Chapter 3

Question 1

Ethics are needed when

Answer 1

conflicts arise—the people need to choose

Question 2

In business, conflicts may arise between:

Answer 2

employees
management
stakeholders
Litigation

Question 3

Four main areas of business ethics

Answer 3

1. Equity
2. Rights
3. Honesty
4. Exercise of Corporate Power

Question 4

concerns the social impact of computer technology (hardware, software, and telecommunications).

Answer 4

Computer ethics

Question 5

What are the main computer ethics issues?

Answer 5

Privacy
Security—accuracy and confidentiality
Ownership of property
Environmental issues
Artificial intelligence
Unemployment and displacement
Misuse of computer

Question 6

false statement or disclosure

Answer 6

False representation

Question 7

a fact must be substantial in
inducing someone to act

Answer 7

Material fact

Question 8

Legal Definition of fraud

Answer 8

1. False representation
2. Material Fact
3. Intent to deceive must exist
4. Justifiable reliance on misrepresentation
5. Caused injury or loss

Question 9

Enron, WorldCom, Adelphia
Underlying Problems

Answer 9

1. Lack of Auditor Independence
2. Lack of Director Independence
3. Questionable Executive Compensation Schemes
4. Inappropriate Accounting Practices

Question 10

Sarbanes-Oxley Act of 2002 principal reforms pertain to

Answer 10

Creation of the Public Company Accounting Oversight Board (PCAOB)
Auditor independence—more separation between a firm’s attestation and non-auditing activities
Corporate governance and responsibility—audit committee members must be independent and the audit committee must oversee the external auditors
Disclosure requirements—increase issuer and management disclosure
New federal crimes for the destruction of or tampering with documents, securities fraud, and
actions against whistleblower

Question 11

Committed by non-management personnel/employee
Usually consists of: an employee taking cash or other
assets for personal gain by circumventing a company’s
system of internal controls

Answer 11

Employee Fraud

Question 12

Perpetrated at levels of management above the
one to which internal control structure relates
Frequently involves using financial statements to
create an illusion that an entity is more healthy and prosperous than it actually is
Involves misappropriation of assets, it frequently is shrouded in a maze of complex business transaction

Answer 12

Management Fraud

Question 13

Three categories of fraud schemes according to the
Association of Certified Fraud Examiners

Answer 13

A. fraudulent statements
B. corruption
C. asset misappropriation

Question 14

Misstating the financial statements to make the copy
appear better than it is
Usually occurs as management fraud
May be tied to focus on short-term financial measures for success
May also be related to management bonus packages
being tied to financial statement

Answer 14

Fraudulent Statements

Question 15

Examples of corruption

Answer 15

bribery
illegal gratuities
conflicts of interest
economic extortion

Question 16

indicative of corruption in business world
impacted accounting by requiring accurate
records and internal controls

Answer 16

Foreign Corrupt Practice Act of 1977

Question 17

Most common type of fraud and often occurs as
employee fraud
Examples:
making charges to expense accounts to cover theft of
asset (especially cash)
lapping: using customer’s check from one account to cover theft from a different account
transaction fraud: deleting, altering, or adding false transactions to steal assets

Answer 17

Asset Misappropriation

Question 18

Internal Control Objectives
According to AICPA SAS

Answer 18

1. Safeguard assets of the firm
2. Ensure accuracy and reliability of accounting records and information
3. Promote efficiency of the firm’s operations
4. Measure compliance with management’s prescribed policies and procedures

Question 19

Modifying Assumptions to the Internal Control Objectives

Answer 19

1. Management Responsibility
2. Reasonable Assurance
3. Methods of Data Processing

Question 20

Limitations of Internal Controls

Answer 20

Possibility of honest errors
Circumvention via collusion
Management override
Changing conditions–especially in companies with high growth

Question 21

Exposures of Weak Internal
Controls (Risk)

Answer 21

Destruction of an asset
Theft of an asset
Corruption of information
Disruption of the information system

Question 22

Undesirable Events

Answer 22

1. Access
2. Fraud
3. Errors
4. Mischief

Question 23

Levels of Control

Answer 23

1. Preventive
2. Detective
3. Corrective

Question 24

Five Internal Control
Components: SAS 78 / COSO

Answer 24

1. Control environment
2. Risk assessment
3. Information and communication
4. Monitoring
5. Control activities

Question 25

Integrity and ethics of management Organizational structure Role of the board of directors and the audit committee Management’s policies and philosophy Delegation of responsibility and authority Performance evaluation measures External influences—regulatory agencies Policies and practices managing human resource

Answer 25

The control environment

Question 27

Identify, analyze and manage risks relevant to financial reporting

Answer 27

Risk Assessment

Question 28

The AIS should produce high quality information which: identifies and records all valid transactions provides timely information in appropriate detail to permit proper classification and financial reporting accurately measures the financial value of transactions accurately records transactions in the time period in which they occurred

Answer 28

Information and Communication

Question 29

The process for assessing the quality of internal control design and operation

Answer 29

Monitoring

Question 30

Policies and procedures to ensure that the appropriate actions are taken in response to identified risks

Answer 30

Control Activities

Question 31

Control activities fall into two distinct categories

Answer 31

1. IT Controls - relate specifically to the computer environment 2. Physical Controls - primarily pertain to human activities

Question 32

Two Types of IT Controls

Answer 32

1. General Controls 2. Application Controls

Question 33

pertain to the entity wide computer environment

Answer 33

General Controls

Question 34

ensure the integrity of specific systems

Answer 34

Application Controls

Question 35

Six Types of Physical Controls

Answer 35

Transaction Authorization Segregation of Duties Supervision Accounting Records Access Control Independent Verification

Question 36

used to ensure that employees are carrying out only authorized transactions general (everyday procedures) or specific(non routine transactions) authorization

Answer 36

Transaction Authorization

Question 37

In manual systems, separation between: ● authorizing and processing a transaction ● custody and record keeping of the asset ● subtasks In computerized systems, separation between: ● program coding ● program processing ● program maintenance

Answer 37

Segregation of Duties

Question 38

a compensation for lack of segregation; some may be built into computer systems

Answer 38

Supervision

Question 39

provide an audit trail

Answer 39

Accounting Records

Question 40

help to safeguard assets by restricting physical access to them

Answer 40

Access Controls

Question 41

reviewing batch totals or reconciling subsidiary accounts with control accounts

Answer 41

Independent Verification