Deck 3: Development of Institutional Structure of Financial Accounting

Question 1

The Accounting Standards Executive Committee of the AICPA (ASEC) and the Emerging Issues Task Force (EITF) were established to solve the problems of particular industries as well as narrow technical issues.

Answer 1

True

Question 2

The AICPA has exclusive authority in the private sector for promulgating auditing rules.

Answer 2

False

Question 3

The FASB has made more extensive use of research than did its predecessors.

Answer 3

True

Question 4

The Federal Litigation Reform Act of 1995 replaced the previous proportionate liability requirement with joint and several liability for damages suffered by third parties who rely on the financial statement of firms attested to by CPAs.

Question 5

The accounting profession has been regulated by Congress since the 1880s when it became clear that accounting was an important instrument in America for conducting business.

Question 6

The Journal of Accountancy was founded by the American Association of Public Accountants in 1905.

Question 7

The Committee on Accounting Procedures (CAP) represented the profession's first sustained attempt to develop workable financial accounting rules.

Question 8

Congress has recently been concerned with the laxity of auditors in detecting and disclosing fraud.

Question 9

The responsibility of the Financial Accounting Foundation is to elect the board of trustees, which selects FASB members, funds the board's activities, and performs the oversight role.

Question 10

The Trueblood Study Group formed the FASB and called for significant changes in the establishment of financial accounting standards.

Question 11

APB Opinions were originally expected to be based on in-depth research studies.

Question 12

The Committee on Accounting Procedures (CAP) used a formalized deductive approach to develop a comprehensive accounting theory.

Question 13

Most of the responsibility for establishing accounting principles has remained with the private sector rather than the SEC.

Question 14

FASB statements have resulted in a more conservative balance sheet and immediate recognition of events on the income statement.

Question 15

An important role of the AICPA is to curb "shopping for accounting principles."

Question 16

The SEC is legally empowered to regulate accounting principles.

Question 17

The Securities Act of 1933 and the Securities and Exchange Act of 1934 were the first national securities legislations in the United States.

Question 18

A normal four-to-three majority vote is required for passing new accounting standards.

Question 19

The SEC was created by Congress to replace the AICPA's standard-setting group.

Question 20

The American Accounting Association was originally called the American Society of Certified Public Accountants.

Question 21

Which of the following was a controversial issue faced by the Accounting Principles Board (APB)?

A)The investment tax credit
B)Income tax allocation
C)Business combinations and goodwill
D)All of the above

Question 22

Which of the following characteristics does not apply to accounting practices and procedures in the United States prior to 1930?

A)They were applied uniformly among companies.
B)They were considered confidential by the companies applying them.
C)They met the needs of creditors to a greater extent than they met the needs of shareholders.
D)They emphasized the disclosure of cash and near-cash resources.

Question 23

Which state passed the law that first created the designation "Certified Public Accountant"?

A)Massachusetts
B)California
C)Ohio
D)New York
E) Iowa

Question 24

What was the purpose of APB Statement 4, Basic Concepts and Accounting Principles Underlying Financial Statements of Business Enterprises?

A)To provide a foundation for evaluating existing accounting practices
B)To assist in solving accounting problems and to guide the future development of financial accounting
C)To enhance understanding of the purposes of financial accounting
D)All of the above

Question 25

Which of the following factors led to significant changes in accounting practices?

A)The Great Depression of 1929
B)The election of Franklin D. Roosevelt to the presidency in 1932
C)The enactment of the New Deal legislation
D)All of the above

Question 26

In 1918, the American Institute of Accountants (AIA) worked with which of the following organizations to publish minimum standards for conducting a balance sheet audit?

A)The Federal Trade Commission (FTC)
B)The Securities and Exchange Commission (SEC)
C)The American Society of Certified Public Accountants
D)The New York Stock Exchange (NYSE)

Question 27

The Litigation Reform Act of 1995 requires that an audit include procedures designed to guarantee that illegal acts that would materially affect financial statements will be detected.

Question 28

Which of the following are true regarding the Financial Accounting Standards Board (FASB)?

A)The FASB includes ten members, each serving a term of three years.
B)Each member of the FASB must be a Certified Public Accountant.
C)There must be no conflict between the FASB members' private interest and the public interest.
D)All of the above are true.

Question 29

The AICPA has developed an electronic filing of financial data called EDGAR.

Question 30

Which of the following was an accomplishment of the American Association of Public Accountants?

A)The passage of a law in 1896 that created the professional designation of "Certified Public Accountant"
B)The founding of The Journal of Accountancy in 1905
C)The development of a list of terms and definitions in 1915
D)All of the above

Question 31

The International Accounting Standards Board's role in establishing standards has decreased significantly since 2002.

Question 32

In which of the following ways did the charge to the Financial Accounting Standards Board (FASB) differ from that given to the Accounting Principles Board (APB)?

A)The FASB was to establish standards of financial accounting and reporting in the most efficient and complete manner possible.
B)The FASB was to work toward standard setting with a two-pronged approach.
C)The FASB was expected to stipulate principles of accounting as an underlying framework.
D)The accounting standards established by the FASB were to be advisory rather than mandatory.

Question 33

Which of the following is not true regarding Accounting Series Release No. 4?

A)It stated that financial statements filed with the SEC and prepared in accordance with accounting principles for which there is no substantial authoritative support would be presumed to be misleading.
B)It implied that the SEC might in the future determine acceptable accounting practices and mandate methods to be used in reports filed with it.
C)It established an authoritative body for the development of accounting standards.
D)It indicated that the SEC was growing impatient with the accounting profession.

Question 34

A problem with the increased importance of the management consulting function in auditing firms is the possible erosion of the integrity of the auditing function.

Question 35

An annual report to stockholders prepared using FASB accounting standards generally has more disclosure of nonfinancial statement information than does the typical annual report filed with the SEC.

Question 36

The Committee on Accounting Procedures (CAP) was immediately succeeded by:

A)the Financial Accounting Standards Board (FASB).
B)the Accounting Principles Board (APB).
C)the Accounting Research Board (ARB).
D)the Financial Accounting Foundation (FAF).

Question 37

FASB lost a significant amount of independence from the SEC due to Sarbanes-Oxley's passage.

Question 38

The importance of the auditing function relative to the management consulting function is declining in major auditing firms.

Question 39

Criticism of the standard-setting process under the APB included:

A)exposure for tentative opinions was too limited and occurred too late in the process.
B)the standard-setting process was too long and subject to too many outside pressures.
C)both a andb.
D)none of the above.

Question 40

Which of the following is true regarding the Committee on Accounting Procedures (CAP)?

A)It developed a comprehensive statement of accounting principles.
B)It adopted a policy of attacking specific problems and recommending preferred methods of accounting when possible.
C)It was formed by the SEC in 1936.
D)It eliminated the use of alternative accounting practices by establishing an underlying accounting theory.

Question 41

Which of the following events resulted in shareholders' beginning to question whether accounting and reporting practices were adequate to assess investments?

A)The stock market crash of 1929
B)The federal government's lump-sum payments for the retirement of Liberty Bonds
C)The creation of the SEC in 1934
D)None of the above

Question 42

Why did accounting and reporting practices in the U.S. prior to 1930 not meet the needs of shareholder investors?

Question 43

The establishment of which of the following groups has resulted in a challenge to the FASB's standard-setting powers?

A)The Governmental Accounting Standards Board (GASB)
B)The Emerging Issues Task Force (EITF)
C)The Accounting Standards Executive Committee (AcSEC)
D)All of the above

Question 44

In which of the following ways has the Financial Executives Institute (FEI) become involved in the accounting standard-setting process?

A)By funding research projects in accounting and related areas
B)By reviewing FASB discussion memorandums and exposure drafts and communicating an official position to FASB.
C)By participating in FASB public hearings
D)All of the above

Question 45

The liability concept that can result in one party having to pay for more than its proportionate share of damages is called:

A)proportionate liability.
B)compensatory liability.
C)joint and several liability.
D)punitive liability.

Question 46

Post-SOX, the accounting/auditing standards setting function has been relegated to:

A)The FASB alone.
B)The FASB and the PCAOB.
C)The AICPA.
D)The IASB.

Question 47

Discuss the steps in the accounting standard-setting process and explain why it may not be capable of dealing with the complex environment of the 2000s and beyond.

Question 48

Compare and contrast the characteristics of the CAP, APB, and FASB.

Question 49

Which of the following is NOT true regarding the PCAOB?

A)The PCAOB is a governmental sector regulatory body.
B)The PCAOB is overseen by the SEC.
C)The PCAOB was established by the Sarbanes-Oxley Act.
D)The PCAOB has authority to set auditing standards.

Question 50

Which of the following bodies was created to deal with municipal accounting issues?

A)GASB
B)FASB
C)FAF
D)EITF

Question 51

Which of the following is true regarding the Emerging Issues Task Force (EITF)?

A)It has formal authority to establish GAAP.
B)Members of this group consist of CEOs of six major corporations and the chief accountant of the SEC.
C)It is concerned with highly technical issues, such as financial instruments, which may affect firms in virtually every industry.
D)All of the above

Question 52

Which of the following are characteristics of the FASB?

A)It is part of the AICPA.
B)Members are part-time employees of the FASB.
C)A member must be a CPA.
D)It makes more extensive use of research than its predecessors.

Question 53

In 1930, the AICPA began working with which of the following organizations to prepare "five broad accounting principles," one of the most important documents in the development of accounting rule making?

A)The SEC
B)The NYSE
C)The AAA
D)The FTC

Question 54

Which of the following is a true statement?

A)The SEC initially required the accounting profession to consult with it before setting any specific accounting principles.
B)The SEC was created by Congress to oversee the accounting profession.
C)The SEC was given authority to prescribe the form and content of financial information filed with the SEC.
D)The SEC formed the Committee on Accounting Procedure to develop a comprehensive set of accounting principles.

Question 55

Major complaints aimed at the FASB's standard setting process include:

A)the cost of preparing standards is too high.
B)some standards are very difficult to understand.
C)both a and b
D)none of the above

Question 56

Which of the following professional associations has an interest in the accounting standard-setting process?

A)The AICPA
B)The Financial Executives Institute (FEI)
C)The American Accounting Association (AAA)
D)All of the above

Question 57

The liability concept that restricts liability to each defendant's share of the damages based upon the judge or jury's assessment of their share of the damages is called:

A)proportionate liability.
B)compensatory liability.
C)joint and several liability.
D)disproportionate liability.

Question 58

Which of the following represented the first formal attempt to develop "generally accepted accounting principles"?

A)"Approved Methods for the Preparation of Balance Sheet Statements" in 1918
B)"Five broad accounting principles" in 1932
C)Accounting Research Bulletin (ARB) 43
D)The FASB's conceptual framework project

Question 59

Which of the following is NOT true regarding the passage of the Sarbanes-Oxley (SOX) Act?

A)SOX more clearly defined auditor independence.
B)SOX was intended to erode public confidence in the accounting profession due to recent scandals.
C)SOX replaced peer review with inspection by the PCAOB.
D)SOX implementation became the immediate focus of public companies and CPA firms.

Question 60

The accounting standard-setting process begins with which of the following steps?

A)A problem is identified.
B)A task force is formed.
C)Public hearings are held.
D)An exposure draft is issued.

Question 61

How and why did the AICPA's role change under Sarbanes-Oxley?

Question 62

Discuss what is meant by "the liability crisis in public accounting." How did the Federal Litigation Reform Act of 1995 address this issue?

Question 63

How might the AICPA regain some of the power it has lost over the years? Are there any disadvantages to these proposals?

Question 64

Describe the controversy surrounding the issuance of APB Opinion No. 2, which addressed the investment tax credit? How did the APB resolve this controversy and what was the resulting effect on the board's authority?

Question 65

How has the Government Accounting Standards Board (GASB) challenged the FASB's standard setting powers?

Question 66

Explain how Sarbanes-Oxley of 2002 significantly changes how the FASB will operate in the future.