As discussed in the opening reflection, MF Global filed a complaint charging PwC with professional malpractice, breach of contract, and unjust enrichment in connection with its advice concerning, and approval of, the company’s off-balance-sheet accounting for its investments. The court’s decision points out that absent PwC’s advice, MF Global Holdings would not have invested heavily in European sovereign debt to generate immediate revenues and would not have suffered the massive damages that befell the company in 2011. Do you believe that auditors should be held legally liable when they advise clients on matters related to the company’s finances that turn out to be wrong? Explain with reference to legal and professional standards.
> Comment on the statement that materiality is in the eye of the beholder. How does this statement relate to the discussion in the chapter of how to gauge materiality in assessing financial statement restatements? Is materiality inconsistent with the notio
> Evaluate the following statements from an ethical perspective: “Earnings management in a narrow sense is the behavior of management to play with the discretionary accrual component to determine high or low earnings.” “Earnings are potentially managed, be
> Evaluate earnings management from a utilitarian perspective. Can earnings management be an ethical practice? Discuss why or why not.
> Relevance and faithful representation are the qualitative characteristics of useful information under SFAC 8. Evaluate these characteristics from an ethical perspective. That is, how does ethical reasoning enter into making determinations about the relev
> Evaluate the following statement: Do the ends of positive organizational consequences justify the means of earnings management?
> In well-governed companies, a sense of accountability and ethical leadership create a culture that places organizational ethics above all else. What role does organizational culture play in preventing financial shenanigans from being used to manage earni
> Big Pharma has been criticized for making deals that may bring harm to shareholder interests. Evaluate the following transaction from earnings management and ethical perspectives: A pharmaceutical drug company agreed to make payments to wholesalers if th
> Explain the meaning of the following two statements and why each may be true: a. Where management does not try to manipulate earnings, there is a positive effect on earnings quality. b. The absence of earnings management does not, however, guarantee high
> The auditor of Beastie Company is reviewing the following client information for the prior year ended December 31, 2015, and all four quarters of 2016. Estimated Accruals in pretax earnings (in millions) December 12/31/15 Quarter ended 3/31/16
> In the study of earnings quality by Dichev et al., CFOs stated that “current earnings are considered to be high quality if they serve as a good guide to the long-run profits of the firm.” Discuss how and why current earnings may not be a good barometer o
> How should an accounting professional go about determining whether a proposed action is in the public interest?
> Are the use of non-GAAP financial measures ethical?
> In the Enron case, the company eventually turned to “back-door” guaranteeing of the debt of Chewco, one of its SPEs, to satisfy equity investors. Assume that a $16 million loan agreement required that Enron stock should not fall below $40 per share. If t
> Critics of IFRS argue that the more principles-based standards are not as precise as, and therefore easier to manipulate than, the more rules-based GAAP. The reason for this is that IFRS requires more professional judgment from both auditors and corporat
> Do you agree with each of the following statements? Explain. • EBITDA makes companies with asset-heavy balance sheets look healthier than they may actually be. • EBITDA portrays a company’s debt service ability— but only some types of debt. • EBITDA isn’
> The SEC’s new rules on posting financial information on social media sites such as Twitter means that companies can now tweet their earnings in 140 characters or less. What are the problems that may arise in using a social media platform to report key fi
> Explain how a company might use the accounting rules for impairment of long-lived assets to manage earnings.
> Tinseltown Construction just received a $2 billion contract to construct a modern football stadium in the City of Industry, located in southern California, for a new National Football League (NFL) team called the Los Angeles Devils of Industry. The compa
> Revenue recognition in the Xerox case called for determining the stand-alone selling price for each of the deliverables and using it to separate out the revenue amounts. Why do you think it is important to separate out the selling prices of each element
> Safety-Kleen issued a major financial restatement in 2001. The next year, the company restated (reduced) previously reported net income by $534 million for the period 1997–1999. PwC withdrew its financial statement audit reports for those years. Do you b
> Krispy Kreme was involved in an accounting fraud where the company reported false quarterly and annual earnings and falsely claimed that, as a result of those earnings, it had achieved what had become a prime benchmark of its historical performance, that
> According to the 2011 National Business Ethics Survey conducted by the Ethics Resource Center, Generational Differences in Workplace Ethics, a relatively high percentage of Millennials consider certain behaviors in the workplace ethical when compared wit
> Maines and Wahlen state in their research paper on the reliability of accounting information: “Accrual estimates require judgment and discretion, which some firms under certain incentive conditions will exploit to report non-neutral accruals estimates wi
> In Arthur Levitt’s speech that was referred to in the opening quote he also said: “…I fear that we are witnessing an erosion in the quality of earnings, and therefore, the quality of financial reporting. Managing may be giving way to manipulation; Integr
> Valley View Manufacturing Inc., sought a $500,000 loan from First National Bank. First National insisted that audited financial statements be submitted before it would extend credit. Valley View agreed to do so and an audit was performed by an independen
> What are the legal requirements for a third party to sue an auditor under Section 10 and Rule 10b-5 of the Securities Exchange Act of 1934? How do these requirements relate to the Hochfelder decision?
> Assume a third party such as a successor audit firm quickly discovers a fraud that the predecessor auditor has overlooked for years. Do you think this provides evidence supporting scienter? Explain.
> Explain the legal basis for a cause of action against an auditor. What are the defenses available to the auditor to rebut such charges? How does adherence to the ethical standards of the accounting profession relate to these defenses?
> Do you think that the provision of nonaudit services for a client with a failed audit is evidence of negligence?
> Distinguish between the legal concepts of actually foreseen third-party users and reasonably foreseeable third-party users. How does each concept establish a basis for an auditor’s legal liability to third parties?
> In this chapter, we discuss problems encountered by the PCAOB in gaining access to inspect workpapers of auditors in U.S. international accounting firms that have Chinese company clients that list their stock in the United States. Explain why these probl
> What are the unique challenges to the global internal audit function?
> According to Adam Smith’s The Wealth of Nations, when it comes to government oversight in the free market and regulations, the less intervention, the better. Does the government play an important role in encouraging businesses to behave in an ethical man
> In discussing the benefits of the Global Code of Ethics, Richard George, chairperson of the International Ethics Standards Board for Accountants, said, “Strong and clear independence standards are vital to investor trust in financial reporting. The incre
> What is the purpose of having a two-tier system of boards of directors in countries such as Germany? How does the dual-board approach ameliorate the potential conflicts in the principal-agent relationship between investor and manager?
> One provision of the U.K. Bribery Act is that it applies to bribes that occur anywhere in the world by non-U.K. companies that conduct any part of their business in the United Kingdom. For example, the Bribery Act would cover a company that has a few emp
> Consider the practice of making “facilitating payments” to foreign officials and others as part of doing business abroad in the context of the following statement: International companies are confronted with a variety of decisions that create ethical dil
> Distinguish between common-law liability and statutory liability for auditors. What is the basis for the difference in liability?
> The Institute of Chartered Accountants in England and Wales (ICAEW) has adopted a code of ethics based on the IFAC Code. In commenting on the principles-based approach used in these codes, the ICAEW states that a principles approach “focuses on the spiri
> What are the costs and benefits of establishing one set of accounting standards (i.e., IFRS) around the world? How do cultural factors, legal systems, and ethics influence your answer? Apply a utilitarian approach in making the analysis.
> How do Gray’s accounting values establish a basis for financial reporting in countries with different cultural systems?
> Business ethics is about managing ethics in an organizational context and involves applying principles and standards that guide behavior in business conduct. According to IFAC, “The decisions and behaviors of accountants should reinforce good governance
> Consider the following statement and explain the relationship between legal compliance on a global level and ethical responsibilities of accountants and auditors: “Ethical values and legal principles are usually closely related, but ethical obligations t
> In a 2014 segment of Shark Tank, Trevor Hiltbrand, the founder of nootropic supplement maker Cerebral Success, sought funding from the "Sharks" to introduce a line of nootropic shots to be sold on college campuses in Five Hour Energy-style containers, bu
> Has the accounting profession created a situation in which the auditors’ ethical behavior is impaired by their professional obligations? How does the profession’s view of such obligations relate to how courts tend to view the legal liability of auditors?
> Assume a U.S. company operates overseas and is approached by foreign government officials with a request to provide family members with student internships with the company. The company does business in that country with foreign customers and is negotiat
> Some auditors claim that increased exposure under Section 404 of the SOX creates a litigation environment that is unfairly risky for auditors. Do you think that the inability of auditors to detect a financial statement misstatement due gross deficiencies
> The following pertains to auditor legal liability standards under the PSLRA: a. The Reform Act requires that, in any private securities fraud action in which the plaintiff is alleging a misleading statement or omission on the part of the defendant, “the
> Nixon and Co., CPAs, issued an unmodified opinion on the 2015 financial statements of Madison Corp. These financial statements were included in Madison’s annual report and Form 10-K filed with the SEC. Nixon did not detect material misstatements in the f
> Rationalization for fraud can fall under two categories: “no harm” and “no responsibility.” Assume an employee is directed by management to reduce recorded expenses at year-end by insignificant amounts individually, but which are material in total. How m
> The following statement expresses the conclusion of XYZ auditors with respect to the company’s investment in ABC. Assume that all amounts are material. What kind of audit opinion should be rendered given this statement? Explain the reasoning behind your
> Give one example each of when an auditor might render an unmodified opinion and include an emphasis-of-matter paragraph and other-matter paragraph. What is the value of such paragraphs in the audit report?
> Explain the content of each section of the audit report. Evaluate the importance of each section with respect to the users of financial reports.
> Do you think it is ethical for an employer to use social media information as a factor when considering whether to hire an employee? What about monitoring social networking activities of employees while on the job? Be sure to use ethical reasoning in ans
> All companies are vulnerable to fraud, but small businesses are particularly vulnerable. Why do you think this may be the case? What signs of possible fraud may be more pronounced in small businesses when compared to larger ones?
> What is the ethical value of applying the fraud triangle to assess the risk of material misstatements in the financial statements?
> AU-C 240 points to three conditions that enable fraud to occur. Briefly describe each condition. How does one’s propensity to act ethically as described by Rest’s model of morality influence each of the three elements of the Fraud Triangle?
> Dennis just got hired after not working for two years following his reporting of financial statement fraud by his previous employer. Dennis was treated as an outcast and ultimately fired after the company “trumped up” some unsubstantiated claims of poor
> Audit morality includes moral sensitivity, moral judgment, moral motivation, and moral character. Explain how audit morality plays a key role in determining best audit practices that influence audit performance.
> Do you agree that a professional accountant providing professional services to a client that is not an audit client of the firm or a network firm, who is unable to escalate a matter pertaining to an illegal act within the client, should be required to di
> The International Auditing and Assurance Standards Board has issued a new standard effective December 15, 2016, requiring that engagement partners physically sign the audit report with their names instead of the name of the firms, as is done in the Unite
> In its report prepared for audit committees and other stakeholders in December 2014, “Our Commitment to Audit Quality,” EY acknowledges that recent PCAOB findings indicate the need for improving audits of internal control over financial reporting (ICFR),
> Discuss the cultural factors that create barriers for the Chinese units of Big Four firms to receiving support from the Chinese authorities to share audit information with the PCAOB to aid its inspection process.
> Distinguish between an auditor’s responsibilities to detect and report errors, illegal acts, and fraud. What role does materiality have in determining the proper reporting and disclosure of such events?
> Is there a difference between cheating on a math test, lying about your age to purchase a cheaper ticket at a movie theater, and using someone else’s ID to get a drink at a bar?
> Explain how PCAOB inspections can lead to improvements in audit engagement quality.
> Evaluate the costs and benefits of having a two-year “cooling off period for engagement partners.
> What are the auditor’s responsibilities to communicate information to the audit committee under AICPA and PCAOB standards? If the auditor discovers that the audit committee routinely ignores such communications especially when they are critical of manage
> Discuss the link between skeptical judgment and skeptical action and Rest’s Four-Component Model of Ethical Decision Making.
> Auditing standards require that a “brainstorming” session should be held at the beginning of each audit to help identify steps to assess the possibility that material misstatements/fraud in the financial statements exist. Discuss how brainstorming sessio
> Mr. Arty works for Smile Accounting Firm as a senior accountant. Currently he is doing a review of rental property compliance testing of rental receipts and expenses of the property owned by the client. He determines that the staff accountants tested onl
> According to GAAS, the auditor must evaluate the control deficiencies that he has become aware of to determine whether those deficiencies, individually or in combination, are significant deficiencies or material weaknesses. What is the purpose of the aud
> Do you think the concept of materiality is incompatible with ethical behavior? Consider in your answer how materiality judgments affect risk assessment in the audit of financial statements.
> Some criticize the accounting profession for using expressions in the audit report that seem to build in deniability should the client commit a fraudulent act. What expressions enable the CPA to build a defense should the audit wind up in the courtroom?
> What do you think is meant by the term ethical auditing with respect to the principles and rules of professional conduct in the AICPA Code?
> 1. What is the relationship between the ethical obligation of honesty and truth telling? 2. Is it ever proper to not tell someone something that he or she has an expectation of knowing? If so, describe under what circumstances this might be the case. How
> A common ethical dilemma used to distinguish between philosophical reasoning methods is the following. Imagine that you are standing on a footbridge spanning some trolley tracks. You see that a runaway trolley is threatening to kill five people. Standing
> Raquel, who works in medical sales, drives her own vehicle to various locations for client sales meetings. Her employer reimburses her $400 each month for various business expenses and does not expect Raquel to provide proof of her expenses. Her employ
> Which expense, incurred and paid in 2017, can be claimed as a miscellaneous itemized deduction subject to the 2% of AGI floor? a. Self-employed health insurance. b. Unreimbursed moving expenses. c. Employee’s unreimbursed business car expense. d. Self-e
> In 2017, the Rinaldis’ vacation cottage was severely damaged by an earthquake. They had AGI of $110,000 in 2017. Following is information related to the cottage: Cost basis………………………………………..$95,000 FMV before casualty…………………………135,000 FMV after casualty
> In 2017, the president of the United States declared a federal disaster due to brush fires in the Southwest. Lisa lives in that area and lost her home in the fires. What choice does she have regarding when she can claim the loss on her tax return? a.
> Which of the following statements is not true regarding documentation requirements for charitable contributions? a. If the total deduction for all noncash contributions for the year is more than $500, Section A of Form 8283, Noncash Charitable Contribut
> Which of the following organizations qualifies for deductible charitable contributions? a. A nonprofit educational institution. b. The Salvation Army. c. Churches. d. All of the above.
> For 2017, Thomas, a single parent, reported the following amounts relating to his investments: Net investment income………………..……………………………………………………………..$7,000 Interest expense on a loan to purchase stocks…………………………………………….…..2,000 Interest expense on funds
> For 2017, the deduction by a taxpayer for investment interest expense is: a. Not limited. b. Limited to the taxpayer’s net investment income for 2017. c. Limited to the investment interest paid in 2017. d. Limited to the taxpayer’s gross investment inc
> What is the maximum amount of personal residence acquisition debt on which interest is fully deductible on Schedule A? a. $1,000,000. b. $500,000. c. $250,000. d. $0.
> During 201 Noriko paid the following taxes related to her home: Real Estate property taxes on residence (paid from escrow account)……………..$1,800 State personal property tax on her automobile (based on value)…………………………600 Property taxes on land held for l
> Daryl, who had significant itemized deductions for 2017 and therefore was eligible to use Schedule A, purchased a new vehicle in 2017 for $40,000 with a state sales tax of 10%. The allocated deduction amount for other purchases made by Daryl throughout t
> For 2017, the amount of the sales tax deduction is calculated by: a. Determining the actual sales tax paid during the year. b. Using the IRS sales tax deduction calculator. c. Using the sales worksheet and tax tables provided by the IRS in the Schedule
> For 2017, Perla, who is single and 55 years of age, had AGI of $60,000. During the year, she incurred and paid the following medical costs: Doctor and dentist fees…………………………………………..$3,350 Prescription medicines………………………………………………..625 Medical care insura
> Prescription drugs obtained from sources outside the United States, such as Canada, are: a. Always deductible no matter how they were obtained. b. Deductible only for citizens of Canada living in the United States. c. Deductible if prescribed by a physi
> During 2017, Raul incurred and paid the following expenses: Prescription drugs…………………………………………………………$ 470 Vitamins and over-the-counter cold remedies…………………..130 Doctors and dentist visits…………………………………………………700 Health club fee………………………………………………………………...
> The threshold amount for the deductibility of allowable medical expenses is: a. 7.5% of AGI. b. 10% of AGI. c. 10% of taxable income. d. 15% of taxable income.
> Generally, a taxpayer may deduct the cost of medical expenses for which of the following? a. Marriage counseling. b. Health club dues. c. Doctor-prescribed birth control pills. d. Trips for general health improvement.
> The majority of itemized deductions are: a. Business expenses. b. Tax credits. c. Personal living expenses. d. None of the above.
> The amount of savings bond interest exempt from tax is limited when an individual is single and his or her AGI reaches a. $117,250. b. $77,550. c. $78,150. d. $76,000.
> An individual with an OID instrument must annually report a portion of the OID as a. Dividend income. b. Pension income. c. Capital gain income. d. Interest income.
> Original issue discount (OID) is deemed to be zero if it is less than ________ of the maturity value, multiplied by the number of complete years to maturity. a. 0.25%. b. 5%. c. 25%. d. 15%.
> Determine the amount of tax liability in the following situations. In all cases, the taxpayer is using the filing status of married filing jointly. a. Taxable income of $62,449 that includes a qualified dividend of $56. b. Taxable income of $12,932 tha
> Daniel and Alexis, both 28, are interested in saving for the college education of their twin daughters Alie and Amber. They decide to purchase some Series EE U.S. savings bonds because they know that the interest on the bonds is tax-free in certain circ
