Exam 4 Study Guide

T/F: Investment transactions list on the monthly statement from the broker should be vouched to the broker's advice, proper authorization, and the cash accounts.

True

T/F: Tests of controls in the finance and investment cycle for nonpublic clients may be limited to entity level

True

Type 1 or 2: A lawsuit that was in progress as of year-end was settled shortly thereafter

Type 1

Type 1 or 2: Additional evidence about conditions that existed at the balance sheet date

Type 1

Primary audit objective: Examining copies of the actual signed note payable to determine the correct dollar amount of the liability

Valuation

The primary objective of analytical procedures used near the end of an audit is to

assist auditors in evaluating the overall financial statement presentation

A letter of inquiry to an attorney _______

must be sent directly from the client

T/F: Auditors typically approach audits of ________ transactions with a reliance approach

routine

When a client company does not maintain its own capital stock records, the auditors should obtain written confirmation from the transfer agent and registrar concerning:

the number of shares issued and outstanding

When auditing the financing and investment cycle, auditors usually _____

use more substantive testing procedures and rely less on tests on controls

Auditors considering the design of internal controls in the finance and investment cycle typically perform a __________ which involves starting with an inquiry of management about how processes are complete

walkthrough

When would this event occur throughout an audit examination: Subsequently discovered facts

~Between the date of the auditors' reports and the audit report release date ~After the audit report release date

Best procedure: Investments are properly described and classified in the financial statements

~Verify that transfers from the trading portfolio to the held-to-maturity investment portfolio have been properly recorded. ~Trace investment transactions to minutes of the board of directors meetings to determine that transactions were properly authorized.

Audit documentation review ______

~allows the firm to adhere to the performance principle ~can be a component of staff training and evaluation ~provides an evaluation of the firm's audit practices

Auditor communications to individuals charged with governance include _______

~auditors' responsibility under GAAS ~any disagreements with management ~judgment about the quality of critical accounting policies and estimates

Market valuation is required for securities classified as

~available for sale ~trading

Management letters ____

~can make the client aware of other business services offered ~are delivered to and discussed with the client

New leasing standards _______

~increase risk for lease auditing ~increase disclosure requirements ~reduce the risk of off-balance sheet transactions

Off-balance-sheet information includes

~loan agreements ~leases ~endorsements ~guarantees ~insurance policies

Complex transactions that can be used as vehicles to hide fraud include

~mergers and acquisitions ~Instruments with both debt and equity characteristics

Indicate the type of communication(s) that correspond to each of the following statements. Use the letters A (attorney letter), M (management letter), and WR (written representations). Each statement may be related to more than one type of communication. ____ 1. Discusses management's responsibility for the fairness of the financial statements. ____ 2. Is obtained on the date of the auditors' report .____ 3. Provides auditors with significant evidence regarding litigation, claims, and assessments. ____ 4. Discusses the absence of fraud activity by the client and its personnel. ____ 5. Is not required by generally accepted auditing standards. ____ 6. Is intended to be returned to auditors as a form of evidence. ____ 7. Is typically prepared following the audit report release date. ____ 8. Is signed by an executive of the client.

1. WR 2. WR 3. A 4. WR 5. M 6. A, WR 7. M 8. A, WR

When would this event occur throughout an audit examination: Communications with the individuals charged with governance

After the audit report release date

Appropriate or Inappropriate: "Based on our assessment, we conclude that the Company has maintained an effective internal control over financial reporting as of December 31, 2017"

Appropriate

Appropriate or Inappropriate: "Certain representations in this letter are described as being limited to matters that are material"

Appropriate

Appropriate or Inappropriate: "We have made available to you all financial records and related data"

Appropriate

When would this event occur throughout an audit examination: Dual dating for subsequently discovered facts

Between the date of the auditor's report and the audit report release date

When would this event occur throughout an audit examination: Attorney letters

Between the date of the financial statements and the date of the auditors' report

Which of the following would not be a place in which owners' equity transactions would be documented?

Capital budget

Loan covenants

Clauses in borrowing agreements intended to keep the borrower's financial position at a level that will ensure repayment

Primary audit objective: Performing analytical procedures on debt and related accounts to ensure that all debt is properly included in the period under audit and that some notes have not been omitted

Completeness

Primary audit objective: Vouching borrowing and repayment terms

Cutoff

Procedure objectives: Review and test reports of investment activity for the investment committee

Ensure policies written are being followed

In an audit of contingent liabilities, which of the following procedures would be least effective?

Examining customer confirmation replies

Primary audit objective: Confirming debt

Existence

Which of the following is not a relevant aspect of internal controls over estimates?

External auditor involvement in developing assumptions

Dividends received from stock investments can be verified by examining the company's cash receipts journal.

False

T/F: A derivative instrument is designed to remove risk of adverse price movements from a transaction.

False

T/F: A securities count should never be done as part of interim testing

False

T/F: Auditors are expected to design and perform procedures solely for the purpose of identifying conditions that indicate going-concern uncertainties

False

T/F: Reliance on controls normally reduces the extent of auditor's substantive procedures on finance and investment cycle accounts

False

T/F: The auditor has no responsibilities related to the audit after the audit report release date

False

Appropriate or Inappropriate: "Our assessment of internal control over financial reporting provides us absolute assurance that no material misstatements will occur and be undetected by our internal control"

Inappropriate

Appropriate or Inappropriate: "Summarized below are important actions taken in response to comments provided by you in the management letter dated March 22, 2018, based on your prior audit"

Inappropriate

Appropriate or Inappropriate: We have prepared a description and evaluation of certain contingencies for which our attorneys have devoted substantive attention on our behalf in the form of legal representation"

Inappropriate

Subsequent events- Type 2

Involve facts after the balance sheet date

The preferred method of determining fair value of transactions is:

Market-based values

Which of the following events occurring after the audit report release date most likely would cause auditors to make further inquiries about the previously-issued financial statements?

New information is discovered concerning undisclosed lease transactions during the period under audit.

Primary audit objective: Evaluating whether debt provisions and covenants have been met

Presentation and disclosure

When would this event occur throughout an audit examination: Interim testing related to tests of controls

Prior to the date of the financial statements

When would this event occur throughout an audit examination: Interim testing relating to substantive procedures

Prior to the date of the financial statements

Subsequent events- Type 1

Provide more information about facts that already existed at the balance sheet date

Management letters are not a means of

Satisfying professional requirements to communicate matters related to the client's internal control

KPMG definition of judgement is

The process of reaching a decision or drawing a conclusion where there are a number of possible alternative solutions

Loan covenants are used for which of the following reasons?

To protect the lender from the borrower substantially weakening the borrower's financial position

T/F: A lack of controls in the finance and investment cycle can lead to significant extended procedures

True

T/F: Reliance on controls does not normally reduce the extent of substantive procedures on finance and investment cycle accounts

True

T/F: Significant events occurring between the date of the audit report and the audit report release date may result in a dual dated report

True

Type 1 or 2: During the audit, a customer with a large A/R balance at year-end declares bankruptcy

Type 1

Type 1 or 2: A flood damages a significant portion of the operating facility after year-end

Type 2

Type 1 or 2: Conditions that have come into existence after the balance sheet date

Type 2

In auditing intangible assets, an auditor most likely would review or recompute amortization and determine whether the amortization period is reasonable in support of the ASB balance assertion of:

Valuation

When auditors assess the risk of material misstatement from pending litigation, they will request the client send a ______ ______ to all lawyers who worked for the client during the period under audit

attorney letter

An important step in testing investments is to ensure all persons with access to investments are properly _______

bonded

auditors should ensure that ______ have been properly disclosed

both favorable and unfavorable contingencies

The auditor must be concerned with custody of ______

both the stock certificate bool and debt instruments

Plans for asset purchases and business acquisitions are detailed in a _________ budget

capital

Responsibility for adjustment the financial statements for auditor proposed adjustments rests with the _______

client

An activity used because a specific standard control activity is not in its place is called an _______ control

compensating

When auditing long-term liabilities and related accounting, the most important balance sheet assertions are _______ along with ______ and ______

completeness presentation disclosure

Auditors are responsible for ________ accounting estimates

considering the reasonableness of

The decision of a company to have a transfer agent handle exchanges of shares is related primarily to which of the functional responsibilities?

custody

Roll-forward work normally occurs between the ____ and the ____.

date of interim work date of the auditors' report

The auditors have gathered sufficient, appropriate evidence on which to base their report at the ______

date of the auditor's report

Only high-ranking officers should have access to negotiable certificates and two people should be required to access the documents which is known as ______ _______ of in its strictest form, joint custody

dual control

Auditors must be alert for adjustments made to meet analysts' profit expectations which is known as _______ _______

earnings management

Auditors need to obtain audited financial statements of the invested company when the _________ method of accounting is used for investments

equity

Auditing fair value measurements is similar to auditing accounting _______

estimates

The auditor's primary relevant assertion concerns surrounding typical marketable securities are ______ and ________ of the securities

existence and valuation

A written agreement between bond issuers and bondholders is called a bond

indenture

Sometimes auditors may ________ securities on hand

inspect

When it is not possible for one person to access a safe, cabinet or drawer, a strict form of dual control known as _______ _______ has been implemented

joint custody

Many subsequent events may involve the settling of _______

litigation

With the exception of stock-based compensation plans, audits of stockholders' equity are considered to be _______ risk

low

Record keeping complications for many types of investments and intangibles arise from ______

maintenance of the accounts over time

Written representations are also known as ________ or _______ representations

management client

Auditors should discuss pending litigation with the client's ______

management and attorneys

Subsequent events need t be disclosed in the financial statements; otherwise, the financial statements would be _______

misleading

After testing internal controls related to investments, it may be necessary to _____ the risk of material misstatement

modify

Related party transactions:

must be disclosed in the financial statements

Off-book arrangements that are supposedly used to create joint ventures for new businesses but may be fraudulent are called _______ _______ entities

special-purpose

To determine whether facts support management's intent to hold securities to maturity, an auditor might:

study the entity's cash flow forecasts

Events occurring between the financial statement date and the date of the auditor's report are referred to as ______ events

subsequent

Facts that become known to auditors after the date of the audit report that may have caused a report revision are known as ______ ______ facts

subsequently discovered

Which of the following events or activities may occur following the audit report release date?

subsequently discovered facts

Audits of accounting estimates generally take a _________ approach

substantive

GAAP requires that impairments to asset values should normally be _______

taken as losses when they occur

Control risk for relevant assertions in the finance and investment cycle may be reduced if _____ _____ ________ is heavily involved in risk assessment and process evaluation

the audit committee

In most public organizations, the phrase "individuals charged with governance" typically refers to ________

the audit committee of the board of directors

An investment committee is a standing committee of _____

the board of directors

Interim testing occurs between the beginning of the year and _____

the date of the financial statements

A partner of the accounting firm who has not been involved in the audit performs an engagement quality review of documentation. This review usually focuses on

the fair presentation of the financial statements in conformity with GAAP.

A proposed adjustment to the financial statements that the client decides not to make is called an ________ ________

uncorrected misstatement

ASC 718 requires that employee stock-based compensation plans be ________

~credited to paid-in capital ~expenses over the compensation period ~recorded when the award is granted

Difficult-to-value assets include:

~investments in debt and equity securities or unique assets ~Derivative instruments ~Certain financial instruments ~Intangible assets, including goodwill ~loans and other receivables that are possibly impaired ~pension another post retirement assets and liabilities

Engagement quality review _____

~is required by GAAS ~reviews whether audit evidence was sufficient to support the audit opinion ~Is also known as concurring-partner review

"Calculated liabilities and credits" include

~lease obligations ~deferred income taxes ~pension and post retirement benefit liabilities ~foreign currency translation gains and losses

When subsequently discovered facts the would result in either the revision of the auditor's report or the financial statements are discovered after the audit report release date and individuals are continuing to rely on the statements, ________

~revised financial statements should be issued as soon as practicable ~management must notify appropriate individuals that the financial statements should not be relied on

When would this event occur throughout an audit examination: Written representation

Between the date of the financial statements and the date of the auditors' report

When would this event occur throughout an audit examination: roll-forward work

Between the date of the financial statements and the date of the auditors' report

Which of the following procedures would auditors most likely perform in obtaining evidence about subsequent events?

Investigate changes in long-term debt occurring after year-end

Which of the following is not an estimate required in the finance and investment cycle?

Stated market value of publicly traded stocks

When would this event occur throughout an audit examination: Identification of subsequent events

Between the date of the financial statements and the date of the auditors' report

When would this event occur throughout an audit examination: Preparation of proposed adjusting journal entries

Between the date of the financial statements and the date of the auditors' report

Best procedure: Investments are properly valued at the balance-sheet date

Determine whether any other-than-temporary impairments in the carrying value of investments have been properly recorded.

Following the audit report release date, auditors became aware of facts existing at the report date that would have affected the reports had auditors then been aware of such facts. What is the most appropriate initial course of action that auditors should take?

Determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information

Procedure objective: Inspect monthly brokerage reports on securities owned purchased, and sold

Ensure reports tie to client activity

Procedure objectives: Trace several transactions for purchases and sales of investments through the accounting system

Ensure transactions are recorded and classified properly

T/F: Auditors normally examine samples of significant finance and investment transaction for tests of controls

False

T/F: If management refuses to provide written representations, the auditor must withdraw from the engagement

False

T/F: Marketable debt security investment classified as trading securities are not subject to mark-to-market accounting on the face of financial statements

False; held-to-maturity

Appropriate or Inappropriate: "No frauds involving management, employees who have significant roles in internal control, or other frauds that could have a material effect on the financial statements have occurred during the year under audit"

Inappropriate- management can't report that they did not commit fraud

Appropriate or Inappropriate: "There are no significant deficiencies, including material weaknesses, in the design or operation of internal controls that could adversely affect our ability to record, process, summarize, and report financial data"

Inappropriate- the expert's report should be attached rather than management's written representation

Best procedure: Recorded investments represent investments actually owned at the balance-sheet date

Obtain positive confirmations as of the balance sheet date of investments held by independent custodians.

Procedure objective: Inspect reports by internal auditors on their review of securities and derivatives

Verify that internal auditors' observations are consistent with those of external auditors

Salvage values, security valuations, goodwill impairment and imputes interest rates are all examples of ________ _______

accounting estimates

Type 1 subsequent events require the financial statements to be _____ if needed

adjusted

Type 2 subsequent events come into existence ______ the balance sheet date

after

Auditors are required to communicate ________ to the client's audit committee

all misstatement detected during the audit

To evaluate financial information by studying relationships among both financial and non financial data auditors use ______ procedures

analytical

Auditors must ensure that a sale made to related parties is the equivalent of a _______ ______ transaction

arm's-length

Auditors must complete various phases of an audit after the date of the financial statements. The auditors' responsibility for matters affecting the client extends from the date of the financial statements to the

audit report release date

When subsequently discovered facts are discovered prior to the audit report release date _______

auditors generally dual date the audit report

The CPA's opinion on the _____ of the financial statements may be changed by subsequent events

fairness

To protect companies from companies from uncertainties in the marketplace, derivatives can be used as ______ instruments

hedging

For nonpublic entities, the communication of all significant internal control deficiencies must be made to the client in writing _______

no later than 60 days after the audit report release date

Auditors typically approach audits of _______ transactions with a substantive approach

nonroutine

The situation where auditors failed to perform necessary audit procedures prior to the audit report release date is referred to as ______ procedures

omitted

For public entities, the communication of all significant internal control deficiencies must be made to the client in writing _____

prior to the auditor report release date

Auditor recommendations for adjustments to the financial statements are considered to be ______ to indicate management's responsibility for the financial statements.

proposed

The typical business activity of the finance and investment cycle would not include

reconciliation of cash

Certificate records are kept by a _______ who updates the records based on information from the transfer agent

registrar

Attorney letters should be ________

requested by the client and mailed by the auditor with responses sent directly to the auditor

A sample internal control questionnaire question may ask about ________ inherent in the investment policy

risk

If relevant internal controls are effective, auditors may use ________ - ________ procedures to move interim conclusions to the year-end date

roll-forward

When auditors use the ______ method to evaluate the materiality of uncorrected mistakes, only current-period income effect(s) are considered

rollover

When auditing employee share option plans, auditor must ________

~ensure Board of Director approval of the plan ~follow standards for auditing accounting estimates ~follow standards for auditing fair value estimates

When considering controls over those who do record keeping in the finance and investment cycle ______

~evidence from prior audits can indicate employee competence levels ~employee turnover is a significant risk factor ~hiring practices may be considered

Investment policy approval

~must be understood and tested by auditors ~should rest with those charged with governance ~variation across companies

Professional standards procedures specifically performed to identify the existence of material subsequent events include _______

~obtaining written representations as to the existence of events ~reviewing interim financial statements ~reading applicable meeting minutes held after the financial statement date

Transactions in the financing and investment cycle

~occur infrequently ~are for large dollar amounts ~vary greatly in type

Problems in the finance and investment cycle can occur because

~of intentional errors in management estimates ~complex transactions make accounting difficult ~transactions are infrequent

Off-balance sheet transactions include

~operating leases and endorsements on discounted notes or on other companies' letters of credit ~guarantees ~repurchase or remarking agreements ~fixed price commitments ~certain stock options

The attorney's response to an attorney letter _______

~should note any issues where the attorney's view is different from the client's view ~should be provided directly to the auditor