Question 1

Which of the following is a fundamental assumption of public interest theory?

Accepted Answer

Public interest theory assumes that economic markets are fragile and require regulation to protect the public interest and ensure fair outcomes.

Question 2

Disadvantage of principles-based standards is:

Accepted Answer

The disadvantage of principles-based standards is that they allow managers to select policies that may not reflect the substance of a transaction. This is because principles-based standards provide broad guidelines that rely on the professional judgement of accountants and managers. While this can lead to flexibility and adaptability in accounting practices, it can also result in inconsistencies and subjectivity in financial reporting. Therefore, principles-based standards need to be supplemented with specific rules and guidance to ensure consistent and reliable financial reporting.

Question 3

One of the advantages of principles-based standard is:

Accepted Answer

Principles-based standards provide general guidance that is flexible and adaptable to various circumstances, making them generally simpler than rules-based standards. Choices A and B are incorrect because principles-based standards do improve representational faithfulness of financial statements and allow for professional judgement.

Question 4

Which of the following is NOT a function of the AASB? standard setting.

Accepted Answer

The AASB's main function is to set accounting standards; enforcing compliance with those standards falls under the jurisdiction of regulatory bodies such as ASIC. The other options (A, B, and C) correctly identify the AASB's role in standard-setting and promoting international accounting standards.

Question 5

Which of the following is NOT a key element of regulation?

Accepted Answer

Regulation should not be biased as it should be impartial and fair. The other three options (B, C, and D) are all key elements of regulation - it requires an intention to intervene, restricts choices in some way, and involves the exercise of control over the regulated activity or industry.

Question 6

Which of the following is a fundamental assumption of Capture Theory?

Accepted Answer

Capture Theory assumes that individuals and groups will rationally pursue their own self-interest, which could result in private interests dominating public policies or regulations. This is a core assumption of the theory, as an understanding of these self-interested motivations is necessary to identify instances of regulatory capture. The other options, while potentially relevant to regulations and markets, are not foundational assumptions of Capture Theory.

Question 7

Which of the following was identified as a benefit when Australia accepted the international harmonisation of its accounting standards?

Accepted Answer

Accepting the international harmonisation of accounting standards has several benefits including lowering reporting costs, increasing comparability of financial statements internationally, and decreasing the cost of capital. Therefore, the correct choice is D - all of the above.

Question 8

Which of the following groups benefits most from rules based accounting regulation?

Accepted Answer

Auditors benefit most from rules-based accounting regulation because it provides clear guidelines and criteria for evaluating companies' financial statements, reducing ambiguity and the potential for misinterpretation.

Question 9

The Financial Reporting Council (FRC)are responsible for:

Accepted Answer

The Financial Reporting Council (FRC) is responsible for all of the above tasks, including appointing board members to the AASB, oversight of the standard-setting process and providing strategic direction and advice to the AASB.

Question 10

Which of the following is a fundamental assumption of Bushfire theory?

Accepted Answer

Bushfire theory assumes that people are reactive when it comes to regulation, meaning they are more likely to take action after a disruptive event occurs, such as a bushfire, rather than being proactive and taking preventative measures beforehand.

Question 11

Which of the following is NOT a disadvantage of regulation?

Accepted Answer

"It leads to standardisation" is not a disadvantage of regulation, but rather a potential benefit. Standardisation can improve efficiency and reliability, and ensure that products and services meet certain minimum standards. The other options are all potential drawbacks of regulation.

Question 12

Which if the following is an advantage of rules-based accounting standards?

Accepted Answer

Rules-based accounting standards reduce opportunities for earnings management through judgments as they introduce a strict set of rules and regulations that must be adhered to. However, option A is incorrect as rules-based accounting standards may not be able to cover every single scenario or situation. Option B is also incorrect as rules-based accounting standards may increase complexity due to the amount of rules and regulations to be followed. Option D is incorrect as rules-based accounting standards may not necessarily improve representational faithfulness of financial statements as they may not capture all relevant information.

Question 13

Which of the following has NOT been identified as a problem with Australia accepting the international harmonisation of its accounting standards?

Accepted Answer

Too few countries adopting international accounting standards has not been identified as a problem with Australia accepting harmonisation.

Question 14

Which of the following is NOT an advantage of accounting regulation?

Accepted Answer

Reduced lobbying to produce favourable outcomes is not an advantage of accounting regulation. Instead, accounting regulation often aims to increase transparency, enhance public confidence, and improve the efficiency of capital allocation. However, it can also lead to increased lobbying by companies seeking to influence regulations in a way that benefits them, rather than reducing it.

Question 15

Which of the following have been blamed for the Global Financial Crisis?

Accepted Answer

All of the listed factors have been blamed for the Global Financial Crisis. Auditor-Client relationships were criticized for lack of independence and conflicts of interest, corporate governance structures were criticized for failing to hold senior executives accountable, and accounting standards were criticized for allowing banks to overestimate the value of their assets.

Question 16

One of the rules-based standard disadvantages can be:

Accepted Answer

Rules-based standards can be very complex, making it difficult for users to understand and comply with them. Additionally, the complexity can result in inconsistencies and errors in application.

Question 17

Research into accounting regulation:

Accepted Answer

Research into accounting regulation often supports capture theory, which suggests that regulatory agencies can be dominated by the industries or interests they are supposed to regulate, rather than being independent or serving a wide range of stakeholders.

Question 18

Signalling Theory postulates that:

Accepted Answer

Signalling Theory suggests that regulation is largely unnecessary because companies will voluntarily disclose information to signal their quality to investors.

Question 19

Which of the following can the AASB NOT do when adopting IFRSs?

Accepted Answer

The AASB cannot change or remove any requirements that are seen as anti-competitive when adopting IFRSs. This is because anti-competitive requirements are usually driven by legal or regulatory considerations that are outside the jurisdiction of the AASB. All other options (A, C, and D) are within the jurisdiction of the AASB when adopting IFRSs.

Question 20

Which of the following groups have been criticised for their failure to respond to exposure drafts?

Accepted Answer

Academics have been criticized for their failure to respond to exposure drafts, as they are often seen as key stakeholders in the development of accounting standards and practices, yet they may not engage as actively in the consultation process as expected.

Quiz 3: Standard Setting