Chapter10

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

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

A firm's cash dividends were $1.98 per share of common stock for calendar 2019. In 2020, the stock was split 3-for-1, and in 2021 a 10% stock dividend was issued. Dividends per share for 2019, to be reported in the firm's annual report for 2021, are:

$0.60 Stock split occurred in 2017 so $1.98 / 3 = $0.66. Then in 2018 there was a stock dividend of 10% so $0.66 / 1.1 = $060 per share, as reported in 2018.

Firms that issue registered securities are required to file, with the SEC on an annual basis, which of the following?

An annual report A form 10-K A set of financial statements All of these

Which of the following circumstances requires an explanatory paragraph in the independent auditors' report?

An explanatory paragraph in the independent auditors' report is required in each of these circumstances

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

Significant accounting policies are described in the notes to the financial statements because:

The reader must be aware of which of the alternative generally acceptable practices have been used

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

Business segment information is included in the notes to financial statements because:

Current and potential investors can make more informed judgements about the company

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

Management's statement of responsibility:

affirms that management is responsible for assuring adherence to internal control policies and procedures. Usually refers to the company's system of internal controls

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

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

For geographic and "lines of business" segment disclosures, the five required data items shown for each segment are:

capital expenditures identifiable assets depreciation and amortization expense operating profit sales to unaffiliated customers

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:

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

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:

industries served organizational structure manufacturing processes product line groups

Corporate governance encompasses:

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

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

The nature and content of note disclosures relate to all of the following except:

management's plans for the future.

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

registration statement Form 10-K proxy statement prospectus

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:

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

When an entity changes its accounting from one generally accepted method to another generally accepted method:

the dollar effect of the change on both the balance sheet and income statement must be disclosed.

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. requires CEOs and CFOs to attest (in front of a notary) to the correctness of their company's financial statements. created the Public Company Accounting Oversight Board (PCAOB).

Which of the following is not a topic that is likely to be discussed as a significant accounting policy?

Method of estimating uncollectible accounts receivable

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

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

Registered securities can be traded publicly on a stock exchange or in the over-the-counter market. Firms that issue these securities are required to file an annual informational report with the SEC. This report is referred to as Form (10/40/K/Q) - (10/40/K/Q).

10-K

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

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.

Blank 1: compilation

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.

Blank 1: introductory

The (introductory/scope/opinion) paragraph normally uses language such as "present fairly, in all material respects" and "in conformity with U.S. generally accepted accounting principles."

Blank 1: opinion

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

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.

Blank 1: scope

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.

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