Question 1

Which of the following is not a provision of the Public Company Accounting Reform and Investor Protection Act of 2002 (Sarbanes-Oxley)? The Act:
A) Changed the entity responsible for setting auditing standards.
B) Increased corporate executive responsibility for financial statements.
C) Limited nonaudit services that can be performed by auditors for audit clients.
D) Changed the entity responsible for setting accounting standards.

Accepted Answer

The Public Company Accounting Reform and Investor Protection Act of 2002 (Sarbanes-Oxley) did not change the entity responsible for setting accounting standards. The responsibility for setting accounting standards remained with the Financial Accounting Standards Board (FASB). The Act did, however, change the entity responsible for setting auditing standards by creating the Public Company Accounting Oversight Board (PCAOB), which is responsible for overseeing the auditing and accounting professions.

Question 2

The possibility that the capital markets' focus on periodic profits may tempt a company's management to bend or even break accounting rules to inflate reported net income is an example of:
A) An ethical dilemma.
B) An accounting theory issue.
C) A technical accounting issue.
D) An auditor's responsibility to inform the SEC.

Accepted Answer

This scenario presents an ethical dilemma where the desire for profits could lead to compromised ethical principles for financial gains. This situation involves balancing the interests of the company management and shareholders against ethical values and professional standards. It is essential to address these dilemmas with integrity and transparency in financial reporting.

Question 3

CPAs are licensed by:
A) The AICPA.
B) The SEC.
C) The federal government.
D) State governments.

Accepted Answer

CPAs are licensed by state governments. Each state has its own Board of Accountancy that oversees the licensure and regulation of CPAs within that state. The board sets the requirements for obtaining a CPA license, such as education, experience, and passing the Uniform CPA Exam.

Question 4

Accounting standard-setting has been characterized as:
A) A political process.
B) Using the scientific method.
C) Pure deductive reasoning.
D) Pure inductive reasoning.

Accepted Answer

Accounting standard-setting involves a complex set of stakeholders with varying interests and goals, including regulators, investors, and companies. As a result, the process is often influenced by political pressures and negotiations to reach a consensus that satisfies the most stakeholders.

Question 5

Which of the following is not a concern expressed by the SEC regarding IFRS adoption by the U.S.?
A) Need for the U.S. to have strong influence on the standard-setting process and ensure that standards meet U.S. needs.
B) The language barriers associated with cooperation among many countries in developing IFRS.
C) The high costs to companies of converting to IFRS.
D) The fact that many laws, regulations and private contracts reference U.S. GAAP.

Accepted Answer

While language barriers may be a practical concern for international cooperation and communication, it has not been specifically cited as a concern by the SEC regarding IFRS adoption by the U.S. The other options have been noted as potential obstacles to full adoption of IFRS.

Question 6

The most political issue in the FASB's most recent deliberations and amendments to GAAP on stock options was:
A) The negative effects on earnings of companies in the tech industry if they had to recognize expenses associated with stock compensation.
B) The negative effects on assets of recognizing stock options in equity.
C) The disclosure of stock compensation expense in the notes.
D) Accounting for stock options that have not yet been granted to employees.

Accepted Answer

The most political issue in the FASB's most recent deliberations and amendments to GAAP on stock options was the negative effects on earnings of companies in the tech industry if they had to recognize expenses associated with stock compensation. This was a highly controversial issue and led to intense lobbying by the tech industry against the proposed changes. Ultimately, the FASB decided to require companies to recognize stock option expenses, despite the opposition.

Question 7

The most likely important flaw leading to the demise of the APB was the perceived lack of:
A) Confidence.
B) Competence.
C) Independence.
D) Importance.

Accepted Answer

The lack of independence was the most likely important flaw leading to the demise of the APB. The board was seen as too closely aligned with the audit firms it was supposed to regulate, which eroded public confidence in its ability to impartially oversee the auditing profession. This ultimately led to the creation of the PCAOB as an independent regulatory body for public company auditing.

Question 8

Which of the following is not a provision of the Public Company Accounting Reform and Investor Protection Act of 2002?
A) Corporate executive accountability.
B) Auditor rotation.
C) Retention of work papers.
D) All of these answer choices are correct.

Accepted Answer

All the listed provisions (corporate executive accountability, auditor rotation, and retention of work papers) are part of the Public Company Accounting Reform and Investor Protection Act of 2002, also known as the Sarbanes-Oxley Act.

Question 9

The most recent example of the political process at work in standard-setting is the heated debate that occurred on the issue of:
A) Pension plan accounting.
B) Accounting for postretirement benefits other than pensions.
C) Accounting for business combinations.
D) Accounting for fair values.

Accepted Answer

The most recent debates in the political process of standard-setting have revolved around the accounting for fair values. This is because fair value accounting, which involves valuing assets and liabilities at current market values, has significant implications for financial reporting and is subject to differing views on how it should be implemented.

Question 10

An important historical reason for the FASB reversing its positions when political pressures occur is:
A) The cost of gathering data was prohibitive.
B) The difficulties in measurement were too great.
C) Companies withdraw financial support for the FASB.
D) The SEC did not support the FASB position.

Accepted Answer

The SEC (Securities and Exchange Commission) is a powerful regulatory body, and its lack of support can significantly influence the FASB's decisions, leading to reversals under political pressure.

Question 11

One of the elements that many believe distinguishes a profession from other occupations is the acceptance of responsibility by its members for the interests of those it serves, which is often articulated in:
A) Its conceptual framework.
B) Its code of ethics.
C) Federal laws.
D) State laws.

Accepted Answer

A code of ethics is a set of principles or rules of behavior that guides the decision-making and actions of professionals. It often includes a statement of responsibility to the clients or society that the profession serves. Therefore, option B is the best choice as it directly relates to the acceptance of responsibility by the members of a profession. Options A, C, and D may also be relevant to the functioning of a profession, but they do not specifically address the acceptance of responsibility by its members.

Question 12

When a registrant company submits its annual filing to the SEC, it uses:
A) Form 10-A.
B) Form 10-K.
C) Form 10-Q.
D) Form S-1.

Accepted Answer

Form 10-K is used for the annual filing of a registrant company to the SEC. Form 10-A is not a valid form, Form 10-Q is used for quarterly filings, and Form S-1 is used for initial public offerings.

Question 13

The FASB's standard-setting process includes, in the correct order:
A) Exposure draft, research, discussion paper, Accounting Standards Update.
B) Research, exposure draft, discussion paper, Accounting Standards Update.
C) Research, discussion paper, exposure draft, Accounting Standards Update.
D) Discussion paper, research, exposure draft, Accounting Standards Update.

Accepted Answer

The FASB's standard-setting process begins with research, where they evaluate the need for new or updated guidance. Then, a discussion paper is issued to share their preliminary thoughts on the issue with stakeholders. This is followed by an exposure draft, which proposes specific changes to the accounting standards. Finally, the FASB issues an Accounting Standards Update to inform stakeholders of the final changes to the standards.

Question 14

In the Norwalk Agreement, the FASB and IASB pledged to:
A) Combine their organizations to form the BUSYB.
B) Make progress on specific MOU projects.
C) Achieve convergence by the year 2015.
D) Remove existing differences between their standards.

Accepted Answer

The answer of In the Norwalk Agreement, the FASB and...

Question 15

SFAC 8 of the conceptual framework focuses on:
A) Objective and qualitative characteristics.
B) Presentation and disclosure.
C) Recognition and measurement.
D) Elements of financial statements.

Accepted Answer

SFAC No. 8 of the conceptual framework focuses on the objective of general-purpose financial reporting and the qualitative characteristics of useful financial information.

Question 16

The primary professional organization for those accountants working in industry is the:
A) AAA.
B) AICPA.
C) IIA.
D) IMA.

Accepted Answer

The Institute of Management Accountants (IMA) is the primary professional organization for accountants working in industry. The American Accounting Association (AAA) is focused on accounting education and research, the American Institute of Certified Public Accountants (AICPA) primarily serves public accountants, and the Institute of Internal Auditors (IIA) focuses on internal auditing.

Question 17

Which of the following has the statutory authority to set accounting standards in the United States?
A) FASB.
B) IRS.
C) SEC.
D) AICPA.

Accepted Answer

The SEC (Securities and Exchange Commission) has the statutory authority to set accounting standards in the United States through its oversight of the FASB (Financial Accounting Standards Board). The AICPA (American Institute of Certified Public Accountants) is a professional organization for accountants, while the IRS (Internal Revenue Service) is the federal agency responsible for collecting taxes.

Question 18

Pronouncements issued by the Committee on Accounting Procedures:
A) Dealt with specific accounting and reporting problems.
B) Were based on exposure drafts and public comment letters.
C) Originated from congressional studies and SEC directives.
D) Were the outcome of research studies and a theoretical framework.

Accepted Answer

The Committee on Accounting Procedures issued pronouncements to provide guidance and solutions to specific accounting and reporting issues faced by companies. Thus, option A is correct. Options B, C, and D are incorrect because the pronouncements were not necessarily based on exposure drafts/public comment letters, congressional studies/SEC directives, or research studies/theoretical frameworks.

Question 19

Independent auditors express an opinion on the:
A) Fairness of financial statements.
B) Accuracy of financial statements.
C) Soundness of a company's future.
D) Quality of a company's management.

Accepted Answer

Independent auditors express an opinion on the fairness of financial statements, which includes whether the information presented is accurate and reliable according to Generally Accepted Accounting Principles (GAAP). They do not express an opinion on the soundness of the company's future or the quality of its management.

Question 20

The International Accounting Standards Board:
A) Was the predecessor to the IASC.
B) Can overrule the FASB when their policies disagree.
C) Promotes the use of high-quality, understandable global accounting standards.
D) Has its headquarters in Geneva.

Accepted Answer

The International Accounting Standards Board (IASB) promotes the use of high-quality, understandable global accounting standards. It is an independent organization and does not have the authority to overrule the Financial Accounting Standards Board (FASB) or vice versa. The IASB is headquartered in London, not Geneva. The IASC was actually the predecessor to the IASB.

Quiz 1: Environment and Theoretical Structure of Financial Accounting

Which of the following is not a provision of the Public Company Accounting Reform and Investor Protection Act of 2002 (Sarbanes-Oxley) ? The Act:

The possibility that the capital markets' focus on periodic profits may tempt a company's management to bend or even break accounting rules to inflate reported net income is an example of:

CPAs are licensed by:

Accounting standard-setting has been characterized as:

Which of the following is not a concern expressed by the SEC regarding IFRS adoption by the U.S.?

The most political issue in the FASB's most recent deliberations and amendments to GAAP on stock options was:

The most likely important flaw leading to the demise of the APB was the perceived lack of:

Which of the following is not a provision of the Public Company Accounting Reform and Investor Protection Act of 2002?

The most recent example of the political process at work in standard-setting is the heated debate that occurred on the issue of:

An important historical reason for the FASB reversing its positions when political pressures occur is:

One of the elements that many believe distinguishes a profession from other occupations is the acceptance of responsibility by its members for the interests of those it serves, which is often articulated in:

When a registrant company submits its annual filing to the SEC, it uses:

The FASB's standard-setting process includes, in the correct order:

In the Norwalk Agreement, the FASB and IASB pledged to:

SFAC 8 of the conceptual framework focuses on:

The primary professional organization for those accountants working in industry is the:

Which of the following has the statutory authority to set accounting standards in the United States?

Pronouncements issued by the Committee on Accounting Procedures:

Independent auditors express an opinion on the:

The International Accounting Standards Board: