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Acct 424 > Chapter 3 > Flashcards

Chapter 3 Flashcards

1
Q

What is a critical component of creating an ethical organization environment?

A

Is the culture that includes shared values, beliefs, goals, norms and problem solving mechanisms

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2
Q

What is an organizational ethical climate?

A

Refers to moral atmosphere of the work encvironment and the level of ethics practiced within a company

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3
Q

An ethical climate is enhanced through?

A

Values driven organization that encourages openness and transparency and provides a supportive environment to voice matters of concern without fear of retribution or retaliation

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4
Q

What has a greater influence on decisions?

A

Organization values

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5
Q

Organizational ethical culture is shaped by?

A

Effective leadership

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6
Q

Jones hiltebeital model looks at what?

A

The role of ones personal code of conduct in ethical behavior within an organization

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7
Q

What is the ethical dissonance model?

A

It illustrates the interaction between individuals and the organization based on person organization ethical fit at various stages of the relationship in each potential ethical fit scenario

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8
Q

There are four ethical fit options, what are they?

A

HIGH HIGH - organizational and individual ethics

LOW LOW - two possess low person organization

HIGH LOW - high .org and low individual

LOW HIGH - low .org and high individual ethics

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9
Q

What is an ethical collapse?

A

It occurs when any organization has drifted from the principles of right and wrong and uses financial reporting standards and rules as one area that it may occur

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10
Q

What are the seven signs of ethical collapse?

A

1) pressure to maintain #
2) fear and silence
3) young un and bigger than life CEO (loyalty to boss)
4) weak BOD
5) conflicts of interest overlooked and unaddressed
6) innovation like no other company
7) goodness in some areas atones for evil in others

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11
Q

What is a important element of ethical culture?

A

Tone at the top

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12
Q

What does tone at the top mean?

A

Refers to the ethical environment that is created in the workplace by the organizations leadership.

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13
Q

What creates the basis for standards of behavior that become part of code of ethics?

A

Ethical tone

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14
Q

What is the cornerstone of relationships with customers, suppliers, employees and others who have dealings with an organization?

A

Trust

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15
Q

Trust means?

A

To be reliable and carry through words with deeds

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16
Q

Code of conduct in a workplace influences?

A

The development of the ethical culture in the workplace

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17
Q

What are the list of measures that should be taken to establish an ethical culture?

A

1) establish clear policies on ethical conduct including code of ethics
2) develop ethics training program that instills a commitment to act ethically and explains code of provisions
3) assign a top level office to oversee compliance with ethics policies
4) use internal auditors to investigate whether ethics policies have been followed in practice
5) establish strong internal controls to prevent and detect unethical behaviors such as fraud
6) establish whistleblowing policies including reporting outlets
7) establish an ethics hotline where employees can discuss questionable behavior on an anonymous basis
8) have employees sign a statement that they have complied with ethics policies
9) enforce ethics policies fairly and take immediate action against those who violate the policies
10) reward ethical behavior by including It in the performance evaluation system

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18
Q

Managers can set right tone at the to and foster ethical leadership by following 4 rules. What are these rules?

A

1) consider how your actions affect others
2) do no harm
3) make decisions that are universal
4) reflect before deciding

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19
Q

What is fraud?

A

Defined as deliberate misrepresentation to gain an advantage over another party

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20
Q

What is occupational fraud?

A

Employee abuses the trust placed in him by an employer for personal gain

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21
Q

ACFE study found that most occupational fraudsters crimes are motivated by what?

A

Some kind of financial pressure

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22
Q

What are some behavioral indicators of fraud?

A

1) living beyond means
2) financial difficulties
3) unusually close association with vendor/customer
4) control issues / unwillingly to share duties
5) wheeler dealer attitude
6) divorce/family problems
7) instability, suspiciousness or defensiveness
8) addiction problems
9) complained about inadequate pay
10) past employment related problems
11) refusal to take vacations
12) excessive pressure within org
13) social isolation
14) complained about lack of authority
15) excessive family/ peer pressure for success
16) instability in life circumstance

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23
Q

Internal controls includes all of?

A

The processes and procedures that management puts in place to help make sure that its assets are protected and that company activities are conducted in accordance with the organizations policies and procedures.

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24
Q

Why is an effective system of IC is critical?

A

It is critical to establish an ethical corporate culture that should be supported by the tone at the top

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25
Q

An internal control report must include what?

A

1) statement of managements responsibility for establishing and maintaining IC
2) managements assessment of the effectiveness of the company’s internal control over financial reporting as of the end of company’s most recent year
3) statement that identified the framework used by mgmt to evaluate the effectiveness of the company’s IC over financial reporting
4) statement that registered public accounting firm audited the company’s FS

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26
Q

An internal control system can provide absolute assurance to management and BOD regarding achievement of entity’s it objectives.

T OR F

A

F

It can provide reasonable not absolute assurance

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27
Q

Why do financial statement fraud schemes occur?

A

It is because an employee who is typically a member of top management causes a misstatement or omission of material information in the organizations financial reports

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28
Q

Common methods for overstating revenues include

A

Recording gross rather than net revenue

Recording revenues of other companies and acting as a middle man

Recording sales that never took place

Recording future sales in current period

Recording sales of products that are out on consignment

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29
Q

Common methods of understatement expenses include

A

Reporting cost of sales as a non operating expense so that it does not negatively affect gross margin

Capitalizing operating costs, recording them as assets on the balance sheet instead of as expenses on the income statement

Not recording some expenses at all or not recording them in proper period

30
Q

Methods of improper asset valuations include

A

Manipulating services

Changing useful lives of assets

Failing to take a write down when needed

Manipulating estimates of FMV

31
Q

What are three factors that are the reason for FS fraud to occur. WhT are those three factors?

A

1) situational pressure

— typically occurs as a result of immediate pressure within her internal or external environment

— feel pressure to meet amounts/goals

2) perceived opportunity

— they do fraud because they believe they can get away with it
— opportunities to commit fraud is due to the lack of proper oversight, weak IC,

3) rationalization

— justify act
— convince thyself that it is just temporary or acceptable

32
Q

Financial statement fraud is enabled by what?

A

The absence of an ethical culture

33
Q

What are the four pillars of corporate governance?

A

1) accountability
2) fairness
3) transparency
4) independence

34
Q

What is corporate governance?

A

No set accepted definition

But it is seen as separation of ownership and control in corporations

35
Q

Corporate governance regime typically includes what?

A

Mechanisms to ensure that the agent (mgmt) runs the firm for the benefit of one or more principals

36
Q

Mechanisms include both internal and external.

Internal: ?

External: ?

A

Internal mechanisms

— direct and monitor corporate activities to create SH value

External Mechanisms

— monitor firms activities affairs and performance to insure that the interests of insiders are aligned with interests of outsiders

37
Q

What strengthens control mechanisms between the audit committee and external auditors?

A

1) independent directors enhance governance accountability
2) SOD of the CEO and board chair
3) separate meetings

38
Q

Ethical and legal responsibilities of officers and directors include

A
  1. Duty of care — manager and directors

— act in good faith, exercise care and act in a way that is considered in best interests of corporations

  1. Duty of loyalty

—requires directors to act in best interest of corporations

  1. Duty of good faith

— requires honesty of purpose which leads to caring for well being of constituents

  1. Business judgement rule

— expected to exercise care and use their best judgement in guiding corporate mgmt

39
Q

What is the relationship between audit committee, internal auditors and external auditors?

A

Audit committee

—has oversight responsibilities for FS

INTERNAL AUDITOR

— have direct and unrestricted access to audit committee so they can take matters of concern directly to that group without having to go through top mgmt

EXTERNAL

—rely on support and actions of the audit committee to resolve differences with mgmt over financial reporting

40
Q

What is the goal of the relationships between committee, internal and external auditors?

A

To establish an ethical corporate culture that supports good corporate governance

41
Q

Audit committee

A

— completely independent of mgmt and include at least 3 members which one of them should have financial expertise

42
Q

The audit committee duties include?

A

1) monitor integrity of FS
2) review announcements relating to company’s financial performance
3) review significant financial reporting judgements
4) review company’s IC and risk procedures
5) monitor effectiveness of company’s internal audit function
6) review company’s whistleblower processes and compliance program
7) review and monitor the external auditors independence and objectivity and effective as of audit process

43
Q

Internal auditors interact with who?

A

Top management

44
Q

Internal auditors should assist top management with?

A

— Developing accurate and reliable FS
— Ensure effectiveness of IC
— Monitor compliance with laws and regulations

45
Q

External auditors have an obligation to whom?

A

To the public interest that underlines their corporate governance responsibilities

46
Q

What is the primary role of external auditors in corporate governance?

A

Protect interest of SH

47
Q

What is an integral part of audit process?

A

Effective two way communication between audit committees and external auditors

48
Q

Internal controls established by management should do what?

A

Help prevent fraud

49
Q

Internal controls are to prevent fraud such as?

A

— including materially false and misleading financial reports

— asset misappropriations

— inadequate disclosures in FS

50
Q

Internal controls are designed to ensure what is followed?

A

Management policies

51
Q

What is the COSO Framework?

A

It defines internal control as a process and it is effected by BOD, mgmt and other personnel

52
Q

COSO FRAMEWork is designed to provide reasonable assurance regarding to the achievement of the following objectives:

A

1) effectiveness and efficiency of operations
2) reliability of financial reporting
3) compliance with applicable laws and regulations

53
Q

Framework consists of 5 dimensions

A
  1. Control environment
  2. Risk assessment
  3. Control activities
  4. Monitoring
  5. Information and communication
54
Q

What is the control environment?

A

Sets tone of organization

55
Q

What is the foundation for all aspects of internal control, providing disciple and structure?

A

Control environment

56
Q

What is risk assessment?

A

Entity’s identification and evaluation of how risk might affect the achievement of objectives

57
Q

What are control activities?

A

Strategic actions established by management to ensure its directives are carried out

58
Q

What is monitoring?

A

Process that assesses the efficiency and effectiveness of IC over time

59
Q

What is information and communication?

A

Systems that provide information in a form and at a time that enables people to carry out their responsibilities

60
Q

An organization ethics officer is to do what?

A

Makes sure the organization is in compliance with laws and regulations

61
Q

Section 302 requires CEO AND CFO to do what?

A

Verify that the financial statements have no material misstatements

62
Q

Jury is still out on whether SOX serves as an adequate deterrent to financial fraud

T OR F

A

True

63
Q

What ar ether four elements to whistleblowing?

A
  1. Whistleblower
  2. Whistleblowing act or complaint
  3. Party to whom the compliant is made
  4. Organization against which the complaint is lodged
64
Q

The key to whether an individual will blow the whistle on wrong doing is whether the whistleblower perceived what?

A

Organizational policies that are designed to encourage

  1. Moral autonomy
  2. Individual responsibility
  3. Organizational support for whistleblowers
65
Q

What is important for the determination of moral behavior?

A

Moral agency

66
Q

What does autonomy mean?

A

Will means to act according to reasons and motives that are taken as ones own and not the product of an organizational polices and external forces

67
Q

Internal accountants are excluded from recovering whistleblower awards because of their pre existing legal duty to report securities violations

T OR F

A

True

68
Q

Under certain circumstances internal accountants are eligible to become Dodd frank whistblowers in three situations:

A
  1. Disclosure to SEC to prevent substantial injury to financial interest of equity or its investors
  2. Whistleblower reasonably believes the entity is impeding investigation of midconduct
  3. Whistleblower has first reported violation internally and at least 120 days have passed with no action
69
Q

External auditor eligibility

A

Generally prohibited from blowing the whistle on their clients because the information gained during the audit would not be considered to derive from an individuals independent knowledge or analysi

70
Q

Rule 102 of AICPA Code requires

A

Member should maintain objectivity and integrity, be free of conflict of interest and should not misrepresent facts

Acct 424 (4 decks)

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