Question 1

Level 1 assets is a broad category of assets and applies to financial instruments, property, or lower of cost or market considerations for inventory, loans, or receivables.

Accepted Answer

Level 1 assets specifically refer to financial instruments that are valued based on quoted prices in active markets, such as stocks traded on major exchanges, and do not apply to property, inventory, loans, or receivables.

Question 2

When auditing financial hedges, the auditor should understand the product, identify relevant risks and controls, and understand the appropriate accounting.

Accepted Answer

This statement is true. When auditing financial hedges, the auditor should have a good understanding of the product being used to hedge, identify any relevant risks and controls, and ensure that the appropriate accounting treatment is being used. This helps to ensure the accuracy and integrity of the financial statements.

Question 3

Assuming that other assets have been properly valued, if the market value of the reporting unit is equal to the carrying value of the assets of the reporting unit, the presumption is that goodwill has been impaired.

Accepted Answer

The presumption is not that goodwill has been impaired if the market value of the reporting unit is equal to the carrying value of its assets. Impairment testing for goodwill involves comparing the fair value of the reporting unit with its carrying value, including the carrying value of goodwill. If the carrying value of goodwill exceeds its implied fair value, then impairment has occurred.

Question 4

Evidence of fraud, whether or not material, on the part of senior management, would likely cause the auditor to conclude that the client had a material weakness in internal control over financial reporting.

Accepted Answer

Fraud by senior management indicates a breakdown or lack of effectiveness in the internal control system, making it a material weakness.

Question 5

If restructuring charges are not calculated correctly, the charges can be used to fraudulently manipulate income.

Accepted Answer

If restructuring charges are not calculated correctly, they can be used to artificially decrease income or expenses, leading to fraudulent manipulation of financial statements.

Question 6

The volume of transactions affected is one of the critical criteria in assessing identified internal control deficiencies.

Accepted Answer

The volume of transactions affected is a critical criterion in assessing identified internal control deficiencies. The number of transactions impacted can have a significant impact on the severity and potential consequences of the deficiency. For example, a deficiency that affects a high volume of transactions could result in a material misstatement in the financial statements, while a deficiency that affects only a few transactions may not have a significant impact. Therefore, the volume of transactions affected is an important factor in evaluating the severity of internal control deficiencies.

Question 7

U.S. accounting standards require organizations to use a two-step process to determine the impairment of goodwill.

Accepted Answer

The answer of U.S. accounting standards require organizations to use...

Question 8

An audit of Level 1 assets is likely to be less challenging than an audit of Level 3 assets.

Accepted Answer

Level 1 assets are highly liquid and have readily observable market prices, making it easier to obtain reliable audit evidence. Level 3 assets, on the other hand, are illiquid and have unobservable inputs, making it more challenging to determine their fair value and assess the adequacy of disclosures. Therefore, auditing Level 3 assets is typically more complex and requires more professional judgment and expertise.

Question 9

Audits of Level 3 assets are the most straightforward as they involve an observable, active market.

Accepted Answer

Audits of Level 3 assets are actually the most complex as they involve unobservable inputs, making it difficult to determine their fair value. These assets include private equities, real estate investments, and other illiquid assets, which do not have an observable market.

Question 10

Independence of the internal audit function is obtained by giving the Chief Audit Executive (CAE) unrestricted access to the board and senior management.

Accepted Answer

Independence of the internal audit function is crucial for maintaining objectivity and credibility. Unrestricted access to the board and senior management allows the CAE to report findings and recommendations without fear of reprisal or retaliation, which is essential for maintaining the integrity and effectiveness of the audit function. Therefore, giving the CAE unrestricted access to the board and senior management is a key factor in ensuring the independence of the internal audit function.

Question 11

When assessing fair value of Level 2 assets, auditors will use information on the sale of identical items in active or inactive markets as a source of audit evidence.

Accepted Answer

Level 2 assets are valued based on observable inputs other than quoted prices for identical assets in active markets, such as quoted prices for similar assets in active markets or quoted prices for identical or similar assets in inactive markets, not directly on sales of identical items.

Question 12

A sensitivity analysis of changes in value based on industry and cash-flow assumptions is one of the aspects of the audit program for goodwill impairment testing.

Accepted Answer

Sensitivity analysis of changes in value based on industry and cash-flow assumptions is a crucial step in determining whether impairment has occurred in goodwill. This is typically included in the audit program for goodwill impairment testing.

Question 13

While performing goodwill impairment testing, if the original reporting unit no longer exists because operations have been fully integrated into operations of the parent company, the approach would be to determine whether all other assets have been adjusted to fair value, where applicable.

Accepted Answer

If the reporting unit no longer exists, the goodwill should be allocated to the remaining assets and liabilities of the parent company, and any excess should be recognized as a gain. The remaining assets and liabilities should be adjusted to fair value, where applicable.

Question 14

In the U.S. a CPA firm can provide both internal and external audit services for the same public company client.

Accepted Answer

In the U.S., a CPA firm cannot provide both internal and external audit services for the same public company client due to independence rules set by the Sarbanes-Oxley Act and the SEC.

Question 15

Internal auditors can perform both consulting services and assurance services.

Accepted Answer

Internal auditors can perform both consulting services (providing advice and recommendations for improvement) and assurance services (evaluating and providing assurance on the effectiveness of controls and processes).

Question 16

A compensating control would not be considered as a factor that could mitigate a potential material weakness.

Accepted Answer

Compensating controls are implemented to mitigate the risk posed by a material weakness. Therefore, compensating controls can be considered as a factor in mitigating potential material weaknesses.

Question 17

The significant judgments related to debt depend on specific accounting rules (U.S. or international) that the company is following.

Accepted Answer

The accounting rules followed by a company determine how debt is recognized and reported on the financial statements, which can impact significant judgments related to the debt. Differences between U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) can also impact how debt is accounted for. Therefore, the statement is true.

Question 18

In assessing the fair value of Level 1 assets, the auditor can perform an analysis of the volume of trading activity as part of obtaining audit evidence.

Accepted Answer

The volume of trading activity in Level 1 assets can be useful in assessing their fair value, and the auditor can consider this as part of obtaining audit evidence.

Question 19

Current FMV of assets and liabilities of non-goodwill assets is one of the factors affecting goodwill impairment valuations.

Accepted Answer

The current FMV of assets and liabilities of non-goodwill assets is considered when determining the fair value of a reporting unit, which is then compared to the carrying value of the reporting unit, including any goodwill. If the fair value is lower than the carrying value, then the difference is the amount of goodwill impairment. Therefore, the current FMV of assets and liabilities of non-goodwill assets is a factor affecting goodwill impairment valuations.

Question 20

When there is a ready market for financial instruments, the audit procedures related to valuation and disclosures are more straightforward than when the instrument is not readily marketable.

Accepted Answer

When an instrument is easily tradable in a market, there are often readily available market prices that can be used to value the instrument. This makes the valuation and disclosure audit procedures simpler and more straightforward compared to when the instrument does not have a ready market.

Quiz 16: Advanced Topics Concerning Complex Auditing Judgments