Deck 18: Advanced Topics Concerning Complex Audit Judgments

Question 1

The auditor considers materiality only at the overall financial statement level.

Answer 1

False

Question 2

Ford Motor Company defines sustainability as - a business model that creates value consistent with the long-term preservation and enhancement of environmental,social and financial capital.

Answer 2

True

Question 3

The significant judgments of net finance receivables are subject to allowance for noncollectibility.

Answer 3

True

Question 4

The purpose of making materiality judgments is to make sure that financial statements are free of any material misstatement.

Question 5

The SEC has the authority to issue guidance on sustainability disclosures and in 2010 issued interpretive guidance regarding public companies' disclosure requirements for climate change matters.

Question 6

An auditor's consideration of materiality is a matter of professional judgment and is influenced by the auditor's perception of the needs of users of financial statements.

Question 7

The significant judgments of "Deferred income taxes" are subject to estimates of future profitable operations against which the deferred asset might be utilized.

Question 8

The importance of sustainability reporting has become a topic of decreasing focus to organizations and societies around the globe in recent years.

Question 9

If the auditor believes that misstatements aggregating approximately $50,000 would be material to the income statement,but misstatements aggregating approximately $100,000 would be material to the balance sheet,the auditor typically assesses overall materiality at $100,000 or less.

Question 10

Sustainability reporting is defined as mandatory corporate disclosures about sustainability initiatives,plans,and associated outcomes.

Question 11

Materiality judgments are made in light of the surrounding circumstances but need not necessarily involve both quantitative and qualitative considerations.

Question 12

Sustainability reporting is required to be filed with the SEC as part of a public company's annual 10-K.

Question 13

According to KPMG's 2008 International Survey of Corporate Responsibility Reporting,about 25 percent of the largest 250 companies in the world now issue reports detailing their sustainability efforts and associated outcomes.

Question 14

Auditors are constantly challenged to evaluate the quality of a client's estimates,including areas such as obsolescence of inventory,allowance for doubtful accounts,and tax provisions among others.

Question 15

Auditor needs to assess disclosures about what lines of business the company may discontinue.

Question 16

Auditors are not responsible for making judgments regarding the fair value of securities for a future time period because they are only concerned about historical cost based values.

Question 17

Planning materiality helps the auditor determine the extent of audit evidence needed.

Question 18

The significant judgments of "Loaned securities" by an auditor are subject to fair value estimates and also must consider the likelihood of securities that will be returned.

Question 19

The significant judgments of "Discontinued assets" are subject to impairment testing that are most likely based on sale or disposal price.

Question 20

Statement on Auditing Standards No.107 provides the AICPA's basic guidance on materiality judgments.

Question 21

Auditors need to consider the risk and take appropriate actions relating to material misstatements of fact contained in the client's MD&A section of the 10-K filed with the SEC.

Question 22

If a company's net income varies significantly from year to year,the auditor might consider using an average of the net income from the prior three to five years as the materiality benchmark.

Question 23

Auditors should consider only quantitative effects and not qualitative effects in making materiality judgments.

Question 24

If the market value of a company is below book value and a significant amount of goodwill exists,the presumption is that there has been an impairment of goodwill.

Question 25

Goodwill arising from many acquisitions can be netted into one test at the company level.

Question 26

A materiality level where the auditor believes that the errors below that level would not,even when aggregated with all other misstatements,be material to the financial statements is called as posting materiality.

Question 27

The accumulation of all potential misstatements in a place where the audit team can assess the materiality of misstatements is often based on posting materiality.

Question 28

Auditors request the client to book all known misstatements even if the recording cost is very high so that there are no carryovers from year to year.

Question 29

The discovery of an intentional misstatement,even if immaterial,could impact the auditor's opinion on the effectiveness of the client's internal controls.

Question 30

The auditor should have performed sufficient work to have confidence in the most likely estimate of misstatements in an account balance and that estimate should be used for making materiality judgments.

Question 31

Although the SEC guidance is developed for public companies,the concepts regarding materiality are sound and could be followed by private companies and other organizations.

Question 32

It is a mandate for all companies listed with the NASDAQ stock exchange to maintain an internal audit function.

Question 33

In performing substantive analytical procedures,the threshold for determining whether differences between the client's account balance and the auditor's expectation should be based on planning materiality.

Question 34

Goodwill has to be evaluated for impairment once a year and not necessarily at the balance sheet date.However,the date for evaluation has to be consistently applied.

Question 35

Volume of transactions affected is one of the critical criteria in assessing materiality of internal control deficiencies.

Question 36

According to the ASC 350 guidance,intangible assets that are not amortized will be tested for impairment at least annually by comparing the fair values of those assets with their recorded amounts.

Question 37

Misstatements detected during the audit that were initially deemed to be immaterial need not be summarized to determine their aggregate effects.

Question 38

Audit Standard No.5 by the PCAOB encourages the external auditor to utilize the work of internal auditors and other objective parties within the organization when performing the assessment of internal control over financial reporting.

Question 39

In order to achieve efficiency,a CPA firm can provide both internal and external audit services for the same client.

Question 40

The auditor need not inform the audit committee about adjustments arising from the audit that were considered to be material.

Question 41

In audit considerations,fair value level 1 is broad and applies to financial instruments,property,or lower of cost or market considerations for inventory,loans,or receivables.

Question 42

The groups that have demanded that companies provide sustainability disclosures include which of the following.

A)external auditors.
B)socially responsible investment funds.
C)the PCAOB.
D)all of the above.

Question 43

Level 1 in the fair value audit consideration indicates which of the following?

A)observable information on similar items.
B)nonexistence of active markets.
C)quoted prices on identical items.
D)relevant economic and industry factors.

Question 44

The assessment as to whether a misstatement in cash-flow classification is material should remain within the income statement perspective.

Question 45

Which of the following indexes track the financial performance of sustainability-driven companies?

A)S&P Sustainability Indexes.
B)Dow Jones Sustainability Indexes.
C)NASDAQ Sustainability Indexes.
D)all of the above.

Question 46

Current FMV of assets and liabilities of non-goodwill assets is one of the factors affecting goodwill impairment valuations.

Question 47

Relevant economic and industry factors could be used as a source of audit evidence while addressing the audit challenge of determining active or inactive markets.

Question 48

According to a report issued by Ernst & Young Australia,common sustainability-related terms include which of the following:

A)non-financial reporting.
B)corporate social responsibility reporting.
C)Triple bottom line reporting .
D)all of the above.

Question 49

Which of the following is needed by a client while estimating fair value?

A)A systematic process to identify each asset that is subject to realizable value or at cost.
B)A process to identify relevant historical values.
C)An analysis of whether the organization has the ability to hold the asset to maturity and whether the decline in value is permanent.
D)A realistic process to estimate future cash flows to discount back to a present value.

Question 50

The two general types of assurance that can be provided to sustainability reports include which of the following:

A)Reasonable assurance and Limited assurance.
B)Material assurance and Reasonable assurance.
C)Limited assurance and material assurance.
D)Reasonable assurance and Compliance assurance

Question 51

External assurance over sustainability reports must be provided by which of the following:

A)Certified Public Accountants in conjunction with the annual financial audit.
B)those with competence in the subject matter and assurance practices.
C)Certified Sustainability Experts.
D)individuals that are not independent with the company issuing the sustainability report.

Question 52

Considering SAB 59 and SAS No.92,the cash position of the investee is one of the factors that indicate that an other-than-temporary impairment of a security's value has occurred.

Question 53

While conducting an audit program for goodwill impairment testing,if the original reporting unit no longer exists because operations have been fully integrated into operations of the parent company,the approach would be to determine whether all other assets have been adjusted to fair value,where applicable.

Question 54

Audits of Level 3 balances are the easiest as they involve an observable,active market.

Question 55

Almost every asset and liability account requires significant judgments.Which of the following accounts is subject to allowance for noncollectibility?

A)Inventories
B)Marketable securities
C)Other receivables
D)Deferred revenue

Question 56

At a fair value level 1,while addressing the challenge of determining identical assets,analysis of the volume of trading activity could be one of the sources of audit evidence.

Question 57

The audit approach for Level 2 requires the auditor to determine which of the following?

A)the correspondence of the client's assets to similar assets in an active market.
B)contingent liabilities.
C)sensitivity of model.
D)the performance of tests of controls.

Question 58

A sensitivity analysis of changes in value based on industry and cash-flow assumptions is one of the aspects of the audit program for goodwill impairment testing.

Question 59

When implementing sustainability reporting,companies determine what to report and how to report it by using various available guidelines,the most prominent of which includes:

A)The Global Reporting Initiative Reporting Framework.
B)The World Initiative Reporting Framework.
C)The Best Practice Sustainability Reporting Standards.
D)The Sustainability Generally Accepted Standards.

Question 60

Assuming that other assets have been properly valued,if the market value of the reporting unit is equal to the carrying value of the assets of the reporting unit the presumption is that goodwill has been impaired.

Question 61

A best practice is to have an oversight of the internal audit function as a responsibility of which of the following parties?

A)management.
B)internal auditors.
C)audit committee.
D)external auditors.

Question 62

Misstatements detected during the audit that were initially deemed to be immaterial must be summarized to determine their:

A)control.
B)quantitative effect.
C)aggregate effects.
D)nature of misstatement.

Question 63

In a standard audit program for goodwill impairment testing,if the original reporting unit no longer exists because operations have been fully integrated into operations of the parent company the auditor should do which of the following?

A)compare market value with carrying value.A market value less than carrying value is presumptive evidence that goodwill has been impaired.
B)compare fair value with realizable value.A fair value less than realizable value is presumptive evidence that goodwill has been impaired.
C)compare book value with realizable value.A book value less than realizable value is presumptive evidence that goodwill has been impaired.
D)compare book value with market value.A market value less than book value is presumptive evidence that goodwill has been impaired.

Question 64

Which one of the following factors is not considered when assessing the quality of internal audit?

A)Quality of working-paper documentation,reports,and recommendations.
B)Review of quality of audit policies,programs,and procedures.
C)Attestation services as demanded by market place.
D)Educational level and professional experience.

Question 65

The FASB has set a hierarchy of inputs to consider in assessing fair value.Which of the following relates to Level 1?

A)Quoted prices for identical items in active,liquid,and visible markets.
B)Unobservable inputs to be used in illiquid situations.
C)Observable information for similar items in active or inactive markets.
D)Unobservable inputs to be used in situations where markets don't exist.

Question 66

SAB 108 mandates what is termed a(n)___ to uncorrected misstatements.

A)matrix approach
B)dual approach.
C)percentage approach
D)judgmental approach

Question 67

Which of the following is true of internal auditing?

A)Only serves the audit committee of the board of directors
B)Primary nature of services include assurance and consulting
C)Is required to report activities and department findings to external stakeholders annually
D)Independence and objectivity are not relevant because they are employees of the company

Question 68

If the acquired company remains intact after the acquisition,it is defined as the:

A)financing segment.
B)investing segment.
C)operating segment.
D)non-operating segment.

Question 69

Which is the international body that sets standards for the practice of internal auditing across the world?

A)The Internal Audit Reporting Standards Board
B)The Institute of Internal Auditors
C)The International Accounting Standards Board
D)The Charter of Certified Internal Auditors

Question 70

Which of the following has represented the fastest growth area in public accounting practice over the past few years?

A)M&A advisory outsourcing
B)Internal audit outsourcing
C)Portfolio management
D)Wealth management

Question 71

Audit Standard No.5 by the PCAOB encourages the external auditor to utilize the work of which of the following?

A)experts.
B)internal auditors.
C)independent valuation professionals.
D)internal officers of the company.

Question 72

Which of the following is true of external auditing?

A)Major focus areas are processes,including risks,controls,and effectiveness and efficiency of processes.
B)Consulting is performed when agreed to by management.
C)Primary scope of services performed includes audits of financial statements.
D)Parties receiving assurance include the audit committee and upper management.

Question 73

In making judgments about the effect of the internal auditors' work on the external auditor's procedures in specific audit areas,which of the following is not among three issues related to the audit areas that should be considered by the external auditor?

A)Materiality of the financial statement amounts.
B)Risk of material misstatement of the assertions related to these financial statement amounts.
C)Review of quality of audit policies,programs,and procedures.
D)Degree of subjectivity involved in the evaluation of the audit evidence gathered in support of the assertions.

Question 74

The scope of services performed in internal auditing (CIA)includes all of the following except

A)providing assurance on financial statement related items.
B)evaluating the effectiveness of operations and related controls .
C)investigating concerns of fraud.
D)all of the above are included.

Question 75

Which one of the following potential audit problems is not true in affecting goodwill impairment valuations?

A)Goodwill arising from acquisitions can be netted into one test at the operating segment level,but not netted at the company level.
B)Market valuation may be volatile.A material temporary decline in market value may not be a good indicator of FMV.
C)FMV might not exist,might require independent appraisals by investment bankers or estimates using cash flow and discounted present value factors.
D)No assumptions are required about competition,economic development,product placement,and so forth.

Question 76

The primary scope of services performed in external auditing (CPA)is:

A)risk analysis.
B)control analysis.
C)operations analysis.
D)audit of financial statements.

Question 77

Impairment is measured by the difference between market value of the operating segment and which of the following?

A)carrying value of net assets.
B)fair market value of net assets.
C)book value of total assets.
D)book value of current assets.

Question 78

The partial or complete outsourcing of internal audit activities is made to public accounting firms or to other specialized firms that perform which of the following types of services?

A)primarily risk,control,and audit activities.
B)attestation services as demanded by market place.
C)operations analysis and risk analysis.
D)analytical and substantial procedures.

Question 79

The adjustments arising from the audit that were considered to be material should be informed by the auditor to the:

A)audit staff.
B)management.
C)audit committee.
D)internal auditors.

Question 80

For the same client,SEC prohibits a CPA firm from providing which of the following services?

A)tax and external audit services
B)internal and external audit services.
C)management letter and audit services.
D)internal control and financial statement audits.