Chapter 10 Auditing

When auditing long-term liabilities and related accounting, the most important balance sheet assertions are ______. Multiple select question. -valuation -existence or occurrence -presentation and disclosure -completeness

-presentation and disclosure -completeness

An activity used because a specific standard control activity is not is place is called a(n) ______ control.

compensating

When auditing long-term liabilities and related accounting, the most important balance sheet assertions are ____ along with _____ and _____ .

completeness presentation disclosure

Which of the following statements are correct? Multiple select question. -A lack of controls in the finance and investment cycle can lead to significant extended procedures. -Auditors normally examine samples of significant finance and investment transactions for tests of controls. -Reliance on controls does not normally reduce the extent of substantive procedures on finance and investment cycle accounts. -Tests of controls in the finance and investment cycle for nonpublic clients may be limited to entity level.

-A lack of controls in the finance and investment cycle can lead to significant extended procedures. -Reliance on controls does not normally reduce the extent of substantive procedures on finance and investment cycle accounts. -Tests of controls in the finance and investment cycle for nonpublic clients may be limited to entity level.

Which of the following statements are true? Multiple select question. -Government debentures are relatively complex to audit. -There is not a "typical" finance and investment cycle that applies to all companies. -The majority of companies in the U.S. are entirely equity financed. -Investment type can have a huge influence on the effort required by the auditor.

-There is not a "typical" finance and investment cycle that applies to all companies. -Investment type can have a huge influence on the effort required by the auditor.

Common problems in the finance and investment cycle are often the result of failure to ______. Multiple select question. -appropriately adjust asset valuations as needed -record operating leases as assets -record and disclosure transactions -properly amortize goodwill

-appropriately adjust asset valuations as needed -record and disclosure transactions

Material misstatements can incur when ______. Multiple select question. -companies have taken a "big bath" in a bad year -assets are overstated due to impairment -impairment write-offs have been delayed

-assets are overstated due to impairment -impairment write-offs have been delayed

Difficult-to-value assets include ______. Multiple select question. -derivatives -pension assets and liabilities -assets acquired in exchange for services -intangible assets -debt and equity securities

-derivatives -pension assets and liabilities -intangible assets -debt and equity securities

Difficult-to-value assets include ______. Multiple select question. -financial instruments -goodwill -most loans and receivables -investments in unique assets

-financial instruments -goodwill -investments in unique assets

When auditing employee share option plans, auditors must ______. Multiple select question. -follow standards for auditing accounting estimates -ensure valuation is based on market value -ensure Board of Director approval of the plan -follow standards for auditing fair value estimates

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

When considering controls over those who do record keeping in the finance and investment cycle ______. Multiple select question. -auditors should ensure that upper management is responsible for the reconciliation function -hiring practices may be considered -employee turnover is a significant risk factor -evidence from prior audits can indicate employee competence levels

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

Off-balance sheet transactions ______. Multiple select questions. -include fixed price commitments -often cause financial reporting and disclosure problems -have been reduced by new accounting standards -include capital leases but exclude operating leases

-include fixed price commitments -often cause financial reporting and disclosure problems -have been reduced by new accounting standards

Record keeping for many types of investments and intangibles ______. Multiple select question. -involve complex accounting standards -are ripe areas for overstatement of liabilities -are ripe areas for understatement of expenses -require management estimates

-involve complex accounting standards -are ripe areas for understatement of expenses -require management estimates

Select all that apply Off-balance sheet transactions include ______. -letters of credit -endorsements on discounted notes -repurchase agreements -all company stock options

-letters of credit -endorsements on discounted notes -repurchase agreements

Loan covenant violations ______. Multiple select question. -cannot force a borrower into bankruptcy -may lead to an audit report modification -allow the lender to call the debt -may cause managers to misstate other accounts

-may lead to an audit report modification -allow the lender to call the debt -may cause managers to misstate other accounts

Select all that apply Transactions in the finance and investment cycle ______. -are more frequent than in other cycles -may require third parties to control management -are often large and complex -include transactions that are difficult to value

-may require third parties to control management -are often large and complex -include transactions that are difficult to value

Complex transactions that can be used as vehicles to hide fraud include ______. Multiple select question. -long-term discounted notes payable -mergers and acquisitions -instruments with both debt and equity characteristics -recording of long-term capital lease obligations

-mergers and acquisitions -instruments with both debt and equity characteristics

Transactions in the finance and investment cycle ______. (select multiple) -have resulted in many auditing standards being revoked -must be understood by the client's accountants -have been a leading cause of financial statement restatements -can be inherently risky for the auditor

-must be understood by the client's accountants -have been a leading cause of financial statement restatements -can be inherently risky for the auditor

Transactions in the financing and investment cycle ______. Multiple select question. -occur infrequently -are for large dollar amounts -vary greatly in type -are recorded in a journal designed for those transactions

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

ASC 718 requires that employee stock-based compensation plans be ______. Multiple select question. -recorded when the award is granted -credited to paid-in-capital -recorded based on fair value accounting as defined in ASC 820 -expensed over the compensation period

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

New leasing standards ______. Multiple select question. -reduce the risk of off-balance sheet transactions -require all leases greater than 24 months to be capitalized -increase risk for lease auditing -increase disclosure requirements

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

New leasing standards ______. Multiple select question. -increase the ability of management to structure lease transactions -decrease audit risk for lease transactions -require all leases to be accounted for using imputed present value estimates -require all leases greater than 12 months to be capitalized

-require all leases to be accounted for using imputed present value estimates -require all leases greater than 12 months to be capitalized

When auditing fair value measurements the auditor must determine if the valuation principles used are ______. Multiple select question. -supported by documentation -one of the specific methods allowed under GAAP -consistently applied -properly disclosed

-supported by documentation -consistently applied -properly disclosed

When auditing fair value measurements the auditor must determine if the valuation principles used are ______. Multiple select question. -supported by documentation -one of the specific methods allowed under GAAP -properly disclosed -consistently applied

-supported by documentation -properly disclosed -consistently applied

Problems in the finance and investment cycle can occur because ______. Multiple select question. -auditors fail to properly perform tests of controls -transactions are infrequent -of intentional errors in management estimates -complex transactions make accounting difficult

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

An approximation of a financial statement element, item or account is called a(n) ____ _____ .

accounting estimate

Salvage values, security valuations, goodwill impairment and imputed interest rates are all examples of _____ _____.

accounting estimates

Auditors must ensure that a sale made to related parties is the equivalent of a(n) ____ ____ transaction.

arms length

The classification of a security as trading or ____ _____ _____ affects whether changes in value influence net income.

available for sale

When the market is down, managers are motivated to classify securities as ______ to remove the losses from net income.

available for sale

Plans for asset purchases and business acquisitions are detailed in a(n) _____ budget.

capital

The authorization for the purchase of large assets will likely reside in the ______.

capital budget

Financial planning starts with the ______.

cash flow forecast

Complex transactions are ______ the balance sheet.

difficult to audit even if they reach

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

dual control

Auditing fair value measurements is similar to auditing accounting .

estimates

True or false: Reliance on controls normally reduces the extent of auditors' substantive procedures on finance and investment cycle accounts.

false

The classification of a derivative instrument as a(n) ____ influences the presentation and characterization of fluctuations in value.

hedge

Marketable debt security investment classified as ______ are not subject to mark-to-market accounting on the face of financial statements.

held-to-maturity

Regarding the finance and investment cycle, most relevant assertions and the amount of work to be done is _______.

hugely impacted by the type of investment

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

indenture

The amount and terms of bonds payable, mortgages payable, and other formal debt instruments can be verified by reading the bond _____ .

indenture

When it it 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

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

loan covenants

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

Auditors typically approach audits of ______ transactions with a substantive approach.

nonroutine

One that can exert significant influence over another is a(n) ____ party.

related

Auditors typically approach audits of ______ transactions with a reliance approach.

routine

GAAP requires that impairments to asset values should normally be ______.

taken as losses when they occur

In order to improve the bottom line, managers are motivated to classify securities as ______ when the market is doing well.

trading

True or false: Authorization is a critical issue for most of the transactions in the financing and investing cycle.

true

When auditing the financing and investment cycle, auditors usually ______.

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