Deck 1: The Canadian Financial Reporting Environment

Question 1

The auditor's primary responsibility is to

A) review financial statements and discuss them with management.
B) prepare financial statements.
C) report to Canada Revenue Agency.
D) report to standard setters.

Answer 1

review financial statements and discuss them with management.

Question 2

Information provided by accounting is important because it enables investors and creditors to

A) compare income and assets of companies.
B) assess the relative risks and returns of investment opportunities.
C) channel their resources more effectively.
D) all of the above

Answer 2

all of the above

Question 3

Financial accounting is concerned with the process that culminates in

A) the preparation of financial reports.
B) specialized reports for inventory management and control.
C) specialized reports for income tax calculation and recognition.
D) reports on changes in stock prices and future estimates of market position.

Answer 3

the preparation of financial reports.

Question 4

Stakeholders who help in the efficient allocation of resources include

A) investors and creditors.
B) financial analysts and regulators.
C) creditors and auditors.
D) management and auditors.

Question 5

Which of the following is NOT true regarding accrual-basis accounting?

A) A company records events that change its financial statements in the periods in which the events occur.
B) Revenues and expenses are recognized in the periods in which the company receives or pays cash.
C) It has greater potential to depict meaningful trends in revenues and expenses.
D) Revenues and expenses can be more easily related to the economic environment of the period in which they occurred.

Question 6

Which of the following is/are major factors in the rapidly changing financial reporting environment in Canada?

A) increased demand for accountants and the impact of technology
B) globalization and the unethical actions of accountants
C) the growing number of institutional investors who want more information regarding environmental and social issues
D) increased use of the Internet

Question 7

The primary responsibility of security and exchange commissions with respect to financial statements is to

A) set generally accepted accounting principles (GAAP), which must be followed in their preparation.
B) review accounting choices made by companies in their financial statements to ensure decision-making logic is sound.
C) monitor financial statements to ensure full and plain disclosure of material information, thus maintaining compliance with listing requirements.
D) monitor and analyze the information looking for signs of an improved or weakened financial condition.

Question 8

In Canada, the primary exchange mechanism(s) for allocating resources is (are)

A) debt and equity markets.
B) financial Institutions such as banks.
C) government authorities such as the Canada Revenue Agency (CRA).
D) both a and b

Question 9

Financial accounting can be broadly defined as the area of accounting that prepares financial statements to be used

A) by parties internal to the business enterprise only.
B) by investors only.
C) by parties both internal and external to the business enterprise.
D) primarily by external users and Canada Revenue Agency.

Question 10

The preparation by some companies of biased information is sometimes referred to as

A) conservative financial reporting.
B) full disclosure of all material facts.
C) aggressive financial reporting.
D) stewardship.

Question 11

The widely publicized subprime lending crisis was NOT caused by

A) capital market participants who acted in their own self-interest.
B) a lack of transparency.
C) the practice of securitizing assets.
D) a lack of investor understanding of the investment's true risk.

Question 12

As part of the objective of general-purpose financial reporting, which of the following perspectives are considered appropriate?

A) proprietary perspective
B) entity perspective
C) stakeholder perspective
D) None of the above perspectives are considered appropriate.

Question 13

Management's primary responsibility with respect to financial statements is to

A) prepare them, as they have the best insight and know what should be included.
B) audit them, as they are distant enough from daily operations.
C) rely on them to make decisions.
D) None of the above are true.

Question 14

Whether a business is successful and thrives is determined by

A) free enterprise or competition.
B) competition and markets only.
C) markets and free enterprise only.
D) markets, competition, and free enterprise.

Question 15

The essential characteristic(s) of accounting is (are)

A) communication of financial information to interested internal parties only.
B) communication of economic information to external parties.
C) identification and measurement of financial information only.
D) identification, measurement, and communication of financial information.

Question 16

Audited financial statements are prepared by

A) auditors.
B) financial analysts.
C) Canada Revenue Agency.
D) management.

Question 17

Which of the following is correct?

A) Reported accounting numbers do not affect the transfer of resources.
B) Credit rating agencies use accounting information to assess only assets.
C) Efficient capital markets promote productivity and encourage innovation.
D) Efficient capital markets promote productivity but do not encourage innovation.

Question 18

Management accounting can be broadly defined as the area of accounting that communicates financial information

A) to investors only.
B) to parties internal to the business enterprise only.
C) to parties both internal and external to the business enterprise.
D) primarily to external users and Canada Revenue Agency.

Question 19

Whether a business is successful and thrives is determined by

A) free enterprise or competition.
B) competition and markets only.
C) markets and free enterprise only.
D) markets, competition, and free enterprise.

Question 20

Objectives of financial reporting do NOT include

A) providing information that is useful to users in making resource allocation decisions.
B) providing information about the liquidation value of an enterprise.
C) providing information about an entity's economic resources, obligations, and equity/net assets.
D) providing information about changes in an entity's economic resources, obligations, and equity/net assets.

Question 21

The exercise of professional judgement does NOT involve

A) the use of knowledge gained through education.
B) the application of knowledge gained through experience.
C) the use of ethical decision making.
D) aggressive accounting.

Question 22

As of 2011, the responsibilities of the Accounting Standards Board (AcSB) in Canada relate to setting standards for

A) publicly accountable entities only.
B) both publicly accountable entities and private enterprises.
C) private enterprises, not-for-profit entities, and pension plans.
D) not-for-profit entities and pension plans only.

Question 23

The problem of information asymmetry can be reduced by

A) aggressive accounting.
B) accounting standards.
C) adverse selection.
D) only focusing on positive events.

Question 24

Under ASPE, the other (as opposed to primary) sources of GAAP include

A) the CICA Handbook and appendices.
B) Accounting Guidelines, including appendices.
C) pronouncements by accounting standard-setting bodes in other jurisdictions.
D) All of these are primary sources of GAAP.

Question 25

Which of the following sources of generally accepted accounting principles (GAAP) are NOT developed by the Canadian Accounting Standards Board (AcSB)?

A) Accounting Standards for Private Enterprises (ASPE)
B) International Financial Reporting Standards (IFRS)
C) GAAP for pension plans
D) GAAP for not-for-profit entities

Question 26

Which of the following does NOT describe a step in the IASB's standard-setting process?

A) appointing trustees to the IFRS Foundation
B) development of an exposure draft
C) provision of strategic advice by the IFRS Advisory Council
D) public consultation

Question 27

Which of the following does NOT describe a cause of management bias?

A) the need to comply with contracts, such as debt covenants
B) the desire to meet financial analysts' expectations
C) the tendency to downplay negative events
D) the desire for all stakeholders to have access to all information

Question 28

Where information asymmetry exists, the capital market may attract the wrong kind of company. This is known as

A) moral hazard.
B) conservative accounting.
C) adverse selection.
D) an inefficient marketplace.

Question 29

Which of the following statements does NOT describe the activities and authority of the Ontario Securities Commission (OSC)?

A) The OSC reviews and monitors the financial statements of companies whose shares are listed on the Toronto Stock Exchange.
B) The OSC issues its own disclosure requirements for listed companies.
C) The OSC has the ability to fine or delist companies.
D) The OSC issues financial accounting standards for Canadian companies.

Question 30

Which of the following does NOT support the use of Accounting Standards for Private Enterprises (ASPE)?

A) Private enterprises usually have less complex business models.
B) Private enterprises that are "going public."
C) Private enterprises usually have fewer users.
D) Private enterprises' financial statement users tend to have first-hand information.

Question 31

The "efficient markets hypothesis" proposes that

A) market prices reflect information known only to internal stakeholders.
B) market prices reflect all information about a company.
C) market prices reflect information known only to external stakeholders.
D) information asymmetry is required.

Question 32

The adoption of International Financial Reporting Standards in Canada is an example of

A) the impact of technology on user's needs.
B) the impact of globalization on capital markets.
C) ethical behaviour.
D) the desire of most private companies to expand internationally.

Question 33

Before 1900, which of the following accurately describes financial reports?

A) They emphasized the need for standardized and increased corporate disclosures.
B) They were for widespread use and distribution.
C) They emphasized solvency and liquidity.
D) None of the above accurately describe financial reports pre-1900.

Question 34

In a rules-based approach (such as U.S. GAAP), compared to a principles-based approach (such as Canadian GAAP),

A) the body of knowledge is smaller.
B) the importance of communicating the best information to users is emphasized.
C) since it is more prescriptive, it may be easier to defend how to account for a particular item.
D) companies frequently do not interpret the rules literally.

Question 35

In Canada, the body that is NOT instrumental in the development of financial reporting standards is the

A) Accounting Standards Board (AcSB).
B) Financial Accounting Standards Board (FASB).
C) International Accounting Standards Board (IASB).
D) American Institute of Certified Public Accountants.

Question 36

Under ASPE, the primary sources of GAAP include

A) accounting textbooks and journals.
B) International Financial Reporting Standards.
C) the CICA Handbook and appendices.
D) research studies.

Question 37

Conservative accounting refers to

A) a manager's tendency to shirk his stewardship responsibilities.
B) a manager's engagement in greater risk taking.
C) a decision to downplay the negative and focus on the positive.
D) a decision to downplay the positive and focus on the negative.

Question 38

In the United States, the body that has the final authority over accounting standards is the

A) Financial Accounting Standards Board (FASB).
B) International Accounting Standards Board (IASB).
C) Securities Exchange Commission (SEC).
D) Accounting Standards Oversight Council (AcSOC).

Question 39

In Canada, the body that has the responsibility of overseeing the Accounting Standards Board (AcSB) is the

A) Accounting Standards Oversight Council (AcSOC).
B) International Accounting Standards Board (IASB).
C) Canadian Institute of Chartered Accountants (CICA).
D) Financial Accounting Standards Board (FASB).

Question 40

Where people think that no one is watching, they will often shirk their responsibilities. This is known as

A) moral hazard.
B) conservative accounting.
C) adverse selection.
D) an inefficient marketplace.

Question 41

The Sarbanes-Oxley Act (SOX) was NOT enacted to

A) help prevent fraud and poor financial reporting practices.
B) ensure the act was applied internationally.
C) enable the SEC to increase its policing efforts.
D) introduce new independence rules for auditors.

Question 42

Entity vs. proprietary perspective
Explain the difference between the entity perspective and the proprietary perspective.

Question 43

Role of securities commissions and stock exchanges
Explain the role of securities commissions and stock exchanges in financial reporting.

Question 44

User needs
Explain why providing information to users is a challenging task.

Question 45

Imperfection of the stakeholder ecosystem
The stakeholder ecosystem (depicted in Illustration 1-3) provides checks and balances to ensure that the people with capital-investors and creditors-have good information to use when deciding where best to invest and allocate capital. However, the system does not always work. Explain why this is the case.

Question 46

Which of the following is likely to be an advantage of the advancement of technology on financial reporting?

A) Users of financial information will have access to more information.
B) The quality and reliability of the information may be compromised.
C) Equal and fair access may be at issue.
D) Internet reporting will increase costs.

Question 47

Sources of capital and stages of company growth
Briefly describe how the sources of capital a company relies upon for funding might vary according to their stage of growth.

Question 48

One political factor influencing the standard-setting process is how the standard-setting bodies are financed. Which of the following is NOT an IASB principle regarding the nature and amount of funding?

A) Closed-loop: Financial commitments for funding should be contingent upon particular outcomes.
B) Broad-based: It should not rely on one or a few sources.
C) Compelling: Constituents should not be allowed to benefit from the standards without contributing to the process of standard setting.
D) Country-specific: Funding should be shared by the major economies on a proportionate basis.

Question 49

Stakeholders in the financial reporting environment
Briefly describe the much-publicized subprime lending crisis in the United States, and identify the stakeholders and how they were affected.

Question 50

standard setting
Explain the relationship between Canadian GAAP and International Financial Reporting Standards (IFRS).

Question 51

Objectives of financial reporting
What are the objectives of financial reporting by business enterprises?

Question 52

Explain the advantages of an effective capital allocation process.

Question 53

The decision-usefulness approach to financial reporting
Explain what is meant by the "decision-usefulness" approach to financial reporting. Who will this information be useful to, and why?

Question 54

Maintaining competitive advantage
In the most efficient and effective marketplace possible, all stakeholders would have equal access to all relevant information. However, a company may feel that complete disclosure may hurt their competitive advantage or position. Offer an example of a circumstance where this may be the case. What do you think the company should do?

Question 55

Information asymmetry
In markets where information asymmetry exists, there can be adverse selection and moral hazard. Explain what these terms mean.

Question 56

Financial versus managerial accounting
Distinguish between financial and managerial accounting.

Question 57

Management bias in financial statement presentation
There are many reasons why management may present biased information in the financial statements. Identify at least three (3) such motivations.

Question 58

In a principles-based standard-setting system (such as Canadian GAAP), compared to a rules-based approach (such as U.S. GAAP),

A) which is more prescriptive, it may be easier to defend how to account for a particular item.
B) there is a rule for every situation.
C) accountants either apply specific standards based on the conceptual framework, or, professional judgement consistent with the framework.
D) it is expected that professional accountants might encounter situations where they are unable to apply the principles appropriately.

Question 59

Which of the following is an argument in favour of a GAAP body of knowledge that is more prescriptive, or rules-based?

A) It always emphasizes communicating the best information for users.
B) The body of knowledge becomes significantly smaller and therefore easier to manage.
C) It may be easier to defend how to account for a particular item.
D) There is a tendency for companies to interpret guidelines loosely, and thus account for items inconsistently.

Question 60

Merits of accrual- vs. cash-basis accounting
Investors are interested in assessing a company's ability to generate net cash inflows, as well as its ability to protect and enhance capital investments. Briefly explain how each of the accrual- and cash-basis methods, respectively, might enhance these objectives.

Question 61

ASPE vs. IFRS
Accounting standards for Private Enterprises (ASPE) are geared towards fewer users who have access to additional information about the company. The need for common language and comparability as facilitated by IFRS is less necessary among private enterprises. Explain why, despite this, a private company might choose to voluntarily adopt IFRS.

Question 62

Explain why U.S. GAAP has and will continue to have a significant impact on GAAP in Canada.

Question 63

Extensible business reporting
What is extensible business reporting language and how is it used?

Question 64

SOX and standard setting
After several highly publicized accounting scandals in the U.S. such as Enron, Sunbeam, and WorldCom, all of whom, coincidentally, were clients of the former public accounting firm of Arthur Andersen, the U.S. regulators enacted the Sarbanes-Oxley Act (SOX). Pressure was put on Canada to follow a similar course. Explain what Canada has done to make public companies more accountable.

Question 65

Sources of GAAP
International Financial Reporting Standards (IFRS) are the primary source of GAAP for public enterprises in Canada. They are, however, insufficient to address all of the accounting issues facing accountants. Explain why this is so and outline some other sources of GAAP that accountants use.

Question 66

Technology and financial information
Explain how technology impacts the accountants' role as providers of information.

Question 67

Professional judgement
Explain the principle of professional judgement. When or why might it be necessary to employ professional judgement, even in a rules-based system?

Question 68

Sources of GAAP
The Canadian principles-based GAAP does not offer specific standards for every transaction. When specific guidance cannot be found in primary sources such as the Handbook and Accounting guidelines, what process should the accountant follow in their consultation of other sources?

Question 69

Role of executives and management in a post-SOX world
SOX introduced sweeping changes to the institutional structure of the accounting profession. What key provision was introduced relating to the role of management and executive officers, and their relationship to financial reporting? Why?

Question 70

IFRS Discussion Group
Explain the purpose of the IFRS Discussion Group.

Question 71

IFRS taxonomy
What is the IFRS taxonomy and how is it used?

Question 72

Purpose of accounting standards
Accounting professions in various countries have tried to develop a set of standards that are generally accepted and universally practised. Explain the motivation for creating such a set of standards.

Question 73

Principles- versus rules-based aproaches
Explain the difference between the principles- versus rules-based approaches regarding GAAP.

Question 74

Challenges facing financial reporting
In North America, the financial reporting environment is changing at a very rapid pace. Briefly describe four challenges facing the accounting profession today.