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11/21/2025
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Course 141003- Profits You Can Trust
  Final Exam
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141003v - Profits You Can Trust

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Auditing
12 CPE Credit Hours
11/21/2025
Final Exam
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Read 'Chapter 1: Profits You Can Trust - and the Profits You Can't' & answer the following question(s):
1. Recent cases of fraudulent reporting bore warning signs missed by investors.
2. Outright fraud (fiction) is far more difficult to detect than aggressive, self serving, or misleading accounting judgments.
3. Fiduciaries, who have a responsibility to protect the investing public, include:
4. Proforma profits have been referred to as "earnings with all the bad stuff taken out".
5. Flexibility is both the genius and the greatest vulnerability of US accounting.
6. Under the current system of accounting, many corporate managers, directors, lawyers, analysts, lenders, and auditors have powerful incentives to ignore or abet deceptive financial reporting.
7. A manager may distort its company's financial results in order to:
8. Dishonest financial reporting drives investors away from the stock market.
9. As long as there have been accounting systems, there have been accounting games.
10. This type of company is more likely to push the accounting envelope and manipulate earnings:
Read 'Chapter 2: Landmines: Where to Look' & answer the following question(s):
11. One revenue inflating trick of Enron was to report the entire amount of a trading transaction as revenue instead of reporting the actual commission.
12. Accounting estimates should be based on:
13. A red flag to Enron investors was when accounts receivable increased by 65% while its allowance for doubtful accounts fell 50%.
14. Mark to Market accounting is a reasonable way to value securities as long as there is an active market for the securities.
15. A key factor supporting the legitimacy of an SPE is that it be independently managed.
16. The existence of risk is a sign of a poorly run company.
17. A vague and confusing discussion of a company's related party transactions could indicate that the company has something to hide.
18. Changes in key financial ratios often signal accounting games going on beneath the surface.
Read 'Chapter 3: Revenue Recognition: What Is a Sale, And When Do You Book It?' & answer the following question(s):
19. Manipulation of financial results usually begins with revenue recognition.
20. The following is NOT a requirement for properly recognizing revenue:
21. Management discretion with regard to revenue recognition includes both 'when' to recognize revenue and 'what' amount to recognize.
22. Priceline.com claimed that 'grossing up' sales properly recognized revenue as Priceline.com was the 'merchant of record' which meant they assumed all the risks of ownership.
23. Aggressive revenue recognition practices employed by MicroStrategy violated which accounting principle:
24. Xerox was able to overstate revenue and income for 1997 through 2000 by manipulating which calculation:
25. Capacity swaps are a 'sale' of unused fiber optic capacity between telecom companies.
26. A game played by telecoms involves recording revenue for the sale of fiber optic capacity to other telecoms while capitalizing (i.e. not expensing) the offsetting purchase of capacity.
27. Percentage of completion is an accounting practice which allows companies to recognize revenue gradually over the life of a long term project.
28. One time gains, such as gains from the sale of real estate, should be segregated from recurring revenue on the income statement.
Read 'Chapter 4: Provisions and Reserves: When Revenue Games Aren't Enough' & answer the following question(s):
29. In the banking world, the chances of a new merger or acquisition increase as a bank's merger reserve is depleted.
30. As a general rule, companies are eager to highlight reserves as they are reversed, but are less eager to highlight reserves when created.
31. Items that might be included in comprehensive income include:
32. Gains or losses from currency translation are reported on the income statement if the subsidiary's functional currency is the US dollar.
33. Management determines if a subsidiary's functional currency is the local currency or the US dollar.
34. Because pension accounting is so complex, management has great opportunity to 'tweak' the numbers.
Read 'Chapter 5: A Landscape of Hazard: The New World of Business Risk' & answer the following question(s):
35. Financial risk is the risk that a company may become insolvent.
36. The first step towards prudent management of financial risk is full disclosure and quantification of all financial obligations.
37. The single biggest hazard with regard to risk for any corporation and its shareholders, creditors and employees is:
38. Green Tree's greatest sin was:
39. A company's line of credit is a classic example of a contingent liability.
40. Derivatives are likely to be used by:
41. The practice of marking energy derivatives to market as done by Enron is still acceptable practice in the US.
42. Recent estimates put the pension fund shortfall in corporate America at hundreds of billions of dollars.
43. The federal Pension Benefit Guaranty Corporation (PBGC) has the authority to conduct a pension plan audit on a corporation and demand immediate remedy of underfunding.
Read 'Chapter 6: Goodwill Hunting: How to Tell Hard Assets from Hot Air' & answer the following question(s):
44. In order to be deemed an asset. A resource must meet this criteria:
45. Generally, software development companies must capitalize and subsequently amortize software development costs until the point at which a workable prototype is produced. After that point, the development costs must be expensed.
46. Management determines at what point software development costs can be capitalized, but auditors must agree.
47. Goodwill is an intangible asset created when one company acquires another.
48. Prior to the FASB interpretation released in 2001, no goodwill was recognized under the pooling of interests accounting for business combinations because the combination was considered a true merger rather than an acquisition.
49. According to the 2001 FASB pronouncement, goodwill is only written down when 'impaired', that is, when its value has declined significantly.
50. Trademarks, patents and copyrights must be valued as a part of goodwill and amortized over their estimated useful lives.
51. In-process R&D should be capitalized and subsequently amortized.
52. In-process R&D write offs are fertile ground for accounting mischief.
53. The annual valuation and analysis of goodwill may result in an increase and 'write up' of the value of goodwill.
54. Shamu (yes, the whale) has been depreciated over the remainder of his/her estimated lifespan.
Read 'Chapter 7: The (Inner) Circle Game: Ripping Off Shareholders with Related-Party Transactions' & answer the following question(s):
55. Mechanisms used to avoid scandalous related party transactions may include:
56. Red flags which may identify hidden related party transactions include:
Read 'Chapter 8: The Measure of Business Performance: Comparisons and Benchmarks' & answer the following question(s):
57. The accounting treatment of goodwill is a good example of how International Accounting Standards (IAS) differ from Generally Accepted Accounting Principles (GAAP).
58. The ratio of net income to sales is known as:
Read 'Chapter 9: Let's Make up Some Numbers: EBITDA, Pro Forma Earnings, and Stupid Cash Tricks' & answer the following question(s):
59. EBITDA is an extremely accurate measure of cash flows.
Read 'Chapter 10: Fair Value Toward Trustworthy Corporate Reporting' & answer the following question(s):
60. The International Accounting Standards Board (IASB) approach to accounting:
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