Question 1

The auditors in the Tier One Bank case were investigated by the SEC because it:

Accepted Answer

A)   Failed to obtain sufficient competent evidential matter to support audit conclusions
B)   Failed to exercise the appropriate level of care in its audit
C)   Failed to exercise the proper degree of professional skepticism
D)   All of the above

Question 2

Which of the following is NOT a qualitative factor when assessing materiality?

Accepted Answer

A)   A misstatement that changes a loss into income or vice versa
B)   The existence of statutory or regulator reporting requirements that affect materiality thresholds
C)   The potential effect of the misstatement on trends, especially trends in profitability
D)   The use of simplistic numerical thresholds and rules of thumb

Question 3

One result of earnings management is:

Accepted Answer

A)   It brings into question the quality of earnings
B)   It uses a non-GAAP financial measure to manipulate earnings
C)   EBITDA does not reflect GAAP earnings
D)   It improves shareholder returns over time

Question 4

Which of the following authors(s)  link earnings management to choices made in determining earnings that may comprise aggressive, but acceptable, accounting estimates and judgments, as compared to fraudulent practices that are clearly intended to deceive others?

Accepted Answer

A)   Dechow and Skinner
B)   Healy and Wahlen
C)   Schipper
D)   Thomas E. McKee

Question 5

What was the original motivation by FASB on SPEs?

Accepted Answer

A)   To establish a mechanism to encourage companies to invest in needed assets while keeping related debt of its books
B)   To keep the large amount of debt off the books
C)   To sell non-producing assets to the SPE
D)   To select which assets to sell to the SPEs affecting the gain

Question 6

Who linked earnings management to an excessive zeal to project smoother earnings from year to year that casts a pall over the quality of the underlying numbers?

Accepted Answer

A)   Warren Buffet
B)   Arthur Levitt
C)   Thomas E. McKee
D)   Lynn Turner

Question 7

The best definition of a financial restatement is:

Accepted Answer

A)   A company, either voluntarily or under prompting by its auditors or regulators, revises its public financial information that was previously reported
B)   A company, either voluntarily or under prompting by its auditors or regulators, revises its public financial information for the current period
C)   An adjustment of financial information due to an error correction
D)   All are part of the definition

Question 8

Sarah's concern in the Solutions Network case is:

Accepted Answer

A)   Expenses were delayed at year-end to manage earnings
B)   Revenue was recorded at year-end before the agreement with the customer was finalized
C)   Revenue was accelerated into an earlier period through channel stuffing
D)   Off-balance sheet entities were not disclosed

Question 9

Accruals that are based on estimated changes in fundamental economic performance of the firm are:

Accepted Answer

A)   Discretionary accruals
B)   Nondiscretionary accrual
C)   Operating accruals
D)   Cookie jar accruals

Question 10

What is the SEC's position on companies that communicate with investors on social media?

Accepted Answer

A)   It is illegal to do so
B)   It is legal so long as companies inform investors which outlets they intend to use
C)   It is legal so long as the postings are restricted to Facebook
D)   There are no limitations on companies communicating through social media

Question 11

Which of the following was not true according to the Enron case?

Accepted Answer

A)   Fastow developed the concept of buying up oil and gas companies to establish SPEs
B)   Fastow worked to structure ventures that met the conditions under GAAP to keep the partnership activities off Enron's books and on the separate books of the partnership
C)   Fastow created SPEs that borrowed money from banks and transferred it to Enron in a sale of an operating asset no longer need by Enron
D)   The SPE created by Fastow enabled Enron to keep debt off its books while benefiting from transfer and use of the cash borrowed by the SPE

Question 12

What is a financial shenanigan and what is it designed to do? Explain each of the financial shenanigans described by Schilit and provide examples of each.

Accepted Answer

Financial shenanigans are acts or action...

Question 13

The main difference between a discretionary and nondiscretionary accrual is:

Accepted Answer

A)   Discretionary accruals are items that management has full control over
B)   Discretionary accruals are based on changes in the fundamental performance of the firm
C)   Discretionary accruals arise from transactions considered normal for the firm
D)   Discretionary accruals always lead to an increase in earnings

Question 14

"Cookie jar reserves" can best be described as:

Accepted Answer

A)   Buying a lot of chocolate chip cookies, storing them for when you have a hunger attack, and then releasing them into your stomach
B)   Overstating or understating allowances and reversing amounts in the future to smooth out net income over time
C)   Accelerating the recording of revenues into an earlier year than is warranted
D)   Delaying the recording of expenses to a later year to boost income in the current year

Question 15

Which of the following was not pointed to by the SEC as a motivation for fraud in the Xerox case?

Accepted Answer

A)   Xerox misled investors by polishing its reputation on Wall Street and to boost the company's stock price
B)   Xerox top management overrode the internal control to manipulate earnings
C)   Xerox failed to disclose GAAP violations that led to acceleration in the recognition of approximately $3 billion in equipment revenues
D)   Xerox recognized a greater amount of revenue on leases in early years than warranted and didn't break out revenues that should have been deferred and recognized in future years

Question 16

Which of the following is NOT one of the techniques used by Gemstar TV Guide International in its accounting fraud?

Accepted Answer

A)   Created cookie jar reserves of advertising revenue to smooth net income
B)   Engaged in round trip transactions
C)   Used channel stuffing to accelerate the recording of revenue into earlier periods
D)   Inflated advertising revenue from nonmonetary and barter transactions

Question 17

In surveys of managers, which technique to manage earnings was considered most acceptable?

Accepted Answer

A)   Changing inventory valuation in order to influence earnings
B)   Accounting manipulation
C)   Manipulating operating decisions
D)   Establishing cookie jar reserves

Question 18

In the Hertz fraud, the company tried to explain its use of non-GAAP financial measures by:

Accepted Answer

A)   Comparing them to aggressive but ethical measurements
B)   Comparing the validity of the amounts to pre-tax GAAP income
C)   Having a conference call with financial analysts to explain their position
D)   Correcting problems in internal controls

Question 19

The SEC's complaint in its case against Allergan included a charge that the company:

Accepted Answer

A)   Used off-balance sheet entities to manipulate earnings
B)   Falsified inventory values to inflate earnings
C)   Used non-GAAP measures to meet EPS estimates
D)   Used EBITDA to obscure reported earnings

Question 20

Which of the following was NOT one of the schemes used by Beazer Homes to manipulate its earnings?

Accepted Answer

A)   Improper recording of revenue on sale-leaseback transactions
B)   Fraudulently increased land inventory expense accounts to reduce earnings
C)   Over-reserving of house cost-to-complete expenses to increase reported earnings in earlier periods
D)   Recording revenue from roundtrip transactions prematurely

Exam 7: Earnings Management

The SEC's complaint in its case against Allergan included a charge that the company:

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"Cookie jar reserves" can best be described as:

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In surveys of managers, which technique to manage earnings was considered most acceptable?

Correct AnswerverifiedShow Answer

The auditors in the Tier One Bank case were investigated by the SEC because it:

Correct AnswerverifiedShow Answer

Which of the following is NOT one of the techniques used by Gemstar TV Guide International in its accounting fraud?

Correct AnswerverifiedShow Answer

Who linked earnings management to an excessive zeal to project smoother earnings from year to year that casts a pall over the quality of the underlying numbers?

Correct AnswerverifiedShow Answer

The main difference between a discretionary and nondiscretionary accrual is:

Correct AnswerverifiedShow Answer

Accruals that are based on estimated changes in fundamental economic performance of the firm are:

Correct AnswerverifiedShow Answer

One result of earnings management is:

Correct AnswerverifiedShow Answer

Which of the following was NOT one of the schemes used by Beazer Homes to manipulate its earnings?

Correct AnswerverifiedShow Answer

What was the original motivation by FASB on SPEs?

Correct AnswerverifiedShow Answer

Which of the following is NOT a qualitative factor when assessing materiality?

Correct AnswerverifiedShow Answer

The best definition of a financial restatement is:

Correct AnswerverifiedShow Answer

Which of the following was not pointed to by the SEC as a motivation for fraud in the Xerox case?

Correct AnswerverifiedShow Answer

Which of the following was not true according to the Enron case?

Correct AnswerverifiedShow Answer

What is a financial shenanigan and what is it designed to do? Explain each of the financial shenanigans described by Schilit and provide examples of each.

Correct AnswerverifiedFinancial shenanigans are acts or action...View AnswerShow Answer

Sarah's concern in the Solutions Network case is:

Correct AnswerverifiedShow Answer

What is the SEC's position on companies that communicate with investors on social media?

Correct AnswerverifiedShow Answer

In the Hertz fraud, the company tried to explain its use of non-GAAP financial measures by:

Correct AnswerverifiedShow Answer

Which of the following authors(s) link earnings management to choices made in determining earnings that may comprise aggressive, but acceptable, accounting estimates and judgments, as compared to fraudulent practices that are clearly intended to deceive others?

Correct AnswerverifiedShow Answer

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Financial shenanigans are acts or action...
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