Finance and Investment Cycle

Question 1

Relevant Assertions of Investment Accounts

Answer 1

Existence/Occurrence
Completeness
Valuation
Presentation & Disclosure

Question 2

Relevant Assertions of Long-Term Debt Accounts

Answer 2

Existence/Occurrence
*Completeness
Valuation
*Presentation & Disclosure

*primary

Question 3

Relevant Assertions of Capital Stock Account

Answer 3

Completeness
Presentation & Disclosure

Question 4

Relevant Assertions of Retained Earnings Account

Answer 4

Completeness

Question 5

Common issues associated with higher risk of material misstatement in finance and investment cycle

Answer 5

Complex transactions, fair market value, related-party transactions, lease accounting, loan covenants, impairments, presentation and disclosure

Question 6

Three substantive approaches to test accounting estimates

Answer 6

1. test company’s process used to develop the estimate
2. develop an independent expectation for comparison to company’s
3. evaluate audit evidence from events/transactions occurring after the measurement date for comparison

Question 7

Four items in the credit class of calculated liabilities and credits that are difficult to audit

Answer 7

lease obligations, deferred income taxes, pension and post-retirement benefit liabilities, foreign currency translation gains/losses

Question 8

Intermediary who handles company stocks and bonds

Answer 8

transfer agent

Question 9

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

Answer 9

special purpose entities (SPE)

Question 10

The individual who keeps certificate records and updates records based on info from the transfer agent

Answer 10

registrar

Question 11

The process of reaching a decision or drawing a conclusion where there are a number of possible alternative solutions” is KPMG’s definition of

Answer 11

judgment

Question 12

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

Answer 12

loan covenants

Question 13

GAAP requires that impairments to asset values should normally be

Answer 13

taken as losses when they occur

Question 14

An activity used because a specific standard control activity is not in place is called a

Answer 14

compensating control

Question 15

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

Answer 15

available for sale

Question 16

Relevant Assertions of marketable securities

Answer 16

Existence and valuation

Question 17

Market valuation is required for securities classified as

Answer 17

trading or available for sale

Question 18

An instrument that takes its value from another asset or index is a

Answer 18

derivative

Question 19

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

Answer 19

indenture

Question 20

Au audit procedure to determine recorded investments represent investments actually owned at the balance-sheet date

Answer 20

Obtain positive confirmations as of the balance sheet date of investments held by independent custodians.

Question 21

Trace several transactions for purchases and sales of investments through the accounting system tests an internal control to ensure proper (blank and blank) of transactions

Answer 21

recording and classification

Question 22

Review and test reports of investment activity for the investment committee tests an internal control to ensure (blank blank) are being followed

Answer 22

written policies

Question 23

Inspect reports by internal auditors on their review of securities and derivatives tests internal controls to verify internal auditors (blank) are consistent with external auditors

Answer 23

observations

Question 24

A sample internal control questionnaire question may ask about _________ inherent in the investment policy.

Answer 24

risk

Question 25

An important step in testing investments is to ensure all persons with access to investments are properly ______.

Answer 25

bonded

Question 26

An investment committee is a standing committee of _______.

Answer 26

the board of directors

Question 27

After testing internal controls related to investments, it may be necessary to ______the risk of material misstatement.

Answer 27

modify

Question 28

Sometimes auditors may ______securities on hand.

Answer 28

inspect

Question 29

Examining copies of the actual signed note payable to determine the correct dollar amount of the liability is a substantive test for debt accounts, testing (blank) assertion

Answer 29

valuation

Question 30

Evaluating whether debt provisions and covenants have been met is a substantive test for debt accounts, testing (blank) assertion

Answer 30

presentation and disclosure

Question 31

Vouching borrowing and repayment terms is a substantive test for debt accounts, testing (blank) assertion

Answer 31

cutoff

Question 32

Confirming debt is a substantive test for debt accounts, testing (blank) assertion

Answer 32

existence

Question 33

Performing analytical procedures on debt and related accounts to ensure that all debt is properly included in the period under audit and that some notes have not been omitted is a substantive test for debt accounts, testing (blank) assertion

Answer 33

completeness

Question 34

Actual signed copies of the notes are often put in the auditors' ________ file.

Answer 34

permanent

Question 35

Notes payable to financial institutions are often confirmed together with the _______ accounts.

Answer 35

cash

Question 36

Bond transactions are typically confirmed directly with the _______.

Answer 36

trustee

Question 37

Sales of capital stock and large debt financing transactions are usually authorized by

Answer 37

the board of directors

Question 38

Inspecting marketable securities provides primary evidence about the ASB balance assertion of

Answer 38

existence

Question 39

Using derivatives to protect companies from market uncertainties is called

Answer 39

hedging

Question 40

If market prices are not readily available for fair value measurements, management should use

Answer 40

Their own assumptions as long as there are no contrary data.

Question 41

Estimates in the finance and investment cycle include

Answer 41

valuation of equity investments

Question 42

BOD/investment committee confirming broker transactions under a periodic review is an internal control for which assertion and account

Answer 42

existence/occurrence, investments

Question 43

3 primary internal control considerations for finance and investment cycles

Answer 43

transaction authorization, documentation (brokers, vendor invoices, cost records, debtholder documents, registrar documents), tracing transactions to cash receipts and disbursements

Question 44

Primary methods of testing finance and investment internal controls are (blank) and (blank)

Answer 44

inspection (documentation, minutes, management review) and inquiry (segregation of duties, company procedures, estimation process)

Question 45

Primary methods of testing estimation process internal controls are (blank) and (blank)

Answer 45

inquiry (who, what, when) and observation

Question 46

Vouching purchases and securities sales to broker advices is a substantive procedure testing (blank) assertion in the investment account

Answer 46

existence/occurrence

Question 47

Vouching recorded interest income and recalculating interest income on debt securities are substantive procedures testing (blank) assertion in the investment account

Answer 47

existence/occurrence

Question 48

comparing YOY balances with expected balances is a substantive procedure testing (blank) assertion in the investment account

Answer 48

completeness

Question 49

scanning cash disbursements ledger for large year-end purchases is a substantive procedure testing (blank) assertion in the investment account

Answer 49

completeness

Question 50

testing the company's process to develop impairment estimates is a substantive procedure testing (blank) assertion in the investment account

Answer 50

valuation

Question 51

Confirming capital stock with third-party registrar and balances with expectations are substantive procedures testing (blank) assertion in the (blank) account

Answer 51

completeness, capital stock

Question 52

employee stock-based compensation must be recorded using a fair value-based method when

Answer 52

the award is granted

Question 53

foreign currency translation gains, deferred income taxes, lease obligations, and post retirement benefits are considered

Answer 53

calculated liabilities and credits

Question 54

The authorization for the purchase of large assets will likely reside in the (blank blank)

Answer 54

capital budget

Question 55

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

Answer 55

available for sale

Question 56

Interest rate swaps, options and futures contracts are all examples of

Answer 56

derivatives

Question 57

Endorsements on discounted notes, repurchase agreements, letters of credit are examples of

Answer 57

off-balance sheet transactions

Question 58

Auditors considering the design of internal controls in the finance and investment cycle typically start by

Answer 58

performing a walkthrough

Question 59

The auditor's primary relevant assertion concerns surrounding typical marketable securities are (blank) and (blank)

Answer 59

existence/occurrence and valuation

Question 60

When it is not possible for one person to access a safe, cabinet or drawer, a strict form of dual control, known as (blank blank) has been implemented

Answer 60

joint custody

Question 61

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

Answer 61

compensating

Question 62

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

Answer 62

trading (unrecorded gains included in net income)

Question 63

Auditors' tests of controls over the estimation process include (blank) and (blank)

Answer 63

inquiry and observation