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Auditing > Finance and Investment Cycle > Flashcards

Finance and Investment Cycle Flashcards

1
Q

Relevant Assertions of Investment Accounts

A

Existence/Occurrence
Completeness
Valuation
Presentation & Disclosure

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2
Q

Relevant Assertions of Long-Term Debt Accounts

A

Existence/Occurrence
*Completeness
Valuation
*Presentation & Disclosure

*primary

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3
Q

Relevant Assertions of Capital Stock Account

A

Completeness
Presentation & Disclosure

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4
Q

Relevant Assertions of Retained Earnings Account

A

Completeness

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5
Q

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

A

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

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6
Q

Three substantive approaches to test accounting estimates

A
  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
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7
Q

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

A

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

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8
Q

Intermediary who handles company stocks and bonds

A

transfer agent

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9
Q

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

A

special purpose entities (SPE)

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10
Q

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

A

registrar

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11
Q

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

A

judgment

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12
Q

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

A

loan covenants

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13
Q

GAAP requires that impairments to asset values should normally be

A

taken as losses when they occur

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14
Q

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

A

compensating control

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15
Q

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

A

available for sale

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16
Q

Relevant Assertions of marketable securities

A

Existence and valuation

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17
Q

Market valuation is required for securities classified as

A

trading or available for sale

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18
Q

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

A

derivative

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19
Q

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

A

indenture

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20
Q

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

A

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

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21
Q

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

A

recording and classification

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22
Q

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

A

written policies

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23
Q

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

A

observations

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24
Q

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

A

risk

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25
Q

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

A

bonded

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26
Q

An investment committee is a standing committee of _______.

A

the board of directors

27
Q

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

A

modify

28
Q

Sometimes auditors may ______securities on hand.

A

inspect

29
Q

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

A

valuation

30
Q

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

A

presentation and disclosure

31
Q

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

A

cutoff

32
Q

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

A

existence

33
Q

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

A

completeness

34
Q

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

A

permanent

35
Q

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

A

cash

36
Q

Bond transactions are typically confirmed directly with the _______.

A

trustee

37
Q

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

A

the board of directors

38
Q

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

A

existence

39
Q

Using derivatives to protect companies from market uncertainties is called

A

hedging

40
Q

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

A

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

41
Q

Estimates in the finance and investment cycle include

A

valuation of equity investments

42
Q

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

A

existence/occurrence, investments

43
Q

3 primary internal control considerations for finance and investment cycles

A

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

44
Q

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

A

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

45
Q

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

A

inquiry (who, what, when) and observation

46
Q

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

A

existence/occurrence

47
Q

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

A

existence/occurrence

48
Q

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

A

completeness

49
Q

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

A

completeness

50
Q

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

A

valuation

51
Q

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

A

completeness, capital stock

52
Q

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

A

the award is granted

53
Q

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

A

calculated liabilities and credits

54
Q

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

A

capital budget

55
Q

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

A

available for sale

56
Q

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

A

derivatives

57
Q

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

A

off-balance sheet transactions

58
Q

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

A

performing a walkthrough

59
Q

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

A

existence/occurrence and valuation

60
Q

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

A

joint custody

61
Q

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

A

compensating

62
Q

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

A

trading (unrecorded gains included in net income)

63
Q

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

A

inquiry and observation

Auditing (10 decks)

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