Module 1

Question 1

What are the six steps involved in the financial statement analysis framework?

Answer 1

1. State the objective and context.
   
   2. Gather data.
   3. Process the data.
   4. Analyze and interpret the data.
   5. Report the conclusions or recommendations.
   6. Update the analysis.

Question 2

What does Financial Reporting refer to?

Answer 2

Financial reporting refers to the way companies present their financial performance to investors, creditors, and other interested parties through financial statements.

Question 3

What is the role of financial statement analysis?

Answer 3

It uses information from financial statements, along with other relevant information, to make economic decisions like investing in securities, extending credit, or assigning credit ratings.

Question 4

What are standard-setting bodies?

Answer 4

Standard-setting bodies are professional organizations that establish financial reporting standards.

Question 5

Which are the two primary standard-setting bodies for financial reporting standards and what do they set out?

Answer 5

1. Financial Accounting Standards Board (FASB): Sets U.S. Generally Accepted Accounting Principles (GAAP).
   2. International Accounting Standards Board (IASB): Establishes International Financial Reporting Standards (IFRS).

Question 6

What is the role of the International Organization of Securities Commissions (IOSCO)?

Answer 6

OSCO improves cross-border cooperation and promotes uniformity in national regulations and enforcement for securities regulation.

Question 7

Is the IOSCO a regulatory body?

Answer 7

No, it is not a regulatory body, but its members regulate over 95% of the world’s financial markets.

Question 8

What are the three IOSCO objectives?

Answer 8

1. Protecting investors.
   
   2. Ensuring fair, efficient, and transparent markets.
   3. Reducing systemic risk.

Question 9

What are the main obligations imposed on companies and auditors by the Sarbanes-Oxley Act of 2002 in relation to reporting requirements?

Answer 9

1. Prohibits auditors from providing certain additional services to avoid conflicts of interest.
   
   2. Requires management to certify the fairness of financial statements.
   3. Requires a statement on the effectiveness of internal controls.

Question 10

What are Proxy Statements and where are they filed?

Answer 10

Proxy statements, filed with the SEC, are issued to shareholders when matters require a vote, providing information on board elections, executive compensation, and stock options.

Question 11

Under which financial reporting framework do EU countries report?

Answer 11

EU countries report using IFRS.

Question 12

Who advises the EU Commission on securities regulation issues?

Answer 12

The European Securities Committee advises the EU Commission.

Question 13

What is ESMA’s role?

Answer 13

ESMA coordinates securities regulation within the EU.

Question 14

What is the purpose of financial statement notes?

Answer 14

Financial statement notes provide additional details about the financial statements, including accounting policies, assumptions, and estimates.

Question 15

What is the purpose of Form S-1?

Answer 15

Form S-1 is used by companies to register securities with the SEC for public offerings.

Question 16

What is the purpose of Form 10-K?

Answer 16

Form 10-K is the annual report providing a comprehensive summary of a company’s financial performance.

Question 17

What is the purpose of Form 10-Q?

Answer 17

Form 10-Q is the quarterly report summarizing a company’s financial performance.

Question 18

What is the purpose of Form DEF-14A?

Answer 18

Form DEF-14A is filed for proxy statements involving shareholder votes.

Question 19

What is the purpose of Form 8-K?

Answer 19

Form 8-K reports significant events like acquisitions, bankruptcy, or changes in leadership.

Question 20

What is the purpose of Form 144?

Answer 20

Form 144 is filed when an insider plans to sell restricted or control securities.

Question 21

What is the purpose of Forms 3, 4, and 5?

Answer 21

These forms report insider ownership and changes in ownership of a company’s securities.

Question 22

Do GAAP and IFRS require companies to report segment data?

Answer 22

Yes, both require companies to report segment data.

Question 23

How is a segment defined under US GAAP and IFRS?

Answer 23

A segment is defined as a portion of a company that accounts for at least 10% of revenues, assets, or income and has distinguishable risks and returns.

Question 24

For what minimum percentage of a firm’s external sales should reported segments account?

Answer 24

Segments should account for at least 75% of external sales.

Question 25

What items should be disclosed for each segment within the financial statement notes?

Answer 25

Revenue, profit or loss, assets, liabilities, interest, acquisitions, depreciation, noncash expenses, tax expense, and equity results.

Question 26

What types of statements can auditors issue regarding financial statements?

Answer 26

Unqualified, qualified, adverse, and disclaimer of opinion.

Question 27

What are the two requirements for geographic segments to also be identified in financial statements?

Answer 27

1. Must meet size criteria.
   
   2. Have a business environment different from other segments.

Question 28

What does the SEC require management to discuss in management commentary?

Answer 28

Trends, significant events, uncertainties affecting liquidity, capital resources, and results of operations.

Question 29

What is the objective of an audit?

Answer 29

To provide an opinion on the fairness and reliability of financial statements.

Question 30

Who is responsible for ensuring financial statements conform to accounting standards?

Answer 30

Management.

Question 31

How many parts does a standard auditor’s opinion contain?

Answer 31

3

Question 32

What are the parts contained in a standard auditor’s opinion?

Answer 32

Financial statements are management’s responsibility.
2. Independent review using accepted auditing standards.
3. Statements prepared according to accounting principles.

Question 33

What is an unqualified opinion?

Answer 33

Indicates financial statements are free from material misstatements.

Question 34

What is a qualified opinion?

Answer 34

Indicates exceptions to accounting principles in financial statements.

Question 35

What is an adverse opinion?

Answer 35

Indicates financial statements are materially nonconforming with standards.

Question 36

What is a disclaimer of opinion?

Answer 36

Indicates the auditor is unable to express an opinion.

Question 37

What is the purpose of internal controls?

Answer 37

To ensure accurate financial statements and compliance with regulations.

Question 38

Who must express an opinion on the firm’s internal controls?

Answer 38

The external auditor.

Question 39

What are two other required sections in an audit report related to audit matters?

Answer 39

Key Audit Matters (international) and Critical Audit Matters (US).

Question 40

What is the purpose of these statements on key or critical audit matters?

Answer 40

To highlight significant management judgments or complex audit issues.

Question 41

What additional sources of information do analysts use in financial statement analysis besides financial reports?

Answer 41

Earnings calls, press releases, industry reports, trade journals, and analyst reports.

Question 42

What are the significant differences between IFRS and US GAAP

Answer 42