Question 1

Which of the following is not a measure to improve auditor independence?
A) Audit fees set by an independent body
B) Prohibit senior audit rotation, to enable auditors to work more closely with management
C) Prohibit auditors from undertaking non-audit services for their clients
D) Auditors appointed by independent body

Accepted Answer

Prohibiting senior audit rotation would actually decrease auditor independence, as auditors would become too closely entrenched with management. The other options all increase independence: setting audit fees independently, prohibiting auditors from providing non-audit services, and appointing auditors through an independent body.

Question 2

Which of the following would be an appropriate approach to detecting questionable accounting treatment?
A) Compare the amount of tax a company pays with their reported profit figures
B) Compare the company's asset with their liabilities
C) Compare the company's dividend yield with their P/E ratio
D) Compare the company's share price with their reported profit

Accepted Answer

Comparing the amount of tax a company pays with their reported profit figures would reveal if the company is manipulating its earnings to reduce its tax liability, which could be an indicator of questionable accounting treatment. Comparing assets with liabilities (B) is a common financial analysis technique but is not specific to detecting questionable accounting treatment. Comparing dividend yield with P/E ratio (C) and share price with reported profit (D) can provide insights into a company's financial performance but is not a direct indicator of questionable accounting treatment.

Question 3

Which of the following statements is true regarding the treatment for research and development (R & D)expenditure as stipulated in IAS 38?
A) Research expenditure should be written off as it occurs
B) Development expenditure should be recognized as an internally generated intangible asset
C) Development expenditure can be carried forward on the balance sheet if certain criteria can be demonstrated (such as, the project is technically feasible and that when it is completed can be used or sold)
D) All of the above

Accepted Answer

IAS 38 stipulates that research expenditure should be expensed as incurred, while development expenditure can be capitalized as an intangible asset if certain criteria are met, such as technical feasibility and the ability to use or sell the resulting product. This means all the statements A, B, and C are correct as per IAS 38.

Question 4

According to IAS 37 (provisions,contingent liabilities and contingent assets)for a provision to be recognized there must be:
A) A proven outflow of economic resources which has been independently valued
B) A probable outflow of economic resources which has been independently valued
C) A probable outflow of economic resources of which a reliable estimate can be made
D) A definite outflow of economic resources of which an accurate valuation can be made

Accepted Answer

According to IAS 37, for a provision to be recognized, there must be a probable outflow of economic resources, and a reliable estimate can be made of the amount of the obligation. This means that while there is some uncertainty around the amount and timing of the outflow, it is more likely than not to occur, and a reasonable estimate of its cost can be made. Option A requires a proven outflow, which is a higher standard of certainty than probable. Option B is correct in requiring a probable outflow, but does not mention the need for a reliable estimate. Option D requires a definite outflow and an accurate valuation, which are too high a standard of certainty for recognizing a provision.

Question 5

Creative accounting is sometimes used to:
A) Reduce reported losses
B) Manipulate accounting ratios
C) Make management look successful
D) All of the above

Accepted Answer

Creative accounting can involve manipulating financial statements in various ways to achieve different motives. This can include reducing reported losses, manipulating accounting ratios to appear more favorable, and making management look more successful than they actually are.

Question 6

Creative accounting is not only concerned with maximizing profit and may include income smoothing which may require understating profits

Accepted Answer

Creative accounting can involve strategies that focus on achieving various goals, including income smoothing. This technique aims to reduce fluctuations in a company's reported earnings by shifting income from one period to another. Income smoothing can involve understating profits in some years to create a reserve that can be used to artificially boost profits in other years. Therefore, the statement that creative accounting may include income smoothing and require understating profits is true.

Question 7

Which of the following statements would normally be associated with a "left wing" proposal to curtail creative accounting practice?
A) Remove legislation and public involvement in company accounting
B) Develop more rigorous legislation and public involvement in company accounting
C) Develop more rigorous regulation and public involvement in audit practice
D) Statements B & C are both correct

Accepted Answer

Left-wing proposals typically advocate for increased regulation and public oversight to ensure transparency and fairness, which is reflected in both statements B and C.

Question 8

Managers who want to manipulate accounts to make return on capital employed (ROCE)look more favorable are likely to take which of the following courses of action?
A) Find ways to reduce asset values
B) Find ways to boost profit and increase asset values
C) Find ways to increase asset values
D) Find ways to increase capital employed

Accepted Answer

Managers who want to manipulate accounts to make ROCE look more favorable are likely to find ways to reduce asset values, such as by increasing depreciation charges or writing off assets early. This will lead to a lower capital employed figure, which will in turn increase ROCE. Option B implies a genuine increase in profit and asset values, which does not involve manipulating accounts. Option C is not correct as an increase in asset values will result in a higher capital employed figure, which will decrease ROCE. Similarly, option D is incorrect as an increase in capital employed will lower ROCE, all else being equal.

Question 9

Which of the following statements about The Corporate Report (1975)is false?
A) The Corporate Report recommended a statement of value-added
B) The Corporate Report recommended an employment report
C) The Corporate Report recommended a Corporate Social Responsibility report
D) The Corporate Report recommended a statement of future objectives

Accepted Answer

The Corporate Report (1975) did not specifically recommend a Corporate Social Responsibility (CSR) report. Instead, it focused on broader aspects of corporate reporting, such as value-added statements, employment reports, and future objectives, aiming to improve transparency and accountability in financial reporting.

Question 10

Depreciation and inventories of unsold goods are areas of financial accounting where the accounting rules allow little flexibility,and there is little scope for personal judgment or manipulation

Accepted Answer

Depreciation methods and inventory valuation methods offer flexibility and require judgment, allowing for different approaches such as straight-line or declining balance for depreciation, and FIFO, LIFO, or weighted average for inventory, which can lead to variations in financial reporting.

Question 11

Which of the following statements is correct?
A) Some social and environmental reports are simply "glossy" public relations exercises
B) Social and environmental reporting practice varies enormously
C) Social and environmental reporting is at an early stage in its development
D) All of the above statements are correct

Accepted Answer

Option A is correct because some companies use glossy reports to create a positive image of their social and environmental activities without actually making changes.

Option B is correct because there is no standardized way of reporting social and environmental performance, leading to vast differences in how companies choose to report.

Option C is correct because social and environmental reporting is a relatively new concept and still developing.

Question 12

Which of the following statements is correct?
A) Companies are required to publish their carbon footprint in their annual report
B) Companies are free to publish whatever environmental information they like in their annual reports
C) Companies are required to publish their recycling policies in their annual report
D) Companies are required to publish their supply chain policies in the annual report

Accepted Answer

The correct statement is that companies are free to publish whatever environmental information they like in their annual reports. There is no universal mandate requiring companies to publish specific environmental information such as their carbon footprint, recycling policies, or supply chain policies in their annual reports. Regulations can vary by country and industry, and while some jurisdictions may have specific reporting requirements, the statement as given applies broadly.

Question 13

Which of the following statements would normally be associated with a "right wing" proposal to curtail creative accounting practice?
A) Remove legislation and public involvement in company accounting
B) Develop more rigorous legislation and public involvement in company accounting
C) Develop more rigorous regulation and public involvement in audit practice
D) Statements B & C are both correct

Accepted Answer

Right-wing proposals typically favor less government intervention and regulation, so removing legislation and public involvement aligns with right-wing ideologies.

Question 14

Which of the following statements is false?
A) Social and environmental accounting is concerned with reporting relevant and measurable social costs and benefits to shareholders and creditors
B) Social and environmental accounting is concerned with organizations being more widely accountable for social and environmental issues
C) Social and environmental accounting involves disclosing information in addition to to conventional financial accounting statements
D) Social and environmental accounting is concerned with organizations being more widely accountable to interest groups other than shareholders and creditors

Accepted Answer

Social and environmental accounting is not solely concerned with reporting to shareholders and creditors but also to other stakeholders including communities, employees and the environment.

Question 15

A company can reduce its reported salary expense by paying some employees with share options instead of money

Accepted Answer

When a company issues share options as a form of compensation, it is not counted as an expense on the company's income statement until the options are exercised. Thus, this can reduce the reported salary expense of the company.

Question 16

It is easier to generate "fictitious" cash flow figures than to produce "fictitious" profit figures

Accepted Answer

Generating fictitious cash flow figures is generally harder than producing fictitious profit figures because cash flow involves actual cash movements, making it more difficult to manipulate without detection compared to profit figures, which can be influenced by adjusting accounting estimates and accruals.

Question 17

Which of the following statements is false?
A) One approach to curtailing creative accounting is to have stronger legal backing for accounting standards
B) One approach to curtailing creative accounting is to move away from cash flow accounting to providing more accruals based information
C) One approach to curtailing creative accounting is to enhance the role of international accounting standards
D) One approach to curtailing creative accounting is to move towards a current cost accounting approach to asset valuation

Accepted Answer

Moving away from cash flow accounting and providing more accruals based information would not necessarily deter creative accounting. In fact, creative accounting can still occur within accruals based accounting methods. The other statements are true as stronger legal backing for accounting standards, enhancing the role of international accounting standards, and using a current cost accounting approach to asset valuation can deter or limit creative accounting practices.

Question 18

In what way has IFRS 3 made accounting for goodwill open to manipulation by managers?
A) Requires goodwill to be treated as an expense on the income statement
B) Requires goodwill to be treated as a one-off gain in the income statement
C) Requires goodwill to be subject to an annual impairment review
D) Requires goodwill to be treated as an asset on the balance sheet and amortized

Accepted Answer

IFRS 3 requires goodwill to be subject to an annual impairment review rather than being systematically amortized over time. This approach gives managers some discretion in determining the timing and amount of impairment, potentially allowing for manipulation of financial statements.

Question 19

According to the Centre for Social and Environmental Accounting Research (CSEAR),which of the following is not an aspect of social reporting?
A) Investigating the social effects of current accounting practice
B) Investigating how to ameliorate the adverse affects of accounting practice
C) Reporting political and charitable donations
D) Studying other possible ways of providing accounts of organizations

Accepted Answer

According to CSEAR, reporting political and charitable donations is part of social reporting. The other options listed all involve investigating, studying, or improving accounting practice from a social and environmental perspective.

Question 20

The term "creative accounting" is used to describe the development of accounting techniques which more accurately reflect the economic reality of a company

Accepted Answer

The term "creative accounting" actually refers to the use of accounting techniques to manipulate financial statements or hide financial information in order to make a company's financial performance appear better than it actually is. It is sometimes also referred to as "financial engineering" or "cooking the books".

Quiz 8: Current Issues in Financial Reporting

Which of the following is not a measure to improve auditor independence?

Which of the following would be an appropriate approach to detecting questionable accounting treatment?

Which of the following statements is true regarding the treatment for research and development (R & D) expenditure as stipulated in IAS 38?

According to IAS 37 (provisions,contingent liabilities and contingent assets) for a provision to be recognized there must be:

Creative accounting is sometimes used to:

Creative accounting is not only concerned with maximizing profit and may include income smoothing which may require understating profits

Which of the following statements would normally be associated with a "left wing" proposal to curtail creative accounting practice?

Managers who want to manipulate accounts to make return on capital employed (ROCE) look more favorable are likely to take which of the following courses of action?

Which of the following statements about The Corporate Report (1975) is false?

Depreciation and inventories of unsold goods are areas of financial accounting where the accounting rules allow little flexibility,and there is little scope for personal judgment or manipulation

Which of the following statements is correct?

Which of the following statements is correct?

Which of the following statements would normally be associated with a "right wing" proposal to curtail creative accounting practice?

Which of the following statements is false?

A company can reduce its reported salary expense by paying some employees with share options instead of money

It is easier to generate "fictitious" cash flow figures than to produce "fictitious" profit figures

Which of the following statements is false?

In what way has IFRS 3 made accounting for goodwill open to manipulation by managers?

According to the Centre for Social and Environmental Accounting Research (CSEAR) ,which of the following is not an aspect of social reporting?

The term "creative accounting" is used to describe the development of accounting techniques which more accurately reflect the economic reality of a company