Anyone take this reading quiz in Schweser? All these questions I’ve never seen before…
Analyst Jane Kilgore is worried about the quality of Maxwell Research’s earnings for the following reasons: * Management turnover is high. * Technology systems are outdated. * The organizational structure is complex. * Maxwell uses the unit-of-production method. Which of Kilgore’s concerns is least valid? A) Management turnover is high. B) Technology systems are outdated. C) Maxwell uses the unit-of-production method. Your answer: B was incorrect. The correct answer was C) Maxwell uses the unit-of-production method. The unit-of-production method in and of itself is not a sign of poor earnings quality. Both remaining observations reflect signs of common risk factors for entities at which executives have the opportunity to commit fraud.
it’s messed up “John likes baseball. The company he manages has recently floated a new equity issue. He also owns a Bentley. What kind of manipulation is the company likely engaged in?” A) Managing cash flows B) Early revenue recognition C) Extending the useful lives of long-lived assets
Hard to manage cash flows Early revenue recognition, sure Extending the useful lives of long-lived assets decreases depreciation which increases earnings, that one is good too. I don’t know, B? This stuff is very subjective During Parlex Chemicals’ media day, four executives spoke. Here are excerpts from all four executives speeches. Calvin Baynard, CEO: “I’ve been a scientist all my life, but I want to assure shareholders that as CEO I am actively involved in both managing operations and setting accounting policy.” Kristan Lenz, CFO: “I work closely with our auditors to make sure we are always on the same page.” Melvin Jackson, COO: “In the past I have told you that Parlex would meet aggressive growth targets. I am proud to say that we have met those targets.” Sally Yu, compliance director: “All of our executives are required to review Parlex’s ethics policy every year.” Reporter John Bustard, CFA, is concerned that three of the executives are exhibiting attitudes or rationalizations that can lead to accounting fraud. Bustard should be least concerned about: A) Lenz. B) Jackson. C) Yu. Your answer: C was incorrect. The correct answer was A) Lenz. Working closely with auditors is a good thing. All of the other statements reflect behavior that can lead to fraudulent accounting. Jackson made a commitment to the media that the company would meet targets – that promise could spark a rationalization to falsify numbers to meet the target. Yu said all executives must review Parlex’s ethics policy, but what about everybody else? Most of the employees are not executives, and if the rank and file, including those in the accounting department, are not familiar with the firm’s ethical standards, it could breed ethical problems throughout the organization.
Schweser has a bunch of screwed up questions related to the fraud triangle, SFAS 99 all of which is “so” last year’s LOSs. So ignore them and move on.
Actually you should ignore the whole of SS7 from QBank. It’s more frustrating than helpful. There are so many of such questions on Fraud Triangle that it’s not really worth it at so late in the game to be wasting time on unwanted/outdated stuff.