Deck 17: Financial Reporting Disclosure Requirements and Ethical Responsibilities

Question 1

The Securities and Exchange Commission's fraud rule prohibits trading on the basis of inside information of a business corporation's stock by

A) Officers
B) Officers and directors
C) All officers, directors, and stockholders
D) Officers, directors, and beneficial holders of 10 percent of the corporation's stock

Answer 1

D

Question 2

The primary responsibility for the adequacy of disclosure in the financial statements and footnotes rests with the

A) Partner assigned to the engagement
B) Auditor in charge of fieldwork
C) Staff who draft the statements and footnotes
D) Client

Answer 2

D

Question 3

Which of the following should be disclosed in the Summary of Significant Accounting Policies?

A) Composition of plant assets
B) Pro forma effect of retroactive application of an accounting change
C) Method of depreciation
D) Maturity dates of long-term debt

Answer 3

C

Question 4

A segment of a business enterprise is to be reported separately when the revenues of the segment exceed 10 percent of the

A) Combined net income of all segments reporting profits
B) Total combined revenues of all segments reporting profits.
C) Total revenues of all the enterprise's industry segments.
D) Total export and foreign sales. .

Question 5

Under the Securities Act of 1933, subject to some exceptions and limitations, it is unlawful to use the mails or instruments of interstate commerce to sell or offer to sell a security to the public unless

A) A surety bond sufficient to cover potential liability to investors is obtained and filed with the Securities and Exchange Commission
B) The offer is made through underwriters qualified to offer the securities on a nationwide basis
C) A registration statement has been properly filed with the Securities and Exchange Commission, has been found to be acceptable, and is in effect
D) The Securities and Exchange Commission approves of the financial merit of the offering

Question 6

Major, Major, and Sharpe, CPA's, are the auditors of MacLain industries. In connection with the public offering of $10 million of MacLain securities, Major expressed an unqualified opinion as to the financial statements. Subsequent to the offering, certain misstatements and omissions are revealed. Major has been sued by the purchasers of the stock offered pursuant to the registration statement, which include the financial statements audited by Major. In the ensuing lawsuit by the MacLain investors, Major will be able to avoid liability if

A) The errors and omissions were caused primarily by MacLain
B) It can be shown that at least some of the investors did not actually read the audited financial statements
C) It can prove due diligence in the audit of the financial statements of MacLain
D) MacLain had expressly assumed any liability in connection with the public offering

Question 7

Footnotes to financial statements should not be used to

A) Describe the nature and effect of a change in accounting principles
B) Identify substantial differences between book and tax income
C) Correct an improper financial statement presentation
D) Indicate bases for valuing assets

Question 8

Footnotes to a company's financial statements are used to
A) Justify fraudulent business practices.

A) More fully explain certain items in the financial statements.
B) Reflect financial notes personalized by the company's executive team.
C) Show the detail of salaries of every employee.

Question 9

For interim financial reporting, an inventory loss from a temporary market decline in the first quarter which can reasonably be expected to be restored in the fourth quarter

A) Should be recognized as a loss proportionately in each of the first, second, third, and fourth quarters
B) Should be recognized as a loss proportionately in each of the first, second, and third quarters
C) Need not be recognized as a loss in the first quarter
D) Should be recognized as a loss in the first quarter

Question 10

Which of the following situations would require adjustment to or disclosure in the financial statements?

A) A merger discussion
B) The application for a patent on a new production process
C) Discussions with a customer that could lead to a 40 percent increase in the client's sales
D) The bankruptcy of a customer who regularly purchased 30 percent of the company's output

Question 11

The basic purpose of the securities laws of the United States is to regulate the issue of investment securities by

A) Providing a regulatory framework in those states which do not have their own securities laws
B) Requiring disclosure of all relevant facts so that investors can make informed decisions
C) Prohibiting the issuance of securities which the Securities and Exchange Commission determines are not of investment grade
D) Channeling investment funds into uses which are economically most important

Question 12

One of the major purposes of federal security regulation is to

A) Establish the qualifications for accountants who are members of the profession
B) Eliminate incompetent attorneys and accountants who participate in the registration of securities to be offered to the public
C) Provide a set of uniform standards and test for accountants, attorneys, and others who practice before the Securities and Exchange Commission
D) Provide sufficient information to the investing public who purchases securities in the marketplace

Question 13

A major impact of the Foreign Corrupt Practices Act of 1977 is that registrants subject to the Securities Exchange Act of 1934 are now required to

A) Keep records which reflect the transactions and dispositions of assets and maintain a system of internal accounting controls
B) Provide access to records by authorized agencies of the federal government
C) Records all correspondence with foreign nations
D) Prepare financial statements in accordance with international accounting standards

Question 14

A CPA is subject to a criminal liability if the CPA

A) Refuses to turn over the working papers to the client
B) Performs an audit in a negligent manner
C) Willfully omits a material fact required to be stated in a registration statement
D) Willfully breaches the contract with the client

Question 15

An Accounting Principles Board Opinion was concerned with disclosure of accounting policies. A singular feature of this particular opinion is that it

A) Calls for disclosure of every accounting policy followed by a reporting entity
B) Applies to immaterial items whereas most opinions are concerned solely with material items
C) Applies also to accounting policy disclosures by not-for-profit entities, whereas most opinions are concerned solely with accounting practices of profit-oriented entities
D) Prescribes a rigid format for the disclosure of policies to be reported upon

Question 16

The stock of Gates, Inc., is widely held, and the company is under the jurisdiction of the Securities and Exchange Commission. In the annual report, information about the significant accounting policies adopted by Gates should be

A) Omitted because it tends to confuse users of the report
B) Included as an integral part of the financial statements
C) Presented as supplementary information
D) Omitted because all policies must comply with the regulations of the Securities and Exchange Commission

Question 17

Assuming that none of the following have been disclosed in the financial statements, the most appropriate item for footnote disclosure is the

A) Collection of all receivables subsequent to year end
B) Revision of employees' pension plan
C) Retirement of president of company and election of new president
D) Material decrease in the advertising budget for the coming year and its anticipated effect upon income

Question 18

The Securities and Exchange Commission (SEC) was established in1934 to help regulate the U.S. securities market. Which of the following statements is true concerning the SEC?

A) The SEC prohibits the sale of speculative securities.
B) The SEC regulates only securities offered for public sale.
C) Registration with the SEC guarantees the accuracy of the registrant's prospectus.
D) The SEC's initial influence and authority has diminished in recent years as the stock exchanges have become more organized and better able to police themselves.

Question 19

Which of the following should be disclosed in a Summary of Significant Accounting Policies?

A) Depreciation method followed
B) Types of executory contracts
C) Claims of equity holders
D) Amount for cumulative effect of change in accounting principle

Question 20

Significant accounting policies may not be

A) Selected on the basis of judgment
B) Selected from existing acceptable alternatives
C) Unusual or innovative in application
D) Omitted from financial statement disclosure on the basis of judgment

Question 21

According to the disclosure requirements outlined in Statement of Accounting Concepts No. 5, the following is an example supplementary information that should be disclosed because it affects an area that is directly affected by existing FASB Standards

A) Management discussion and analysis.
B) Segment information.
C) Accounting policies.
D) A statement of cash flows.

Question 22

The discrete view of interim reporting

A) Holds that an interim period is a separate accounting period; thus, revenues and expenses should be treated as though they occurred only in one period.
B) Holds that revenues and expenses should be allocated to the various interim periods.
C) Holds that revenues and expenses should be reported as they occur.
D) Holds that an interim period is an integral part of the annual reporting period.

Question 23

Which of the following post-balance-sheet events would require adjustment of the accounts before issuance of the financial statements?

A) Loss on a lawsuit, the outcome of which was deemed uncertain at year end
B) Loss of plant as a result of fire
C) Changes in the quoted market prices of securities held as an investment
D) Loss on an uncollectible account receivable resulting from a customer's major flood loss

Question 24

The statement that "the financial statements were prepared in accordance with generally accepted accounting principles" is found in the
A) Management letter

A) Auditor's report.
B) Management discussion and analysis
C) Footnotes to the balance sheet.

Question 25

The Securities act of 1933

A) Regulates the trading of securities of publicly held companies.
B) Regulates the initial public sale and distribution of a corporation's securities.
C) Addresses the personal duties of corporate officers.
D) Specifies information that is to be contained in a company's annual report.

Question 26

The Sarbanes-Oxley (SOX) Act of 2002 created the PCAOB. The PCAOB

A) Is primarily responsible for establishing generally accepted accounting principles.
B) Provides legal and expert services to CPA firms when they are involved in class-action law suits.
C) Oversees the conduct of acts that are intended to influence, coerce, manipulate, or mislead a CPA when he/she is preparing a company's financial statements.
D) Oversees audits of companies whose securities are public traded.

Question 27

APB Opinion No. 28 (FASB ASC 270) indicates that

A) The discrete view is the most appropriate approach to take in preparing interim financial reports.
B) The same accounting principles used for the annual report should be employed for interim reports.
C) All companies that issue an annual report should issue interim financial reports.
D) The three basic financial statements should be presented each time an interim period is reported upon.

Question 28

The inclusion of MD&A (Management Discussion and Analysis) in annual reports is required by the

A) FASB.
B) AICPA.
C) SEC.
D) APB.

Question 29

Norris Company settled a lawsuit in February for an amount that was significantly different from the amount that was originally accrued as an estimate of potential loss. The company's year-end is December 31 and its financial statements are issued in March. This is an example of

A) A subsequent event that must be disclosed, but because it happened after the balance sheet date no adjustment is needed.
B) A subsequent event that provided evidence of a condition that did not exist at the balance sheet date.
C) A subsequent event that need not be disclosed because it did not occur before the company's yearend.
D) A subsequent event that provided further evidence of conditions that existed on the balance sheet.

Question 30

Which of the following Federal Acts required the SEC to develop guidelines for all publicly traded companies to report on management's responsibilities for, and assessment of, the internal control system?

A) Securities Act of 1933,
B) The Securities Exchange Act of 1934
C) The Foreign Corrupt Practices Act of 1977
D) The Sarbanes-Oxley Act of 2002

Question 31

The Sarbanes-Oxley (SOX) Act of 2002 created the PCAOB. The PCAOB

A) Is primarily responsible for establishing generally accepted accounting principles.
B) Provides legal and expert services to CPA firms when they are involved in class-action law suits.
C) Oversees the conduct of acts that are intended to influence, coerce, manipulate, or mislead a CPA when he/she is preparing a company's financial statements.
D) Oversees audits of companies whose securities are public traded.

Question 32

The Management Discussion and Analysis section of a company's annual report covers which of the following three items:

A) Income statement, balance sheet, and statement of owners' equity.
B) Income statement, balance sheet, and statement of cash flows.
C) Changes in the stock price, mergers, and acquisitions.
D) Liquidity, capital resources, and results of operations.

Question 33

A disclaimer of opinion is issued when

A) All informative disclosures have not been made in the financial statements.
B) Circumstances prevent the auditor from performing all audit procedures necessary to comply with generally accepted auditing standards.
C) The financial statements are not prepared in accordance with generally accepted accounting principles.
D) There is a potential going concern issue.

Question 34

Which SEC reporting form is the normal registration statement for securities to be sold to the public?
A) Form 10.

A) Proxy Statement.
B) Form 10-K.
C) Form 10-Q.

Question 35

Footnote disclosure that summarizes information that does not meet the measurement and reporting requirements for presentation in a company's financial statements, but is useful to informed readers, is required in order to meet the concept of

A) Understandability.
B) Reliability.
C) Representational faithfulness.
D) Cost/benefit.

Question 36

List and discuss the recognition criteria for the two types of subsequent events.

Question 37

Companies should disclose which of the following in interim reports

A) Changes in accounting principles.
B) Seasonal revenue, cost, or expenses.
C) Basic and diluted earnings per share
D) All of the above

Question 38

List and discuss the types of information commonly disclosed in the footnotes to corporate financial statements.
a. Accounting policies. APB Opinion No. 22, "Disclosure of Accounting Policies" (See FASB ASC 235), required all companies to disclose both the accounting policies the firm follows and the methods it uses in applying those policies. Typically, companies disclose this information in a Summary of Significant Accounting Policies preceding the footnotes. Specifically, APB Opinion No. 22 required that the accounting methods and procedures involving the following be disclosed:
b. Schedules and exhibits. -Firms typically report schedules or exhibits concerning long-term debt and income tax, for example. The purpose of supplementary schedules is to improve the understandability of the financial statements. They may be used to highlight trends, such as five-year summaries; or they may be required by FASB pronouncements, such as information on current costs.
c. Explanations of financial statement items. -Some items require additional explanation so that users can make sense of the reported information. Pensions and postretirement benefits are two examples. Parenthetical disclosures are contained on the face of the financial statements (usually on the balance sheet). They are generally used to describe the valuation basis of a particular financial statement element but also may provide other kinds of information, such as the par value and number of shares authorized and issued for various classes of a company's stock
d. General information about the company. -Occasionally, firms face events that may impact their financial performance or position but cannot yet be recognized on the financial statements. In that case, investors have an interest in learning this information as soon as possible. Information concerning subsequent events and contingencies are two examples.

Question 39

Conboy Corporation disclosed in the notes to its financial statements that a significant number of its unsecured trade account receivables are with companies that operate in the same industry. This disclosure is required to inform financial statement users of the existence of

A) Concentration of market risk.
B) Risk of measurement uncertainty.
C) Off-balance sheet risk of accounting loss.
D) Concentration of credit risk.

Question 40

List the building blocks to disclosure described in SFAC No. 5.

Question 41

List the six criteria identified by the Anderson report and are indicative of effective auditor performance.

Question 42

List the four sections of the AICPA Code of Professional Conduct.

Question 43

Discuss the general purposes of:
a. The Securities Act of 1933
The Securities Act of 1933 regulates the initial public sale and distribution of a corporation's securities (going public). The goal of this legislation is the protection of the public from fraud when a company is initially issuing securities to the general public. The provisions of the Securities Act of 1933 require a company initially offering securities to file a registration statement and a prospectus with the SEC. The registration statement becomes effective on the twentieth day after filing unless the SEC requires amendments. This twenty-day period is termed the waiting period, and it is unlawful for a company to offer to sell securities during this period. The registration of securities under the provisions of the 1933 Act is designed to provide adequate disclosures of material facts to allow investors to assess the degree of potential risk. Nevertheless, registration does not completely protect investors from the possibility of loss, and it is unlawful for any company officials to suggest that registration prevents possible losses.
b. The Securities Exchange Act of 1934
The Securities Exchange Act of 1934 regulates the trading of securities of publicly held companies (being public). This legislation addresses the personal duties of corporate officers and owners (insiders) and corporate reporting requirements, and it specifies information that is to be contained in the corporate annual reports and interim reports issued to shareholders. The Act established extensive reporting requirements to provide continuous full and fair disclosure. Each corporation that offers securities for sale to the general public must select the appropriate reporting forms. The most common reporting forms, all of which can be obtained from the SEC's Web site, are:
Form 10. -the normal registration statement for securities to be sold to the public.
Form 10-K. -the annual report.
Form 10-Q. -the quarterly report of operations.
Proxy statement. -used when a company makes a proxy solicitation for its stockholder meetings.
One of the major goals of the 1934 Act is to ensure that any corporate insider (broadly defined as any corporate officer, director, or 10 percent-or-more shareholder) does not achieve an advantage in the purchase or sale of securities because of a relationship with the corporation. It also established civil and criminal liabilities for insiders making false or misleading statements when trading corporate securities. The specific SEC reporting requirements for going public and being public are beyond the scope of this text; however, it should be noted that the SEC's stipulation that much of the information provided in the 10-K, 10-Q, and proxy reports must be certified by an independent certified public accountant has been a significant factor in the growth and importance of the public accounting profession in the United States.
c. The Foreign Corrupt Practices Act of 1977
The Foreign Corrupt Practices Act (FCPA) of 1977 contains two main elements. The first makes it a criminal offense to offer bribes to political or governmental officials outside the United States and imposes fines on offending firms. It also provides for fines and imprisonment of officers, directors, or stockholders of offending firms.
The second element of the FCPA is a requirement that all public companies must (1) keep reasonably detailed records that accurately and fairly reflect company financial activity and (2) devise and maintain a system of internal control that provides reasonable assurance that transactions were properly authorized, recorded, and accounted for. This element is an amendment to the Securities Exchange Act of 1934 and therefore applies to all corporations that are subject to the Act's provisions. The major goals of this legislation are the prevention of the bribery of foreign officials and the maintenance of adequate corporate financial records.

Question 44

What information is required to be included in the Management Discussion and Analysis section of the 10-K annual report? (Do not include the information required by item 7a).

Question 45

In April 2013, the FASB issued Accounting Standards Update 2013-07, Presentation of Financial Statements (Topic 205): Liquidation Basis of Accounting.
a. Define the term liquidation as used in this pronouncement.
Liquidation is defined as "the process by which an entity converts its assets to cash or other assets and partially or fully settles its obligations with creditors in anticipation of the entity ceasing its operations." 4 Liquidation is considered to be imminent when either of the following situations occurs:

Question 46

What are the purposes of the letter to stockholders?

Question 47

Discuss three general provisions of the Sarbanes-Oxley Act.

Question 48

Define market risk and the types of market risk to be disclosed in item &a of a company's MD&A.

Question 49

In January 2014, the AICPA's Professional Ethics Executive Committee (PEEC) approved a revised AICPA Code of Professional Conduct that restructures the Code to improve its readability and converges the Code with international standards. The revised Code contains three sections. Part 1 contains the rules of conduct and interpretations that are applicable to members in public practice. For AICPA members in public practice who provide attest services to clients, there is a conceptual framework for independence that focuses on the specific threats to independence and certain examples of threats associated with a specific relationship or circumstance are identified. What are these identified threats? How should a public practice member deal with other threats?

Question 50

List and explain the three types of financial analysts.

Question 51

In the event the auditor cannot satisfy the criteria necessary to issue an unmodified audit opinion, he or she will issue a modified opinion. What are the types of modified opinions and what is that decision dependent upon?

Question 52

Discuss the general requirements of Sections 404(a) and 404(b) of the Sarbanes-Oxley Act.

Question 53

Discuss the framework for analysis that may be used in the resolution of ethical dilemmas.

Question 54

The AICPA recently redrafted the majority of the auditing sections in the Codification of

Question 55

How is the quantitative information about market risk-sensitive instruments to be disclosed according to the SEC?

Question 56

In most cases an audit will result in the issuance of an unmodified opinion List and discuss the paragraphs contained in a standard unmodified audit option and how they differ from previous requirements.