Regulation and Ethics in Financial Reporting
Exam Answer Key
Course Introduction
This course examines the regulatory environment and ethical considerations surrounding financial reporting in contemporary business practice. Students will explore the roles and responsibilities of various regulatory bodies, such as the Securities and Exchange Commission (SEC) and the Financial Accounting Standards Board (FASB), and gain an understanding of the framework underpinning accounting standards. The course also addresses key ethical issues faced by accountants and financial professionals, including conflicts of interest, transparency, and corporate governance. Through case studies and real-world examples, students will develop the ability to navigate legal requirements and ethical dilemmas in financial reporting, preparing them to uphold integrity and public trust in the profession.
Recommended Textbook
Ethics In Accounting A Decision Making Approach 1st Edition by Gordon Klein
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Page 2
Chapter 1: Introduction to Ethics
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Sample Questions
Q1) A CPA who is a member of the AICPA failed to abide by the AICPA's Code of Professional Conduct.The state in which she practices accounting requires all CPAs to abide by "all professional standards." This CPA's license to practice accounting will potentially be:
A) Suspended
B) Revoked
C) Not affected
D) All of the above
Answer: D
Q2) Normative ethics focuses on:
A) How people normally behave
B) How people have been observed to behave, based on one or more empirical studies
C) How people should behave
D) The conduct of accountants that is most prevalent in their profession
Answer: C
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Chapter 2: Ethical Principles and Reasoning
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Q1) According to the Objectivity and Independence Principle of the AICPA's Code of Professional Conduct,accountants should always be independent in providing:
A) All professional services
B) All services to their employer
C) All audit services
D) All tax advisory services
Answer: C
Q2) If a CPA violates one of the Principles of the AICPA's Code of Professional Conduct,the CPA:
A) Will never be subject to disciplinary action by the AICPA
B) May lose the right to practice accounting for a period of time unless the violation was justified
C) Definitely will lose the right to practice accounting for a period of time unless the violation was justified
D) May or may not lose the right to practice accounting, depending on the severity of the violation
Answer: A
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Chapter 3: The Core Philosophies
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Sample Questions
Q1) A focus on the importance of categorical imperatives distinguishes:
A) Utilitarianism from consequentialism
B) Deontology from utilitarianism
C) The philosophies espoused by Kant from deontology
D) The philosophies espoused by Mill from utilitarianism
Answer: B
Q2) A real-world difficulty of applying deontology is that:
A) It can be difficult to identify all stakeholders affected by a decision
B) It can be difficult to measure utility
C) Some benefits, such as the right to the protection of trade secrets, are difficult to quantify
D) Two or more rights protected by deontology sometimes are in conflict
Answer: D
Q3) Which of the following best describes deontology?
A) It has few, if any, protections for cultural minorities
B) It often conflicts with important rights, such as freedom of contract
C) The set of rights protected by this philosophy are ill-defined
D) It favors the rights of broader society over the rights of individuals
Answer: C
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Page 5
Chapter 4: Virtue,justice,and Social Responsibility
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Sample Questions
Q1) Rawls was a proponent of:
A) The universality principle
B) The veil of ignorance
C) The reversibility principle
D) Our current system of federal income tax rates
Q2) Which of the following is,or are,commonly accepted definitions of CSR?
A) A corporation fully complies with all applicable laws and regulations
B) A corporation engages in activities that are both socially responsible and profit-enhancing
C) A corporation engages in activities that are socially responsible, even if they are not profit-enhancing
D) All of the above
Q3) What broad categories of acts do you consider to be acts of Corporate Social Responsibility?
Q4) A student enrolled in your class has dyslexia.As a result of this learning disability,he reads slowly.The university has agreed to give this student more time to take a test that customarily is allotted to other students.Evaluate this decision in the context of Aristotle's view on distributive justice.
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Page 6
Chapter 5: Why We Cheat
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Sample Questions
Q1) Why did the 9/11 attack evoke such a high degree of moral outrage? Analyze it by applying the issue-contingent model.
Q2) Pick a close friend.How important is the maintenance of a high self-image to this friend? Provide examples.
Q3) People who cheat are more likely to do so when:
A) The line separating an ethical act from an unethical act is unclear
B) The line separating an ethical act from an unethical act is clear
C) They are well-rested
D) They have a low self-image, but consider their self-image to be important
Q4) The Becker Rational Model is an economic model that weighs:
A) The likely benefits from cheating against the likely costs
B) The actual marginal benefits from cheating against the actual marginal costs
C) The magnitude of harm that likely will arise from cheating against the probability of cheating being detected
D) The expected maximum benefits from cheating against the expected maximum costs
Q5) Does our college have a student ethics code? What impact,if any,does it have on your behavior? Could a student ethics code be made more effective?
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Chapter 6: Greed,corruption,and Collusion
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Q1) What rule in the IFAC Code of Conduct governs an accountant's responsibilities when the accountant is offered a bribe?
Q2) The "books and records" provisions of the Foreign Corrupt Practices Act:
A) Potentially imposes criminal liability on internal auditors who fail to detect bribery or corruption in a firm's record-keeping system
B) Potentially imposes criminal liability on external auditors who fail to detect bribery or corruption in a firm's record-keeping system
C) Requires publicly-held companies to devise and maintain adequate internal controls over payments that constitute bribes
D) Requires companies to document the amounts, purpose, and recipients of facilitation payments to ensure that their federal income tax reporting is accurate
Q3) Under the Foreign Corrupt Practices Act,a company can be held criminally liable:
A) If it is more probable than not that it committed bribery
B) In a lawsuit filed by a government other than the United States
C) If it engaged in "willful blindness" to acts of bribery that furthered its economic interests
D) Only if documentary evidence confirms the existence of bribery
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Chapter 7: Fraud and Earnings Management
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Sample Questions
Q1) Which of the following scandals involved expenses that were improperly were capitalized as assets?
A) World Com
B) Parmalat
C) Bernie Madoff
D) Enron
Q2) When a person's net cash flow exceeds his reported taxable income,the presumption that this individual has misreported his income to taxing authorities can be rebutted by showing that:
A) The cash flow was attributable to the receipt of a nontaxable inheritance
B) The cash flow was attributable to loan proceeds
C) The cash flow was attributable to the receipt of nontaxable gifts
D) All of the above
Q3) What lessons have been learned from the demise of Enron?
Q4) Some commentators have suggested that Enron would not have collapsed if it:
A) Had enacted a Code of Conduct
B) Had enacted a standard Code of Conduct rather than the weak one that it in fact had
C) Had carefully complied with all of the provisions of the Sarbanes-Oxley Act
D) Had not unduly focused on short-term stock performance
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Chapter 8: Discreditable Acts: Discrimination,deceit,and Disclosure
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Sample Questions
Q1) Winkelberg,a CPA,has been retained to prepare unaudited financial statements for a company,on an income tax reporting basis,for a privately-held company owned by her best friend,Stinkelberg.WInkelberg has a professional obligation to:
A) Withdraw from this engagement because of her friendship with Stinkelberg
B) Withdraw from this engagement because of the basis on which these financial statements are presented
C) Use due care in preparing these statements
D) Inform her client that this basis of reporting violates SEC filing requirements, but she does not necessarily have a duty to withdraw from this engagement
Q2) Is there a difference between an act being "discreditable to the profession" of accounting and an act that is merely "discreditable?" Explain.
Q3) When can a minor dollar amount nonetheless be considered to be "material" in financial accounting reporting?
Q4) Under what circumstances are departures from GAAP permitted?
Q5) What are the advantages of preparing financial statements in accordance with GAAP? What are the disadvantages?
Q6) Outside the United States,what constitutes GAAP?
Page 10
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Chapter 9: Confidentiality
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Q1) Is there a federal accountant-client privilege? What does it cover?
Q2) Due to its international expansion,a privately-held company ended its relationship with its local CPA firm and retained a larger,multi-office CPA firm.The newly-retained CPA firm has asked the former CPA firm to "forward all client records,financial statements,and workpapers still in its possession." The former CPA firm,however,has refused to do so.The former CPA firm:
A) Definitely is not in violation of the AICPA's Code of Professional Conduct
B) Is in violation of professional standards if all outstanding fees owed to it have been paid by its client
C) Is in violation of professional standards if the newly-retained CPA firm has offered to pay all reasonable costs associated with the transmission of documents
D) Is in violation of professional standards if the newly-retained CPA firm has, in good faith, communicated that receipt of these records is urgent due to a time-sensitive governmental filing that is overdue
Q3) Can the duty of confidentiality be waived or overridden by:
a. Government authorities?
b. The client itself?
Q4) When does a CPA's duty of confidentiality begin? When does it terminate?
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Chapter 10: Independence and Moral Seduction
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Sample
Questions
Q1) If a CPA prepares a few sales invoices on behalf of an audit client without charge because the client does not want to have to pay overtime to the workers who normally perform this task,the CPA's independence is:
A) Impaired due to the management participation threat
B) Impaired due to the self-review threat
C) Impaired due to the self-interest threat
D) Not impaired because the threat, if any, is immaterial
Q2) A hearing of the State Commission on Workplace Administration was convened to determine if the CFO of a corporation had engaged in "quid pro quo" sexual harassment.A part of that hearing,an external auditor who observed various incidents while auditing this corporation testified voluntary about his observations.This testimony created:
A) A self-review threat to independence
B) A management participation threat to independence
C) An adverse interest threat to independence
D) No threat to independence
Q3) A CPA was raised by his grandmother.Can his grandmother's stock ownership in one of the CPA's audit clients impair his independence?
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Page 12
Chapter 11: Conflicts of Interest
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Sample Questions
Q1) A CPA has been asked by an engaged couple to help them budget the amount that they can afford to spend on their upcoming wedding.Both the groom and the bride approached the CPA together and met with him together.The CPA has no prior relationship with either of these individuals.The groom and the bride each have agreed to pay one-half of the CPA's fees.The CPA:
A) Currently does not have an accountant-client conflict of interest, but must be alert to the possibility that one will arise
B) Currently does not have a dual-client conflict of interest, but must be alert to the possibility that one will arise
C) Currently has a conflict of interest and should not accept this professional engagement
D) Currently has a conflict of interest, and should agree to render professional services to this couple only if they give their specific consent to waive this conflict of interest
Q2) When can a CPA provide services to all partners in a client partnership? When can it not provide services to all client partners without obtaining their consent?
Q3) What is an apparent conflict of interest? Provide an example.
Q4) What is "implied consent," in the context of conflicts of interest?
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13
Chapter 12: Duties As a Whistleblower
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Q1) If an auditor discovers that a suspected illegal act involving financialstatement preparation occurred at a client,the auditor has a duty to:
A) Never inform management to prevent management from potentially engaging in a cover-up
B) Inform management, unless the auditor suspects that management is involved
C) Inform the company's Audit Committee
D) Determine if key client financial personnel were involved in the misconduct
Q2) To encourage interested parties to report fraudulent accounting practices,a company maintains a whistleblower hotline.A person left a message on this hotline anonymously,but the company's Chief Regulatory Compliance Officer was able to identify this caller based on her voice and surrounding facts.As a result,the company may:
A) Not disclose this caller's identify under any circumstances
B) Not disclose this caller's identity if the caller is a company employee
C) Not disclose this caller's identity until after the investigation concerning accounting fraud is completed
D) Not disclose this caller's identity until after the investigation concerning accounting fraud is completed and resolved in the company's favor
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Chapter 13: Duties of Public-Company Auditors: the
Sarbanesoxley Act
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Q1) Under the Sarbanes-Oxley Act,the decision whether to have a concurring audit partner on an audit engagement,in addition to the lead audit partner,is:
A) A decision that solely is made by the audited company's Audit Committee
B) A decision that is made solely by the lead audit partner
C) A decision that is made jointly by the audited company's Audit Committee, in consultation with the lead audit partner
D) A compulsory provision in the law
Q2) Under the Sarbanes-Oxley Act,a CFO may:
A) Delegate the task of certifying company financial statements to the company's designated Chief Compliance Officer
B) Delegate the task of certifying company financial statements to the company's top accounting executive, commonly called the Controller of the Chief Accounting Officer
C) Delegate the task of certifying company financial statements to one or more heads of company subsidiaries or divisions through the use of subcertifications
D) Not delegate the responsibility for certifying company financial statements
Q3) Do any provisions of the Sarbanes-Oxley Act pertain to tax accounting professionals?
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Page 15
Chapter 14: Duties of Tax Professionals
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Q1) In what circumstances may a tax return preparer rely upon information furnished by a client?
Q2) A paid tax return preparer estimated a client's charitable contributions based on the taxpayer's statement that she "donates $20 cash every week to her church" and she "attends church weekly,without fail." Upon audit,the IRS discovered that this taxpayer never attends church and never made any charitable contributions.This tax return preparer is:
A) Not subject to any fines or penalties
B) Subject to civil fines, but not criminal penalties, if the character of these claimed deductions as estimates was adequately disclosed to the IRS with the word "estimate" or the abbreviation "est." appearing adjacent to the estimated item
C) Subject to civil fines and potentially subject to criminal penalties
D) Subject to having his license as a professional tax return preparer suspended for a short period of time
Q3) Should tax return preparers have a duty to verify the information provided to them by clients? Why or why not?
Q4) What are some of the ethical duties that apply to accounting professionals engaged in tax planning?
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Page 16
Chapter 15: Duties of Fiduciaries: Financial
Planners,trustees,and Executors
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Q1) A CPA recently inherited $400,000 of stock outstanding in one of her audit clients.In an attempt to maintain her independence,she placed her holdings of this audit client's stock into a trust.The trust is managed by a well-known independent trustee,JP Bankers Trust Services.The CPA's two young children are the sole beneficiaries of this trust.The CPA:
A) Successfully has maintained her independence because none of the trust's assets directly benefit her
B) Successfully has maintained her independence because she does not have control of these assets
C) Has not maintained her independence because of the serious self-review threat presented
D) Has not maintained her independence because she still is considered to have an interest in her audit client
Q2) Why would a person create a spendthrift trust?
Q3) A CPA is most likely to be held to the standards of a fiduciary when she:
A) Performs tax accounting services
B) Serves as investment fund manager
C) Performs attest services other than audits
D) Performs audits
Page 17
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Chapter 16: Duties in the Accounting Workplace Online Only
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Q1) Do you consider a large differential in pay between executives and lower-paid personnel to be an ethical issue? If so,what do you believe should be done to moderate this differential?
Q2) "Wrongful termination against public policy" is:
A) An ethical concept, but not a legal concept
B) An ethical concept that some commentators believe should legally be enforceable
C) An ethical concept and a legal concept that currently is in effect
D) A legal concept that was replaced with the "employment at will" doctrine
Q3) An accounting firm insists that all of its professional staff members and partners provide copies of their most recent federal and state income tax returns to the partner in charge of regulatory compliance.These submissions must occur no later than the April 15 due date for filing these tax returns.This policy:
A) Is mandated by the AICPA's Code of Professional Conduct
B) Is reasonable to ensure compliance with professional standards, but is not required C) Is a discreditable act by the accounting firm
D) Is an illegal violation of employee privacy under the federal tax law
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