Reference no: EM131038330

1. By serving on the Board of Directors of various charities, Bernie Madoff was able to:

• Invest funds in a nontaxable manner
• Utilize their tax-exempt status to his advantage
• Gain their trust
• Hide his profits through the use of nonprofit organizations that were highly unlikely to be audited by the IRS

2. A "side agreement":

• Allows a company to charge a lower selling price to attract a new customer, without existing customers discovering this reduction
• An comparatively minor agreement that forensic investigators set aside during the course of conducting a fraud examination of major improprieties
• A technique used by Certified Fraud Examiners and others to deter potentially fraudulent actions
• A secondary agreement that overrides a primary agreement, for the purposes of committing accounting fraud

3. According to the Fraud Triangle, which the following is one of the requisites for fraud to occur?

• The existence of a clear-cut opportunity for ill-gotten financial gain
• The perception of an opportunity for ill-gotten financial gain
• Employment in a sensitive financial capacity in which peers reap greater financial rewards than the employee contemplating fraud receives
• The existence of sound justification for a person to receive greater financial rewards

4. From the perspective of accounting, the downfall of Lehman Brothers was primarily attributable to:

• The company's undue focus on short-term earnings
• A subtle variation on cookie jar accounting
• The company's blatantly deceptive revenue recognition policy on complex financial products and services
• Debt repayment transactions that lacked enduring economic substance

5. "Big bath accounting" describes a company's actions when it:

• Optimizes the amount of Goodwill recognized upon paying a premium to acquire another company
• Manages its earnings in a downward direction in the year of a major acquisition or restructuring
• Manages its earnings by maintaining such a large number of discretionary items that it could "fill a bathtub," so to speak
• "Cleans its books," so to speak, of improperly recorded items in anticipation of a rigorous audit examination

6. In some jurisdictions, laborers, including accountants, are given a lien over client records. (A lien is a priority legal and economic right that is created when a client fails to pay agreed-upon fees.) This lien customarily entitles an accountant to retain possession of client records until outstanding fees are paid in full. When such a lien right arises, the AICPA Code of Professional Conduct states that:

• The CPA is allowed to select the set of rules that are most favorable to the CPA
• The CPA profession's rules of ethical conduct are given priority over state law
• The CPA is obligated to abide by the set of rules that is most favorable to the client
• State law is given priority over the CPA profession's rules of ethical conduct

7. Preparing financial statements for an unincorporated business on a basis that does not comply with GAAP usually will result in:

• A professional accountant suffering adverse professional consequences if the accountant practices in a country that has adopted IFRS
• A CPA being suspended from membership in the AICPA
• No professional discipline as long as the noncompliance with GAAP is adequately disclosed
• A CPA being permanently disqualified from continuing membership in the AICPA

8. The name of a CPA firm may:

• May include the name of a non-CPA without needing to identify the non-CPA as being, in fact, a non-CPA
• Include the name of a founder who is retired, as long as he or she remains an active member of the AICPA
• Not include the name of a CPA unless that CPA is a member in good standing of the AICPA
• Include the name of a founder who is deceased

9. Which of the following acts is clearly discreditable?

• Commenting on "how graceful" an administrative assistant is when she wears high-heeled shoes
• Creating and posting a youtube video in which a CPA berates the IRS for incompetence
• Refusing to return client records, even if a CPA is owed unpaid fees, if these records are needed by the client to prepare its tax return
• Mentioning on your CPA firm's website that you formerly worked for the IRS, if a reader might conclude from this statement that you are better able to negotiate favorable settlements with the IRS for clients

10. Which of the following is most likely to be considered "material," even if the amounts involved are small?

• Amounts that cause an upward earnings trend to become even larger
• Amounts that mask a retailer's inability to control its Cost of Goods Sold
• Amounts that cause an earnings trend to swing from slightly positive to slightly negative
• Amounts that cause reported Gross Profit to be larger than Net Income