Questions and Answers of Ethical Obligations Decision

You were engaged to file the 2018 individual and corporate tax returns for a client. The client provided her records and other tax information on March 1, 2019, to help prepare the 2018 tax return.
The issue of the size of executive compensation packages is explored in the text. The highest paid CEO in 2016 was Thomas Rutledge, CEO of Charter Communications, who received $98 million in
In talking about transformational leadership, Jennifer Wilson, Co-founder & Partner of ConvergenceCoaching, stresses the importance of getting people to believe in what they do, excited about
The court rulings in Digital Realty and Erhart establish standards of behavior for accountants and auditors. Which elements of ethical leadership might influence that behavior?
Krispy Kreme management utterly failed at transformational leadership. This is defined as a leadership approach that causes which of the following?a. Changes in the company and social systemb.
How does an auditor’s commitment to the firm, view of oneself as a professional, and loyalty to colleagues influence whether he will blow the whistle on financial wrongdoing?
PwC’s failure at the audit suggests the failure to create an ethical environment created through which of the following?a. Transformational leadership and moral intensityb. Moral persons and moral
The failure to notice large shipments at year end and the subsequent issue of large credits is probably a failure of not employing what?a. Substantive proceduresb. Analytic proceduresc. Year-end
Marketing tax shelters with names like FLIP and BLIPS suggests a lack of what?a. Transformational leadershipb. Moral personsc. Whistleblowersd. Ethical leadership competence
It might be said that an effective, ethical leader is one who adheres to ‘situational’ ethics. Explain what this means. Do you agree?
One has to wonder about the ethical climate at KPMG due to the lack of ________________.a. guidance on tax shelter transactionsb. an ethical tone at the topc. transformational leadershipd. all of
1. Describe the leadership style of David Norris? Include in your explanation the nature of the relationship he had with Lindsay Farrow.2. Do you consider the decisions made by Norris dysfunctional
Describe the role of professional judgment in ethical leadership as it pertains to accountants and auditors and the link to their moral role in society.
Why do you suppose the marketing of the tax shelters at KPMG grew so fast?a. Transformational leadershipb. Moral managerc. Social learning theoryd. Moral intensity
1. How was mismanagement at Krispy Kreme reflective of leadership failure?2. Describe the financial shenanigans used by Krispy Kreme. In this regard, is earnings management always a sign of failed
Steve is balancing the desire to sell the firm’s product with the lack of independence in appearance, which may be a result of being the auditor AND advisor in the software decision. Perhaps Steve
1. Describe the link between the tax culture at KPMG and leadership. Do you believe there is a direct correlation between dysfunctional tax decisions and culture?2. How can tax positions taken
Giving voice to values considers values to be the first pillar of the methodology. In his position as advisory manager of the audit, Steve should be considering his commitment to what?a. Individual
Who has the most at stake among the stakeholders in this case?a. Steve Michaelsb. Rosanne Fieldc. Research Triangled. Oak Manufacturing
1. Describe the characteristic traits of leadership at GE. How would you describe Flannery’s leadership style?2. Do you believe that leadership style and connection with employees can influence
1. Describe the leadership style of Steve in this case.2. Assume Steve decides to support Gary's explanation for choosing the firm's own package. What will you do next?3. Have there been any
Review the numbers below. Assume you are an investor. What questions would you have about the numbers and presentation?
Read the following statements made by Warren Buffet in a letter to shareholders included in the Berkshire Hathaway 2017 Annual Report. Should the external auditors have a role in responding to its
Schilit describes a variety of financial shenanigans. What is the purpose of using those techniques? Would you call it gimmickry? Explain.
Discuss the revenue recognition and internal control challenges when a company uses cloud computing.
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
What is the risk of management bias for each earnings judgment and estimate? What safeguards should be in place to mitigate the risk of management bias, if any? What is the external auditor’s role
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
Tinseltown Construction just received a $2.6 billion contract to construct a modern football stadiumfor the L.A. Rams and San Diego Chargers at the L.A. Sports and Entertainment District. The company
In remarks in the speech, The Numbers Game, ________ described the technique of cookie-jar reserves used by Dell.a. Alan Greenspan, FED Chairmanb. Mary Shapiro at the SECc. Arthur Levitt at the SECd.
Explain the SEC rules and regulations applicable to the public disclosure of non-GAAP financial measures.
Dell used "cookie-jar reserves" to inflate income and "make the numbers" Wall Street wanted to see. Such reserves are an example of the use of what?a. Discretionary expensesb. Discretionary
Why are non-GAAP financial measures used by many investors and analysts?
Dell did not reveal Intel’s "additional rebates" as an unusual cost reduction that might not continue in the future. A study by Dichev et al. revealed the beliefs of some 169 CFOs. CFOs believed
Sarah and Paul are industry CPAs rather than public CPAs. R. Z. Elias conducted a study of corporate ethical values and earnings management ethics. He found that CPAs in industry in an organization
1. What is the underlying accounting and financial reporting concept at issue as described in EITF Issue No. 01-9 with respect to the way Monsanto accounted for customer rebates? Explain in your own
Do you agree with Thomas McKee's conception of earnings management as applied to (a) operational earnings management and (b) accounting earnings management?
Suppose Sarah meets with Paul on Monday and no resolution is obtained; Paul does not back off. To whom should Sarah turn next?a. Board of Directorsb. Audit Committeec. External auditorsd. SEC as a
Needles talks about the use of a continuum ranging from questionable or highly conservative to fraud to assess the amount to be recorded from for an estimated expense. Do you believe that the choice
The approach Solutions is taking is most closely aligned witha. Operating expense managementb. Operating earnings managementc. Accounting expense managementd. Accounting earnings management
1. Consider the costs/harms and benefits of disclosing non-GAAP financial numbers. What value, if any, do you see in the use of non-GAAP metrics?2. What responsibilities do auditors currently have
1. Was TierOne’s accounting for the loan loss reserve indicative of “managed earnings”? How would you make that determination?2. What is the purpose of the auditor's assessment of ICFR?
Solutions Network is attempting to manage earnings. Which features of earnings management is being employed by Solutions?a. Alter numbers not yet in the financial records by using discretionary
1. In his analysis of the Dell fraud for Forbes, Edward Hess comments: "Too often, the market's maniacal focus on creating ever-increasing quarterly earnings drives bad corporate behavior, as it
Nortel tried to find a solution to the hundreds of millions of dollars of inventory sitting in its warehouses. The external auditors might have discovered this red flag with which of the following
1. What are the main arguments that you will need to counter? That is, what are the reasons and rationalizations you will need to address?2. What is at stake should you not convince King Bernard to
Nortel’s earnings management techniques were indeed detrimental to the long-term value of the firm. Such behavior links to which ethical model of behavior?a. Rest Four-Step Modelb. Kohlberg’s Six
1. Do you believe Allergan’s financial information in its press release is useful? Why or why not?2. Do you believe this kind of information should be subject to audit procedures? If so, what
The presentation of financial information should contain this characteristic, which was clearly lacking in the Nortel statements.a. Representational usefulnessb. Representational faithfulnessc.
Nortel began issuing financial restatements in 2004. The definition of a financial restatement is _________________.a. indications that the current year’s financial statements contained material
1. Describe each of the financial shenanigans used by Nortel and how they manipulated earnings.2. What were the motivating factors that led to the fraud at Nortel? How should the auditors have
How does auditors’ meeting public interest obligations relate to avoiding legal liability?
What are the costs and benefits of voluntarily disclosing violations of the FCPA assuming an internal compliance official threatens to blow the whistle on the company under the Dodd-Frank Financial
What is the importance of having an effective compliance and ethics program with respect to the FCPA? What is the role of confidential reporting and internal investigations in the compliance program?
Answer the following with respect to deficiencies in ICFR.a. How should a SEC registrant evaluate whether a deficiency in ICFR is a material weakness?b. Why should SEC registrant’s document why a
Carly Simmons is approached by a small sole proprietor to assist him in getting the record-keeping for the enterprise organized to firm up receivables, payables, payroll, and other taxes necessary to
Given the recent changes in audit committee responsibilities under SOX and PCAOB standards, when might audit committee members be held at least partially responsible for a financial reporting failure?
Should Section 302 of SOX be broadened to establish legal liability for others in the certification process in addition to CEOs and CFOs? Explain.
How has the Sarbanes-Oxley Act affected the legal liability of accountants and auditors?
Explain your answers to the following questions about the PSLRA:a. Do you believe the standard for liability under the PSLRA better protects auditors from legal liability than the standards which
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
What do you believe would be required for an auditor to successfully assert the fraud of a client’s managers as a defense against the company’s charges of breach of contract, failure to exercise
There is an old industry joke that if you ask an accountant what is four plus four, she will tell you it's whatever you want it to be. Explain what might be meant by this statement.
1. What exactly is the difference between an auditor’s opinion and a statement of fact?2. In her opinion, Judge Forrest wrote that: “Section 10 and 11 claims regarding opinion statements require
1. Analyze the facts of the case with respect to the AICPA Code and explain any perceived deviation from ethical standards.2. Assume Miller Energy is considering bringing a lawsuit against KPMG for
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 Louisiana School
1. What are the main arguments that the partner from PwC will need to counter when he meets with Billy? That is, what are the reasons and rationalizations he should expect to hear from Billy as to
What must a plaintiff assert in a Section 11 claim under the Securities Act of 1933 to properly allege an “opinion” statement is materially misleading? When might certain financial statement
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.
Describe the possible entities that may sue an auditor and the possible reason for a lawsuit.
Grant Thornton prevailed in the Epic Resorts case with a defense that included, among other defenses:a. There was no evidence of a causal connection between the alleged misrepresentation and the
1. Assume that a third party(ies) is considering whether to sue the external auditors of QSGI. What could they allege in their lawsuit and why?2. Assuming a third party(ies) files the lawsuit, what
Three of six defenses Kay & Lee might use would include which of the following?a. The third party did not suffer a loss; any loss was caused by other events; the claim is invalid because the
1. Are the auditors guilty of malpractice? Explain.2. What defenses are available to Joker & Wild in this case? Explain what they must prove to successfully assert these defenses.3. Assume you
To succeed in obtaining a judgment, the bank would have to prove these three things as part of a five-step process.a. False representation by the accountant; belief by the accountant the
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
You may know the difference between right and wrong behavior and never would consider committing fraud. But how do you maintain the highest level of professional conduct as it relates to fraudulent
Assume you are inspecting EY’s audit of Medicis Pharmaceutical Corporation for the PCAOB. Read through the information provided about the case in the chapter and identify the factors the auditors
Do you believe the end-user cares whether the lead audit engagement partner signs his or her name to the report or the firm simply files Form AP with the PCAOB? Explain.
Answer the following questions about financial statement restatements.a. What are financial statement restatements?b. When should financial statements be restated?c. Assume the auditor has
What is the purpose of an audit firm developing a system of quality controls?
Explain how PCAOB inspections can lead to improvements in audit engagement quality.
In 1995, Congress added Section 10A to the Securities Exchange Act of 1934 as part of the Private Securities Litigation Reform Act. Is it accurate to say that Congress enacted Section 10A with the
Discuss the link between skeptical judgment and skeptical action and Rest’s four-component Model of Ethical Decision Making.
Data analysis, often in the form of continuous monitoring of transactions and controls, is increasingly used as a key component of risk management and audit processes overall. How might data
The PCAOB believes there have been improvements in audit quality during the past few years. Discuss the indicators of audit quality and why they are important to protect the public interest.
1. Explain how pressures and incentives drove the actions taken by Hudgins and Kitay to commit financial statement fraud.2. Describe the problems in the audit of Weatherford International by Ernst
Gary James works for Hill & Beans, a professional services firm. James was a onetime business partner of former Florida state Senator Howard Clark and a donor to his campaign. Clark was recently
In the aftermath of frauds like ZZZZ Best and Enron, SOX beefed up the requirements to belong on the audit committee, as well as its responsibilities. These include which of the following?a. The
1. Given the facts of the case, what communications do you believe Forrester & Loomis should have made with the audit committee with regard to the transactions with the vendor to comply with
Ernst was expected to adhere to audit standards in preparation of their report. What is true about audit standards?a. The SEC requires the 10 standards created by the PCAOB and IFRS.b. The PCAOB
1. Use the Fraud Triangle to analyze the business and audit risks that existed at Diamond Foods during the period of its accounting fraud.2. How would you characterize Diamond's accounting? Did they
A review differs from an audit in that ________________.a. The external auditor reviews company-prepared documentsb. The external auditor reviews internal control to prepare a SOX Section 404
1. Who are the stakeholders in this case and what are Barry's obligations to them?2. What are related-party transactions? Why are related-party transactions a particularly sensitive area? What do you
Describe the types of audit deficiencies that might arise because of problems with ICFR.
How might the existence of the dark triad personalities underlie undesirable behaviors by management and how might it influence the audit?
The audit failure on the part of Ernst can be traced to the failure to _____________.a. Gather sufficient evidential materialb. Realize the inherent risk in auditing a cleaning businessc. See the
The external auditors at Ernst and Whinney succumbed to which part of the fraud triangle?a. Opportunityb. Incentive pressurec. Rationalizationd. A and C
Vick and Lester are engaging in fraud. The definition of fraud can include which of the following?a. Fraudulent financial reportingb. A violation of the Foreign Corrupt Practices Actc.
Vick Jensen is now caught in what dynamic of the Fraud Triangle?a. Incentiveb. Pressurec. Opportunityd. All of these choices are correct

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