Finance and Investment Cycle Flashcards
Relevant Assertions of Investment Accounts
Existence/Occurrence
Completeness
Valuation
Presentation & Disclosure
Relevant Assertions of Long-Term Debt Accounts
Existence/Occurrence
*Completeness
Valuation
*Presentation & Disclosure
*primary
Relevant Assertions of Capital Stock Account
Completeness
Presentation & Disclosure
Relevant Assertions of Retained Earnings Account
Completeness
Common issues associated with higher risk of material misstatement in finance and investment cycle
Complex transactions, fair market value, related-party transactions, lease accounting, loan covenants, impairments, presentation and disclosure
Three substantive approaches to test accounting estimates
- test company’s process used to develop the estimate
- develop an independent expectation for comparison to company’s
- evaluate audit evidence from events/transactions occurring after the measurement date for comparison
Four items in the credit class of calculated liabilities and credits that are difficult to audit
lease obligations, deferred income taxes, pension and post-retirement benefit liabilities, foreign currency translation gains/losses
Intermediary who handles company stocks and bonds
transfer agent
Off-book arrangements that are supposedly used to create joint ventures for new businesses but may be fraudulent are called
special purpose entities (SPE)
The individual who keeps certificate records and updates records based on info from the transfer agent
registrar
The process of reaching a decision or drawing a conclusion where there are a number of possible alternative solutions” is KPMG’s definition of
judgment
Clauses in borrowing agreements intended to keep the borrower’s financial position at a level that will ensure repayment are called
loan covenants
GAAP requires that impairments to asset values should normally be
taken as losses when they occur
An activity used because a specific standard control activity is not in place is called a
compensating control
When the market is down, managers are motivated to classify securities as Blank______ to remove the losses from net income.
available for sale
Relevant Assertions of marketable securities
Existence and valuation
Market valuation is required for securities classified as
trading or available for sale
An instrument that takes its value from another asset or index is a
derivative
A written agreement between bond issuers and bondholders is called a bond
indenture
Au audit procedure to determine recorded investments represent investments actually owned at the balance-sheet date
Obtain positive confirmations as of the balance sheet date of investments held by independent custodians.
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
recording and classification
Review and test reports of investment activity for the investment committee tests an internal control to ensure (blank blank) are being followed
written policies
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
observations
A sample internal control questionnaire question may ask about _________ inherent in the investment policy.
risk
An important step in testing investments is to ensure all persons with access to investments are properly ______.
bonded
An investment committee is a standing committee of _______.
the board of directors
After testing internal controls related to investments, it may be necessary to ______the risk of material misstatement.
modify
Sometimes auditors may ______securities on hand.
inspect
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
valuation
Evaluating whether debt provisions and covenants have been met is a substantive test for debt accounts, testing (blank) assertion
presentation and disclosure
Vouching borrowing and repayment terms is a substantive test for debt accounts, testing (blank) assertion
cutoff
Confirming debt is a substantive test for debt accounts, testing (blank) assertion
existence
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
completeness
Actual signed copies of the notes are often put in the auditors’ ________ file.
permanent
Notes payable to financial institutions are often confirmed together with the _______ accounts.
cash
Bond transactions are typically confirmed directly with the _______.
trustee
Sales of capital stock and large debt financing transactions are usually authorized by
the board of directors
Inspecting marketable securities provides primary evidence about the ASB balance assertion of
existence
Using derivatives to protect companies from market uncertainties is called
hedging
If market prices are not readily available for fair value measurements, management should use
Their own assumptions as long as there are no contrary data.
Estimates in the finance and investment cycle include
valuation of equity investments
BOD/investment committee confirming broker transactions under a periodic review is an internal control for which assertion and account
existence/occurrence, investments
3 primary internal control considerations for finance and investment cycles
transaction authorization, documentation (brokers, vendor invoices, cost records, debtholder documents, registrar documents), tracing transactions to cash receipts and disbursements
Primary methods of testing finance and investment internal controls are (blank) and (blank)
inspection (documentation, minutes, management review) and inquiry (segregation of duties, company procedures, estimation process)
Primary methods of testing estimation process internal controls are (blank) and (blank)
inquiry (who, what, when) and observation
Vouching purchases and securities sales to broker advices is a substantive procedure testing (blank) assertion in the investment account
existence/occurrence
Vouching recorded interest income and recalculating interest income on debt securities are substantive procedures testing (blank) assertion in the investment account
existence/occurrence
comparing YOY balances with expected balances is a substantive procedure testing (blank) assertion in the investment account
completeness
scanning cash disbursements ledger for large year-end purchases is a substantive procedure testing (blank) assertion in the investment account
completeness
testing the company’s process to develop impairment estimates is a substantive procedure testing (blank) assertion in the investment account
valuation
Confirming capital stock with third-party registrar and balances with expectations are substantive procedures testing (blank) assertion in the (blank) account
completeness, capital stock
employee stock-based compensation must be recorded using a fair value-based method when
the award is granted
foreign currency translation gains, deferred income taxes, lease obligations, and post retirement benefits are considered
calculated liabilities and credits
The authorization for the purchase of large assets will likely reside in the (blank blank)
capital budget
When the market is down, managers are motivated to classify securities as ______ to remove the losses from net income.
available for sale
Interest rate swaps, options and futures contracts are all examples of
derivatives
Endorsements on discounted notes, repurchase agreements, letters of credit are examples of
off-balance sheet transactions
Auditors considering the design of internal controls in the finance and investment cycle typically start by
performing a walkthrough
The auditor’s primary relevant assertion concerns surrounding typical marketable securities are
(blank) and (blank)
existence/occurrence and valuation
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
joint custody
An activity used because a specific standard control activity is not in place is called a(n) Blank______ control.
compensating
In order to improve the bottom line, managers are motivated to classify securities as Blank______ when the market is doing well.
trading (unrecorded gains included in net income)
Auditors’ tests of controls over the estimation process include (blank) and (blank)
inquiry and observation
