(n): A. disbursement scheme. B. expense scheme. C. cash register scheme. D. check tampering scheme. 6.2-23 Overbilling the company for parking fees or cab fare would be examples of: A. disbursement schemes. B. expense schemes. C. cash register schemes. D. check tampering schemes. 6.2-24 Recording assets that the company does not possess is an example of: A. management fraud. B. employee fraud. C. collusion. D. embezzlement. Answer: A

6.3-1 For fraud to occur, three things must exist. Answer: True EOC Ref: Vocabulary 6.3-2 A business has great control over perceived pressure felt by an employee. Answer: False 6.3-3 The Fraud Triangle is used to show the connection of the factors necessary to commit fraud by or against an organization. Answer: True 6.3-4 Which of the following is NOT part of the Fraud Triangle? A. Realization B. Perceived opportunity C. Rationalization D. Perceived pressure Answer: A

6.3-5 The chance to commit a fraud, conceal it, and avoid punishment is an example of: A. realization. B. perceived opportunity. C. rationalization. D. perceived pressure. 6.3-6 Finding good reasons for doing things that we really know are wrong is an example of: A. realization. B. perceived opportunity. C. rationalization. D. perceived pressure. 6.3-7 Committing a fraud because of a drug habit or living beyond your means is an example of: A. realization. B. perceived opportunity. C. rationalization. D. perceived pressure. Answer: D

6.3-8 Committing a fraud because of easy access to a company s assets is an example of: A. realization. B. perceived opportunity. C. rationalization. D. perceived pressure. 6.3-9 An employee s moral beliefs make it impossible to commit a fraud. This contradicts which part of the Fraud Triangle? A. Realization B. Perceived opportunity C. Rationalization D. Perceived pressure 6.3-10 An employee believes that getting away with a fraud without being detected is unlikely. This contradicts which part of the Fraud Triangle? A. Realization B. Perceived opportunity C. Rationalization D. Perceived pressure

6.3-11 If an employee has a low incentive to commit fraud, the employee does NOT have: A. realization. B. perceived opportunity. C. rationalization. D. perceived pressure. Answer: D 6.3-12 Committing a fraud because of a gambling addiction is indicative of what part of the Fraud Triangle? A. Realization B. Perceived opportunity C. Rationalization D. Perceived pressure Answer: D 6.3-13 Committing a fraud because the employee feels I deserve a pay raise. The company owes this to me is indicative of what part of the Fraud Triangle? A. Realization B. Perceived opportunity C. Rationalization D. Perceived pressure

6.3-14 Committing a fraud because the employee feels that it will be easy to do is indicative of what part of the Fraud Triangle? A. Realization B. Perceived opportunity C. Rationalization D. Perceived pressure 6.3-15 can be reduced through a good system of internal control. A. Realization B. Perceived opportunity C. Rationalization D. Perceived pressure 6.3-16 The factor that would make a person feel forced to steal money because of high medical bills would be: A. realization. B. perceived opportunity. C. rationalization. D. perceived pressure. Answer: D

6.3-17 The factor that might make a person steal money because The company has more than its fair share, would be: A. realization. B. perceived opportunity. C. rationalization. D. perceived pressure. 6.3-18 Jill is stealing money because the cash registers are not always locked away at night. This is an example of: A. realization. B. perceived opportunity. C. rationalization. D. perceived pressure. 6.3-19 Attempting to justify your actions is an example of: A. realization. B. perceived opportunity. C. rationalization. D. perceived pressure.

6.3-20 I didn t steal the money, I only borrowed it until I can pay it back is an example of: A. realization. B. perceived opportunity. C. rationalization. D. perceived pressure. 6.3-21 By removing any of the components of the Fraud Triangle, the company can guarantee that : A. will be eliminated. B. will be less. C. will be greater. D. may be reduced. Answer: D 6.4-1 An organization s employees are responsible for the design and implementation of the internal control system. Answer: False LO: 6-4 EOC Ref: S6-3 6.4-2 One objective of an internal control system is to safeguard the assets of a company. Answer: True LO: 6-4 EOC Ref: S6-3

6.4-3 Ensuring compliance with laws and regulations is an example of what following GAAP can do for a company. Answer: False LO: 6-4 EOC Ref: S6-3 6.4-4 Safeguarding assets and ensuring proper reporting of financial information are two of the objectives of having an internal control system. Answer: True LO: 6-4 EOC Ref: S6-3 6.4-5 Just like anything in accounting, internal control systems are not perfect, although they do reduce the risk of undetected errors and irregularities. Answer: True LO: 6-4 EOC Ref: S6-3 6.4-6 Two or more people must work together to commit fraud. Answer: False LO: 6-4 EOC Ref: S6-3

6.4-7 Which of the following items may NOT limit the effectiveness of internal control systems in an organization? A. Properly designed controls B. Collusion C. Costs not worth benefits D. Overriding controls Answer: A LO: 6-4 EOC Ref: S6-7 6.4-8 Which of the following items may NOT limit the effectiveness of internal control systems in an organization? A. Duties not segregated B. Understanding of policies and procedures C. Poorly designed controls D. Costs not worth benefits LO: 6-4 EOC Ref: S6-7 6.4-9 A disgruntled employee who convinces another to steal from the company is an example of: A. collusion. B. monitoring. C. the control environment. D. control activities. Answer: A LO: 6-4 EOC Ref: S6-7

6.4-10 Which of the following items may NOT limit the effectiveness of internal control systems in an organization? A. Careless employees B. Benefits of system exceed the cost of the system C. Staff size limitations D. Collusion LO: 6-4 EOC Ref: S6-7 6.4-11 Internal control is a comprehensive system that helps an organization do all of the following EXCEPT: A. safeguard assets. B. safeguard liabilities. C. operate efficiently and effectively. D. ensure compliance with applicable laws and regulations. LO: 6-4 EOC Ref: S6-7 6.4-12 Internal control systems: A. are the same from company to company. B. are regulated by the Securities and Exchange Commission. C. vary from company to company. D. guarantee the safeguard of assets. LO: 6-4 EOC Ref: S6-7

6.4-13 A good internal control system does which of the following? A. Guarantees the efficiency and effectiveness of operations B. Reduces the risk of undetected errors C. Provides absolute assurance that no errors will occur D. Guarantees that fraud will be prevented LO: 6-4 EOC Ref: S6-7 6.4-14 Which of the following may NOT limit the effectiveness of internal controls? A. Poorly defined controls B. Managers overriding controls C. Not separating duties in departments D. Making sure employees are less distracted on the job Answer: D LO: 6-4 EOC Ref: S6-7 6.4-15 A company may be limited in their internal control procedures because the cost of hiring enough people to implement the procedures: A. outweighs the benefits of the system. B. has nothing to do with the effectiveness of the internal control system. C. can prevent collusion. D. can limit employee distractions. Answer: A LO: 6-4 EOC Ref: S6-7

6.5-1 According to the text, there are three elements that affect an organization s internal control system. Answer: False LO: 6-5 EOC Ref: S6-9 6.5-2 Management and staff attitudes toward internal control are an important part of control activities. Answer: False LO: 6-5 EOC Ref: S6-9 6.5-3 The ongoing process that identifies and analyzes potential problems in an organization and takes steps to reduce it is risk assessment. Answer: True LO: 6-5 EOC Ref: S6-9 6.5-4 Separation of duties is part of the control environment of an internal control system. Answer: False LO: 6-5 EOC Ref: S6-9

6.5-5 The delegation of authority and leadership is part of the control environment of an internal control system. Answer: True LO: 6-5 EOC Ref: S6-9 6.5-6 Which element of internal control deals with establishing procedures for things such as handling of incoming checks? A. Monitoring B. Control environment C. Control activities D. Risk assessment LO: 6-5 EOC Ref: S6-9 6.5-7 Which element of internal control deals with the oversight of the internal control system? A. Monitoring B. Control environment C. Information and communication D. Risk assessment Answer: A LO: 6-5 EOC Ref: S6-9

6.5-8 Which element of internal control deals with the establishment of a company s policies? A. Control environment B. Control activities C. Information and communication D. Risk assessment LO: 6-5 EOC Ref: S6-9 6.5-9 Which element of internal control deals with a company having large amounts of cash on hand? A. Control environment B. Control activities C. Information and communication D. Risk assessment Answer: D LO: 6-5 EOC Ref: S6-9 6.5-10 Employing competent employees would be an example of what element of internal control? A. Control environment B. Control activities C. Information and communication D. Risk assessment LO: 6-5 EOC Ref: S6-9

6.5-11 Establishing a hierarchy to let all management and employees know what is going on in a company would be an example of what element of internal control? A. Risk assessment B. Monitoring C. Information and communication D. Control environment LO: 6-5 EOC Ref: S6-9 6.5-12 Details that support business transactions make up what is called: A. internal control. B. monitoring.. C. risk assessment. D. an audit trail. Answer: D LO: 6-5 EOC Ref: S6-9 6.5-13 Which of the following would NOT be considered a control activity? A. Keeping accounting records B. Having written job descriptions C. Not having employees take vacations D. Changing passwords regularly LO: 6-5 EOC Ref: S6-9

6.5-14 Which of the following would NOT be considered part of the control environment? A. Having integrity and ethical values B. Assessing chances of fraud C. Having competent workers D. Having a leadership philosophy LO: 6-5 EOC Ref: S6-9 6.5-15 Which of the following would NOT be considered part of monitoring in an internal control system? A. Having an audit trail B. Assessing performance of the system C. Locating weakness of the system D. Management involvement Answer: A LO: 6-5 EOC Ref: S6-9 6.5-16 Which of the following would be considered a part of control activities in an internal control system? A. Having large quantities of cash on hand B. Separation of duties C. Having a leadership philosophy D. Locating weaknesses in an internal control system LO: 6-5 EOC Ref: S6-9

6.5-17 Having security measures, proper authorization channels, and restricted access to assets is an example of what element of internal control? A. Control environment B. Control activities C. Information and communication D. Risk assessment LO: 6-5 EOC Ref: S6-9 6.6-1 Audits confirm the accounting records and reports of a business. Answer: True 2 6.6-2 Employees conduct external audits of a business. Answer: False 2 6.6-3 Certified Public Accountants perform external audits of a company to confirm that the financial statements are fairly presented according to GAAP. Answer: True 2

6.6-4 The agency that requires financial audits of publicly traded companies is the: A. Financial Accounting Standards Board. B. Securities and Exchange Commission. C. Federal Government. D. Internal Revenue Service. 2 6.6-5 The audit opinion that all companies try to achieve is a(n): A. disclaimer of opinion. B. qualified opinion. C. adverse opinion. D. unqualified opinion. Answer: D 2 6.6-6 An audit opinion in which there are material misstatements in the financial statements is the: A. disclaimer of opinion. B. qualified opinion. C. adverse opinion. D. unqualified opinion. 2

6.6-7 An audit opinion in which the financial statements are fairly presented without exception is the: A. disclaimer of opinion. B. qualified opinion. C. adverse opinion. D. unqualified opinion. Answer: D 2 6.6-8 An audit opinion in which the auditors are unable to express an opinion is the: A. disclaimer of opinion. B. qualified opinion. C. adverse opinion. D. unqualified opinion. Answer: A 2 6.6-9 An audit opinion in which the auditors are taking exception to a specific treatment of accounting information is the: A. disclaimer of opinion. B. qualified opinion. C. adverse opinion. D. unqualified opinion. 2

6.6-10. Another name for a clean audit opinion is a(n): A. disclaimer of opinion. B. qualified opinion. C. adverse opinion. D. unqualified opinion. Answer: D 2 6.6-11. Another name for an except for audit opinion is a(n): A. disclaimer of opinion. B. qualified opinion. C. adverse opinion. D. unqualified opinion. 2 6.6-12 In order to get a handle on accounting fraud, the U. S. Congress in 2002 passed the: A. Internal Revenue Fraud Act. B. Securities and Exchange Commission Fraud Act. C. Sarbanes-Oxley Act. D. Federal Reserve Act. 2

6.6-13 The Sarbanes-Oxley act applies to: A. all corporations. B. all partnerships. C. all publicly traded companies. D. international companies doing business in the United States. 2 6.6-14 Under SOX, the external auditors must now report to: A. the management of the company being audited. B. an audit committee. C. the Securities and Exchange Commission. D. the Public Company Accounting Oversight Board. 2 6.6-15 Under SOX, the Chief Executive Officer and Chief Financial Officer must sign off on: A. all annual reports by the company. B. all quarterly reports by the company. C. all annual and quarterly reports by the company. D. the external auditor s opinion. 2

6.6-16 Under Sarbanes-Oxley, those officers signing off on the reports must have evaluated the company s internal control within the previous: A. 90 days. B. six months. C. nine months. D. year. Answer: A 2 6.6-17 One of the biggest factors in implementing SOX was: A. reviewing the financial reports. B. establishing internal control procedures. C. disclosing deficiencies in internal controls. D. the cost of implementing the system. Answer: D 2 6.6-18 The Audit Committee s responsibilities are assigned by the: A. Chief Executive Officer. B. Chief Financial Officer. C. Board of Directors. D. company Controller. 2

6.6-19 The responsibility of external and internal auditing is assigned by the: A. Audit Committee. B. Chief Executive Officer. C. Chief Financial Officer. D. Board of Directors. Answer: A 2 6.6-20 The positions of Treasurer and Controller directly report to the: A. Audit Committee. B. Vice-President of Accounting and Finance. C. Chief Executive Officer. D. Chief Financial Officer. 2 6.7-1 Currently, over half the world s countries are using International Financial Reporting Standards. Answer: True LO: 6-7 3 6.7-2 The U.S. is now using International Financial Reporting Standards instead of the old GAAP system. Answer: False LO: 6-7 3

6.7-3 The IFRS are developed by the Financial Accounting Standards Board in the United States. Answer: False LO: 6-7 3 6.7-4 The IFRS is considered a principles based system, while U.S. GAAP is considered a rules-based system. Answer: True LO: 6-7 3 6.7-5 In terms of valuation, GAAP uses current market value and IFRS uses historical cost to value items. Answer: False LO: 6-7 3 6.7-6 According to the text, the United States is considering a switch from GAAP to IFRS in: A. 2011. B. 2012. C. 2013. D. 2014. Answer: D LO: 6-7 3

6.7-7 The members of the International Standards Board are: A. appointed by the International Accounting Standards Committee. B. are elected by members of the International Accounting Standards Committee. C. are elected by CPA firms. D. volunteer CPA s approved by their respective countries. Answer: A LO: 6-7 3 6.7-8 As of 2009, the IFRS has less than standards that provide guidance on accounting issues. A. 50 B. 40 C. 80 D. 70 LO: 6-7 3 6.7-9 U.S. GAAP is a hierarchy of which number in the several hundreds. A. principles B. procedures C. rules D. laws LO: 6-7 3

6.7-10 The beginnings of International Financial Reporting Standards occurred in the: A. 1960s. B. 1970s. C. 1980s. D. 1990s. LO: 6-7 3 6.7-11 Below is a list of treatments of accounting topics. Place GAAP on the line if the treatment is GAAP-based and place IFRS on the line if the treatment is IFRS-based. A. The use of LIFO is prohibited in inventory costing. B. Research and development costs are expensed as incurred. C. Extraordinary items are reported as income from continuing operations. A. B. C. Answer: a-ifrs, b-gaap, c-ifrs LO: 6-7 3 6.7-12 Below is a list of treatments of accounting topics. Place GAAP on the line if the treatment is GAAP based and place IFRS on the line if the treatment is IFRS based. A. Development costs are capitalized and amortized over time. B. The use of LIFO is allowed. C. If contingent liabilities are possible, they are only disclosed in footnotes. A. B. C. Answer: a-ifrs, b-gaap, c-gaap LO: 6-7 3

6.7-13 Below is a list of treatments of accounting topics. Place GAAP on the line if the treatment is GAAP based and place IFRS on the line if the treatment is IFRS based. A. Under LCM inventory, market is defined as current replacement cost. B. Under LCM inventory, market is defined as the net realizable value. C. Contingent liabilities are recorded if they are either probable or possible. A. B. C. Answer: a-gaap, b-ifrs, c-ifrs LO: 6-7 3 6.7-14 Below is a list of treatments of accounting topics. Place GAAP on the line if the treatment is GAAP based and place IFRS on the line if the treatment is IFRS based. A. Development costs are capitalized and research costs are expensed. B. Interest and dividend income, and interest expense are reported in the operating section of an indirect method cash flow statement. C. Contingent liabilities are recorded only if they are probable and can be reasonably estimated. A. B. C. Answer: a-ifrs, b-gaap, c-gaap LO: 6-7 3 6.7-15 Below is a list of treatments of accounting topics. Place GAAP on the line if the treatment is GAAP based and place IFRS on the line if the treatment is IFRS based. A. Intangible assets may be purchased or internally generated. B. Intangible assets are valued at cost and only recognized if purchased. C. Extraordinary items have their own component part of net income. A. B. C. Answer: a-ifrs, b-gaap, c-gaap LO: 6-7 3

6.7-16 Below is a list of treatments of accounting topics. Place GAAP on the line if the treatment is GAAP based and place IFRS on the line if the treatment is IFRS based. A. Interest and dividend income are reported in the investing section of the cash flow statement. B. Interest expense is reported in the financing section of the cash flow statement. C. The use of LIFO is prohibited. A. B. C. Answer: a-ifrs, b-ifrs, c-ifrs LO: 6-7 Difficulty: 3 3 6.7-17 Below is a list of treatments of accounting topics. Place GAAP on the line if the treatment is GAAP based and place IFRS on the line if the treatment is IFRS based. A. The use of LIFO is allowed. B. Both research and development costs are expensed as incurred. C. Market is defined as current replacement cost. A. B. C. Answer: a-gaap, b-gaap, c-gaap LO: 6-7 Difficulty: 3 3