Fall 2005 Comprehensive Exam by 8Rx5ebQ


									                               Comprehensive Exam – Fall 2005
                               Master of Accountancy Program

Instructions: There are four parts to this examination. You should allocate one hour for each
question. Please put the answer to each question in a separate file titled with your name and the
number of the part: John_Smith-Q1.doc (for example). Also include the number of the part and
your name at the top of each file. Email a copy to me (tgordon@uidaho.edu) and Amber
(amberg@uidaho.edu). The time limit is 4 hours with a 15 minute maximum grace period.
Balance your time wisely between the four questions since they are equally weighted. Make sure
that all four files have arrived and are readable in Amber’s email before you leave.

1.     Questions related to accounting information systems – answer all three.

       a.      A noted accounting information system textbook author writes on the subject of
               accounting information system control goals that:

                      “The first control goal, ensure effectiveness of operations, strives to
                      ensure that a given operations process is fulfilling the purpose for which it
                      was intended…. The next goal, ensure efficient employment of resources,
                      can be evaluated in only a relative sense.”

               He goes on to state that these goals are likely to be in conflict with each other. Do
               you agree or disagree with his view? Why or why not? Be sure to cite examples
               to support your position.

       b.      Consider this quote from a noted finance professional:

                      “Choosing among renting, leasing, and purchasing a computer is strictly
                      a financial decision and should be done by the finance staff.”

               Do you agree? Discuss fully.

       c.      A noted accounting professional recently stated that”

                      “There are enough software packages on the market today to preclude
                      any organization needing to write another application program.”

               Do you agree? Explain your position.
2.   The Securities and Exchange Commission is currently investigating pension accounting
     by major corporations, according to a Wall Street Journal article dated November 9, 2005
     (Pension Inquiry Shines Spotlight on Assumptions by Deborah Solomon & Lee Hawkins
     Jr.). “The SEC … is probing whether companies had an eye on their shareholders, not
     their retirees, when they changed some financial assumptions in recent years …”

     Many assumptions (discount rate, expected return on plan assets, inflation rate for health
     care, etc.) are disclosed in the footnotes of companies' financial statements. “On their
     face, a company's choices are difficult for outsiders to challenge. While an interest rate
     may look high or low, a company always could argue it made a good-faith estimate. But
     the SEC is using its subpoena power to dig into the thought processes, to determine if the
     estimates were made in good faith -- or were results-driven.” For example, at GM, a
     0.25% increase in the expected return on assets would lower the pension obligation by
     $220 million. According to GM’s own disclosures, a one-percentage-point increase in the
     health-care trend rate would increase its annual expense by $543 million and increase its
     liability by $8.4 billion.

     Use the various concepts you’ve learned (agency theory, information asymmetry,
     externalities, moral hazard, etc.) in your discussion of the following issues:

        a. Could empirical accounting research be used to determine whether post-
           retirement benefit assumptions were used to manage earnings? Describe at least
           two types of studies that might shed light on this topic. Be specific about how
           hypotheses might be tested.
        b. Given the extensive disclosures required under GAAP for pensions and other
           post-retirement benefits, do you believe that skewing the assumptions would be
           an effective earnings management technique? Explain.
        c. Explain why a firm’s manager might believe in securities market efficiency and
           also engage in earnings management.
        d. According to the article, the FASB may consider requiring companies to adjust a
           plan's assets and liabilities to "fair value," eliminating much of management’s
           ability to smooth earnings by biased pension assumptions. Would this
           “measurement focus” (to use Scott’s terminology) improve financial reporting for
           external users? How might the change affect the use of net income internally for
           management compensation and other contractual arrangements?
3.   Sarbanes Oxley has changed the environment of auditing substantially. Discuss the

     a.   What lead to the passage of Sarbanes Oxley?
     b.   Name four major provisions of SOX and describe their essential content.
     c.   How has SOX changed the environment of auditing? Be specific.
     d.   How has SOX changed how a public company operates?
     e.   How has SOX changed how private companies and not-for-profits operate?
     f.   Describe at least one indirect effect of SOX that was probably an unintended

4.   You are a staff accountant for a CPA firm and involved in the firm’s audit of a small
     publicly traded company called SwapMeet, Inc. This year, SwapMeet offered its current
     shareholders the right to double their holdings of SwapMeet capital stock at 5% below
     the market price on the date the deal was announced. About 40% of the stockholders
     chose to subscribe. Under the terms of the stock subscription agreement, they paid one-
     third upon acceptance, another third 120 days later, and the final third 240 days after
     acceptance. At the end of the year, the balance due (the final third) has been booked as
     an asset (Notes Receivable – Capital Stock) in the amount of $52,200,000 (a material
     amount). The due date is almost 4 months after the end of the fiscal year (and later than
     the date that the audit opinion letter will be issued).

     Under the terms of the agreement, the shares of capital stock are not issued and do not
     receive dividends until the amount owed is paid in full. Since the stock has not been
     completely paid for and does not earn dividends, SwapMeet ignored the unissued shares
     when it computed earnings per share for the year. SwapMeet has no outstanding options,
     convertible debt or convertible preferred stock. Its income statement presentation
     includes basic earnings per share.

     What problems do you see with SwapMeet’s handling of (1) the notes received account
     (2) and earnings per share? Provide citations to the authoritative literature but you should
     interpret the literature that you find on the subject rather than cut & paste long quotations
     from GAAP. Since you are a staff accountant, address your concerns in the form of a
     memo to the manager on the audit engagement, Mary Givins.

     No journal entries or computations are required. Do not invest more than one-hour in
     answering this question.

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