Questions and Answers of Ethical Obligations Decision

Solutions Network is attempting to manage earnings. Which features of earnings management is being employed by Solutions?a. Alter numbers not yet in the financial records by using discretionary
1. In his analysis of the Dell fraud for Forbes, Edward Hess comments: "Too often, the market's maniacal focus on creating ever-increasing quarterly earnings drives bad corporate behavior, as it
Nortel tried to find a solution to the hundreds of millions of dollars of inventory sitting in its warehouses. The external auditors might have discovered this red flag with which of the following
1. What are the main arguments that you will need to counter? That is, what are the reasons and rationalizations you will need to address?2. What is at stake should you not convince King Bernard to
Nortel’s earnings management techniques were indeed detrimental to the long-term value of the firm. Such behavior links to which ethical model of behavior?a. Rest Four-Step Modelb. Kohlberg’s Six
1. Do you believe Allergan’s financial information in its press release is useful? Why or why not?2. Do you believe this kind of information should be subject to audit procedures? If so, what
The presentation of financial information should contain this characteristic, which was clearly lacking in the Nortel statements.a. Representational usefulnessb. Representational faithfulnessc.
Nortel began issuing financial restatements in 2004. The definition of a financial restatement is _________________.a. indications that the current year’s financial statements contained material
1. Describe each of the financial shenanigans used by Nortel and how they manipulated earnings.2. What were the motivating factors that led to the fraud at Nortel? How should the auditors have
How does auditors’ meeting public interest obligations relate to avoiding legal liability?
What are the costs and benefits of voluntarily disclosing violations of the FCPA assuming an internal compliance official threatens to blow the whistle on the company under the Dodd-Frank Financial
What is the importance of having an effective compliance and ethics program with respect to the FCPA? What is the role of confidential reporting and internal investigations in the compliance program?
Answer the following with respect to deficiencies in ICFR.a. How should a SEC registrant evaluate whether a deficiency in ICFR is a material weakness?b. Why should SEC registrant’s document why a
Carly Simmons is approached by a small sole proprietor to assist him in getting the record-keeping for the enterprise organized to firm up receivables, payables, payroll, and other taxes necessary to
Given the recent changes in audit committee responsibilities under SOX and PCAOB standards, when might audit committee members be held at least partially responsible for a financial reporting failure?
Should Section 302 of SOX be broadened to establish legal liability for others in the certification process in addition to CEOs and CFOs? Explain.
How has the Sarbanes-Oxley Act affected the legal liability of accountants and auditors?
Explain your answers to the following questions about the PSLRA:a. Do you believe the standard for liability under the PSLRA better protects auditors from legal liability than the standards which
Nixon and Co., CPAs, issued an unmodified opinion on the 2015 financial statements of Madison Corp. These financial statements were included in Madison’s annual report and Form 10-K filed with
What do you believe would be required for an auditor to successfully assert the fraud of a client’s managers as a defense against the company’s charges of breach of contract, failure to exercise
There is an old industry joke that if you ask an accountant what is four plus four, she will tell you it's whatever you want it to be. Explain what might be meant by this statement.
1. What exactly is the difference between an auditor’s opinion and a statement of fact?2. In her opinion, Judge Forrest wrote that: “Section 10 and 11 claims regarding opinion statements require
1. Analyze the facts of the case with respect to the AICPA Code and explain any perceived deviation from ethical standards.2. Assume Miller Energy is considering bringing a lawsuit against KPMG for
What are the legal requirements for a third party to sue an auditor under Section 10 and Rule 10b-5 of the Securities Exchange Act of 1934? How do these requirements relate to the Louisiana School
1. What are the main arguments that the partner from PwC will need to counter when he meets with Billy? That is, what are the reasons and rationalizations he should expect to hear from Billy as to
What must a plaintiff assert in a Section 11 claim under the Securities Act of 1933 to properly allege an “opinion” statement is materially misleading? When might certain financial statement
Assume a third party such as a successor audit firm quickly discovers a fraud that the predecessor auditor has overlooked for years. Do you think this provides evidence supporting scienter? Explain.
Describe the possible entities that may sue an auditor and the possible reason for a lawsuit.
Grant Thornton prevailed in the Epic Resorts case with a defense that included, among other defenses:a. There was no evidence of a causal connection between the alleged misrepresentation and the
1. Assume that a third party(ies) is considering whether to sue the external auditors of QSGI. What could they allege in their lawsuit and why?2. Assuming a third party(ies) files the lawsuit, what
Three of six defenses Kay & Lee might use would include which of the following?a. The third party did not suffer a loss; any loss was caused by other events; the claim is invalid because the
1. Are the auditors guilty of malpractice? Explain.2. What defenses are available to Joker & Wild in this case? Explain what they must prove to successfully assert these defenses.3. Assume you
To succeed in obtaining a judgment, the bank would have to prove these three things as part of a five-step process.a. False representation by the accountant; belief by the accountant the
As discussed in the opening reflection, MF Global filed a complaint charging PwC with professional malpractice, breach of contract, and unjust enrichment in connection with its advice concerning, and
You may know the difference between right and wrong behavior and never would consider committing fraud. But how do you maintain the highest level of professional conduct as it relates to fraudulent
Assume you are inspecting EY’s audit of Medicis Pharmaceutical Corporation for the PCAOB. Read through the information provided about the case in the chapter and identify the factors the auditors
Do you believe the end-user cares whether the lead audit engagement partner signs his or her name to the report or the firm simply files Form AP with the PCAOB? Explain.
Answer the following questions about financial statement restatements.a. What are financial statement restatements?b. When should financial statements be restated?c. Assume the auditor has
What is the purpose of an audit firm developing a system of quality controls?
Explain how PCAOB inspections can lead to improvements in audit engagement quality.
In 1995, Congress added Section 10A to the Securities Exchange Act of 1934 as part of the Private Securities Litigation Reform Act. Is it accurate to say that Congress enacted Section 10A with the
Discuss the link between skeptical judgment and skeptical action and Rest’s four-component Model of Ethical Decision Making.
Data analysis, often in the form of continuous monitoring of transactions and controls, is increasingly used as a key component of risk management and audit processes overall. How might data
The PCAOB believes there have been improvements in audit quality during the past few years. Discuss the indicators of audit quality and why they are important to protect the public interest.
1. Explain how pressures and incentives drove the actions taken by Hudgins and Kitay to commit financial statement fraud.2. Describe the problems in the audit of Weatherford International by Ernst
Gary James works for Hill & Beans, a professional services firm. James was a onetime business partner of former Florida state Senator Howard Clark and a donor to his campaign. Clark was recently
In the aftermath of frauds like ZZZZ Best and Enron, SOX beefed up the requirements to belong on the audit committee, as well as its responsibilities. These include which of the following?a. The
1. Given the facts of the case, what communications do you believe Forrester & Loomis should have made with the audit committee with regard to the transactions with the vendor to comply with
Ernst was expected to adhere to audit standards in preparation of their report. What is true about audit standards?a. The SEC requires the 10 standards created by the PCAOB and IFRS.b. The PCAOB
1. Use the Fraud Triangle to analyze the business and audit risks that existed at Diamond Foods during the period of its accounting fraud.2. How would you characterize Diamond's accounting? Did they
A review differs from an audit in that ________________.a. The external auditor reviews company-prepared documentsb. The external auditor reviews internal control to prepare a SOX Section 404
1. Who are the stakeholders in this case and what are Barry's obligations to them?2. What are related-party transactions? Why are related-party transactions a particularly sensitive area? What do you
Describe the types of audit deficiencies that might arise because of problems with ICFR.
How might the existence of the dark triad personalities underlie undesirable behaviors by management and how might it influence the audit?
The audit failure on the part of Ernst can be traced to the failure to _____________.a. Gather sufficient evidential materialb. Realize the inherent risk in auditing a cleaning businessc. See the
The external auditors at Ernst and Whinney succumbed to which part of the fraud triangle?a. Opportunityb. Incentive pressurec. Rationalizationd. A and C
Vick and Lester are engaging in fraud. The definition of fraud can include which of the following?a. Fraudulent financial reportingb. A violation of the Foreign Corrupt Practices Actc.
Vick Jensen is now caught in what dynamic of the Fraud Triangle?a. Incentiveb. Pressurec. Opportunityd. All of these choices are correct
What are the objectives of audit risk assessment, and why is it important in assessing the likelihood that fraud may occur? How might the assessment influence the auditors’ evaluation of ICFR?
Vick and Ethan have both defrauded Fostermann. Each now knows the other is a fraudster. They are caught up in the Fraud Triangle. The components of the triangle are which of the following?a.
1. Assume you are asked as part of an audit of GE’s insurance business to assess fraud risks, what would you include in your report and why?2. At GE’s annual meeting in November 2017, CFO Jamie
1. What issues should be of concern to Margaret in deciding whether Dairy and Cheese should accept the reaudit engagement?2. What are Mark’s ethical obligations in this matter? Should he discuss
1. Analyze the facts of the case using the Fraud Triangle. Would you characterize what Ethan Lester did as a failure of internal controls? Explain.2. Assume Ethan sets a meeting with Vick in two days
On August 31, 2017, the SEC charged Evan R. Kita, a CPA and former accountant at Celator Pharmaceuticals, Inc., and three others with insider trading on market-moving news about the New Jersey-based
Do you think the lead engagement partner in an audit should sign his or her name on the audit report itself or, instead, the informational Form AP with the PCAOB? Use ethical reasoning to weigh the
You are the CFO of a privately-owned business and prepare financial statements and tax returns (which are distributed to lenders, bonding/insurance providers, shareholders, and the IRS). What are
What are client hosting services? Would a CPA/CPA firm violate the Independence Rule if it provides hosting services for a client? Explain when it would or would not impair independence. Would
Assume you disclosed information about a client. How would you determine if you violated the Confidential Client Information rule in the AICPA Code?
What are the specific threats to independence when a CPA accepts gifts or entertainment from an attest client? Does it matter whether the amount of the gift or entertainment was significant?
1. Do you believe covenants not to compete, such as the one in BDO Seidman, are ethical? Do they violate any rules of conduct in the AICPA Code?2. Who are the stakeholders in the BDO case and what
When do ethical conflicts arise in the performance of professional accounting services? How should a CPA go about resolving ethical conflicts?
The applicable section to Helen’s situation in the conceptual framework rules for CPAs in business would be which of the following?a. 110.010b. 1.130.020c. 1.000.020d. 2.000.010
1. Evaluate Mark’s conduct with respect to the Six Pillars of Character.2. Did Mark violate any ethics rules either of the state board or AICPA? Explain.Mark started his own practice ten years ago.
In the event that Carl and the CEO won’t change their position, Helen should probably take her concerns to which of the following?a. The SECb. The external auditorsc. The PCAOBd. The audit committee
1. What role does ‘Auditor Independence’ play in a CPA’s responsibility to protect the public interest?2. Explain the type of threat(s) to independence this case represents and explain why it
Helen Strom is in an ethical dilemma due to a(n) ____________.a. Adverse interest threatb. Familiarity threatc. Undue influence threatd. Financial self-interest threat
1. Evaluate the ethics of the tax shelter transactions, including your concerns about the practices.2. Who are the stakeholders in this case, and what are your professional responsibilities to
Do you believe the threats and safeguards approach establishes a situational or relativistic ethic? How might utilitarianism be used to evaluate the ethicality of permitting certain relationships
Carl Land’s observation that "we push the envelope around here" is typical of the rationalization employed in _____________.a. Groupthink tendencyb. Availability tendencyc. Overconfidence
Grace was lacking in several professional areas in relying on the client rather than external evidence. Arnold Schilder, Chair of the International Auditing and Assurance Standards Board (IAASB),
1. Identify any potential threats to judgment you think could exist based on the facts of the case?2. Thinking back to the biases discussed in Chapter 2, what biases might the identified threat(s)
At the very center of the KPMG framework is __________.a. Attitudeb. Professional skepticismc. Mindsetd. Confidence tendency
We all know people who say, “Don’t bother me with the facts. I’ve already made up my mind.” How might such an attitude influence judgment tendencies of auditors?
It appears Grace has fallen victim to which of the following?a. Judgment triggersb. Availability tendencyc. Mindset tendencyd. Groupthink tendency
1. Apply the steps in Exhibit 4.3, Ethical Conflicts and Compliance with the Rules of Conduct, and analyze whether the relationships described in this case create a conflict of interests and, if so,
Grace Sloan explained that the audit team pressured her to let certain matters go. By doing so, Grace succumbed to groupthink. Groupthink has a home in which of the following?a. Stage 3 of the Rest
Do you believe the U.S. Supreme Court decision in Digital Realty Trust, Inc. v. Somers and the decision in Erhart v. BOFI Holdings were the "right" decisions? Explain the basis for your answer.
Is it a positive result that 39.1 percent of occupational fraud is initially detected by a "tip"? Explain why or why not.
When financial results aren’t what they seemed to be – and a company is forced to issue material financial restatements –should it be required to develop policies to claw back incentive pay and
Review the facts related to the reporting of financial statement fraud by Tony Menendez at Halliburton in the context of the factors identified in the Anti-Fraud Collaboration study. Discuss the
While on a lunch break following a dispute with a supervisor, an employee updated her Facebook status to an expletive and the name of the employer’s company. Several coworkers “liked” her
At the time, revenue recognition required a firm to include ___________.a. Persuasive evidence of an arrangementb. Receipt of a purchase order from the buyer’s budget and the Purchasing Officec.
How can a board of directors know whether the culture of the organization supports the right kind of risk taking?
Halliburton provided a flow chart on revenue recognition known as the ______________.a. Channel Stuffing Treeb. Bill-and-Hold Decision Treec. Mark-to-Market Treed. Revenue Allocation Tree
What are the roles and responsibilities of independent members of the board of directors with respect to risk management and corporate governance?
Menendez was excluded from a meeting on accounting for a potential joint venture arrangement. This is a violation of which of the following?a. Dodd-Frankb. Sarbanes-Oxleyc. The RICO Racketeer
Explain how internal auditors’ sensitivity to ethical dilemmas might be influenced by corporate governance mechanisms.
Halliburton was violating revenue recognition rules by recognizing revenue _____________.a. Before assembling the productb. Before delivering the productc. Before the risks of ownership had passed to
A tobashi scheme involves which of the following?a. Selling investments and buying them back disguised as advisory feesb. Using special purpose entities (SPEs), a la Enron, to offload losses to
Olympus attempted to cover up the losses by writing investments off as ___________.a. Market-to-market trading securitiesb. Goodwill impairmentsc. Discontinued operationsd. Deferred taxes due to

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