Question

1. Which term would best describe Just for FEET, Inc.’s increase in outstanding vendor allowance receivables of $400,000 at the end of fiscal 1997 to nearly $29,000,000 at the end of fiscal 1998?
   1. Most likely true (highly probable)
   2. Fifty-fifty chance of being true
   3. Impossible/unbelievable
   4. Normal

2. PSLRA is the anachronism for:
   1. Private Securities Liabilities Refund Act.
   2. Private Securities Litigation Reform Act.
   3. Pennsylvania State Legislators’ Retirement Account.
   4. Professional Society for Less Restrictive Auditing.

3. Which of the following are key features of the PSLRA?
   1. It replaced joint and several liability with proportional liability unless the defendant knowingly participated in the fraud.
   2. Permitted federal judges to fine plaintiff attorneys who file frivolous securities lawsuits.
   3. Required audit firms to design audits to provide reasonable assurance of detecting illegal acts that have a material and direct effect on a client’s financial statements.
   4. Auditors need to report to the SEC any illegal act by a client that had a material effect on the client’s financial statements if the client didn’t.
   5. All of the abov

4. Health Management was able to deceive the auditors about the value of its inventory due to;
   1. The fact that Health Management DID NOT have a perpetual inventory.
   2. Management went to great lengths to develop a conspiracy to inflate the inventory by using the old “in-transit” inventory trick.
   3. Both ‘a” and ‘b”.
   4. Neither “a” nor “b”.

5. How many Health Management, Inc.’s employees were involved in the in-transit inventory conspiracy?
   1. Seven (7)
   2. Eight (8)
   3. Nine (9)
   4. ELEVEN 11

1. Which of the following factors were unusual about Health Management’s bogus year end in-transit inventory?
   1. The amount of inventory involved ($1,800,000).
   2. The fact that the company typically had little or no in-transit inventory at year end.
   3. The fact that a company van was used as opposed to the customary common carrier such as FedEx or UPS.
   4. All of the above.

2. In addition to the questionable in-transit-inventory BDO Seidman also had greater than normal concerns with which of the following other items regarding the Health Management, Inc. engagement?
   1. The auditors felt that company’s allowance for doubtful account was too high
   2. Health Management, Inc.’s decision to publicly announce earnings before the audit was complete.
   3. Receipt of an anonymous letter questioning certain accounting procedures used by Health Management and a possible threat to the audit firm’s independence.
   4. All of the above.

3. The BDO Seidman partner-in-charge (Fred Borstein) of the Health Management audit justified accepting their client’s allowance for doubtful accounts of $600,000 instead of the auditor proposed amount of $1,200,000 on which of the following grounds?
   1. The financial statements are the client’s responsibility.
   2. The auditors may be wrong.
   3. The audit firm was satisfied with Health Management’s explanation for the $600,000 figure.
   4. The disputed amount was immaterial.
   5. All of the abov
   6. Choices “a”; “b”; and “c”.

4. The Health Management, Inc. fraud came to light as a result of:
   1. The efforts of the BDO Seidman audit team.
   2. One of the co-conspirators mentioned it to the newly hired CFO who succeeded Drew Bergman.
   3. An SEC investigation.
   4. Health Management, Inc.’s internal whistleblower program.

5. One factor that may have played a prominent role in Leslie Fay’s missing the change in the women’s fashion industry was:
   1. The company’s president refusal to integrate computers into key internal functions thus falling behind competitors in recognizing shifts and changes in customers preferences.
   2. Company management was dominated by males.
   3. Headquartered in New York but its accounting offices and were in Wilkes-Barre, Pa.
   4. The age of the company’s president John Pomerantz.
6. Some commonalities between the Health Management fraud and the Leslie Fay fraud is:
   1. They both overstated liabilities.
   2. They both understated marketable securities.
   3. Both companies engaged BDO Seidman as their auditor.
   4. Both companies had operations in New York and Pennsylvania.
   5. Both involved manipulating inventory and used “in-transit: inventory as part of the rus
   6. Answers “c”; “d”; and “e”.

7. An example of the power of ratio analysis that could have possibly uncovered the Leslie Fay fiasco sooner would be:
   1. Using multiple regressions of sales data plotted against an extrapolation of back orders.
   2. Using econometric data to determine if debt financing would be better than equity financing.
   3. Comparing Leslie Fay’s remarkably stable gross profit percentage during the early 1990s against that of competitors and the industry average.
   4. The fact that the ratios were used by the perpetrator to arrive at the fictitious numbers in the made up financial statements.

8. Barry Minkow profited from ZZZZ Best Company, Inc. by:
   1. Selling restoration services.
   2. The appreciation of the company’s stock price and diverting the proceeds of bank loans to his personal use.
   3. Being the majority stockholder and declaring large dividends.
   4. Capitalizing on becoming a celebrity as the boy wonder founder of the business and collecting large fees for personal appearances.

9. The confidentiality agreement Barry Minkow demanded from Ernst & Whinney’s Larry Gray (Exhibit 3 on page 125) could be construed as:
   1. A scope limitation.
   2. Cause for an explanatory paragraph in an unqualified opinion.
   3. Highly routine part of protecting a client’s “trade secrets”.
   4. Unnecessary as the professional code of conduct conveys the expectation of privileged communications.

10. Friehling & Horowitz (the Madoff Securities audit firm) were :
    1. Competent to audit Madoff securities despite their size as they were experienced.
    2. Understaffed and not sufficiently competent to agree to an engagement of a client the size and complexity of Madoff Securities.
    3. Could do a thorough audit with only one or two professional staffers as they used testing and generalized audit software.
    4. Competent to take on the audit of Madoff Securities as the y were CPAs.

11. Friehling & Horowitz violated which of the AICPA’s old ten auditing standards?
    1. The General standards
    2. The Fieldwork standards
    3. The Reporting standards
    4. ALL OF THE ABOVE

Answer 1