Online Quiz 9b Flashcards
What characteristic of an earnings management plan strongly suggests that the plan is unethical?
Maximize shareholder value
Intent to deceive
Public relations
Skeptical use by financial statement users
“Fortuitous” timing
Answer: Intent to deceive
Which ONE of the following is a DISADVANTAGE of an earnings-based bonus plan?
Makes the financial statement numbers less reliable
Violates the principle of the separation of duties
Makes it impossible to hire an independent external auditor
Violates both U.S. federal law and SEC regulations
Answer: Makes the financial statement numbers less reliable
Which ONE of the following statements is TRUE with respect to Mini-Case #3, the Flame Control case?
The company has an incentive to make optimistic accounting assumptions to increase net income.
The company’s bonus plan requires employees to focus on the company’s bottom line.
The company’s bonus plan causes employees to have a short-term focus.
The company has an incentive to make pessimistic accounting assumptions to decrease net income.
Answer: The company has an incentive to make pessimistic accounting assumptions to decrease net income.
Which ONE of the following statements is TRUE with respect to the auditor-focused case, “Barry and His Carpet-Cleaning Sales”?
The auditor should speak with Barry’s customers to find out whether the carpet-cleaning jobs are legitimate.
The auditor can assume that the carpet-cleaning jobs are legitimate as long as debits equal credits in Barry’s trial balance.
The auditor can assume that the carpet-cleaning jobs are legitimate as long as debits equal credits in each of Barry’s journal entries.
The auditor has no responsibility for verifying whether the carpet-cleaning jobs are legitimate.
Answer: The auditor should speak with Barry’s customers to find out whether the carpet-cleaning jobs are legitimate.
Which ONE of the following statements is TRUE with respect to the auditor-focused case, “Tino and His Salad Oil”?
The Salad Oil fraud was not uncovered until 1984 when Tino moved his operations to upstate New York.
The Salad Oil fraud was designed to allow Tino’s publicly-traded company to manage earnings in order to meet analysts’ earnings expectations.
The Salad Oil fraud could have been detected by doing some simple calculations of the claimed quantity of salad oil in the tanks compared to the total quantity of salad oil in the United States.
The Salad Oil fraud is a classic case of managers biasing their accounting assumptions in order to reach management earnings-based bonus thresholds.
Answer: The Salad Oil fraud could have been detected by doing some simple calculations of the claimed quantity of salad oil in the tanks compared to the total quantity of salad oil in the United States.
