Deck 10: Corporate Governance, Notes to the Financial Statements and Other Disclosures

Question 1

Which of the following is the proper paragraph sequence for an independent Auditor's Report?

A) Scope, introduction, opinion.
B) Introduction, scope, opinion.
C) Opinion, scope, summary.
D) Introduction, opinion, scope.

Answer 1

B

Question 2

The notes to the financial statements:

A) should be referred to if more than a cursory, and perhaps misleading impression of a firm's financial position and its results of operations is to be achieved.
B) arenot an integral part of the financial statements.
C) include a great deal of detailed information that is potentially useful only to a financial analyst making a detailed appraisal of the future prospects of the entity.
D) are used by many entities to hide information from the reader of the financial statements by including in the notes information that should be shown in detail on the financial statements themselves.

Answer 2

A

Question 3

Business segment information is included in the notes to financial statements because:

A) the amounts shown on the financial statements of most companies are just too large to comprehend.
B) current and potential investors can make more informed judgments about the company.
C) net income from various geographic areas can be clearly determined.
D) by combining these amounts for each segment, ROI and cash flows for the company as a whole can be determined.

Answer 3

B

Question 4

The nature and content of disclosures relate to all of the following except:

A) accounting changes.
B) segment information.
C) management's plans for the future.
D) contingencies and commitments.
E) events subsequent to the balance sheet date.

Question 5

Management's statement of responsibility:

A) usually refers to the company's system of internal controls.
B) emphasizes that the auditors are responsible for the financial statements.
C) includes a disclaimer of responsibility for the level of the P/E ratio of the company's common stock.
D) gives the president of the company an opportunity to explain why profits changed.

Question 6

Management's statement of responsibility:

A) explains that the entity's financial statements are the responsibility of the entity's auditors.
B) states that the financial statements are free of significant error.
C) affirms that management is responsible for assuring adherence to internal control policies and procedures.
D) guarantees that the firm has operated in a highly ethical manner.

Question 7

The notes to the financial statements:

A) are not an integral part of the financial statements.
B) explain the significant accounting policies of the company.
C) usually disclose the amount of the company's bad debts expense.
D) describe management's product development plans for the coming year.

Question 8

For 2013, Skresso Co. reported $3.64 of earnings per share of common stock. During 2014, the firm had a 4% common stock dividend. The 2013 earnings per share to be reported in the annual report for 2014 are:

A) $3.79.
B) $3.64.
C) $3.50.
D) $3.49.

Question 9

Which of the following is not a topic that is likely to be discussed as a significant accounting policy?

A) Depreciation method.
B) Earnings per share of common stock calculation details.
C) Inventory valuation method.
D) Method of estimating uncollectible accounts receivable.

Question 10

Corporate governance includes concerns about:

A) business ethics and social responsibility.
B) the responsibilities of the board of directors.
C) equitable treatment of all stakeholders.
D) disclosures and transparency.
E) all of these.

Question 11

The impact of changing price levels on amounts reported in financial statements is:

A) reported as a separate item on the balance sheet.
B) accomplished by reporting assets at their replacement cost.
C) required to be described in the notes to the financial statements.
D) encouraged, but not required to be described in the notes to the financial statements.

Question 12

A firm's cash dividends were $3.96 per share of common stock for calendar 2013. In 2014, the stock was split 3-for-1, and in 2015 a 10% stock dividend was issued. Dividends per share for 2013, to be reported in the firm's annual report for 2015, are:

A) $3.96.
B) $1.45.
C) $1.32.
D) $1.20.

Question 13

When an entity changes its accounting from one generally accepted method to another generally accepted method:

A) financial statements of all prior years are changed to maintain comparability.
B) an explanatory note stating that the change was approved by the Financial Accounting Standards Board is required.
C) the dollar effect of the change on both the balance sheet and income statement must be disclosed.
D) changes like this are not permitted.

Question 14

A firm's independent auditors have the responsibility to:

A) assess the firm's accounting policies.
B) ascertain the firm's profit potential.
C) uncover all fraudulent activities.
D) assess management's discussion and analysis.

Question 15

Firms that issue registered securities are required to file, with the SEC on an annual basis, which of the following?

A) An annual report.
B) A form 10-K.
C) A set of financial statements.
D) All of these.

Question 16

The most powerful corporate governance legislation to date has been:

A) the Sarbanes-Oxley Act (SOX) of 2002.
B) the creation of the American Institute of Certified Public Accountants.
C) Corporate Ethics Code of 2007.
D) the regulation of inventory management practices by the SEC.

Question 17

The independent auditors' report usually:

A) presents a "clean bill of health" for the company.
B) refers to the quality of the company's products or services.
C) includes an opinion that the financial statements are correct.
D) includes an opinion that the financial statements present fairly, in all material respects, financial information about the company.

Question 18

Which is the following descriptions is not one of the "Thirteen Financial Shenanigans" identified by Schilit and Perler, and listed in Exhibit 10-1:

A) recording revenue too soon or that is of a questionable quality.
B) boosting income with one-time gains.
C) failing to record intangible assets which the company has ownership rights to.
D) shifting future expenses to the current period as a special charge.
E) failing to record or improperly reducing liabilities.

Question 19

Significant accounting policies are described in the notes to the financial statements because:

A) there isn't enough space for them to be included in the captions of the financial statements.
B) if the accrual basis of accounting is used, "matching" of revenues and expenses may not take place.
C) the reader must be aware of which of the alternative generally accepted accounting practices have been used.
D) none of these.

Question 20

The Sarbanes-Oxley Act (SOX) of 2002 does not specifically prohibit an independent auditor from performing the following non-audit function(s) for an audit client:

A) financial information systems design and implementation.
B) internal audit outsourcing services.
C) tax services.
D) "expert" services.
E) SOX specifically prohibits an independent auditor from performing all of the non-audit services for an audit client.

Question 21

Which of the following requires an explanatory paragraph in the independent auditors' report?

A) Basing the opinion on the work of another auditor.
B) Uncertainties about the outcome of a significant event that would have affected the presentation of the financial statements.
C) Substantial doubt about the entity's viability to continue as a going concern.
D) None of these.
E) Basing the opinion on the work of another auditor, uncertainties about the outcome of a significant event that would have affected the presentation of the financial statements and substantial doubt about the entity's viability to continue as a going concern are correct.

Question 22

An audit conducted in accordance with generally accepted auditing standards includes each of the following except:

A) examination, on a test basis, of evidence supporting the amounts and disclosures in the financial statements.
B) evaluation of the efficiency and effectiveness of management.
C) assessment of the accounting principles used and significant estimates made by management.
D) planning and performance of the audit to obtain reasonable assurance that the financial statements are free of material misstatements.