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62 Cards in this Set
- Front
- Back
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What is an audit? |
Examination of company prepared FSs to determine if in accordance with GAAP |
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What is the expectations gap? |
Difference between what public/users of FSs perceive as the responsibility of auditors and the purpose of an audit, and what the accounting profession perceive. |
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With the expectations gap: Accounting profession believes ___________ Public believes ____________ |
Reasonable Assurance against material misstatement Absolute Assurance against material misstatement |
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What is fraudulent financial reporting? What are 3 ways to do it? |
Intentional/deliberate misstatement or omission
1. Deception - alteration, manipulation, falsification 2. Misrepresentation/intentional omissions 3. Intentional misapplication of principles |
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What is the difference between error, fraud, and illegal act? |
Error is innocent (ex. mistake) Fraud is deliberate (ex. misappropriation, omission etc.) Illegal act is a violation of law (ex. bribery) |
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What does CAS240 outline? What must they do? |
Details for auditors in Canada relating to fraud discovery Assess potential impact fraud has on FSs - nature, timing, materialty |
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Who must auditor consult with concerning potential of fraud? |
Those charged with governance. |
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If potential fraud is discovered, who must auditors consult? What must they obtain? |
Legal counsel and other specialists. A written letter of representation from management and those charged with governance about their responsibility, disclosure, impact on FSs |
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What are the first lines of defence against fraud? |
1. Effective system of internal control 2. Independent internal audit function 3. Fraud assessment |
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What are the parts of the fraud triangle? Give examples of each. |
1. Pressure to commit fraud (meet goals, financial distress personally, targets, self-service) 2. Opportunity to commit fraud (access to cash, inventory, lack of internal control) 3. Rationalization to commit fraud (you're underpaid, overworked, company has lots of cash already) |
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What are 5 things an auditor must do when discovering illegal act? |
1. Assess impact on FSs 2. Potentially withdraw from duties 3. Management representation letter (which protects auditors) 4. Communicate with those in charge of governance 5. Seek legal advice |
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What are some red flags fraud may exist? |
Poor internal control Lack of segregation of duties No job rotation No internal audit committee Poor governance Poor culture/tone at the top Customer complaints Timing differences for collections and accounts Lack of accounting policy |
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What are 4 things SOX requires from CEO, CFO? |
1. Confirmation management has performed assessment of effectiveness of internal control over financial reporting 2. Deficiencies in design are disclosed 3. All information needed for fair presentation of FSs has been disclosed 4. Effectiveness of internal control has been maintained. |
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Qualified/Modified opinion means |
Financial statements are either materially misstated or auditors were unable to obtain sufficient appropriate evidence to make conclusions |
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What are the different modified opinions? |
Modified Adverse (GAAP departure, material and pervasive) Disclaimer of opinion (Scope limitation, material and pervasive) |
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Unmodified/unqualified opinion means |
financial statements look to be presented fairly and are free from material misstatement to a reasonable assurance.
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What are some causes behind restatements? |
Complexity of accounting standards/transactions Weak financial governance and controls Increase conservatism from auditor & audit committee Broad application of materiality Earnings management Lack of transparency Fraud |
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Describe the ZZZZ case: What was the company? What happened? |
Restoration/cleaning company. Couldn't meet payroll so they cooked books, borrowed money from mob, lied to investors about insurance contracts (their customers) to restore buildings damaged by fire. Created phoney documents, paid security guards to recognize them all to get financing and fool auditors. |
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What are the 5 components of the COSO framework? |
1. Control activities 2. Control environment 3. Monitoring activities 4. Risk Assessment 5. Information and Communication |
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What are 5 basic types of financial fraud? |
1. Fictitious sales 2. Improper expense recognition 3. Incorrect asset valuation 4. Hidden liabilities 5. Inadequate disclosures |
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What is income smoothing? Why do people do it? How do you do it? Give a technique example (hint: yum) |
Steady, artificial increase in growth and net income over a period of time. It's preferred. More investment. Revenue and expense recognition timing differences (i.e., delays, acceleration). Cookie jar reserves. |
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What is earnings management? |
Inflate/Deflate revenues or EPS figures via: Aggressive accounting Establishing/altering estimates to achieve a goal (ex. useful life) |
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What are the 2 categories of earnings management? What are they? |
1. Operations earnings management - altering operating decisions to affect cash flows 2. Account Earnings Management - using flexibility in accounting standards to alter earnings numbers |
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What are the 2 different views on earnings management? |
Negative - "Purposeful intervention for private gain" - Schipper Positive - "Reasonable and legal management decisions" - McKee |
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What are some materiality considerations of earnings management? |
Masks changes in earnings/trends Hides failures to meet analysts expectations Changes loss into income or vice versa Conceals unlawful transactions Typically increases management compensation |
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What are the 3 components of audit risk? |
1. Inherent Risk - possibility misstatement occurs in clients book 2. Control Risk - risk clients controls may not detect 3. Detection Risk - risk auditor may not detect |
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What are some earnings management techniques? Accounting hocus pocus etc... |
Cookie jar reserves Big bath - one-time large restructuring charge/write-down instead of recording loss over several periods Creative acquisition accounting - allocating price to R&D instead of assets Accelerated revenue recognition |
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What are 2 common forms of earnings management techniques? |
1. Inflate/deflate revenues - record too soon, too late, fake revenue 2. Inflate/deflate expenses - record too soon, too late, fake expenses |
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What are some elements that are in SOX because of Enron? |
No internal audit services for audit clients Off-balance-sheet financing must be disclosed Related-party transactions must be disclosed |
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What is the 4 step model for ethical decision-making? |
1. Recognize ethical dilemma 2. Identify and analyze elements in situation 3. Identify alternative actions 4. Select best or most ethical alternative |
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Why is there a move toward one set of IAS? |
Comparability Universality |
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US GAAP is ________-based and aims to present _____________. |
Rules Present fairly |
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IFRS is _________-based and aims to present _______________. |
Principle True and Fair |
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Rules-based is about ______________, whereas principle-based is about ______________. |
Compliance (you do it because you have to) Communication |
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What are the principles of CIMA Code of Ethics? |
Integrity Objectivity Professional Competence & Due Care Confidentiality Professional behavior |
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What are some ways to combat global fraud? |
External audits Internal audits Codes of conduct "Tone and the top" "Walk the talk" Educated workforce Culture of compliance Strong corporate governance |
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What is corporate governance? |
System of rules, practices and processed by which a company is directed and controlled. You balance the needs of your stakeholders. |
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What are some determinants of corporate governance systems? |
Ethical issues Legal issues Business practices Cultural issues Ownership concentration |
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What are some corporate governance systems? |
Market-based Culture-based |
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What are the 3 reasons comply or explain approach is better than traditional? |
1. More freedom for managers and shareholders to organize governance 2. Encourages companies to follow best practices or justify why they aren't 3. Enables setting more demanding standards |
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What is the regulation spectrum? |
A spectrum that begins with complete self-regulation (market/industry self-discipline/laissez-faire), ending with complete government regulation. |
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Give an example of how the government has gotten involved with CSR. |
Labelling diamonds |
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What is lobbying? |
Direct or indirect attempt to influence government activity |
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What are some types of business lobbyists? |
Interest groups/associations Consultants "In-house" groups |
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What are some pros and cons of business lobbying? |
Pros: Offsets other opinions Opinions and perspectives made known to government Cons: Practices are unethical (bribes, gifts, blackmail) Access is unequal Costs of lobbying passed onto customer |
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What is corporate agenda? What is corporate welfare? |
Corporate agenda = real or imagined domination of policy/legislation by corporations or business organizations Corporate welfare = Industries increasingly willing to advocate for and accept government assistance/corporate welfare |
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What are some ethical implications of government-business relationships? |
Favouritism Accessibility Appropriateness Lack of transparency |
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What is corporate governance? |
System used by firms to control and direct their operations by balancing stakeholders. |
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What is the role of the owner stakeholder? |
Provide capital to finance operations. |
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Ownership and the ethical implacations |
Managers can ignore smaller shareholders Minority stock groups can be taken advantage of Democracy abused with non-voting shares Accountability issues |
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What is shareholder democracy? |
Exercise of power by owners to ensure shareholders are treated fairly and enjoy equal rights |
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What are some ways of protecting owners and investors? |
Government legislation - SOX Regulating agencies - Stock exchanges Industry associations Activism |
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What are some evaluation criteria for the board and director performance? |
Strategic Legal Social Financial Business HR Governance |
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What are criticisms of corporate governance reform? |
Audit fees increasing Management attention diverted away from operation of business Additional costs make NA less competitive Changes may not make a difference Approach should be principles-based, not rules-based |
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Describe the Mattel case |
3 recalls due to toxic lead levels in paint. After odd apologies to USA and China, they were sued for breach of fiduciary duty, negligence etc. Toys R Us implemented "trust but verify" |
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Who are the 4 key stakeholders? |
1. Employees 2. Consumers 3. Competitors 4. Suppliers |
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What are some stakeholder issues with employees? |
Right to work Safety Fairness Diversity management Unions Fair compensation etc. |
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Why do firms need ethics training? |
PwC survey found 56% of companies admit most serious fraud was committed by own employees. More than half of large firms experience fraud. |
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Why is fraud committed? |
Lack of internal control (opportunity) Personal financial need (Pressure) Ignorance (rationalization) |
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How are fraudsters caught? |
Control systems - personnel rotation, audits, monitoring Corporate culture - tips, whistle-blowing Externally - crime agencies, law enforcement |
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What are the 7 goals of ethics training? |
Resources Communication Sanctions Feedback Codes of Conduct Self-development Organizational climate |
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What is whistle-blowing? Canada vs. USA.. |
Employee informs another employee about potentially unethical behaviour. USA's SOX protects whistle-blowers jobs and also rewards them money. Canada lags behind USA. |
