Question 1

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 2

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) Staff who draft the statements and footnotes
D) Client

Accepted Answer

The client is ultimately responsible for the financial statements and footnotes as they are the ones who prepare and present them to the users. It is the auditor's responsibility to provide assurance on the fairness of the financial statements but not to ensure their adequacy. The partner assigned to the engagement and the auditor in charge of fieldwork are involved in the audit process but do not have primary responsibility for the adequacy of disclosure. The staff who draft the statements and footnotes may be responsible for the accuracy and completeness of the information presented, but the primary responsibility still rests with the client.

Question 3

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) Method of depreciation
D) Maturity dates of long-term debt

Accepted Answer

The Summary of Significant Accounting Policies should disclose the method of depreciation used by the company.

Question 4

A segment of a business enterprise is to be reported separately when the revenues of the segment exceed 10 percent of the
A) Combined net income of all segments reporting profits
B) Total combined revenues of all segments reporting profits.
C) Total revenues of all the enterprise's industry segments.
D) Total export and foreign sales. .

Accepted Answer

According to GAAP (Generally Accepted Accounting Principles), a segment should be reported separately when its revenues are 10% or more of the total revenues of all the enterprise's industry segments.

Question 5

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. Under the Securities Act of 1933, a security may not be sold or offered for sale to the public unless a registration statement has been properly filed with the SEC, found to be acceptable, and is in effect. This is the primary way that investors are protected as the registration statement discloses all relevant information about the security being offered, including risks and conflicts of interest. Choices A and B are incorrect as they are not requirements under the Securities Act of 1933. Choice D is incorrect as the SEC does not approve the financial merit of an offering, rather they review that the registration statement fully and accurately discloses all relevant information.

Question 6

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 because if Major can prove that they exercised due diligence during the audit and detected any misstatements or omissions through appropriate audit procedures, they may avoid liability. Options A, B, and D do not provide a valid defense against the lawsuit. While MacLain may have contributed to the errors and omissions, it does not absolve Major of their responsibility as auditors. Whether or not investors read the financial statements is irrelevant to Major's duty to audit them. Lastly, MacLain assuming liability does not remove Major's responsibility as auditors to issue a proper opinion on the financial statements.

Question 7

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. Such corrections should be made in the actual financial statements. The other options (A, B, and D) are appropriate uses of footnotes in financial statements.

Question 8

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 are used to provide additional information and explanations to help users of the financial statements better understand certain items. They are not used to reflect personal notes or justify fraudulent practices. Neither are they used to show the detail of every employee's salary.

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
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

An inventory loss from a temporary market decline that 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 it is expected to be restored and hence does not meet the definition of a loss. As per the accrual accounting principle, losses should be recognized in the period in which they occur, and restoring the loss in a subsequent quarter indicates that the loss was not permanent. Therefore, the loss need not be recognized in the first quarter of interim financial reporting.

Question 10

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 and would need to be disclosed or adjusted for. The other situations listed may be important information for investors or stakeholders to know, but they do not necessarily require adjustment to or disclosure in the financial statements.

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

Accepted Answer

The securities laws of the United States, such as the Securities Act of 1933 and the Securities Exchange Act of 1934, require companies to disclose all relevant information about their securities, including risks, financial statements, and management background, so that investors can make informed decisions. The laws also regulate the trading of securities and the activities of brokers and other market participants. The primary goal is to protect investors from fraudulent or unfair practices and to promote transparency and fairness in the securities markets. While the laws may indirectly channel investment funds into important economic uses, this is not the primary purpose.

Question 12

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 main purpose of federal security regulation is to provide sufficient information to the investing public who purchases securities in the marketplace. This is achieved through mandatory disclosures, such as financial statements and other material information, to enable investors to make informed investment decisions. It also serves to protect investors from fraud and manipulative practices by securities issuers and other market participants. While establishing qualifications for accountants and lawyers and eliminating incompetent professionals are important goals, they are not the primary purpose of federal securities regulation. Similarly, while uniform standards for practitioners practicing before the SEC are important, they do not constitute the main purpose of federal securities regulation.

Question 13

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

Accepted Answer

The Foreign Corrupt Practices Act of 1977 requires registrants subject to the Securities Exchange Act of 1934 to keep records which reflect the transactions and dispositions of assets and maintain a system of internal accounting controls. This provision is aimed at preventing and detecting bribery and other corrupt practices in foreign transactions. Providing access to records by authorized agencies of the federal government and recording all correspondence with foreign nations are requirements under different statutes, and preparing financial statements in accordance with international accounting standards is not a specific requirement of the Foreign Corrupt Practices Act.

Question 14

A CPA is subject to a criminal liability 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 criminally liable for willfully omitting a material fact required to be stated in a registration statement. This is a violation of securities laws and can result in serious consequences. Refusing to turn over working papers or breaching a contract may result in civil liability, but not criminal liability. Performing an audit in a negligent manner may result in disciplinary action or civil liability, but not necessarily criminal liability.

Question 15

An Accounting 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 Accounting Principles Board Opinion concerned with disclosure of accounting policies is unique in that it applies to not-for-profit entities as well as profit-oriented entities. Most opinions are concerned solely with the accounting practices of profit-oriented entities.

Question 16

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 17

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 18

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.

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 19

Which of the following should be disclosed in a Summary of Significant Accounting Policies?
A) Depreciation method followed
B) Types of executory contracts
C) Claims of equity holders
D) Amount for cumulative effect of change in accounting principle

Accepted Answer

The Summary of Significant Accounting Policies should disclose the depreciation method followed by the company.

Question 20

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 always be disclosed in the financial statements to provide transparency to the users. Therefore, significant accounting policies cannot be omitted from disclosure based on judgment.

Quiz 17: Financial Reporting Disclosure Requirements and Ethical Responsibilities

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

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

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

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

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

Footnotes to financial statements should not be used to

Footnotes to a company's financial statements are 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

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

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

One of the major purposes of federal security regulation is to

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 CPA is subject to a criminal liability if the CPA

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

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

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

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?

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

Significant accounting policies may not be