Topic 8 - Internal Controls

Excessive earnings management typically begins as a result of

• a regulatory investigation.

• pressure to meet the expectations of stakeholders.

• a violation of generally accepted accounting principles.

• a downturn in business.

The GAAP Oval best represents

• The philosophy that earnings management within limits is ethical.

• The fact that only one true earnings number exists.

• The flexibility managers have within GAAP to report one earnings number from among many possibilities.

• The fact that GAAP is not subject to interpretation.

Which of the following groups on the earnings management continuum are always considered ethical?

• Aggressive accounting and fraudulent reporting

• Deceptive accounting and savvy transaction timing

• Savvy transaction timing and aggressive accounting

• There is not a clear definition as to which of these are ethical and which are not

Which of the following groups on the earnings management continuum are always considered ethical?

• There is not a clear definition as to which of these are ethical and which are not

• Deceptive accounting and savvy transaction timing

• Aggressive accounting and fraudulent reporting

• Savvy transaction timing and aggressive accounting

As William is preparing the end of year financial statements, he realizes that the earnings are not quite up to par for the large loan application that is being currently processed. He decides to stretch the assumptions just enough to be able to meet the requirements for the loan application. This is an example of

• Income smoothing

• Meeting internal targets

Which of the following categories of control activities is NOT considered a preventative control?

• Proper procedures for authorization

• Adequate segregation of duties

• Independent checks on performance

• Physical control over assets and records

Which of the following requires that audit committee members be financially literate?

• American Institute of Certified Public Accountants

• Foreign Corrupt Practices Act

• Sarbanes-Oxley Act

• Securities Exchange Commission

Which of the following is NOT one of the five basic categories of internal control?

• Meeting external expectations

• Window dressing

Which of the following is an example of an adequate segregation of duties?

• Every year, Doug is required to take one full week of vacation time.

• Every evening, Shellie makes a back-up file of all transactions recorded in the computer that day, burns the back-up file onto a CD and then locks the CD into a fire-proof vault for the night.

• Greg is in charge of recording receipt of payments made to accounts receivable, while Susan is in charge of making deposits to the bank.

• John, a clerk, is authorized to perform transactions as large as $5,000 but must maintain authorization from Andrea to perform larger transactions.

Which of the following are usually members of a company's audit committee?

• Members of the board of directors who are not officers of the company

• Internal auditors

• Officers of the company

• External auditors