Deck 14: Audit of Longer-Term Liabilities, equity, acquisitions, and Related-Entity Transactions, long-Term Liabilities, and Equity

Question 1

The auditor must determine that all dividends were properly authorized by the board of directors.

Answer 1

True

Question 2

Accounting combinations must be performed as a pooling of interest transaction and treated as mergers.

Answer 2

False

Question 3

A possible impairment of goodwill is determined if the fair value of the related reporting unit is less than the book value of the unit,including the goodwill.

Answer 3

True

Question 4

Professional skepticism means the auditor should always act professional and not be skeptical when assessing statements made by management.

Question 5

Impairment tests for goodwill should be performed at least every five years.

Question 6

If the operating unit relating to goodwill is not the reporting unit,estimates using cash flow may be necessary to derive the fair market value of the unit.

Question 7

When auditing an acquisition the auditor is faced with the problem of determining fair market value of the net assets acquired.

Question 8

There is strong evidence that companies have used pension obligations as a means of smoothing earnings by changing the assumed long-term discount rate or the earnings rate,so this is an important and judgmental area in which the auditor must be careful to exercise appropriate professional skepticism.

Question 9

Valuation of assets for the purpose of acquisition accounting is simple due to the fact that the target company typically keeps the assets at fair market value.

Question 10

Restructuring charges and expenses may be estimated and a liability recorded as a result of acquisition activities.

Question 11

Now that the accounting for business combinations has been refined by the FASB,accountants need not consider further changes.

Question 12

Goodwill within operating segments can be offset (netted).

Question 13

The auditor may rely on management inquiry for all disclosures relating to bond indentures and the auditor need not read the entire indenture.

Question 14

Audit tests for goodwill and other asset impairments will require considerable judgment on the part of the auditor.

Question 15

Testing of goodwill for possible impairment is often facilitated through a formal corporate budgeting system.

Question 16

A comprehensive audit program for stockholders' equity includes a step requiring the examination of all minutes,bylaws,and articles of incorporation.

Question 17

The impairment of goodwill should be addressed immediately if there is a significant adverse change in the business environment.

Question 18

The excess of the purchase price paid for a company over the fair market value of identifiable intangible and tangible assets acquired is goodwill.

Question 19

The auditor does not have an obligation to use professional skepticism for significant assumptions used by actuaries since they are independent from management and are also professionals.

Question 20

Goodwill is an asset that is systematically amortized over a defined number of years.

Question 21

Significant,unanticipated and effective competition that enhances the value of the products and services of a company are events that require the recording of an increase to the goodwill of the related operating unit.

Question 22

Accounting principles require goodwill arising from acquisitions to be amortized over the lesser of the estimated undiscounted cash flows at the operating unit level or 20 years.

Question 23

The intangible assets of a newly acquired business must be identified and valued for proper recording in the combination.

Question 24

Examples of evidence typically examined by the audit team in a post-acquisition restructuring include severance agreements with terminated employees.

Question 25

A company is required to systematically release over-estimated restructuring liabilities into earnings each period to adequately match revenues with expenses.

Question 26

If an operating unit is sold,the goodwill related to that unit may remain on the books of the reporting entity until replaced by another acquisition.

Question 27

Impairment of goodwill may be signaled by the significant impairment of a group of property,plant and equipment.

Question 28

The purchase of a company by the acquirer through stock presents valuation issues related to the market price of the stock on the date of closing.

Question 29

When an auditor is uncomfortable with the work of a valuation expert pertaining to the fair value of the assets and liabilities acquired in an acquisition,another third-party specialist may be utilized to further test the evidence.

Question 30

The reputation and independence of the valuation expert directly affect the competency of the evidence utilized for audit purposes.

Question 31

In a restructuring,the specific commitment to compensate named individuals for severance results in the recognition of expenses and corresponding liabilities.

Question 32

Once the impairment of goodwill has been signaled,the amount of the impairment loss is calculated as the difference between the implied fair value of the goodwill and its carrying amount.

Question 33

Auditors should ensure that clients place a "more than adequate" liability on the books for restructuring charges that are created as a result of acquisitions to be conservative.

Question 34

Purchases of companies or divisions must be accomplished through payment of cash to make the cost of the acquisition straightforward.

Question 35

In acquisitions that are material to the purchasing entity,the auditor can just accept the specialist's appraisal and management's assessment of the fair value of the assets.

Question 36

Goodwill must be specifically identified with an operating unit or reporting unit for impairment consideration.

Question 37

Once impairment losses have been taken in previous periods,any recovery of goodwill value may be used to increase the recorded balance of the intangible asset.

Question 38

Auditors should continually update themselves on generally accepted accounting principles relative to the accounting for restructurings as they continue to evolve.

Question 39

The initial offer to purchase another entity may change due to terms that cover post-audit valuation changes.

Question 40

Performance terms in the acquisition agreement will usually not result in additional payments as the risks have already passed to the buyer.

Question 41

Transactions between companies and related entities must be eliminated in consolidation or fully disclosed in the financial statements.

Question 42

If a specialist is used by client management to value the assets of the target company,the auditor will most likely evaluate all of the following characteristics of the expert,except for which of the following?

A)fees and billings.
B)credentials.
C)methodologies.
D)independence.

Question 43

An auditor must understand the business processes of the client to adequately test management's decisions surrounding the impairment of goodwill.

Question 44

The acquisition of an entity or division may be performed through which of the following forms of consideration?

A)Cash but not stock.
B)Stock with no other contingent performance.
C)Contingent performance with no further adjustment after the initial agreement.
D)Cash,stock and/or contingencies.

Question 45

An example of a liability that requires significant judgments about certain events is the pension obligation.

Question 46

Related entity transactions transpire only between entities and individuals.

Question 47

The purchase of another company or division must be recorded on which basis?

A)pooling basis.
B)purchase basis.
C)push down basis.
D)merger basis.

Question 48

The SEC requires that personal use of a company's assets by officers be disclosed in the financial statements.

Question 49

Related entity transactions are fraudulent in nature.

Question 50

Bonds are reported on the financial statements net of premium or discount.

Question 51

Which of the following best represents a complex valuation issue in the acquisition of a new entity?

A)Carrying value of assets and liabilities.
B)Book value of assets and liabilities.
C)Fair market value of assets and liabilities.
D)Liquidation value of assets and liabilities.

Question 52

Financial statement disclosure of significant customers is necessary due to the inherent risks involved.

Question 53

Auditors must control the client's information system in order to adequately identify related party entity transactions.

Question 54

Companies will not consolidate an entity where ownership is significantly less than 50% because of the variable interest entity rules.

Question 55

An example of a restriction in a bond indenture is the use of a trustee to disburse funds.

Question 56

The auditors must notify the SEC of any related party transactions discovered during testing.

Question 57

Goodwill impairment is a measurement problem that should be addressed when?

A)upon significant adverse change in the business environment.
B)every other year on a scheduled and consistent basis.
C)initially,in accordance with SFAS No.146.
D)in conjunction with the recording of restructuring liabilities.

Question 58

It is important that the audit team tests the relationship of a client with other entities in order to determine whether a variable interest entity exists that must be consolidated.

Question 59

An auditor must calculate the actuarial estimates for the client to record an accurate pension liability.

Question 60

Which of the following will management of the acquiring company typically engage to determine,for reporting purposes,the value of assets and liabilities of the target company?

A)Appraiser.
B)Actuary.
C)Transfer Agent.
D)Underwriter.

Question 61

Which of the following defines goodwill resulting from an acquisition?

A)The historical value of the stock received less the current value of the stock issued.
B)The excess purchase price over the fair value of the entity acquired.
C)The difference between the designated market value and the book value of the target company.
D)The amount of the contingent performance obligation less the purchase price adjustment made upon signing the letter of intent.

Question 62

Which of the following does not identify a reporting unit for purposes of impairment testing?

A)Separate accounting.
B)Could be easily separated from the company.
C)Is managed as a separate segment.
D)Has similar assets.

Question 63

Rapture,Inc.compares the fair value of the reporting unit related to goodwill to the reporting unit's carrying value,including goodwill.The fair value is less than the carrying value.This implies which of the following?

A)that the difference must be reported as impairment expense in the balance sheet.
B)that impairment exists and that goodwill must be written-down.
C)that the goodwill is supported by valid assumptions and may remain.
D)that the impaired value of the goodwill is greater than the implied value of the underlying assets.

Question 64

Jakobe Company acquires an average of two companies per year in its efforts to integrate and expand.Which of the following statements best represents Jakobe's treatment of multiple goodwill in the assessment of impairment?

A)All goodwill must be netted at the reporting level for testing and isolated at the individual subsidiary level.
B)The goodwill of a single unit will be selected at random each year for testing and all operating units must be cycled in testing every five years.
C)Goodwill within operating segments can be netted,but goodwill that exists in different operating segments cannot be offset.
D)Goodwill is not a factor in the testing of impairment,only the undiscounted cash flows of an individual reporting unit will be considered.

Question 65

According to current accounting principles,for the purposes of testing impairment,goodwill resulting from the acquisition process must be identified

A)as an expense on the income statement.
B)on the books of the parent company.
C)on the basis of present value.
D)with an operating or reporting unit.

Question 66

How is the valuation and testing of goodwill for impairment best facilitated by a company?

A)Through physical inspection of the goodwill.
B)By the CPA firm hired to perform the audit of financial statements.
C)With the use of a formal budgeting process.
D)Through the development of new products and services.

Question 67

Current accounting principles require that goodwill be expensed according to which of the following?

A)systematically over its estimated useful life.
B)arbitrarily over a period of no more than 20 years.
C)as impairment occurs.
D)at the completion of the acquisition.

Question 68

Costs associated with the restructuring of operations are recorded

A)when the commitment is put into action.
B)when the auditor deems them significant.
C)when the decision is made and planned by the board of directors.
D)as assets on the balance sheet until realized.

Question 69

What are the most important attributes that an auditor must possess in testing client's assessment of goodwill?

A)Expertise in the laws surrounding mergers and acquisitions and the legal implications of such endeavors.
B)Sound judgment and a knowledge of the client's business and the related accounting principles.
C)Trustworthiness in attitude and a loyalty to the client as its business advisor.
D)Experience with business failures and audit scandals so that such issues can be brought to the table.

Question 70

Which one of the following disclosures is required for reporting classes of stock in the financial statements?

A)Number of shareholders of record.
B)Retirement value.
C)Voting rights.
D)Price-to-earnings ratio.

Question 71

All of the following are significant issues for consideration when auditing for the impairment of goodwill,except for which of the following?

A)timing of the assessment by management.
B)amortization in years of the goodwill.
C)clear objective evidence supporting the assessment.
D)understanding the client's business and its risks.

Question 72

Simco's shaving products division was acquired over ten years ago in a purchase transaction by BlizzardCraft.The related goodwill was amortized until 2002 and $4.5 million remained on the books thereafter.In 2008,Simco's production machinery was assessed for impairment as a long-lived asset because of obsolescence issues.What relationship will the auditors most likely make between the facts stated above?

A)BlizzardCraft erroneously treated the acquisition of Simco as a purchase transaction when it should have been a pooling of interests.
B)Simco should not have amortized goodwill previous to 2002.
C)The goodwill related to Simco may have been impaired during 2008.
D)Simco's goodwill should have been written off when purchased by BlizzardCraft in a one-time transaction.

Question 73

When stock is valued at amounts substantially greater than the value of the assets transferred to the corporation,it is called

A)no par stock.
B)watered stock.
C)par value stock.
D)preferred stock.

Question 74

Which of the following factors would most likely trigger the need for impairment testing on the recorded goodwill of a nutritional products company?

A)the FDA halts the distribution of the acquired subsidiary's only product.
B)management hires a new tax director at the corporate level.
C)there is no doubt about the acquired subsidiary's ability to continue as a going concern.
D)goodwill testing occurred eight months previously.

Question 75

If the auditor is hesitant to rely on the appraisal of a specialist hired by management,which of the following will be performed?

A)The auditor will make the appraisal.
B)The auditor will adjust the values to zero.
C)The auditor will resign from the engagement.
D)The auditor will hire a specialist to test the appraisal.

Question 76

In testing goodwill for impairment,the audit team will evaluate management's

A)estimated allowance for goodwill losses as a percent of sales.
B)ability to utilize the purchase method of accounting.
C)assessment of the initial purchase price of the acquired company in relation to its assets.
D)methodologies for assessing impairment.

Question 77

The evidence that an auditor will most likely review to assess the recording of restructuring charges includes which of the following?

A)bank statements.
B)confirmations.
C)employment agreements.
D)acquisition indentures.

Question 78

Which represents the most significant risk associated with restructuring liabilities on the financial statements?

A)Understatement of assets in the period of recording the liabilities.
B)Future smoothing of income by releasing the reserves.
C)Related party transactions that are not recorded at arms-length.
D)Payroll liabilities that are not disclosed in the notes.

Question 79

Which of the following best represents the period in which testing will be performed for goodwill impairment by an audit client?

A)Year of final amortization.
B)Five year anniversary of acquisition.
C)As dictated by the internal auditors.
D)At least annually.

Question 80

All of the following represent a related entity to an organization except

A)the president's son.
B)an affiliate with common ownership.
C)customers.
D)primary owners.