Accounting 1 - Test 3 - ch 10

True or false: The management's statement of responsibility explains that the responsibility for the financial statements lies with the external auditor, who expresses an opinion about the financial statements of the company.

False

Copies of public documents filed by publicly traded corporations can be obtained either from the corporation or from the SEC, including the most recent:

Form 10-K proxy statement prospectus registration statement

Identify the correct statements about notes that are an integral part of the financial statements.

They contain important disclosures that are not contained in the financial statements themselves. They help users of the financial statements to make informed decisions and judgments.

True or false: The notes are integral part of the financial statement because it contains disclosures that are not contained in the financial statements themselves.

True

Identify the situations where an auditor can issue a qualified opinion on a company's financial statements.

When the scope of audit is restricted because of which the auditor is not able to perform an essential audit work When there is a material deviation from generally accepted accounting principles that affects only a part of the financial statements

Securities issued by publicly traded corporation must be registered with the SEC. The basic objectives of the registration process are to provide to potential investors:

a full and fair disclosure of the securities being issued. an explanation of the use to be made of the proceeds of the security issue. details concerning the issuer's business activities and financial position.

While performing audit of an entity's financial statements, the auditor finds that the financial statements are misrepresented, misstated, and do not present fairly in all material respects the financial position and results of operations of the reporting entity. In such a scenario, the auditor will issue a(n)

adverse opinion

Examples of subsequent events that frequently have a material impact on the balance sheet or income statement and thus should be described in the notes to the financial statements include the:

agreement to enter into a business combination. restructuring of long-term debt. issuance of a large amount of capital stock. sale of a significant part of the company's assets. issuance of a large amount of long-term debt.

Reports issued by accounting firms that clearly communicate to the user that the firms are not providing any form of assurance about the fairness of the financial statements are called _____ (review/compilation/audit) reports.

compilation

During a particular year, if a firm acts as a guarantor of the indebtedness of another entity, the firm that is acting as the guarantor needs to disclose this information under the ground of

contingencies and commitments

Most corporate annual reports present a summary of financial data for at least five years; items frequently included in the summary include:

earnings per share average stockholders' equity working capital at year end total assets at year end earnings as a percentage of sales dividends per share

The Sarbanes-Oxley (SOX) Act of 2002 prohibited accounting firms from performing certain specific nonaudit services to their audit clients, including:

financial information systems design and implementation "expert" services internal auditing services

Segment disclosures for publicly traded companies are generally required for:

geographic territories. lines of business. major customers.

Some of the significant policies that are frequently described in the notes to the financial statements of publicly traded companies include details concerning:

goodwill and acquisition-related intangibles. inventory valuation methods. stock option and stock purchase plans. income taxes. employee benefit (pension and postretirement) plans. depreciation methods. earnings per share of common stock. basis of consolidation.

The _____ (introductory/scope/opinion) paragraph identifies the financial statements that were audited and briefly describes the responsibilities of both management and the auditors with respect to the financial statements.

introductory

Corporate governance encompasses:

issues concerning business ethics and social responsibility. the responsibilities of the board of directors and its various committees. issues concerning full and fair disclosure and the equitable treatment of stakeholders. a set of structures, control mechanisms, rules, and regulations that all directors, officers, and employees must follow.

When a company's financial report consists of immaterial misstatements or adjustments made in normal course of business, the company is required to simply revise the financial statements and notes that were previously filed with the Securities and Exchange Commission, and such revision is called a

little r restatement

A business segment is a group of the firm's business activities that has a common denominator. The components of each business segment are identified and defined by management. Segments may reflect:

manufacturing processes organizational structure industries served product line groups

A _____ (proxy/prospectus/tender) summarizing the complete registration statement must be provided to investors prior to, or concurrently with, their purchase of the security.

prospectus

Stockholders who do not expect to attend the AGM are invited to return a _____ (prospectus/tender/proxy), which gives another person (usually a director of the corporation) the right to vote the stockholder's shares in accordance with their wishes.

proxy

The _____ (introductory/scope/opinion) paragraph describes the nature and extent of the auditors' work and refers to the need to obtain reasonable assurance about whether the financial statements are free of material misstatement.

scope

An accounting firm provides a compilation report

to clearly communicate to the user that the firm is not providing any form of assurance about the fairness of the financial statements

The Sarbanes-Oxley (SOX) Act of 2002:

was aimed primarily to curtail the misbehavior of senior management of corporate entities. created the Public Company Accounting Oversight Board (PCAOB). requires CEOs and CFOs to attest (in front of a notary) to the correctness of their company's financial statements.

Identify the scenarios that describe contingencies and commitments that need to be disclosed in the annual report.

A potential loss that can arise from a pending lawsuit A commitment made to another entity to take an equipment on lease for several years into the future

Identify the section of an annual report where the reporting entity discloses the non-GAAP financial measures and key performance indicators used to assess the entity's financial and operating results.

Management's discussion and analysis

When a company's financial report consists of material errors, it is required to completely reissue the full set of financial statements and related note disclosures that were previously filed with the Securities and Exchange Commission, and such reissue is called a

Big R restatement

Many firms include in the notes management's statement of _____ (ethics/responsibility/accountability), which explains that the responsibility for the financial statements lies with the management of the firm, not the _____ (internal/external/bank) auditor and certified public accountants who express an opinion about the _____ (fairness/accuracy/precision) with which the financial statements present the financial condition and results of operations of the company.

Blank 1: responsibility Blank 2: external Blank 3: fairness

Identify a true statement regarding management's discussion and analysis (MD&A) provided in a company's annual report.

It discloses non-GAAP financial measures and key performance indicators used to assess the company's financial and operating results.