Compliance and Auditing Financial Reporting Compliance 1 — Questions and Answers
Question 1: Which accounting standards are publicly traded US companies required to use for financial reporting?
- IFRS
- GAAP (Generally Accepted Accounting Principles) (Correct answer)
- GASB Standards
- FASAB Standards
Correct answer: GAAP (Generally Accepted Accounting Principles)
Publicly traded US companies are required by the SEC to prepare financial statements in accordance with US GAAP, established by the Financial Accounting Standards Board (FASB).
Question 2: What is the purpose of management's discussion and analysis (MD&A) in an annual report?
- To summarize the audit opinion
- To provide management's perspective on financial results, trends, and risks (Correct answer)
- To list all company officers and directors
- To document internal control weaknesses
Correct answer: To provide management's perspective on financial results, trends, and risks
MD&A provides management's narrative explanation of the company's financial condition, results of operations, liquidity, and known trends or uncertainties that could affect future performance.
Question 3: What is 'earnings management' in the context of financial reporting compliance?
- Setting annual earnings targets for employees
- Manipulating financial results within or outside GAAP to achieve desired outcomes (Correct answer)
- Managing investment portfolios
- Tracking earnings per share over time
Correct answer: Manipulating financial results within or outside GAAP to achieve desired outcomes
Earnings management involves the use of accounting discretion or transactions to influence reported financial results, which may range from legitimate judgment to fraudulent misrepresentation.
Question 4: Which SEC filing must publicly traded US companies file annually with audited financial statements?
- Form 8-K
- Form 10-Q
- Form 10-K (Correct answer)
- Form S-1
Correct answer: Form 10-K
Form 10-K is the annual report that publicly traded companies must file with the SEC, containing audited financial statements, MD&A, risk factors, and SOX management attestations.
Question 5: What does 'revenue recognition' compliance require under ASC 606?
- Recording revenue when cash is received
- Recognizing revenue when performance obligations to customers are satisfied (Correct answer)
- Recognizing revenue when contracts are signed
- Recording revenue at the end of the fiscal year
Correct answer: Recognizing revenue when performance obligations to customers are satisfied
ASC 606 requires companies to recognize revenue when (or as) they satisfy performance obligations by transferring promised goods or services to customers, in an amount reflecting the consideration entitled.
Question 6: What is the role of an external auditor in public company financial reporting compliance?
- Preparing the financial statements
- Providing an independent opinion on whether financial statements present fairly in accordance with GAAP (Correct answer)
- Setting accounting policies for the company
- Approving all significant transactions
Correct answer: Providing an independent opinion on whether financial statements present fairly in accordance with GAAP
External auditors provide an independent opinion on whether a company's financial statements are presented fairly in all material respects in accordance with applicable accounting standards.
Compliance and Auditing Financial Reporting Compliance 1
Which accounting standards are publicly traded US companies required to use for financial reporting?