Ethics Exam

Fall 2014 ACCT 411 7980

EXAM 3

Instructions:

Exam 3 covers topics included in Chapters 8, 9, 10, Afterword, Appendix A and Appendix B of the text book, Accounting Ethics (2nd Edition), being used in the class and related material, the discussions and homework during Weeks 5 to 8

The Exam has multiple choice questions (10 questions for 30 points), TRUE or FALSE and Fill in the Blanks (10 questions for 20 points) and essay questions (3 for a 50 points) for a total of 100 Points. See the questions in the following pages for further details. Exam 3 carries 15% of the Course Grade.

Your response to the exam should be in a separate word document titled ‘Exam 3_your Last Name’ posted in the assignments folder (similar to homework).

Your document will have the three sections as in the question paper.

• For multiple choice questions, enter the question number and letter of your choice;
• For True or False questions, enter the question number and either TRUE or FALSE; and for fill in the blanks, enter the question number and what you want to fill the bank with;
• For essay questions, while there is no minimum length, I would look for clear and well-argued submissions showing your depth of knowledge and understanding of the concepts studied. Check grammar and spelling before submission. I anticipate one to two pages (double spaced, Arial 10 or Times New Roman 12 font) for each question. No penalty if marginally longer if needed.

Best of Luck!

Sathya Vardhana

EXAM 3

1. Multiple Choice questions (10X3 = 30 Points)

1. A public accounting firm is not allowed to provide certain services to an issuer contemporaneously with the audit. These prohibited services do not include:

1. Financial information systems design and implementation
2. Tax services
3. Internal Audit outsourcing services
4. Appraisal or valuation services

1. The standards of ethical conduct presented by the Institute of Management Accountants for practitioners of management accounting and financial management does not include

1. Integrity
2. Objectivity
3. Independence
4. Competence
5. None of the above

1. Under the Dodd-Frank Wall Street Reform and Consumer protection Act, to be eligible for an award under the SEC bounty provision, the whistleblower must voluntarily provide the Commission with original information that leads to the successful enforcement by the Commission of a federal court or administrative action in which the Commission obtains monetary sanctions totaling more than:

1. $100,000
2. $1,000,000
3. $10,000,000
4. No minimum limit

1. Under Tax Return Positions, a “frivolous position” is:

1. A position without much precedent except that the taxpayer lost a judicial case on the same issue some years ago.
2. A position taken on a minor matter on which there is no precedent.
3. A position that is knowingly advanced in bad faith and is patently improper.
4. A position based on estimates provided by the tax payer

1. Annual quality reviews (inspections) of registered firms must be conducted by PCAOB for firms that audit more than

1. 10 issuers
2. 25 issuers
3. 50 issuers
4. 100 issuers

1. Which of the following is not an argument against using fair value accounting?

1. Some types of assets are not amenable to fair value accounting.
2. It is not a method necessary to maintain trust and confidence of the investing public.
3. Information provided to the public through fair value approach is valid only at a given point of time and is too time-sensitive.
4. Fair value creates a false perception of great volatility since the unrealized gains and losses recognized under such approach create inappropriate highs and lows in the balance sheet. Such highs and lows do not reflect the underlying economic health of the firm.

1. One of the main advantages of standardization in financial reporting is:

1. Comparability between accounting periods and between entities
2. The production of prudent financial statements
3. Increased flexibility in financial reporting
4. The use of creative accounting practices

1. Smith, CPA and a tax practitioner, is preparing the tax return of Wilson, the sole owner of a business. Wilson wants to take a position with respect to a material item on his tax return and is pressing Smith to agree. Smith believes that the position Wilson is insisting on is wrong and cannot be sustained if challenged administratively or judicially. What action should Smith take?

1. He should prepare the return and sign it. The return is Wilson’s responsibility and he has fulfilled his responsibility by telling Wilson his own opinion on the matter.
2. He should prepare the return but should not sign it.
3. He should neither prepare the return not sign it.
4. He should report the matter to tax authorities.

1. PCAOB requires publicly traded companies to change their auditors every

1. 5 years
2. 3 years
3. One year
4. No requirement

1. Which of the following is not a way of manipulating earnings by a firm

1. Recognition of revenue earlier than they should be recognized
2. Stock repurchases
3. Recognition of future expenses as current operating expenses
4. Recognition of asset disposals as operating revenues

II.         True or False questions and Fill in the Blanks (10X2 = 20 Points)

True or False:

1. Accounting techniques are always ethical as long as they are allowed under generally accepted accounting principles (GAAP).

1. TRUE
2. FALSE

1. To be eligible for an award under the under the Dodd-Frank Wall Street Reform and Consumer protection Act, a whistleblower must first report the violations internally before reporting to SEC.

1. TRUE
2. FALSE

1. In tax practice, the member (tax practitioner) owes his/her first allegiance to the client.

1. TRUE
2. FALSE

1. PCAOB’s Auditing Standard 5 prohibits an auditor using the work of others to reduce the work the auditor might otherwise perform himself or herself.

1. TRUE
2. FALSE

1. "An entity which adopts international financial reporting standards must always adhere to the requirements of every standard, no matter what the circumstances".

1. TRUE
2. FALSE

Fill in the Blanks:

1. ‘The primary and only responsibility of business is to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception and fraud’ is a statement by ____Milton Friedman_____________.

1. ‘Our self-assessment tax system can only function effectively if tax payers report their income on a tax return that is _____true___________, _correct_________ and ______complete___’

1. Section _________404_________of the Sarbanes-Oxley Act, as amended by the Dodd-Frank Act, requires management of all companies to assess and report on the effectiveness of the company's internal control over its financial reporting.

1. International Financial Reporting Standards are promulgated by ____Internal Accounting Standards Board _(IASB)_______

1. The Statements on Standards for Tax Services and their interpretations are intended to complement other standards of tax practice, such as Treasury Department Circular No. ______230_________.

III. Essay Questions (Points as shown against each. Total 50 points)

Q1.         (10X2 = 20 Points)

1. Discuss how Sarbanes–Oxley Act has changed the basic structure of the public accounting profession in the United States?

1. Explain the similarities and differences between standards set by AICPA Professional Code of Conduct and the IMA Code of Conduct for Management Accountants, as they relate to integrity and objectivity.

(a)

The Sarbanes-Oxley Act was introduced by Paul Sarbanes and Michael Oxley. The bill was introduced in response to several accounting scandals. It mandates that public companies provide accurate financial information among other stipulations. There are eleven sections. Each section covers different areas that the public companies need to address. It includes everything from financial statements to the auditing process.