Question 1

Major,Major,and Sharpe,CPA's,are the auditors of MacLain industries.In connection with the public offering of $10 million of MacLain securities,Major expressed an unqualified opinion as to the financial statements.Subsequent to the offering,certain misstatements and omissions are revealed.Major has been sued by the purchasers of the stock offered pursuant to the registration statement,which include the financial statements audited by Major.In the ensuing lawsuit by the MacLain investors,Major will be able to avoid liability if

Accepted Answer

Major can avoid liability in the lawsuit if they can prove due diligence in the audit of the financial statements of MacLain. This implies that Major had conducted a thorough audit and made a reasonable effort to detect any misstatements and omissions in the financial statements. The other options (A, B, and D) do not absolve Major of liability in the lawsuit, as they do not address the fundamental issue of the auditor's responsibility to conduct a reasonable audit.

Question 2

One of the major purposes of federal security regulation is to

Accepted Answer

One of the main purposes of federal security regulation is to provide sufficient information to the investing public who purchases securities in the marketplace. This is achieved through various regulations such as the Securities Act of 1933 and the Securities Exchange Act of 1934, which require companies to publicly disclose certain information about their financial health, operations, and risks. This helps investors make informed decisions about whether to buy or sell securities, and helps prevent fraud and other abuses in the securities market.

Question 3

Which of the following should be disclosed in a Summary of Significant Accounting Policies?

Accepted Answer

The Summary of Significant Accounting Policies should disclose the significant accounting policies followed by the company, including the depreciation method used. B and C are not related to accounting policies, while D should be disclosed in the footnotes to the financial statements, but not necessarily in the Summary of Significant Accounting Policies.

Question 4

Which of the following should be disclosed in the Summary of Significant Accounting Policies?

Accepted Answer

The basis of consolidation is a significant accounting policy that should be disclosed in the summary of significant accounting policies.

Question 5

The Securities and Exchange Commission SEC)was established in1934 to help regulate the U.S.securities market.Which of the following statements is true concerning the SEC?

Accepted Answer

The SEC does not prohibit the sale of speculative securities, nor does it guarantee the accuracy of a registrant's prospectus. Its influence and authority have not diminished; rather, it continues to play a crucial role in regulating the securities market. The SEC's primary function includes regulating securities offered for public sale, ensuring transparency, and maintaining fair trading practices.

Question 6

Significant accounting policies may not be

Accepted Answer

Significant accounting policies must be disclosed in financial statements. They should not be omitted on the basis of judgment. Therefore, option D is the correct choice. Options A, B, and C are not correct as significant accounting policies are selected on the basis of judgment, selected from available acceptable alternatives, and may be unusual or innovative in application.

Question 7

Which of the following situations would require adjustment to or disclosure in the financial statements?

Accepted Answer

The bankruptcy of a customer who regularly purchased 30 percent of the company's output would require disclosure in financial statements as it could have a significant impact on the company's revenue and financial performance. A potential merger, the application for a patent, and discussions with a customer about potential sales increases do not necessarily require adjustments or disclosure in the financial statements.

Question 8

Footnotes to financial statements should not be used to

Accepted Answer

Footnotes should not be used to correct an improper financial statement presentation. Any corrections should be made directly in the financial statements themselves. The other options (A, B, and D) are appropriate uses of footnotes to provide additional information and clarification to the financial statements.

Question 9

For interim financial reporting,an inventory loss from a temporary market decline in the first quarter which can reasonably be expected to be restored in the fourth quarter

Accepted Answer

The inventory loss from a temporary market decline in the first quarter which can reasonably be expected to be restored in the fourth quarter should not be recognized as a loss in the first quarter. This is because the loss is temporary, and it may be restored later in the year. Recognition of the loss in the first quarter would result in an overstatement of expenses and a distortion of the financial statements. Therefore, the loss should be recognized in the fourth quarter when it is expected to be restored.

Question 10

The primary responsibility for the adequacy of disclosure in the financial statements and footnotes rests with the

Accepted Answer

The client is ultimately responsible for ensuring that the financial statements and footnotes are complete and accurate. While auditors have a responsibility to review and assess the disclosures, they are not responsible for creating them. The partner and auditor in charge of fieldwork oversee the audit process and the work of their staff, but the ultimate responsibility for the disclosures still rests with the client.

Question 11

A segment of a business enterprise is to be reported separately when the revenues of the segment exceed 10 percent of the

Accepted Answer

According to Generally Accepted Accounting Principles (GAAP), a business segment should be reported separately if its revenue is 10% or more of the total revenue of all the enterprise's industry segments. Therefore, option C is the correct answer.

Question 12

Under the Securities Act of 1933,subject to some exceptions and limitations,it is unlawful to use the mails or instruments of interstate commerce to sell or offer to sell a security to the public unless

Accepted Answer

Under the Securities Act of 1933, it is unlawful to use the mails or instruments of interstate commerce to sell or offer to sell a security to the public unless a registration statement has been properly filed with the Securities and Exchange Commission, has been found to be acceptable, and is in effect. This requires companies to disclose important financial information about the securities being offered to investors. Exceptions and limitations such as Regulation D, allow certain private placements to be exempt from registration requirements. A surety bond or approval of the financial merit of the offering is not a requirement under the Securities Act of 1933. Using underwriters qualified to offer securities on a nationwide basis is a common practice in public offerings, but it is not a requirement under the Securities Act of 1933.

Question 13

The Securities and Exchange Commission's fraud rule prohibits trading on the basis of inside information of a business corporation's stock by

Accepted Answer

The Securities and Exchange Commission's fraud rule, specifically Rule 10b-5 under the Securities Exchange Act of 1934, prohibits insider trading, which includes trading based on material, non-public information by officers, directors, and beneficial holders of more than 10% of a corporation's stock.

Question 14

Assuming that none of the following have been disclosed in the financial statements,the most appropriate item for footnote disclosure is the

Accepted Answer

The revision of employees' pension plan is a significant event that could impact the company's financials in the future. Disclosure of this event would provide important information to users of the financial statements. The other choices are either routine events (such as collection of receivables or retirement/election of a president) or events that have not yet occurred (such as the decrease in advertising budget).

Question 15

An Account Principles Board Opinion was concerned with disclosure of accounting policies.A singular feature of this particular opinion is that it

Accepted Answer

The singular feature of this particular opinion is that it applies also to accounting policy disclosures by not-for-profit entities, whereas most opinions are concerned solely with accounting practices of profit-oriented entities.

Question 16

The basic purpose of the securities laws of the United States is to regulate the issue of investment securities by

Accepted Answer

The main purpose of securities laws is to protect retail investors by requiring companies issuing securities to publicly disclose all relevant information. This promotes transparency and enables investors to make informed decisions. The other answer choices are not accurate. The securities laws do not provide a regulatory framework in states without their own securities laws, as they are federal laws. The SEC does not determine whether securities are investment grade or not, as this is left to credit rating agencies. Finally, the securities laws do not channel investment funds into specific uses.

Question 17

A major impact of the Foreign Corrupt Practices Act of 1977 is that registrants subject to the Securities Exchange Act of 1934 are now required to

Accepted Answer

The Foreign Corrupt Practices Act of 1977 requires registrants subject to the Securities Exchange Act of 1934 to maintain accurate records which reflect the transactions and dispositions of assets and maintain a system of internal accounting controls. This was implemented to prevent the bribery of foreign officials in exchange for business contracts and to ensure transparency and integrity in financial reporting. Choices B, C, and D are not directly related to the impact of the Foreign Corrupt Practices Act.

Question 18

The stock of Gates,Inc. ,is widely held,and the company is under the jurisdiction of the Securities and Exchange Commission.In the annual report,information about the significant accounting policies adopted by Gates should be

Accepted Answer

The significant accounting policies adopted by Gates should be included as an integral part of the financial statements in the annual report. This information is important for users of the report to understand the basis for the preparation of the financial statements and to assess the company's financial performance and position. Omitting this information or presenting it as supplementary information may not provide sufficient clarity about the company's accounting policies. Additionally, all policies adopted by Gates must comply with the regulations of the Securities and Exchange Commission.

Question 19

A CPA is subject to a criminal ability if the CPA

Accepted Answer

A CPA is subject to criminal liability if they willfully omit a material fact required to be stated in a registration statement, which is a violation of federal securities laws. Refusing to turn over working papers or breaching a contract would typically result in civil penalties, while negligent audit performance may result in professional discipline or civil liability.

Question 20

An inventory loss from a market decline occurred in the first quarter that was not expected to be restored in the fiscal year.For interim financial reporting purposes,how would the dollar amount of inventory in the balance sheet be affected in the first and fourth quarters? First Quarter Fourth Quarter

Accepted Answer

The inventory loss from a market decline would result in a decrease in the dollar amount of inventory in the first quarter. As this loss is not expected to be restored in the fiscal year, there would be no effect on the dollar amount of inventory in the fourth quarter.

Quiz 17: Financial Reporting Disclosure Requirements and Ethical Responsibilities