Multiple Choice Question
1. The audit client has acquired another company by purchase. Which of the following would be the best audit procedure to test the appropriateness of the allocation of cost to tangible assests?
a. Determine whether assets have been recorded at their book value at the date of purchase.
b. Evaluate procedures used to estimate and record fair market values for purchased assets.
c. Evaluate the reasonableness of recorded values by using replacement cost data for similar new assets.
d. Evaluate the reasonableness of recorded values by discussion with operating personnel.
2. An audit client will often utilize a specialist to assist in the valuation of selected assets and liabilities. Which of the following is not an accurate description of the auditor's responsibilities for evaluating the work of a specialist?
a. The auditor must gather evidence that pertains to both the competence and independence of the specialist.
b. The auditor must evaluate the reasonableness of the specialist's evidence even if the specialist is certified.
c. The auditor must test the underlying information on which the specialist develops the estimates in order to determine the reliability of the information.
d. The auditor should evaluate the assumptions made by the specialist to determine the reasonableness of the assumptions and the effect on the estimates developed.
e. All of the above.
3. In accounting for an acquisition, the auditor must determine that there are separate valuations for all of the following except:
a. All the specifically identifiable intangible assets, including an estimate of remaining useful life
b. Goodwill associated with the reporting unit
c. Warranty expense for the previous year
d. The useful life of physical assets that were acquired
4. In determining the potential impairment of goodwill, which of the following would not be an appropriate methodology to estimate the fair value of a reporting entity? Assume the reporting entity is not the company as a whole.
a. Determine the fair market value of the entity based on current stock price of the company.
b. Obtain a "fairness" letter from an investment banker as to the value of the reporting entity if it were to be sold to another company.
c. Evaluate current profitability and cash flow in comparison with the capital budgeting model used in acquiring the company.
d. Obtain outside financial analysts' reports of the company's prospects that include a specific discussion of the reporting entity's prospects.
5. If a company overpays for the purchase of another company, as was the assertion when the merger of AOL and Time-Warner took place, what steps should the client take to be sure the results are fairly portrayed in the financial statements?
a. Review financial analysts' reports; write the excess payment off to owner's equity at the time of acquisition.
b. Increase the value of tangible assets to cover the amount of overpayment since these are amounts that were paid to acquire the assets.
c. Record the excess amount to goodwill, but shorten the estimated life of goodwill for amortization purposes.
d. Record the excess amount as goodwill but test goodwill for impairment annually.
6. When auditing related-party transactions, an auditor places primary emphasis on:
a. Confirming the existence of the related entities
b. Verifying the valuation of the related-entity transactions
c. Evaluating the disclosure of the related-entity transactions
d. Determining the rights and obligations of the related entities
7. Which of the following statements is correct regarding transactions between a company and a major customer that accounts for more than 10% of the company's sales?
a. The profit from such transactions should be shown as a separate line item on the financial statements.
b. There is no disclosure required.
c. Disclosure of the nature of the relationship with the related-entity and amounts due to and from each entity is required for all companies.
d. Disclosure of the amounts of such transactions must be disclosed for publicly traded companies, but not for privately-held companies.
8. Which of the following is not a procedure that an auditor would use in performing an audit designed to identify and account for related entity transactions?
a. Send confirmations to all customers inquiring whether they are related entities.
b. Obtain a list of all related entities from the client.
c. Review all large, unusual transactions to determine if they took place with related entities.
d. Review SEC filings to obtain a list of related entities.
9. The auditor's program for the examination of long-term debt should include steps that require:
a. Verification of the existence of the bondholders
b. Examination of the bond trust indenture
c. Inspection of the accounts payable master file
d. Investigation of credits to the Bond Interest Income account
10. When a client does not maintain its own stock records, the auditor should obtain written confirmation from the transfer agent and registrar concerning:
a. Restrictions on the payment of dividends
b. The number of shares issued and outstanding
c. Guarantees of preferred stock liquidation value
d. The number of shares subject to agreements to repurchase