Ethical Issues in Financial Reporting
Final Exam Questions
Course Introduction
This course explores the ethical challenges and dilemmas encountered in the preparation and presentation of financial reports. Students will examine frameworks for ethical decision-making, professional codes of conduct, and regulatory standards that shape the financial reporting landscape. Topics include earnings management, disclosure practices, auditor independence, conflicts of interest, and the responsibilities of accountants to various stakeholders. Through case studies and real-world examples, the course equips students to critically evaluate ethical issues and develop sound judgment in financial reporting processes.
Recommended Textbook
Ethics In Accounting A Decision Making Approach 1st Edition by Gordon Klein
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16 Chapters
513 Verified Questions
513 Flashcards
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Chapter 1: Introduction to Ethics
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Sample Questions
Q1) The SEC had:
A) A primary role in the development of the AICPA Code of Professional Conduct
B) A secondary role in the development of the AICPA Code of Professional Conduct
C) No role in the development of the AICPA Code of Professional Conduct, but it retains the authority to override this code of conduct concerning the behavior of both internal and external auditors performing services relating to the financial activities of regional and local financial institutions
D) No role in the development of the AICPA Code of Professional Conduct
Answer: D
Q2) The rules of the AICPA are required to be:
A) Identical to the rules of the IFAC
B) Developed by the international professional accounting community through IFAC and then applied through the IFAC to professional accountants practicing in the United States
C) More rigorous than IFAC's rules due to the mandates imposed by American stock exchange trading rules
D) Never more lenient that the rules of the IFAC
Answer: D
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Chapter 2: Ethical Principles and Reasoning
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Sample Questions
Q1) Kohlberg's three levels of moral development,in order,focus on:
A) Self-interest, achieving justice, and achieving peer approval
B) Self-interest, adhering to principles over laws, and learning to disregard the need for peer approval
C) The avoidance of punishment, compliance with laws, and compliance with societal expectations
D) Self-interest, achieving peer approval, and the pursuit of justice
Answer: D
Q2) Acting on principle,knowing that the party you hurt would have done the same thing if the roles had been reversed,corresponds to which of the following stages of moral development?
A) The pre-conventional stage
B) The conventional stage
C) The post-conventional stage
D) All of the above
Answer: C
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Chapter 3: The Core Philosophies
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Sample Questions
Q1) The law of eminent domain allows a local government to take a person's property for public use,such as building a freeway that has been designed to cross land owned by this landowner.The landowner,by law,is entitled to be paid the fair market value of her land.However,in a recent action,a local government took a landowner's property under eminent domain and paid that landowner less than fair market value.Under utilitarianism,this government's action:
A) Definitely was suboptimal
B) Definitely was optimal because the government saved money for the benefit of society
C) Definitely was optimal because any act that shifts resources away from a private individual to broader society satisfies the precepts of utilitarianism
D) May have been optimal or suboptimal, but further inquiry into relevant facts is needed
Answer: D
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Chapter 4: Virtue,justice,and Social Responsibility
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Sample Questions
Q1) The disclosure of conflict minerals in SEC filings is historically significant because:
A) The Dodd-Frank Act revolutionized depletion accounting rules for natural resource properties
B) Investors now will be better able to evaluate the risks of firms that are highly dependent upon minerals from war-torn areas of the world
C) Investors receive superior information that better enables them to hold companies accountable if they engage in socially irresponsible behavior
D) Investors now will be better able to evaluate the foreign currency risks to which global corporations are subject
Q2) Rawls believed that society should strive for:
A) Equality of resource allocation among all
B) Equality of resource allocation among the most productive members of society
C) Inequality of resource allocation at birth, to spur hard work and innovation
D) Variability in resource allocation, which he called the difference principle
Q3) Should accounting rules be revised to better account for socially responsible expenditures? Which rules?
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Chapter 5: Why We Cheat
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Sample Questions
Q1) The Becker Rational Model would likely be most helpful in:
A) Assisting law enforcement authorities in setting the level of punishment imposed on a particular cheater after unlawful behavior has occurred
B) Assisting potential cheaters in assessing the expected likelihood of getting caught
C) Assisting potential cheaters in assessing the expected punishment they will endure, if and when they are caught
D) Assisting potential cheaters in assessing the net economic gains they will garner from cheating
Q2) The term "proximity," as it is used in the issue-contingent model,describes:
A) The immediacy with which harm is expected to occur
B) The geographic distance between the location where harm occurs and the location of the decision-maker
C) The degree of likelihood that harm actually will arise
D) A person's affinity for the person or group harmed
Q3) 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?
Q4) What criticisms do you have of the Becker Rational Model?
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Chapter 6: Greed,corruption,and Collusion
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Sample Questions
Q1) 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
Q2) The Assistant Controller of a publicly-traded company may buy company stock as long as:
A) She agrees to hold company stock for a minimum of six months
B) She does not possess non-public information
C) Her trading activities are authorized by her employment contract
D) All of the above
Q3) When are contingency fees permissible in rendering management consulting services?
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Chapter 7: Fraud and Earnings Management
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Sample Questions
Q1) "Cookie jar accounting":
A) Always sweetens, or increases, a company's reported profits, as its name suggests
B) Sets aside questionable but desirable items in a jar, so to speak, and reports conservative results
C) Allows a firm to manipulate the trend in its earnings, making earnings less volatile
D) Allows a firm to boost its long-run, total reported earnings from a financial accounting perspective
Q2) By serving on the Board of Directors of various charities,Bernie Madoff was able to:
A) Utilize their tax-exempt status to his advantage
B) Invest funds in a nontaxable manner
C) Hide his profits through the use of nonprofit organizations that were highly unlikely to be audited by the IRS
D) Gain their trust
Q3) What lessons have been learned from the demise of Enron?
Q4) What is cookie jar accounting? How is it abused?
Q5) What is big bath accounting? How is it abused?
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Chapter 8: Discreditable Acts: Discrimination,deceit,and Disclosure
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Sample Questions
Q1) What acts,if any,are expressly identified as discreditable by the IFAC Code of Conduct?
Q2) Under the Advertising and Other Forms of Solicitation Rule of the AICPA's Code of Professional Conduct,a CPA may not engage in advertising that is:
A) Undignified
B) Unprofessional
C) Deceptive
D) All of the above
Q3) Outside the United States,what constitutes GAAP?
Q4) The Accounting Principles Rule states that financial statements:
A) Always must comply with GAAP
B) Never should contain a departure from GAAP
C) May contain a departure from GAAP for administrative reasons, as long as the departure is clearly disclosed
D) May contain a departure from GAAP if adherence to GAAP would result in the statements being misleading
Q5) Is there a difference between an act being "discreditable to the profession" of accounting and an act that is merely "discreditable?" Explain.
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Chapter 9: Confidentiality
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Q1) A CPA may utilize information obtained during the course of a professional accountant-client relationship for personal gain:
A) Only if the CPA does not disclose this information to others
B) Only if the source of this information cannot reasonably be discovered by others
C) Only if the use of this information does not preclude the client from pursuing any opportunities that it otherwise would have desired to pursue
D) Never
Q2) if a paid tax return preparer discloses a client's Social Security Number,the preparer is subject to monetary penalties:
A) Only if the disclosure was intentional
B) Only if the disclosure was intentional or reckless
C) If the disclosure was intentional, reckless, or inadvertent
D) Only if the client can demonstrate that he or she suffered monetary damages
Q3) A CPA' duty of confidentiality ends when:
A) A professional relationship with a client ends
B) A client dies
C) A client's is acquired by another company in a merger or purchase
D) Never
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Chapter 10: Independence and Moral Seduction
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Q1) Status as a "covered member" is important in determining independence because CPAs who are classified as a "covered member" lack the independence to conduct an audit if:
A) They have an indirect ownership interest in even a single share of stock outstanding in an audit client
B) They refuse to subordinate their best judgment to the wishes of their client
C) Their college-age, dependent child works in the client's warehouse during the summer as a shipping clerk
D) Their sister is an attorney who works as the company's General Counsel
Q2) The adverse interest threat exists when:
A) A client sues its auditor for incompetence
B) A CPA testifies in court, in response to a valid court subpoena, that it observed illegal activity taking place at the client's place of business
C) A CPA voluntarily testifies in court that its client incorrectly recorded cash proceeds as nontaxable loan proceeds rather than as a taxable sale
D) A CPA, in response to a formal SEC inquiry, states that it has serious concerns about the trustworthiness and candor of an audit client's CFO
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Page 12
Chapter 11: Conflicts of Interest
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Q1) For a CPA who performs auditing services,the most significant conflict of interest that is likely to arise is between:
A) Two clients who both sell the same product in different geographic markets
B) Two clients who both are aggressively pursuing sales to the same prospective customer
C) The client's interest and the public interest
D) The CPA's interest and another CPA's interests
Q2) A CPA performs tax advisory services,but it does not provide tax return preparation services.For this CPA,the most significant conflict of interest that is likely to arise is between:
A) The AICPA's Code of Professional Conduct and IRS Regulations regarding professional conduct
B) The Internal Revenue Code and state tax codes
C) The client and the IRS
D) The duty of loyalty to the client and a duty to the public interest
Q3) What is "implied consent," in the context of conflicts of interest?
Q4) What is an apparent conflict of interest? Provide an example.
Q5) What is "discounting," as that term is used in the context of conflicts of interest?
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Chapter 12: Duties As a Whistleblower
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Q1) The AICPA Code of Professional Conduct:
A) Makes whistleblowing concerning perceived illegal acts mandatory only if the amounts involved are material to a company
B) Makes whistleblowing concerning perceived illegal acts mandatory only if the whistleblower is both a CPA and a company employee
C) Does not make whistleblowing mandatory by CPAs working in industry, but the Integrity and Objectivity Rule expressly encourages it
D) Tends to discourage it due to the duty of confidentiality
Q2) Why is whistleblowing a relatively recent phenomenon?
Q3) If an auditor discovers a suspected illegal act involving financial statement presentation occurred at a client,the auditor has a duty to:
A) Consult with outside legal counsel to determine if the act is in fact illegal
B) Not mention this suspected misconduct, unless the illegality of the act is, at minimum, determined to be probable
C) Not mention this suspected misconduct, unless the resulting monetary liability can be determined with reasonable certainty
D) Inform the company's Audit Committee
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Chapter 13: Duties of Public-Company Auditors: the
Sarbanesoxley Act
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Q1) Under the Sarbanes-Oxley Act,loans to top corporate officers:
A) Cannot be made by a publicly traded company under any circumstances
B) Must bear a fair market interest rate if their employer is a publicly traded company
C) May not be made directly by their employer if the employer is a publicly traded company, but the employer may serve as a co-signer or guarantor on a loan granted to them by a bank
D) May be made by significant company shareholders in publicly traded companies as long as these loans satisfy the law's "commercially reasonable terms" requirement
Q2) What provisions of the Sarbanes-Oxley Act pertain to nonprofit charitable organizations? Do you believe that other provisions should also apply?
Q3) In accordance with the Sarbanes-Oxley Act's clawback provisions,amounts recovered are collected by:
A) The SEC, on a net-of-tax basis
B) The SEC, without adjustment for tax considerations
C) The company itself
D) The executive who suffered the clawback's financial injury
Q4) What is a "reportable event"? Who receives submissions of reportable events?
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Chapter 14: Duties of Tax Professionals
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Sample Questions
Q1) What are some of the ethical duties that apply to tax return preparers?
Q2) In what circumstances may a tax return preparer rely upon information furnished by a client?
Q3) What are some of the ethical duties that apply to accounting professionals engaged in tax planning?
Q4) A taxpayer wishes to assert a tax position concerning the deductibility of mortgage interest on a home that is partially used for business and partially used as a vacation home.This tax position satisfies the "substantial authority" standard.This taxpayer ordinarily may assert this tax position:
A) Only if advance written permission is obtained from the IRS
B) Only if the position is prominently disclosed on the face of the taxpayer's tax return
C) Only if the position is prominently disclosed in a written statement attached to the front of the taxpayer's tax return
D) Without special conditions or disclosures
Q5) What are a tax return preparer's duties,if any,upon discovering an error in a tax return that previously was submitted by a client to a taxing authority?
Q6) Should a tax return preparer solely be an advocate for a client?
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Chapter 15: Duties of Fiduciaries: Financial
Planners,trustees,and Executors
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Q1) What types of ethical dilemmas might a trustee encounter in fulfilling its duty of loyalty?
Q2) When an accountant serves as a trustee of a blind trust and prepares annual state and federal tax returns for the trust,the accountant:
A) Is entitled to compensation both for serving as a trustee and for preparing the tax returns
B) Is entitled to compensation for serving as the trustee, but is not entitled to separate and independent compensation for preparing the tax returns
C) Is not entitled to compensation for serving as the trustee, but is entitled to compensation for preparing the tax returns because a trustee is not expected as part of her customary duties to have sufficient skill or training to prepare accurate tax returns
D) Is not entitled to compensation whatsoever, and is allowed to delegate the task of preparing tax returns to a competent, paid tax return preparer
Q3) Why would a person create a blind trust?
Q4) Can a split-interest trust also be a testamentary trust?
Q5) What are the key characteristics that tend to create a fiduciary relationship?
Q6) Why would a person want to create a living trust?
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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) An employer recently terminated an employee from her job as a company tax accountant.Which of the following likely would be be classified as a "wrongful termination against public policy"?
A) The employee was fired without cause or justification
B) The employee truthfully responded to a question posed by an IRS investigator, which resulted in the employer incurring substantial penalties
C) The employee carelessly overstated the employer's gross income on its tax return, which resulted in the employer making substantial additional, and unnecessary, tax payments
D) The employer fired the employee for being late to work two times in one month, even though several other employees in the same department were late to work three times and were not terminated
Q3) Prior to hiring a new professional staff member,an auditing firm checks public records to see if a prospective employee has ever been convicted of insider trading? Is this ethical?
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