Question 1

Footnotes to financial statements should not be used to
A)Describe the nature and effect of a change in accounting principles
B)Identify substantial differences between book and tax income
C)Correct an improper financial statement presentation
D)Indicate bases for valuing assets

Accepted Answer

Footnotes to financial statements should not be used to correct an improper financial statement presentation as this should be done through restatement or revision of the original financial statement. Choices A, B, and D are all appropriate uses of footnotes.

Question 2

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
A)Should be recognized as a loss proportionately in each of the first,second,third,and fourth quarters
B)Should be recognized as a loss proportionately in each of the first,second,and third quarters
C)Need not be recognized as a loss in the first quarter
D)Should be recognized as a loss in the first 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 need not be recognized as a loss in the first quarter because it is not an actual loss but a temporary decline in the market value of inventory. If it is expected that the inventory value will be restored by the end of the fiscal year, no adjustments need to be made in interim financial reporting.

Question 3

The primary responsibility for the adequacy of disclosure in the financial statements and footnotes rests with the
A)Partner assigned to the engagement
B)Auditor in charge of fieldwork
C)Staffman who drafts the statements and footnotes
D)Client

Accepted Answer

The client is ultimately responsible for the accuracy and completeness of their financial statements and footnotes. While auditors have a responsibility to evaluate the adequacy of the disclosures and provide an opinion on the financial statements, they cannot guarantee the completeness and accuracy of the information provided by the client. Therefore, it is important for clients to provide complete and accurate information to auditors to ensure the adequacy of disclosures in the financial statements and footnotes.

Question 4

An Account Principles Board Opinion was concerned with disclosure of accounting policies.A singular feature of this particular opinion is that it
A)Calls for disclosure of every accounting policy followed by a reporting entity
B)Applies to immaterial items whereas most opinions are concerned solely with material items
C)Applies also to accounting policy disclosures by not-for-profit entities,whereas most opinions are concerned solely with accounting practices of profit-oriented entities
D)Prescribes a rigid format for the disclosure of policies to be reported upon

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 5

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
A)The errors and omissions were caused primarily by MacLain
B)It can be shown that at least some of the investors did not actually read the audited financial statements
C)It can prove due diligence in the audit of the financial statements of MacLain
D)MacLain had expressly assumed any liability in connection with the public offering

Accepted Answer

The best choice is C. This is because if Major can prove that they exercised due diligence in their audit of MacLain's financial statements, it may help them avoid liability in the lawsuit by the MacLain investors. The other choices do not provide a strong defense for Major. A is not a strong defense as even if the errors and omissions were caused primarily by MacLain, Major still has a responsibility to ensure the accuracy of the financial statements. B is not a strong defense as investors are generally expected to rely on financial statements when making investment decisions, regardless of whether they actually read them or not. D is not a strong defense as MacLain cannot simply assume liability for any misstatements or omissions in the financial statements.

Question 6

One of the major purposes of federal security regulation is to
A)Establish the qualifications for accountants who are members of the profession
B)Eliminate incompetent attorneys and accountants who participate in the registration of securities to be offered to the public
C)Provide a set of uniform standards and test for accountants,attorneys,and others who practice before the Securities and Exchange Commission
D)Provide sufficient information to the investing public who purchases securities in the marketplace

Accepted Answer

The major purpose of federal security regulation is to provide sufficient information to the investing public who purchases securities in the marketplace. This is done through various disclosure requirements and regulations that govern the offering and trading of securities. The other choices (A, B, and C) may be important aspects of federal security regulation, but they are not the primary purpose.

Question 7

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?
A)The SEC prohibits the sale of speculative securities.
B)The SEC regulates only securities offered for public sale.
C)Registration with the SEC guarantees the accuracy of the registrant's prospectus.
D)The SEC's initial influence and authority has diminished in recent years as the stock exchanges have become more organized and better able to police themselves.
E)The SEC's powers are broad with respect to enforcement of its reporting requirements as established in the 1933 and 1934 acts,but narrow with respect to new reporting requirements because these require confirmation by the Congress

Accepted Answer

The answer of The Securities and Exchange Commission SEC)was established...

Question 8

A CPA is subject to a criminal ability if the CPA
A)Refuses to turn over the working papers to the client
B)Performs an audit in a negligent manner
C)Willfully omits a material fact required to be stated in a registration statement
D)Willfully breaches the contract with the client

Accepted Answer

A CPA can be subject to criminal liability if they willfully omit a material fact required to be stated in a registration statement. This is because registration statements are filed with the SEC and are subject to securities laws, which include criminal penalties for willful violations. The other answer choices (A, B, and D) could result in civil liability or loss of professional license, but not necessarily criminal liability.

Question 9

The Securities and Exchange Commission's fraud rule prohibits trading on the basis of inside information of a business corporation's stock by
A)Officers
B)Officers and directors
C)All officers,directors,and stockholders
D)Officers,directors,and beneficial holders of 10 percent of the corporation's stock

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 10

Assuming that none of the following have been disclosed in the financial statements,the most appropriate item for footnote disclosure is the
A)Collection of all receivables subsequent to year end
B)Revision of employees' pension plan
C)Retirement of president of company and election of new president
D)Material decrease in the advertising budget for the coming year and its anticipated effect upon income

Accepted Answer

The revision of employees' pension plan is the most appropriate item for footnote disclosure because it directly affects the financial position and obligations of the company, potentially impacting future cash flows and liabilities. Changes in pension plans can have significant financial implications, thus requiring disclosure to inform users of the financial statements about the nature and effect of these changes.

Question 11

The basic purpose of the securities laws of the United States is to regulate the issue of investment securities by
A)Providing a regulatory framework in those states which do not have their own securities laws
B)Requiring disclosure of all relevant facts so that investors can make informed decisions
C)Prohibiting the issuance of securities which the Securities and Exchange Commission determines are not of investment grade
D)Channeling investment funds into uses which are economically most important
E)Ensuring that all shareholders have the right to vote in the election of directors

Accepted Answer

The primary purpose of the securities laws of the United States is to ensure that companies issuing investment securities disclose all relevant information so that investors can make informed decisions. This is achieved through mandatory disclosure requirements and other regulations designed to protect investors. While the other choices have some basis in reality, disclosure is the primary focus of securities laws.

Question 12

Footnotes to a company's financial statements are used to
A)More fully explain certain items in the financial statements.
B)Reflect financial notes personalized by the company's executive team.
C)Show the detail of salaries of every employee.
D)Justify fraudulent business practices.

Accepted Answer

Footnotes provide additional information to explain certain items in the financial statements, such as accounting policies, significant events, and contingencies. They are not used to reflect personalized financial notes or to justify fraudulent practices, and they do not provide the detail of every employee's salary.

Question 13

With respect to disclosure,the unqualified short-form report
A)States that disclosure is adequate in the financial statements including the footnotes thereto
B)States that disclosure is sufficiently adequate to make the statements not misleading
C)States that all material items are disclosed in conformity with the generally accepted accounting principles
D)Implies that disclosure is adequate in the financial statements including the footnotes thereto

Accepted Answer

The answer of With respect to disclosure,the unqualified short-form report
A)States...

Question 14

Significant accounting policies may not be
A)Selected on the basis of judgment
B)Selected from existing acceptable alternatives
C)Unusual or innovative in application
D)Omitted from financial statement disclosure on the basis of judgment

Accepted Answer

Significant accounting policies must be disclosed in the financial statements. Omitting them from disclosure is not acceptable and could lead to a material misstatement in the financial statements. Therefore, significant accounting policies cannot be omitted from financial statement disclosure on the basis of judgment.

Question 15

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
A)Omitted because it tends to confuse users of the report
B)Included as an integral part of the financial statements
C)Presented as supplementary information
D)Omitted because all policies must comply with the regulations of the Securities and Exchange Commission

Accepted Answer

The significant accounting policies adopted by Gates should be included as an integral part of the financial statements. This information is necessary to understand the financial statements and make informed decisions. The SEC requires companies to disclose their significant accounting policies in their annual reports.

Question 16

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
A)A surety bond sufficient to cover potential liability to investors is obtained and filed with the Securities and Exchange Commission
B)The offer is made through underwriters qualified to offer the securities on a nationwide basis
C)A registration statement has been properly filed with the Securities and Exchange Commission,has been found to be acceptable,and is in effect
D)The Securities and Exchange Commission approves of the financial merit of the offering

Accepted Answer

The correct answer is C, as it is required under the Securities Act of 1933 to file a registration statement with the Securities and Exchange Commission (SEC), which must be found to be acceptable and in effect, in order to sell or offer to sell a security to the public using the mails or instruments of interstate commerce. Options A, B, and D are not required by the Securities Act of 1933.

Question 17

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
A)Decrease No effect
B)Decrease Increase
C)No effect Decrease
D)No effect No effect

Accepted Answer

The inventory loss from the market decline would have already been recognized in the first quarter, resulting in a decrease in inventory on the balance sheet. There is no expectation of restoration, so the inventory amount would not change in the fourth quarter. Therefore, there would be a decrease in the first quarter and no effect in the fourth quarter.

Question 18

Which of the following should be disclosed in the Summary of Significant Accounting Policies?
A)Composition of plant assets
B)Pro forma effect of retroactive application of an accounting change
C)Basis of consolidation
D)Maturity dates of long-term debt

Accepted Answer

The basis of consolidation is a significant accounting policy and should be disclosed in the Summary of Significant Accounting Policies. Choices A, B, and D do not relate to significant accounting policies and therefore should not be disclosed in this section.

Question 19

Which of the following situations would require adjustment to or disclosure in the financial statements?
A)A merger discussion
B)The application for a patent on a new production process
C)Discussions with a customer that could lead to a 40 percent increase in the client's sales
D)The bankruptcy of a customer who regularly purchased 30 percent of the company's output

Accepted Answer

The bankruptcy of a customer who regularly purchased 30 percent of the company's output would have a significant impact on the company's financial statements, particularly its revenue and accounts receivable. This would require adjustment to or disclosure in the financial statements. The other options do not necessarily have a direct impact on the financial statements.

Question 20

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
A)Keep records which reflect the transactions and dispositions of assets and maintain a system of internal accounting controls
B)Provide access to records by authorized agencies of the federal government
C)Records all correspondence with foreign nations
D)Prepare financial statements in accordance with international accounting standards
E)Produce full,fair,and accurate periodic reports on foreign commerce and/or foreign political party affiliations

Accepted Answer

The Foreign Corrupt Practices Act of 1977 requires companies to maintain accurate records and a system of internal accounting controls to prevent corruption and ensure transparency.

Quiz 17: Financial Reporting Disclosure Requirements and Ethical Responsibilities

Footnotes to financial statements should not be used to

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

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

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

One of the major purposes of federal security regulation is to

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?

A CPA is subject to a criminal ability if the CPA

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

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

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

Footnotes to a company's financial statements are used to

With respect to disclosure,the unqualified short-form report

Significant accounting policies may not be

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

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

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

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

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