CFA questions

Question 1

Auditing

a) Assures the reader that the financial statements are free from error, fraud, or illegal acts.

Answer 1

A is incorrect. An auditor can only provide reasonable assurance that the financial statements A. are free from error, fraud, or illegal acts.

Question 2

Auditing

B. Must express an opinion about the effectiveness of the company’s internal control systems.

Answer 2

B is correct. For a publicly traded firm in the United States, the auditor must express an opinion as to whether the company’s internal control system is in accordance with the Public Company Accounting Oversight Board, under the Sarbanes–Oxley Act. This is done either as a final paragraph in the auditor’s report or as a separate opinion.

Question 3

Auditing

C. Must state that he prepared the financial statements according to generally accepted accounting principles.

Answer 3

B is incorrect. Auditors’ responsibility is to express an opinion that the financial statements are free from error, fraud, or illegal acts. Preparing the financial statement is not the responsibility.

Question 4

2. The financial statement that would be most helpful to an analyst in understanding the changes that have occurred in a company’s retained earnings over a year is the statement of:

Answer 4

The statement of changes in equity reports the changes in the components of shareholders’ equity over the year, which would include the retained earnings account.

The statement of financial position (Balance Sheet) reports a company’s financial position at a specific time. - WRONG

The statement of comprehensive income illustrates the financial performance and results of operations of a particular company or entity for a period of time.

Question 5

The role of the auditor’s report

Answer 5

is to provide reasonable assurance that the financial statements are free of material mistakes.

Question 6

The role of financial statement analysis

Answer 6

is to help analysts or investors to make a wide array of economic decisions, including evaluating potential equity or venture capital investments, evaluating corporate division or subsidiaries and forecasting future financial performance.

Question 7

. Information about management compensation and any potential conflicts of interest that may exist between management and shareholders is most likely found in the:

Answer 7

Proxy Statement

Question 8

Management discussion and analysis

Answer 8

a review of the company’s consolidated operating performance and its financial condition,

an assessment of the significant effects of known treads,

the capital resources available to the firm and its liquidity, extraordinary or unusual events,

and a review of the performance of operating segments

Significant events, conditions, trends, and contingencies that may affect future operations

Question 9

Financial Analysis Framework

STEPS

Answer 9

1. State the objective and context.
   Determine what questions the analysis seeks to answer, the form in which this information needs to be presented, and what resources and how much time are available to perform the analysis.
2. Gather data.
   Acquire the company’s financial statements and other relevant data on its industry and the economy. Ask questions of the company’s management, suppliers, and customers, and visit company sites.
3. Process the data.
   Make any appropriate adjustments to the financial statements. Calculate ratios. Prepare exhibits such as graphs and common-size balance sheets.
4. Analyze and interpret the data.
   Use the data to answer the questions stated in the first step.
   Decide what conclusions or recommendations the information supports.
5. Report the conclusion or recommendations.
   Prepare a report and communicate it to its intended audience.
   Be sure the report and its dissemination comply with the Code and Standards that relate to investment analysis and recommendations.
6. Update the analysis. Repeat these steps periodically and change the conclusions or recommendations when necessary.

Question 10

common size analysis is part of

Answer 10

B. Process data

Question 11

7. An analyst’s examination of the performance of a company is least likely to include an assessment of a company’s:

Answer 11

profitability and cash flow generating ability.

The relationship between assets and liabilities is used to assess a company’s financial position, not its performance.

Question 12

notes

Answer 12

Notes to the financial statement provide detailed disclosures.
For example, a summary of the significant accounting policies, disclosures for most asset categories and income taxes.

Question 13

Audits provide reasonable assurance that the financial statements are fairly presented, meaning that there is a high degree of probability that they are free of

Answer 13

of material error, fraud or illegal acts.

not just ALL errors

Question 14

Adverse opinion.

Answer 14

An adverse opinion occurs when the financial statements materially depart from accounting standards and are not fairly presented.

Question 15

Qualified Opinion

Answer 15

is issued when there is a material instance of noncompliance with applicable accounting standards or there is a limitation on the auditor’s ability to complete the audit as required by auditing standards.
will include an explanatory paragraph describing the problem that prevents the auditors from issuing an unqualified opinion.

Question 16

C. disclaimer of opinion.

Answer 16

issued when the auditor doer not have the ability to issue an opinion for some reason.

Question 17

interim report

Answer 17

Public companies are generally required to provide interim financial information, either quarterly or semiannually.

include the key financial statements and footnotes, are not audited.

They provide updates to a company’s audited annual financial information so that investors, analysts, and other interested parties can assess a company’s incremental financial performance.

Question 18

management statement of responsibility.

Answer 18

regularly appears as a written letter at the beginning of a financial statement. This statement is usually an annual report. The letter declares that all financial statements within the report are accurate.

Question 19

The five fundamental principles underlying the preparation of financial statements under the IFRS Framework

Answer 19

fair presentation,
going concern,
accrual basis,
consistency, and materiality.

Matching is a general principle of expense recognition.

Question 20

Inflows

Answer 20

Gains are an account, not an element of the financial statements.

Revenues are inflows from delivering or producing goods, rending services, or other activities that constitute the entity’s ongoing major or central operations.

Question 21

B. Interim SEC filings typically update the major financial statements and footnotes.

Answer 21

not necessarily audited

Question 22

C. Annual reports top shareholders are generally viewed as the most factual and objective source of information about a company.

Answer 22

WRONG
Annual reports to shareholders and press releases are written by management and are often viewed as public relations or sales materials.

Question 23

C. The absence of an explanatory paragraph in the audit report relating to the going concern assumption suggests that there are no serious problems that require a close examination of that assumption by the analyst.

Answer 23

A specific explanatory paragraph that makes reference to (questions) the going concern assumption may be a signal of serious problems and call for close examination by the analyst.

Question 24

The auditor generally only provides reasonable assurance that there are no material errors in the financial statements, not an opinion about their numerical accuracy.

Answer 24

The objective of an audit is to enable the auditor to provide an opinion on the fairness and reliability of the financial statements. This is not the same as numerical accuracy

Question 25

An independent certified public accounting firm must be appointed by the audit committee of the company’s board of directors, not by its management

Answer 25

Appointment of the auditors by management would reduce the level of perceived independence.

Question 26

21. Which of the following sources of information should an analyst consider the least reliable?

Answer 26

Corporate press releases are written by management and are often view as public relations or sales materials because of the great possibility of inherent management bias in such documents.
Often, little or none of the material is independently reviewed by outside auditors. Such documents are not mandated by the securities regulators.

Form 10-Q (quarterly financial statements) and Proxy statement are mandatory SEC filings in the U.S., which inherently increases their reliability given the penalties that can be imposed by the SEC if any serious irregularities are subsequently found.

Question 27

Owner´s Equity

Answer 27

represents shareholders’ residual claim on the company’s assets after deducting liabilities.

Question 28

Sarbanes-Oxley Management Report:

Answer 28

1) Responsibility to establish and maintain adequate internal controls
2) Mgmt’s framework for evaluating internal controls
3) Assessment of the effectiveness of internal controls over the last operating period
4) Statement of auditor’s assessment
5) Certify that f/s are fairly presented

Question 29

Trade-Offs Qualitative Characteristics of IFRS

Answer 29

1) Relevance vs. reliability; 2) Benefit > cost;

3) Excludes intangibles and non-quantifiable info.

Question 30

IFRS Revenue Recognition

Answer 30

1) Risk & Reward transferred;
2) No continued control;
3) Reliable measurement;
4) Probable flow of benefits;
5) Cost verifiable

Question 31

IFRS Revenue Recognition For Service

Answer 31

1) The amount is measurable;
2) probable that benefits from transaction will flow; 3) stage of completion can be measured reliably; 4) costs incurred and to complete can be measured reliably

Question 32

Installment Method

Answer 32

Profit recognized is the proportion of cash collected x total expected profit.
Profit for period = (cash collected in the period/selling price) x total profit

Question 33

Cost-recovery method

Answer 33

Profit is recognized only once total cash collections (including principal and interest on any financing provided to the buyer) exceed total costs.

Question 34

Diluted EPS

Answer 34

[net income - preferred dividends + convertible preferred dividends + (convertible debt interest)*(1-t) ] / [weighted average number of common shares outstanding + new shares from conversion + new shares issued from stock options exercised - shares repurchased from proceeds of option exercise]