1/23 Flashcards
The financial expert on the audit committee should have
an understanding of GAAP and FS
experience in preparing or auditing FS
experience with internal control
understanding of audit committee functions
on all 10q and 10k reports the CEO and CFO must certify
they have reviewed the report
the report doesn’t have any material mistakes as far as they know
statements present fairly
they have evaluated internal controls
they have disclosed any significant control deficiencies or fraud
Which of the following external factors would increase the inherent risk of a highly leveraged audit client that has closely monitored profit expectations and imports most of its resale inventory from Europe?
-a change in the management of the marketing department
-a stronger dollar relative to the euro
-a low rate of inflation
-an increase in the prime interest rate
an increase in the prime interest rate
highly leveraged means they are heavily utilizing debt.
Which of the following factors is inherent in a firm’s operations if it utilizes only equity financing?
-marginal risk
-business risk
-financial risk
-interest rate risk
Business risk.
Business risk is unique to a particular company
Marginal risk is incremental and only if using its own equity
Financial risk is the failure of borrowers to repay
Interest rate risk is related to changes in interest rates
The annual percentage rate of interest is
10,000 borrowed
10% nominal interest rate
9,500 proceeds after stamps and fees
10,000 x 10% = 1,000
1,000 / 9,500 = 10.5%
Existence of a published code of ethics and a periodic acknowledgement that ethical values are understood is evidence of
development of ethical values and ensuring that those values are understood and taken seriously.
The effective annualized percentage cost of the financing, based on a 360-day year would be
3 month terms
FV 1,000,000 for 980,000
Transaction cost 1,200
1,000,000 - 980,000 = 20,000 original issue discount
20,000 + 1,200 = 21,200
21,200 / 980,000 = .0216
.0216 * 4 = .865
What is the change in value of the company’s investment in US dollars?
20m investment
2.57 to $1 at time of investment
3.15 to $1 after
20 mil x 2.51 = 51,400,000 foreign currency investment
51,400,000 / 3.15 = 16,317,460
20,000,000 - 16,317,460 = 3,682,540
3,682,540 / 20,000,000 = .184 decline
A company that maintains a strong internal audit function that reports to the board of directors is applying the ideas from which principle of effective internal control over financial reporting?
Organizational Structure
According to COSO, the position or internal entity that is best suited to devise and execute procedures for a particular department is
A manager within the department
Fernwell wants to buy shares of Gurst Company in two years. Fernwell uses a growth dividend discount model with a presumed growth rate of 5%. If Fernwell’s discount is 10% and Gurst’s current dividend is $20, what is the approximate price Fernwell will pay?
20 x (1.05)^2 = 20 x 1.1025 = 22.05
22.05 x 1.05 / .1 - .05 = 23.15 / .05 = 463
What is an internal rate of return?
A time-adjusted rate of return from an investment
According to COSO, what is the first monitoring step in evaluating the effectiveness of an internal control system?
Establishing a control baseline.
How would a lockbox most likely effect receivables for management?
Minimize collection float.
A firm designs its cost structure to include a higher degree of operating fixed costs rather than variable costs. It is magnifying the additional sales dollar using the concept of
Operating leverage
degree to which a firm uses fixed operating costs. A firm with high operating leverage has high fixed costs
