Deck 16: The Sec and Financial Reporting

Question 1

Which one of the following statements best describes the principal mission of the SEC?

A) To ensure the profitability and safety of investments offered to the public.
B) To promote efficient capital allocation by ensuring that securities markets function fairly and honestly.
C) To promulgate accounting and auditing standards.
D) To maintain a database useful in securities research.

Answer 1

To promote efficient capital allocation by ensuring that securities markets function fairly and honestly.

Question 2

The Securities Act of 1933:

A) Established the Securities and Exchange Commission.
B) Regulates investment companies.
C) Regulates the public offering of securities.
D) Requires monitoring of auditing firms.

Answer 2

Regulates the public offering of securities.

Question 3

The Public Utility Holding Company Act of 1935 requires public utility holding companies to:

A) Set rates based on documented costs.
B) Issue only common stock to the public.
C) Pay fees to the SEC as a percentage of income.
D) Reorganize when dictated by the public interest.

Answer 3

Reorganize when dictated by the public interest.

Question 4

The Trust Indenture Act of 1939 provides regulations for the issuance of

A) Bonds.
B) Preferred stock.
C) Stock by dealers.
D) Derivative instruments.

Question 5

The Investment Company Act of 1940 regulates the activities of:

A) Mutual funds.
B) Banks.
C) Insurance companies.
D) Financial planning services.

Question 6

The Investment Advisers Act of 1940 prohibits investment advisers from:

A) Setting advisement fees as a percentage of client stock transactions.
B) Offering advice on government debt securities.
C) Sharing in the gains in their clients' portfolios.
D) Providing stock rankings based on personal preferences.

Question 7

The Foreign Corrupt Practices Act of 1977 includes all of these provisions except:

A) Penalties for violating insider trading rules were increased.
B) Provisions to prevent companies from making illegal payments.
C) Companies must maintain accurate accounting records.
D) Companies must maintain a system of effective internal accounting controls.

Question 8

The Insider Trading Sanctions Act of 1984 allows the SEC to assess fines for inappropriate use of nonpublic information in amounts up to

A) $2 million.
B) Three times the amount of insiders' gains.
C) The amount of insiders' gains.
D) $5 million.

Question 9

The Private Securities Litigation Reform Act of 1995:

A) Outlines the rights of bondholders and provides for the appointment of an independent trustee to represent their rights.
B) Regulates open-end mutual funds and closed-end investment companies.
C) Increased penalties for violating insider trading rules.
D) Shields registrants from lawsuits concerning forward-looking financial information.

Question 10

The Emergency Economic Stabilization Act of 2008:

A) Allowed the government to bail out banks and other organizations.
B) Temporarily banned short sales.
C) Provided investors with insurance against credit crisis investment losses.
D) Suspended fair value accounting for investments.

Question 11

The Dodd-Frank Act of 2010 expanded the SEC's role in monitoring:

A) The issuance of debt securities.
B) Accounting standards.
C) Financial services markets.
D) Auditing firms.

Question 12

The Jumpstart Our Business Startups Act of 2012 (JOBS) facilitates capital formation by emerging growth companies by:

A) Providing funding for qualifying projects.
B) Providing a safe harbor for pro forma information.
C) Exempting them from certain SEC reporting requirements.
D) Guaranteeing a minimum securities value for their investors.

Question 13

What is the primary mission of the PCAOB?

A) Identify and prosecute those who manipulate accounting earnings.
B) Establish audit standards and monitor auditing firms.
C) Develop generally accepted accounting principles for public companies.
D) Develop the regulations that publicly traded companies must follow.

Question 14

Which of the following is exempt from the reporting provisions of the 1934 Securities Act?

A) Short-term notes issued for working capital purposes.
B) Securities issued by not-for-profit organizations.
C) Securities issued by banks.
D) Debt securities classified as held-to-maturity.

Question 15

Which of the following is exempt from the reporting provisions of the 1934 Securities Act?

A) Financial derivatives used for hedging.
B) Securities issued by mutual funds.
C) Securities issued by a state government.
D) Preferred stock issued by corporations.

Question 16

Securities issued by all of the following organizations are exempt from the registration requirements of the 1933 Securities Act except:

A) Not-for-profit organizations.
B) State and local governments.
C) Banks.
D) Investment companies.

Question 17

The SEC division most frequently encountered by accountants is the:

A) Division of Corporation Finance.
B) Division of Enforcement.
C) Division of Trading and Markets.
D) Division of Investment Management.

Question 18

The Division of Corporation Finance primarily:

A) Monitors trading activity to identify instances of fraud.
B) Administers insider trading sanctions.
C) Administers the disclosure requirements of the securities laws.
D) Sets standards for audits and auditors.

Question 19

The Division of Trading and Markets monitors:

A) Secondary securities markets.
B) Issuance of new securities.
C) Mutual funds and investment companies.
D) Brokers.

Question 20

The Chief Accountant of the SEC does all of the following except:

A) Advises the SEC on accounting principles, auditing standards, and financial disclosures.
B) Is the liaison between the SEC and the accounting profession.
C) Serves as one of the five commissioners of the SEC.
D) Conducts investigations of questionable accounting practices.

Question 21

The Division of Economic and Risk Analysis:

A) Supports the oversight activities of the Division of Corporation Finance.
B) Monitors public companies for securities law violations, using sophisticated data analytics.
C) Evaluates the costs and benefits of SEC initiatives.
D) Monitors trading activities to identify possible instances of insider trading and fraud.

Question 22

The purpose of the Accounting Quality Model is to:

A) Test the disclosure accuracy of new accounting standards.
B) Identify new standards that allow companies to most effectively portray their financial health.
C) Uncover inappropriate audit practices of auditing firms.
D) Identify company filings that are most likely to contain misleading information.

Question 23

The Financial Reporting and Audit Group (FRAud Group) is charged with developing techniques to identify potential accounting fraud. Which SEC division created the FRAud Group?

A) Division of Corporation Finance
B) Division of Enforcement
C) Division of Trading and Markets
D) Division of Investment Management

Question 24

The Financial Reporting and Audit Group (FRAud Group) focuses on "gatekeepers" to support its efforts to increase accountability for accounting fraud. Which one of the following is not a gatekeeper?

A) Whistleblowers.
B) Boards of directors.
C) Audit committee.
D) Auditors.

Question 25

The highest-ranking authoritative source of accounting principles for publicly held companies is:

A) Accounting and Auditing Enforcement Releases
B) Financial Reporting Releases
C) Accounting Series Releases
D) Staff Accounting Bulletins

Question 26

Which SEC publications are similar to FASB Technical Bulletins?

A) Financial Reporting Releases
B) Staff Accounting Bulletins
C) Accounting and Auditing Enforcement Releases
D) Interpretive Letters

Question 27

When the information provided to the SEC for a new security issue meets SEC requirements, this means that:

A) The information provides adequate disclosure of material facts concerning the company and the securities it proposes to sell.
B) The company's governance structure provides adequate internal controls over the financial information provided.
C) Independence requirements for the CEO, board of directors, and the audit committee have been met.
D) Financial information has been audited and given a clean audit opinion.

Question 28

A prospective issuer of new securities must initially file a registration statement with the SEC that includes all of the following items except:

A) A description of business operations and risks.
B) Balance sheets for the past two years.
C) Statements of income and comprehensive income for the past three years.
D) A letter of comment from the Division of Corporation Finance

Question 29

In a registration statement, a comfort letter is written by an accountant and provides negative assurance regarding:

A) The issuing company's internal controls.
B) Audited financial statement information.
C) Management's responsibility for the accuracy of the financial statements.
D) Unaudited financial statement information.

Question 30

The basic SEC form used for the registration of new security issues is:

A) Form 8-K
B) Form S-K
C) Form S-1
D) Form S-4

Question 31

The SEC form used for issuance of securities in business acquisitions is:

A) Form 8-K
B) Form S-K
C) Form S-1
D) Form S-4

Question 32

When a company goes through the process of issuing new securities, the stub period is:

A) The time a new registrant must wait before hearing whether the SEC approves their registration statement.
B) The period of time from the last audited financial statement to the date of the most recent interim period prior to issuance of the registration statement.
C) The interim period ending just prior to issuance of the registration statement.
D) The time it takes the Division of Enforcement to evaluate the financial information in the registration statement for signs of potential fraud or misleading information.

Question 33

During the waiting period between the time a company files the registration statement for the issue of new securities and the time the SEC approves it, a company cannot:

A) Issue audited interim financial statements.
B) Change auditors unless no disagreements exist between the current auditor and management.
C) Borrow on a short or long-term basis from banks or other lending organizations.
D) Release information to the public promoting the sale of its securities.

Question 34

In which type of underwriting does the company issuing new shares bear none of the risk that the market will not buy its stock at the asking price?

A) Firm commitment underwriting
B) Best efforts underwriting
C) All-or-none underwriting
D) Over-the-counter underwriting

Question 35

Which type of underwriting arrangement relieves the issuing company of the risk that not enough capital will be raised to finance its intended projects?

A) Firm commitment underwriting
B) Best efforts underwriting
C) All-or-none underwriting
D) Over-the-counter underwriting

Question 36

Which statement regarding the structure, content, and filing requirements of Form 10-K is incorrect?

A) Information regarding executive compensation, related party transactions, and security ownership is provided.
B) A description of the business, properties owned and legal proceedings involving the company is presented.
C) A company's 10-K report must be filed with the SEC within 90 days of the end of the registrant's fiscal year, unless the company is an accelerated filer.
D) The "risk factors" section describes actual events that have adversely affected the company's financial health.

Question 37

Which of the following is not a specifically required item in Form 10-K?

A) Related-party transactions
B) Dividend policy
C) Disagreements with accountants on accounting disclosures
D) Principal accountant fees and services

Question 38

Regulations S-X and S-K provide the rules for different aspects of periodic filings. Which statement below is true?

A) Regulation S-X governs the content of the 10-K, while Regulation S-K governs the content of all other periodic filings.
B) Regulation S-K governs the content of the 10-K, while Regulation S-X governs the content of all other periodic filings.
C) Regulation S-X governs the financial statements and supplementary financial information in periodic filings, while Regulation S-K governs all other items in periodic filings.
D) Regulation S-K governs the financial statements and supplementary financial information in periodic filings, while Regulation S-X governs all other items in periodic filings.

Question 39

Which statement is false concerning Regulation S-X?

A) Regulation S-X prescribes the accounting principles to be used in SEC filings.
B) Regulation S-X does not cover reporting requirements for disclosures other than financial information in periodic filings.
C) Regulation S-X prescribes reporting requirements for interim financial statements.
D) Regulation S-X prescribes standards for qualifications of auditors of periodic financial statements.

Question 40

Which of the following statements concerning the SEC's EDGAR system is false?

A) EDGAR allows users to electronically search for filing information.
B) Most documents filed with EDGAR are available in multiple formats.
C) Documents filed with EDGAR do not include nonfinancial information.
D) Documents filed with EDGAR include Form 10-K and Form 10-Q.

Question 41

What is Item 7 in Form 10-K?

A) Discussion of risk factors.
B) Financial statements and supplementary information.
C) Quantitative and qualitative disclosures about market risk.
D) Management's discussion and analysis of financial condition and results of operations.

Question 42

What is Item 8 in Form 10-K?

A) Discussion of risk factors.
B) Financial statements and supplementary information.
C) Quantitative and qualitative disclosures about market risk.
D) Management's discussion and analysis of financial condition and results of operations.

Question 43

What is Item 1A in Form 10-K?

A) Discussion of risk factors.
B) Financial statements and supplementary information.
C) Quantitative and qualitative disclosures about market risk.
D) Management's discussion and analysis of financial condition and results of operations.

Question 44

Filing deadlines for Forms 10-K and 10-Q differ depending on:

A) The industry in which the filer operates.
B) The market capitalization of the filer.
C) How long the filer's securities have been listed in the U.S.
D) The market(s) on which the filer's securities are traded.

Question 45

All of the following are official item categories of Form 10-K except:

A) Changes in audit firm and disagreements with audit firms.
B) Unresolved staff comments.
C) Description of properties.
D) Description of accounting policies.

Question 46

Companies often report "non-GAAP" performance measures in their 10-K that exclude income items management feels are not useful to investors in predicting future performance. In which 10-K item category are these measures often reported?

A) Item 9A: Controls and procedures
B) Item 1A: Risk factors
C) Item 7A: Quantitative and qualitative disclosures about market risk
D) Item 6: Selected financial data

Question 47

Companies often report "non-GAAP" performance measures in their 10-K that exclude income items management feels are not useful to investors in predicting future performance. Which one of the following income items would be least likely to be omitted in determining a company's non-GAAP income measure?

A) Depreciation and amortization.
B) Restructuring expenses.
C) Goodwill impairment loss.
D) Cash bonus compensation.

Question 48

Off-balance-sheet arrangements required to be disclosed in Form 10-K include all the items below except:

A) Unconsolidated variable interest entities.
B) Supplier and customer agreements.
C) Lease agreements.
D) Bank loans.

Question 49

Key areas of company performance discussed in management's discussion and analysis (Item 7) include all of the following except:

A) Strategic plan.
B) Liquidity.
C) Trends or uncertainties.
D) Capital resources.

Question 50

Item 7A (Quantitative and Qualitative Disclosures about Market Risk) in Form 10-K requires registrants to group their investments in "market risk sensitive instruments" into these categories:

A) Current and noncurrent.
B) Those acquired on formal markets and those acquired privately.
C) Those entered into for trading purposes and those entered into for purposes other than trading.
D) Those entered into for speculative purposes and those entered into as hedges of price risk.

Question 51

Item 7A (Quantitative and Qualitative Disclosures about Market Risk) in Form 10-K gives companies the option of communicating their market risk by disclosing VaR. Which one of the following is an example of VaR?

A) Estimated potential losses if certain market risk factors change at least 5%.
B) Expected cash flows by maturity date of financial instruments.
C) Estimated maximum loss that will occur 95% of the time.
D) Expected range of gains or losses occurring 95% of the time.

Question 52

Which information below is most likely to be incorporated by reference in Form 10-K?

A) Controls and procedures.
B) Audited financial statements and supplementary financial information.
C) Legal proceedings involving the company.
D) Changes in and disagreements with accountants.

Question 53

Section 302 of the Sarbanes-Oxley Act requires a company's CEO and CFO to certify that the annual and quarterly financial reports filed with the SEC:

A) Are prepared using generally accepted accounting principles.
B) Fairly present the company's results of operations and financial condition.
C) Have been audited by licensed and independent accountants and given a clean opinion.
D) Meet all SEC regulations regarding procedures for reporting financial information.

Question 54

Which statement is most accurate regarding the accounting standards required for financial statements of non-U.S. companies that file with the SEC?

A) The financial statements must be prepared using U.S. GAAP.
B) The financial statements must be prepared using IFRS.
C) The financial statements must be prepared using either U.S. GAAP or IFRS.
D) The financial statements may be prepared using standards other than U.S. GAAP or IFRS, with reconciliations of income and equity to U.S. GAAP.

Question 55

What is the annual reporting form for non-U.S. companies whose stock is listed on U.S. exchanges?

A) Form 20-F
B) Form 10-F
C) Form 10-X
D) Form 20-P

Question 56

In their annual SEC filings, companies that have significant unconsolidated subsidiaries and equity method investees:

A) Are not required to provide separate financial information on these entities.
B) Must provide complete balance sheets and income statements for these entities.
C) Must provide summarized balance sheet and income statement information for these entities.
D) Must explain why the entities are not consolidated and provide summarized income statement information for the entities.

Question 57

Which of these statements concerning quarterly reports to the SEC is false?

A) Quarterly reports are typically much shorter than the annual report.
B) The requirements of FASB ASC Topic 270, Interim Reporting, apply.
C) A fourth quarter interim report is not required.
D) Quarterly reports must be audited by a qualified accountant.

Question 58

Financial information required in quarterly reports filed with the SEC includes all of the following except:

A) Balance sheets at the end of the quarter and the end of the prior fiscal year.
B) Statement of income and comprehensive income for the current quarter and the same quarter of the prior year.
C) Year-to-date statement of income and comprehensive income for the current quarter and the same quarter of the prior year.
D) Statement of cash flows for the current quarter and the same quarter of the prior year.

Question 59

SEC registrants must file information on special events of significance to investors, such as changes in control or material impairments, using:

A) Form 10-K.
B) Form S-3.
C) Form 8-K.
D) Form S-1.

Question 60

Events requiring registrants to file a Form 8-K include all of the following except:

A) A change in the independent certifying accountant.
B) A change in control of the registrant.
C) A change in the fiscal year.
D) A change in accounting method.

Question 61

When is Form 8-K required to include financial statements?

A) Form 8-K is always required to include pro forma financial statements reflecting the expected impact of the special event on the company's financial performance.
B) When there is a material modification in the rights of the company's security holders, pro forma financial statements are required.
C) The financial statements of the acquired company must be included when a company makes a major business acquisition.
D) When there are material impairments of assets, financial statements reflecting the impairment losses are included.

Question 62

The Sarbanes-Oxley Act requires the SEC to review the periodic filings of each registered company:

A) Every quarter.
B) Every year.
C) At least every two years.
D) At least every three years.

Question 63

If SEC staff are not satisfied with the information provided in the 10-Q and 10-K filings of a registered company, they issue a(n):

A) Information request letter.
B) Staff letter.
C) Comment letter.
D) Quiet period letter.

Question 64

When SEC staff review the information contained in periodic filings, they often are not satisfied with the information provided. Which one of the following items is most likely to cause SEC staff to question the information submitted by a company?

A) Description of the business.
B) Market price of common stock, dividends, and related shareholder matters.
C) Security ownership by certain beneficial owners.
D) Non-GAAP measures of performance.

Question 65

Which legislation established the Public Company Accounting Oversight Board (PCAOB)?

A) Dodd-Frank Act
B) Sarbanes-Oxley Act
C) Economic Recovery and Stabilization Act
D) Private Securities Litigation Reform Act

Question 66

The Sarbanes-Oxley Act includes which one of these provisions?

A) Limits on types of services provided by CPA firms.
B) A requirement that all public companies have internal audit departments.
C) A requirement that the CEO serve on the audit committee.
D) Restrictions on the types of non-audit services that CPA firms can provide to audit clients.

Question 67

The Sarbanes-Oxley Act provides for requirements with respect to which committee(s) of a company's board of directors?

A) Nominating committee.
B) Audit committee.
C) Compensation committee and audit committee.
D) Nominating committee and compensation committee.

Question 68

Which of these statements concerning audit committees is false?

A) The SEC requires registrants to have an audit committee.
B) The Sarbanes-Oxley Act prohibits the CEO from serving on the audit committee.
C) The audit committee is directly responsible for arrangements with and oversight of the external audit firm.
D) The audit committee monitors the company's financial accounting and reporting system.

Question 69

To limit overfamiliarity with a company or its management, the Sarbanes-Oxley Act requires rotation of the lead audit engagement partner and concurring audit partner every:

A) Year.
B) Three years.
C) Five years.
D) Ten years.

Question 70

In the 1934 Securities Act, officers, directors, and shareholders owning more than 10% of a class of equity securities are called:

A) Majority shareholders.
B) Preference owners.
C) Beneficial owners.
D) Insiders.

Question 71

Insider trading is:

A) Any trading in company securities by top management.
B) Both a purchase and a sale of the same company's securities by top management within a 6-month period.
C) Trading activity that results in abnormal gains.
D) Any trading in company securities based on information not available to the public.

Question 72

Matters of shareholder action, communicated through proxy statements, include all of the following issues except:

A) Approval of change in the corporate charter or bylaws.
B) Approval of the company's business plan.
C) Appointment of the independent auditor.
D) Election of directors.

Question 73

The Dodd-Frank Act of 2010 provides for stronger regulation of:

A) Top management of public companies.
B) Firms that audit public companies.
C) The financial services industry.
D) Firms that are "too big to fail."

Question 74

The Volcker Rule:

A) Limits trading and service activities of banking entities.
B) Protects "whistle blowers" who provide information about securities violations.
C) Regulates derivatives markets.
D) Regulates hedge funds.

Question 75

The Dodd-Frank Act established the following new regulatory organizations except:

A) The Financial Stability Oversight Council.
B) The Bureau of Consumer Financial Protection.
C) The Office of Credit Rating Agencies.
D) The FRAud Group.

Question 76

What was the principal conclusion of the SEC's Congressionally-mandated study of mark-to-market accounting, delivered to Congress in 2009?

A) FASB standards for investments contributed to the credit crisis of 2008.
B) Fair value accounting standards for investments provide useful information and should not be suspended.
C) Accounting for investments should be on an historical cost basis.
D) Mark-to-market accounting should be extended to all assets, including intangibles and plant and equipment.

Question 77

An example of almost complete convergence of U.S. GAAP and IFRS is accounting for:

A) Municipal government pensions.
B) Financial instruments.
C) Impairment of long-term assets.
D) Business combinations.

Question 78

Many of the federal securities laws administered by the SEC were the result of events that harmed investors and the economy.
Required
For each of the regulations below, briefly describe the events that motivated their enactment.
a. Securities Acts of 1933 and 1934
b. Foreign Corrupt Practices Act of 1977
c. Sarbanes-Oxley Act of 2002
d. Dodd-Frank Act of 2010

Question 79

Regulation of U.S. financial markets is the purpose of the Securities Act of 1933 and the Securities Act of 1934.
Required
a. Each Act focuses on regulation of a different aspect of financial markets. What is the difference in focus between the two Acts?
b. Briefly describe the major purposes of each Act.

Question 80

The Securities and Exchange Commission's mission is to regulate the securities markets by requiring full disclosure of information and preventing fraudulent activities. However, it does not regulate registration and reporting for every type of financial security.
Required
a. Briefly describe the markets and securities that are regulated by the SEC.
b. Provide two examples of securities that are not subject to the SEC's registration and reporting rules.