Deck 6: Financial Reporting Principles, accounting Standards and Auditing

Question 1

The application of the lower of cost or market rule in valuing inventory is an example of:

A) prudence
B) materiality
C) disclosure
D) consistency.

Answer 1

A

Question 2

The financial statements need to contain information that is useful to decision-makers.

A) relevance
B) reliability
C) materiality
D) prudence.

Answer 2

A

Question 3

The preparation of financial statements in a similar form to those of other companies facilitates:

A) comparability
B) materiality
C) reliability
D) understandability.

Answer 3

A

Question 4

If a particular item is,by reason of its nature or its size,significant to a proper understanding of the situation,it should be separately stated.

A) relevance
B) reliability
C) materiality
D) prudence.

Question 5

Which of the following statements about consistency is true?

A) A company has to use the same accounting methods in all parts of a company.
B) The same depreciation method should be employed for all assets of a company.
C) The same accounting methods must be used as those used by other companies in the industry.
D) The same accounting methods must be used from year to year,except where a change is made and the impact on profit is disclosed.

Question 6

The agency empowered to prepare and issue accounting standards for the purposes of the Corporations Act 2001 is the:

A) Australian Accounting Research Foundation
B) Australian Securities Exchange
C) Australian Securities and Investments Commission
D) Australian Accounting Standards Board.

Question 7

Use of the same accounting methods over time facilitates:

A) disclosure
B) prudence
C) comparability
D) reliability.

Question 8

Information must represent faithfully the transactions or events that have occurred.

A) relevance
B) reliability
C) materiality
D) prudence.

Question 9

In August 2011,Eggs 'R' Us was forced to destroy all its poultry as a result of an outbreak of Newcastle disease.In the annual report for the year ended 30 June 2012,published in late August,a footnote revealed the loss.This is an example of the concept or principle of:

A) disclosure
B) prudence
C) consistency
D) understandability.

Question 10

In reporting on its liability for long service leave to employees,a company is obliged to trade off:

A) understandability and consistency
B) relevance and reliability
C) materiality and disclosure
D) comparability and prudence.

Question 11

Assets are usually reported in the balance sheet at:

A) liquidation value
B) value in use
C) current or market value
D) historical cost.

Question 12

A policy of caution when estimating uncertain amounts is an example of:

A) consistency
B) prudence
C) understandability
D) materiality.

Question 13

A decision by an accountant to disregard errors involving less than 1% of profits is an application of the concept of:

A) relevance
B) consistency
C) disclosure
D) materiality.

Question 14

The decision by a motor repair company to expense small tools immediately on acquisition rather than depreciate them over their useful lives is an application of the concept of:

A) timeliness
B) materiality
C) disclosure
D) understandability.

Question 15

The agency charged with the administration and enforcement of the Corporations Act 2001 is the:

A) Australian Accounting Standards Board
B) Australian Securities Exchange
C) Australian Securities and Investments Commission
D) Australian Accounting Research Foundation.

Question 16

The practice by Woolworths Ltd of presenting their financial statements in millions of dollars is an application of the concept of:

A) relevance
B) materiality
C) understandability
D) prudence.

Question 17

Which accounting concept is involved in the requirement that financial statements contain information that is useful to those who are making decisions?

A) prudence
B) comparability
C) reliability
D) relevance.

Question 18

The letters GAAP stand for:

A) government approved accounting principles
B) generally accepted audit procedures
C) generally accepted audit principles
D) generally accepted accounting principles.

Question 19

Information should have predictive value and/or feedback value.

A) relevance
B) reliability
C) materiality
D) prudence.

Question 20

Which of the following is not a key point of the Framework?

A) Relevance and reliability are the primary qualitative characteristics that financial information should possess.
B) Consistency should not be an end in itself.
C) The concept of prudence should always take precedence over reliability.
D) Financial information may lose its relevance if there is undue delay in reporting it.

Question 21

Which of the following items is/are generally NOT included in a directors' report to shareholders?

A) names of directors
B) principal activities of the company
C) budgeted net profit for following year
D) significant changes in the company's state of affairs.

Question 22

A liability should only be recognised in the financial statements when: (i)reserves have been set aside by the entity
(ii)the amount can be measured reliably
(iii)it is probable that the future sacrifice of economic benefits will be required.

A) (i)and (ii)only
B) (i)and (iii)only
C) (ii)and (iii)only
D) (i),(ii)and (iii).

Question 23

Which of the following is/are essential requirements for an asset to exist for accounting purposes? (i)The entity must be able to control the future economic benefits associated with the item.
(ii)The entity must be the legal owner of the item.
(iii)The entity must have purchased the item.

A) (i)only
B) (i)and (ii)only
C) (i)and (iii)only
D) (ii)and (iii)only.

Question 24

Which of the following statements about accounting regulation is NOT true?

A) The Financial Reporting Council is responsible for providing broad oversight of the accounting standard-setting process in the private and public sectors.
B) One of the key functions of the Australian Accounting Standards Board is to oversee the operation of the Financial Reporting Council.
C) The Australian Securities and Investments Commission monitors compliance with accounting standards.
D) ASIC promotes honesty and fairness in financial markets.

Question 25

Which of the following statements about a liability is true?

A) A liability is restricted to being a legal debt.
B) A liability must result from a past transaction or event.
C) A liability arises when a business creates reserves for contingencies.
D) A liability results even if the entity can avoid the sacrifice of economic reasons.

Question 26

The external auditor renders an 'except for' opinion when he/she:

A) is unable to express an opinion either way because of a limitation in the work he or she was able to do
B) considers that the financial statements are not presented fairly in accordance with GAAP
C) is generally satisfied except for a specified departure from GAAP in the statements
D) is unable to obtain sufficient reliable audit evidence.

Question 27

Which of the following is NOT an essential characteristic of an asset?

A) It must be legally owned by the entity.
B) The entity must have control over the asset.
C) The transaction giving the entity control over the asset must have occurred.
D) It is probable that future economic benefits will flow to the entity.

Question 28

Which of the following statements about liabilities is NOT true?

A) An intention to repair a machine in 6 months' time does not give rise to a liability.
B) If a liability is to be reliably measured,estimation procedures cannot be used.
C) For a liability to exist,the entity must not be able to avoid the sacrifice of economic resources.
D) A liability is a present obligation arising from past events.

Question 29

The standard version of the audit report does NOT state that:

A) the financial statements are the responsibility of management
B) the auditor's responsibility is to express an opinion on the financial statements
C) the company will remain a going concern
D) the financial statements give a true and fair view.

Question 30

The Framework states that an asset should be recognised when and only when: (i)the asset possesses a cost or other value that can be measured reliably
(ii)it is legally owned by the entity
(iii)it is probable that the future economic benefits embodied in the asset will eventuate.

A) (i)and (ii)only
B) (i)and (iii)only
C) (ii)and (iii)only
D) (i),(ii)and (iii).

Question 31

Which of the following is NOT included in the corporate governance statement required under stock exchange regulations?

A) composition of audit committee
B) audit report
C) remuneration policy for directors
D) statement of ethical standards.

Question 32

Which of the following is an essential requirement for an asset to exist for accounting purposes?

A) An asset must be tangible.
B) An asset must have been exchanged for another asset.
C) An asset must be under the control of the entity.
D) An asset must have been acquired at a cost to the entity.

Question 33

Which of the following is NOT true? The external auditor's report provides the auditor's opinion that:

A) the financial statements give a true and fair view
B) the financial statements are in accordance with the provisions of the Corporations Act 2001
C) the financial statements are in accordance with applicable accounting standards
D) the financial statements are accurate.

Question 34

The external auditor renders an adverse opinion when he/she:

A) is unable to express an opinion either way because of a limitation in the work he or she was able to carry out
B) considers that the financial statements are not presented fairly in accordance with GAAP
C) is generally satisfied except for a specified departure from GAAP in the statements
D) is unable to obtain sufficient reliable audit evidence.

Question 35

Which of the following items would be recognised as a liability?

A) advances from customers for goods and services to be provided next year
B) accumulated depreciation
C) the estimated cost of maintenance of plant deferred from this year to next year
D) interest earned but not yet received.

Question 36

Which of the following opinions is NOT included in the directors' statement accompanying the financial statements?

A) whether the company can pay its debts when they fall due
B) whether the financial statements give a true and fair view of the financial performance of the company
C) whether the cash budget fairly indicates the anticipated cash flows from operations
D) whether the financial statements comply with the requirements of the Corporations Act 2001.

Question 37

Which of the following is a liability?

A) sales returns and allowances
B) general reserve
C) allowance for doubtful debts
D) unearned revenue.

Question 38

An asset should be recognised in the financial statements when: (i)an exchange has occurred
(ii)it possesses a cost or other value that can be measured reliably
(iii)it is probable that the future economic benefits embodied in the asset will eventuate.

A) (i)and (ii)only
B) (i)and (iii)only
C) (ii)and (iii)only
D) (i),(ii)and (iii).

Question 39

The professional code of ethics of an accountant involves: (i)behaving in a professional manner
(ii)maintaining a level of expertise required in order to perform skillfully
(iii)following procedures that will ensure that high standards of work are met.

A) (i)and (ii)only
B) (i)and (iii)only
C) (ii)and (iii)only
D) (i),(ii)and (iii).

Question 40

Which of the following is/are included in the corporate governance statement required under stock exchange regulations? (i)composition of audit committee
(ii)statement of ethical standards
(iii)procedures for identifying and managing business risks

A) (i)and (ii)only
B) (i)and (iii)only
C) (ii)and (iii)only
D) (i),(ii)and (iii).

Question 41

Systemic effects on the share prices of companies are:

A) changes arising from the installation of a new accounting system
B) market-wide price changes coming from the economic system
C) changes resulting from government legislation
D) changes in accounting policies.

Question 42

Which of the following statements about agency theory is true?

A) Accounting information is viewed as something that is 'right'.
B) Conflicts of interest are regarded as unnatural.
C) It tends to focus on the future-oriented,decision-making role of accounting information.
D) It is concerned with contractual relationships among people.

Question 43

Which of the following statements is NOT true of parties interested in a company's financial accounting?

A) In smaller companies,managers and owners may be the same people.
B) All parties share the same interest in the company's accounting.
C) They assess past financial performance.
D) It is difficult for financial statements to meet the needs of all users.

Question 44

Which of the following statements about a portfolio is NOT true?

A) A portfolio is a way of diversifying away the unsystematic risk.
B) A portfolio made up of a group of securities with different unsystematic risks is generally more risky than any individual security.
C) The investor can assemble a portfolio with whatever risk he/she wishes.
D) Investing in a portfolio is riskier than investing in individual securities.

Question 45

If the market is efficient with respect to accounting information,which of the following statements is true?

A) Accounting reports are useless to investors.
B) It is impossible to 'beat the market' using only accounting information that was released to the market 1 month ago.
C) Knowing the contents of an annual report before it is released to the market would not be useful to an investor.
D) Capital markets respond only to expected new information.

Question 46

Which of the following statements about agency theory is NOT true?

A) Agency theory tends to focus on the stewardship role of accounting information.
B) Agency theory develops ideas about how the agent can be induced to act properly.
C) Conflict of interest is unfavourable and to be avoided at all costs.
D) For the agent,effort is costly and therefore to be minimised.

Question 47

Agency theory regards conflicts of interest as:

A) something to be eliminated before a contract can be finalised
B) the natural state of affairs
C) something bad
D) a method for solving problems.

Question 48

Agency theory tends to focus on:

A) the decision-making role of accounting information
B) the stewardship role of accounting information
C) future orientated decision making
D) the role of accountants.

Question 49

Systemic effects arise when:

A) the shares of a deceased estate are sold to enable a distribution to be made to beneficiaries
B) market-wide changes in share prices come from the economic system
C) an announcement is made regarding the future prospects of a particular company
D) the takeover of a large public company is announced.

Question 50

Which of the following statements about the efficient market hypothesis is NOT true?

A) Markets respond quickly and smoothly to public information.
B) Markets tend to respond to new information only if it is unexpected.
C) Public financial statements can be used to 'beat the market'.
D) Markets can be efficient with respect to publically available information.

Question 51

The return you earn by owning a share is:

A) the cash from dividends
B) the current price of the share on the Australian Securities Exchange
C) the change in the market price of the share
D) cash from dividends plus the change in the market price of the share.

Question 52

Which of the following statements about risk is NOT true?

A) Unsystematic risk is the security's own residual variation not related to the market.
B) Beta is a measure of the security's relationship to overall market variations.
C) A low-beta security's prices vary more than overall market prices do.
D) Risk is calculated as the variance of the share price around the average price.

Question 53

Which of the following is NOT a policy of stock exchanges?

A) To ensure that all persons investing in securities listed on the exchange have equal access to information that may affect investment decisions.
B) To regulate the conduct of securities markets.
C) To enable companies to maximise profits.
D) To protect investors and retain their confidence.

Question 54

Which of the following is NOT true of capital markets?

A) Capital markets operate somewhere in the world pretty much 24 hours a day.
B) Capital markets include trading in shares and other securities.
C) Capital markets operate in conjunction with organisations that initially issue the securities.
D) Some bonds traded in capital markets carry the right to be converted into shares at the option of the holder.

Question 55

The area of economic and accounting thought that focuses on contractual relationships among people is NOT known as:

A) contract theory
B) financial accounting
C) principal-agent theory
D) efficient market theory.

Question 56

Accounting research shows that share price changes generally happen:

A) at the same time as official earnings reports are released
B) before the official earnings reports are released
C) after the official earnings reports are released
D) at the same time as official earnings reports are released or after the official report is released.

Question 57

Which of the following is NOT an example of an event that may give rise to general information-based trading?

A) the outbreak of war
B) a change in the party in power as a result of an election
C) the announcement of a rise in inflation
D) a consistent dividend policy.

Question 58

Which of the following statements about capital markets is true?

A) Systematic risk refers to the risk arising from a firm's financing decision.
B) Returns of high-beta stocks tend to vary less than overall market prices.
C) The efficient market hypothesis states that it is not possible to consistently 'beat the market' by using publicly available information.
D) If the efficient market hypothesis were true,it would be impossible to make money in the stock market.

Question 59

A security's price may NOT vary because:

A) the whole share market is going up
B) of information specific to that security
C) of information specific to the company issuing the security
D) of consistent financial policies.