Deck 11: Auditing and Corporate Governance: An International Perspective

Question 1

According to OECD principles, what group is ultimately responsible for governing a multinational organization?

A) Regulatory agencies in the host country
B) Regulatory agencies in the home country
C) Board of directors
D) Common shareholders

Answer 1

C

Question 2

Which of the following is a main function of internal auditing in multinational corporations?

A) Preparing the annual report to corporate shareholders
B) Selecting independent members for the board of directors
C) Helping external auditors with the financial statement audit
D) Monitoring risks and assessing their effect on the company

Answer 2

D

Question 3

Why is litigation against external auditors, which is very common in the United States, virtually unknown in Japan?

A) Japanese auditors rarely make mistakes in their professional work.
B) Such litigation is inconsistent with Japanese values of interpersonal harmony.
C) Japan lacks a sophisticated court system for handling complex cases involving accounting matters.
D) External auditors are not responsible for the quality of work performed for a corporate client.

Answer 3

B

Question 4

The OECD believes which group in a multinational corporation should oversee the financial reporting function to ensure that appropriate controls are in place to safeguard information integrity?

A) Mid-level management
B) External auditors
C) Board of directors
D) Information systems department

Question 5

What are the two main theories of corporate governance?

A) Audit reliance and board of directors' responsibility
B) Agency and stakeholder
C) Common law and code law
D) Internal auditing and external auditing

Question 6

What is the first line of enforcement of legal and professional financial reporting standards?

A) Prosecuting attorney
B) International Accounting Standards Board
C) Local civil court system in the home country
D) External auditing

Question 7

Recently enacted listing requirements of the New York Stock Exchange focuses attention on independent directors. How does the NYSE define an independent director?

A) No material relationship with the listed corporation
B) Not a member of corporate management
C) Owns fewer than 10,000 shares of the corporation's stock
D) Does not meet regularly with the board of directors

Question 8

Which of the following is NOT a concern identified in the 2008 IFAC report "Financial Reporting Supply Chain-Current Perspectives and Directions"?

A) Governance in name, but not in spirit
B) Overregulation
C) The development of a checklist mentality
D) Trend towards less disclosure and transparency in business and financial reporting

Question 9

In multinational corporations, to whom are the external auditors responsible according to OECD guidelines?

A) Corporate management
B) Shareholders
C) Government of the host country
D) Creditors

Question 10

What explains the reason for the historically very low (1/3% to 1/2%) limit on allowance for doubtful accounts in China?

A) The primary customer in China was the government, which was presumed to have very good credit.
B) This is the international accounting standard for companies operating in eastern Asia.
C) Prior to being admitted to the World Trade Organization (WTO), China was required to reduce its bad debt level.
D) All of the above

Question 11

What impact did the Asian financial crisis in the late 1990s and the corporate scandals in the United States in this century have on the auditing profession?

A) Regulation of the external auditing profession was reduced.
B) CPAs were no longer allowed to provide external audit services for multinational corporations.
C) Reputation for being the watchdogs of financial reporting integrity was reduced.
D) External auditors were required to sit on the boards of directors of multinational corporations.

Question 12

In Germany, who do external auditors consider as their clients?

A) The government
B) Board of directors
C) Society as a whole
D) All of the above

Question 13

What reason has been given to explain the lack of well-developed auditing professions in less developed economies?

A) Inability to train auditors given the lack of educational systems.
B) Since creditors and investors are not major players in these economies, there is little need for audited financial statements.
C) Investors and creditors in these countries do not want external auditors attesting to financial statement reliability.
D) In these cultures, financial statements are presumed to be accurate and therefore do not require independent audits.

Question 14

What is the primary role of external auditing in multinational corporations?

A) Preparing the annual report to corporate shareholders
B) Designing a working system of internal accounting controls
C) Assuring that financial statement information is high quality
D) Selecting independent members for the board of directors

Question 15

What act of the U.S. Congress advocated creating the Public Company Accounting Oversight Board, required financial statement certification by the CEO and CFO, and requires external auditors to report directly to an audit committee?

A) Securities Act of 1933
B) Securities and Exchange Act of 1934
C) Sherman Anti-Trust Act of 1890
D) Sarbanes-Oxley Act of 2002

Question 16

What term is used to describe the relationships between a company's management, its board, shareholders, and other stakeholders that create a structure through which the objectives of the company are set, attained, and monitored?

A) Management control
B) Corporate governance
C) Internal auditing
D) Government regulation

Question 17

What caused the U.S. Congress, the OECD, the International Federation of Accountants, and other organizations to enact stricter rules on corporate governance in recent years?

A) Sudden increase in world trade
B) High-profile corporate scandals
C) Significant decline in world trade
D) Expansion of the European Union membership

Question 18

Which of the following is NOT a key driver of audit quality based on the 2008 U.K. FRC publication "The Audit Quality Framework"?

A) The composition of a company's audit committee
B) The culture within an audit firm
C) The effectiveness of the audit process
D) The skills and personal qualities of audit partners and staff

Question 19

Who is considered to be the client for external auditors in the United Kingdom?

A) Corporate shareholders
B) The government
C) Society as a whole
D) All of the above

Question 20

Why has corporate financial reporting in China not resembled reporting in Anglo-Saxon countries?

A) There was a lack of distinction between business functions and social service functions in Chinese reporting entities.
B) China has only recently become involved in international trade.
C) The concept of accounting was only introduced to China recently and therefore it has not had time to develop properly.
D) The 1960's Cultural Revolution eliminated the requirements that Chinese corporations provide information on business operations.

Question 21

Which of the following is a strategy adopted internationally to limit the auditor's liability?

A) Decreasing the amount of disclosure in financial statements
B) Limiting the amount of foreign direct investment in audit firms
C) Increasing dependence of auditors on management of the company
D) Changing the ownership structure of audit firms

Question 22

Which of the following groups is responsible for developing international auditing standards?

A) International Accounting Standards Board (IASB)
B) International Auditing and Assurance Standards Board (IAASB)
C) International Organization of Securities Commissions (IOSCO)
D) Organization for Economic Cooperation and Development (OECD)

Question 23

Which of the following is a positive area identified in the 2008 IFAC report "Financial Reporting Supply Chain-Current Perspectives and Directions"?

A) Governance not in name but in spirit
B) Limited liability for directors and senior management
C) More transparency in reporting
D) Good relation of remuneration to performance

Question 24

Which of the following is a factor influencing the probability that an auditor will report a detected error or irregularity?

A) Competence of the auditor.
B) Independence of the auditor.
C) Quality review and monitoring.
D) Financial reporting requirements.

Question 25

Why is international harmonization of auditing standards important?

A) To be consistent with harmonized international accounting standards.
B) To ensure the independence of external auditors of multinational corporations.
C) To assure international capital markets that auditing has been consistent across companies.
D) To reduce the authority of individual governments to enact accounting laws.

Question 26

What is the focus of Section 404 of the Sarbanes-Oxley Act?

A) Requirement that all members of the board of directors be independent of the corporation.
B) It addresses the need for a consistent set of international auditing standards.
C) Attesting to the reliability of internal controls in the annual report.
D) This defines the membership in the Public Company Accounting Oversight Board (PCAOB).

Question 27

What term is used to refer to the probability that an accounting error or irregularity is detected and reported?

A) Accounting risk
B) Audit risk
C) Audit quality
D) Transaction risk

Question 28

Which of the following terms is NOT defined by statute in the Companies Act of the United Kingdom?

A) Accountant
B) Auditor
C) Independence
D) None of the above terms is defined in the Companies Act of the UK.

Question 29

Which of the following is NOT a factor influencing the probability that an auditor will detect an accounting error?

A) Competence of the auditor
B) Quality review and monitoring
C) Financial reporting requirements
D) Independence of the auditor

Question 30

If an auditor breaks a contractual obligation, such as failing to complete an audit within the time frame specified in the engagement letter, what kind of liability does the auditor face?

A) Criminal liability
B) Civil liability
C) Professional sanctions
D) None of the above

Question 31

Which group is responsible for setting and developing auditing standards in the United Kingdom?

A) Department of Trade and Industries (DTI)
B) Consultative Committee of Accountancy Bodies (CCAB)
C) Auditing Practices Board (APB)
D) Institute of Chartered Accountants in England and Wales (ICAEW)

Question 32

Why was the issuance of International Standard on Auditing 13 (ISA 13) considered so important to harmonization of auditing standards?

A) It required all multinational corporations to adopt international auditing standards by 2008.
B) It specified the form and content of the annual report.
C) It provided guidance on the form and content of the audit report.
D) It requires the auditor to express an opinion on whether the statements give a true and fair view of corporate performance.

Question 33

In what countries would one expect auditing standards to evolve based on the needs perceived by the auditing profession?

A) Code law countries
B) Members of the European Union
C) Countries that follow common law
D) Countries with strong accounting laws

Question 34

What does ISA 700 say about the interpretation of an audit opinion?

A) It enhances the credibility of the financial statements of corporation.
B) It guarantees the future viability of the corporation.
C) It assures readers that no errors have been made in the financial statements.
D) It tells shareholders that management has operated the corporation efficiently.

Question 35

According to international auditing standards, if audit work has been limited in its scope, the auditors have had a disagreement with management, or there is significant uncertainty associated with the financial statements, what kind of audit opinion should be rendered?

A) Disclaimer of opinion
B) Unqualified
C) Adverse
D) Qualified

Question 36

According to the International Auditing Practices Committee, financial statements have conformed to International Financial Reporting Standards (IFRS) if:

A) they have complied with at least 75% of the International Financial Reporting Standards (IFRS).
B) they have complied with at least one-half of the provisions of the International Financial Reporting Standards (IFRS).
C) they have complied with all requirements and interpretations of the International Financial Reporting Interpretations Committee (IFRIC).
D) they have complied with most of the International Financial Reporting Standards (IFRS) or with U.S. GAAP.

Question 37

The Fourth Directive of the European Commission:

A) aims at harmonizing the educational and training prerequisites necessary to become a statutory auditor.
B) requires that the auditor's report include whether the financial statements present a "true and fair view."
C) mandates for the new members of the auditing profession to hold a university degree in accountancy.
D) requires that the auditor of the company to be the officer or employee of the company being audited.

Question 38

In an effort to harmonize international auditing standards on a regional level, the European Union has issued directives pertaining to this end. Its Eighth Directive caused the United Kingdom to change the country's long-held standard for individuals wishing to be auditors. Which of the following is a new requirement for auditors in the UK?

A) Auditors must be members of a recognized professional association, such as the ICAEW.
B) New entrants to the auditing profession must hold a university degree in accountancy.
C) Auditors may now be a citizen of any country in the European Union rather than just the UK.
D) New members of the auditing profession must have a university degree.

Question 39

In China, who is responsible for regulating auditing practice?

A) Chinese Institute of Certified Public Accountants (CICPA)
B) Government, through local audit bureaus
C) Chinese stock exchange
D) Auditing Practices Board (APB)

Question 40

In what area is external auditing consistent internationally?

A) Audit report
B) Auditing standards
C) Regulation of the profession
D) None of the above

Question 41

What is the position of the U.S. Securities and Exchange Commission (SEC) with respect to internal auditing?

A) It requires all companies, including foreign enterprises, listed on U.S. stock exchanges to have an internal audit function.
B) Since 2000, the SEC has been silent with respect to internal auditing.
C) Internal auditing is recommended by the SEC, but it is not required for listed companies.
D) Only multinational companies are required to have internal auditing systems.

Question 42

In proposed PCAOB Rule 4012, "Inspection of Foreign Registered Public Accounting Firms" issued for comment in December 2007, which of the following is NOT one of the broad principles upon which the board may place full reliance on the inspection program of qualified non-U.S. auditor oversight entities?

A) Transparency of the oversight system
B) Adequacy and integrity of the oversight system
C) Rigidity of professional standards mandated by the oversight system
D) Independence of the oversight system's source of funding

Question 43

The Canadian Institute of Chartered Accountants (CICA) has taken a principles-based approach to auditor independence, whereas the Federation des Experts Comptables Europeens (FEE) has taken a conceptual approach. What is the difference?

A) The principles-based approach has been effective, but the conceptual approach has not.
B) The principles-based approach offers more flexibility in compliance than the conceptual approach does.
C) The principles-based approach gives specific rules and prohibitions that must be followed, but the conceptual approach asks auditors to focus on the aim of independence rather than rules.
D) The conceptual approach is only theoretical and hasn't yet been applied, whereas the principles-based approach is currently in practice.

Question 44

What is an audit committee?

A) It is a group of audit firms that develop national or international standards for auditing practice.
B) It is a subset of a corporate board of directors with oversight of the auditing function.
C) It is the team of external auditors (i.e. CPAs) that conducts audit testing and prepares the audit report.
D) It is a management group responsible for negotiating the audit engagement with a public accounting firm.

Question 45

Which of the following is the responsibility of an audit committee?

A) Oversee the internal control systems
B) Oversee internal auditing and the independent public accounting function
C) Monitor the financial reporting process
D) All answers are correct

Question 46

The Institute of Chartered Accountants in New Zealand (ICANZ) proposed a policy of proportionate liability to replace the country's existing "joint and several liability" approach. Why was the proposal denied?

A) Proportionate responsibility for damages cannot be determined objectively.
B) Fairness to the defendants was not relevant to ensuring fairness to the injured party.
C) Large auditing firms would be paying proportionately higher damage awards than small firms.
D) Such a policy is inconsistent with harmonization of international auditing standards.

Question 47

How does the principle of "joint and several liability" affect auditors in countries where it is applied?

A) This limits civil liability to only those people who conducted the audit negligently.
B) All partners in the accounting firm can be personally liable for the negligence of any one partner.
C) All audit partners are liable for the actions of the firm only up to the level of their investment in the firm.
D) It creates limited liability for auditors accused of wrong-doing by their clients.

Question 48

Under the Sarbanes-Oxley Act of 2002, who is responsible for paying the independent auditor?

A) Management
B) Audit committee
C) Government who has jurisdiction over the corporation
D) American Institute of Certified Public Accountants (AICPA)

Question 49

Which of the following is true of a conceptual approach to auditor independence?

A) Its applicability goes beyond any specific situation and mandates a proactive approach based on clearly articulated principles.
B) It prohibits certain nonaudit services such as bookkeeping, valuations, actuarial, and internal audit outsourcing.
C) It requires audit committee prior approval for any service provided by the auditors.
D) It prevents the use of legalistic devices to avoid compliance.

Question 50

Who oversees the work of the IFAC committees?

A) PIOB
B) PCAOB
C) IOSCO
D) OECD

Question 51

An auditor may be subject to criminal liability under which of the following situations?

A) He/she willingly participates in defrauding the company's stockholders.
B) He/she breaks a contract with the client.
C) He/she violates a rule on the manner of advertising allowed by the professional accounting and auditing association.
D) None of the above

Question 52

What is the role of internal auditing?

A) To substitute for the external auditor whenever possible
B) To provide assurance and consulting services to improve an organization's operations
C) To assist the audit committee in negotiations with the external auditor
D) To mediate disagreements between the external auditor and corporate management

Question 53

Who may bring civil litigation against an auditor?

A) Only the client company
B) Only shareholders
C) The client company and shareholders
D) It depends on a country's laws governing auditor liability

Question 54

What does the Foreign Corrupt Practices Act have to do with accounting?

A) It requires that U.S. companies properly record bribes made to obtain business from foreign clients.
B) It requires that appropriate internal control systems be maintained by publicly traded U.S. companies.
C) It mandates the use of the temporal method of translating assets obtained illegally in foreign countries.
D) It demands that publicly traded U.S. companies follow international best-practices when auditing illegal operations abroad.

Question 55

Which of the following is a limitation of SEC requirements for audit committee membership?

A) The expanded responsibilities make service on the committee less desirable to competent directors.
B) External auditors are unwilling to report to an independent audit committee.
C) The audit committee compromises the external auditor's independence.
D) Only the United Kingdom and the United States require audit committees, putting corporations in these countries at a disadvantage.

Question 56

Auditors in the United States may form limited liability partnerships. What does this mean for civil liability of auditors?

A) It allows negligent auditors to escape civil litigation for their failures.
B) Auditors are limited to serving clients that agree not to pursue litigation for audit negligence.
C) The personal wealth of partners who are not negligent is protected from litigation against the audit firm.
D) It has no impact on civil liability because it provides limitations only on criminal liability.

Question 57

Under Securities and Exchange Commission regulations, who may be a member of an audit committee for a listed company?

A) Any member of the corporate board of directors
B) Any member of the corporate board of directors who is not a Certified Public Accountant (CPA)
C) Only members of the corporate board of directors who do not have a material interest in the company
D) Any manager or director of the corporation

Question 58

Under the Sarbanes-Oxley Act of 2002, to whom does the audit committee report?

A) Management of the corporation
B) External auditor
C) Board of directors
D) Internal audit department

Question 59

What reason can be given for the importance of internal auditing in multinational corporations?

A) A serious lack of external auditors available to audit an international company
B) A growing demand for risk management skills possessed by internal auditors
C) Reluctance by multinational corporations to hire external auditors to comply with international regulations
D) Decline in the reputation of external auditors

Question 60

Auditors in the United Kingdom often include disclaimers of liability in their audit reports. According to the U.S. Securities and Exchange Commission, how effective is this approach to limiting civil liabilities?

A) It will have no effect when included in the financial statements of U.S. companies.
B) It effectively caps the damage awards that will be made in U.S. civil courts.
C) It limits who can bring civil action in cases involving the audit of U.S. companies.
D) It limits both civil and criminal liability against auditors of U.S. companies.

Question 61

What is the meaning of the term audit expectation gap?

A) The difference between what the public and financial statement users believe auditors are responsible for, and what auditors themselves believe to be their responsibilities
B) The difference between public expectations about the responsibilities and duties of the auditing profession and what the auditing profession actually provides
C) The gap between the expectations of society about auditors and the performance of auditors
D) All answers are correct