Chapter 10 learnsmart

New leasing standards ______.

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

A securities count ______.

- should only be done with client personnel present - is similar to a physical inventory count - may be part of interim testing

"Calculated liabilities and credits" ______.

- transactions require lengthly auditor discussion - are accounting transactions calculated using basic company data - often involve significant management estimates

Transactions in the financing and investment cycle ______.

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

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

compensating

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

compensating

An instrument that takes its value from another asset or index is a(n) ______.

derivative

Inquiries should be made regarding the nature of investments and the reasons for holding them, especially ______ securities used for hedging activities.

derivative

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

Auditors need to obtain audited financial statements of the investee company when the method ______ of accounting is used for investments.

equity

Auditing fair value measurements is similar to auditing accounting ______.

estimates

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

hedge

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

hedging

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 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

"The process of reaching a decision or drawing a conclusion where there are a number of possible alternative solutions" is KPMG's definition of ______.

judgement

According to KPMG, "the process of reaching a decision or drawing a conclusion where there are a number of possible alternative solutions" is ______.

judgment

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

loan covenant

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

Auditors considering the design of internal controls in the finance and investment cycle typically ______.

perform a walkthrough

Certificate records are kept by a(n) ______ who updates the records based on information from the transfer agent.

registrar

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

related

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

special-purpose

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

trading

Company stocks and bonds are normally handled by an intermediary called a(n) ______ ______.

transfer agent

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

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

Auditors considering the design of internal controls in the finance and investment cycle typically perform a(n) ______ which involves starting with an inquiry of management about how processes are completed.

walkthrough

Financial planning starts with the ______.

cash flow forecast

Which of the following statements are correct?

- 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?

- 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 ______.

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

Record keeping for many types of investments and intangibles ______.

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

Material misstatements can incur when ______.

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

Market valuation is required for securities classified as ______.

- available for sale - trading

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

- completeness - presentation - disclosure

To obtain responses on a class of items termed off-balance-sheet information, auditors may use ______ and ______ procedures.

- confirmation - inquiry

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

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

Off-balance-sheet information includes ______.

- endorsements - insurance policies - loan agreements

Off-balance sheet transactions include ______.

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

When auditing employee share option plans, auditors must ______.

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

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

- existence - valuation

The auditor's primary relevant assertion concerns surrounding typical marketable securities are _blank_.

- existence and - valuation

"Calculated liabilities and credits" include ______.

- foreign currency translation gains - deferred income taxes - lease obligations

Off-balance sheet transactions ______.

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

Transactions in the finance and investment cycle ______.

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

Difficult-to-value assets include ______.

- investments in unique assets - goodwill - financial instruments

Existence/occurrence, completeness, valuation and presentation and disclosure are all relevant assertions for ______.

- long-term debt - investments

Auditors' tests of controls over the estimation process include ______.

- making inquiries - observations

Loan covenant violations ______.

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

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

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

Investment policy approval ______.

- must be understood and tested by auditors - should rest with those charged with governance

Transactions in the finance and investment cycle ______.

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

Problems in the finance and investment cycle can occur because ______.

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

Difficult-to-value assets include Blank______.

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

When auditing fair value measurements the auditor must determine if the valuation principles used are ______.

- properly disclosed - consistently applied - supported by documentation

New leasing standards ______.

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

True or false: A securities count should never be done as part of interim testing.

False

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

False

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

True

True or false: Special-purpose entities are off-book arrangements that may be used to enrich company officers and hide debt under the guise of creating joint ventures.

True

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.

arm's-length

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

available for sale

All investment policies should be approved by the ______.

board of directors or investment committee

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

Completeness and presentation and disclosure are the only relevant assertions for ______.

capital stock