Deck 17: Financial Reporting Disclosure Requirements and Ethical Responsibilities

Question 1

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

Answer 1

C

Question 2

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

Answer 2

C

Question 3

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)Staffman who drafts the statements and footnotes
D)Client

Answer 3

D

Question 4

An Account 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 5

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 6

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 7

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.
E)The SEC's powers are broad with respect to enforcement of its reporting requirements as established in the 1933 and 1934 acts,but narrow with respect to new reporting requirements because these require confirmation by the Congress

Question 8

A CPA is subject to a criminal ability 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 9

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

Question 10

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 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
E)Ensuring that all shareholders have the right to vote in the election of directors

Question 12

Footnotes to a company's financial statements are used to

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.
D)Justify fraudulent business practices.

Question 13

With respect to disclosure,the unqualified short-form report

A)States that disclosure is adequate in the financial statements including the footnotes thereto
B)States that disclosure is sufficiently adequate to make the statements not misleading
C)States that all material items are disclosed in conformity with the generally accepted accounting principles
D)Implies that disclosure is adequate in the financial statements including the footnotes thereto

Question 14

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 15

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 16

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 17

An inventory loss from a market decline occurred in the first quarter that was not expected to be restored in the fiscal year.For interim financial reporting purposes,how would the dollar amount of inventory in the balance sheet be affected in the first and fourth quarters? First Quarter Fourth Quarter

A)Decrease No effect
B)Decrease Increase
C)No effect Decrease
D)No effect No effect

Question 18

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)Basis of consolidation
D)Maturity dates of long-term debt

Question 19

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 20

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
E)Produce full,fair,and accurate periodic reports on foreign commerce and/or foreign political party affiliations

Question 21

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 yearend 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 22

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 23

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 24

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 25

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 yearend 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 26

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 27

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 28

Which SEC reporting form is the normal registration statement for securities to be sold to the public?

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

Question 29

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 30

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 31

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 32

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 33

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

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

Question 34

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 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

According to the disclosure requirements outlined in Statement of Accounting Concepts No.5,the following is an example information that should be disclosed in the notes to financial statements because it is basic to the financial statements

A)Management discussion and analysis.
B)Accounting policies.
C)Segment information.
D)The auditor's report.

Question 37

According to the disclosure requirements outlined in Statement of Accounting Concepts No.5,the following is an example information that should be disclosed in the notes to financial statements because it is basic to the financial statements

A)Management discussion and analysis.
B)Accounting policies.
C)Segment information.
D)The auditor's report.

Question 38

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 39

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 40

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 41

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 42

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

Question 43

List and discuss the circumstances that might cause an auditor to issue each of the four types of audit opinions.

Question 44

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

Question 45

What information is required to be included in the MD & A section of the 10-K annual report.Do not include the information required by item 7a).

Question 46

List and explain the three types of financial analysts.

Question 47

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

Question 48

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:
i.A selection from existing acceptable alternatives.
ii.Principles and methods peculiar to the industry in which the reporting entity operates.
iii.Unusual or innovative applications of GAAP.
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.