Question 1

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

Accepted Answer

As part of their audit procedures, the auditor must review the board of directors' meeting minutes and resolutions to ensure that all dividends declared were authorized by the board of directors in accordance with applicable laws and regulations. This is necessary to confirm the legality and validity of the dividends.

Question 2

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

Accepted Answer

Accounting combinations may be performed using either the pooling of interest method or the purchase method. The pooling of interest method is only allowed under specific circumstances and involves combining the two companies' balance sheets using their historical book values. The purchase method, on the other hand, involves combining the two companies' balance sheets at fair value and assigning the excess to goodwill. Both methods are recognized by accounting standards and are treated as mergers.

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.

Accepted Answer

This statement is true. When the fair value of a reporting unit is less than its book value, including the goodwill, it indicates that the goodwill may be impaired and a goodwill impairment test should be performed. This impairment test evaluates whether the carrying amount of the goodwill exceeds its fair value and whether a write-down is necessary.

Question 4

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

Accepted Answer

Professional skepticism is the attitude or mindset that the auditor should maintain when conducting an audit, which involves questioning and critically assessing the evidence presented by management or other sources. Therefore, the statement is incorrect, as professional skepticism requires auditors to be vigilant and challenging while gathering and evaluating information.

Question 5

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

Accepted Answer

Impairment tests for goodwill should be performed annually or more frequently if there is an indication of impairment. The five-year timeframe is for amortization of goodwill, which is no longer required under US GAAP.

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.

Accepted Answer

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. This is because goodwill impairment testing involves comparing the fair value of reporting units to their carrying values, and if the unit relating to goodwill is not the reporting unit, it may be necessary to estimate its fair value using cash flow projections.

Question 7

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

Accepted Answer

The auditor is responsible for determining the fair market value of the net assets acquired during an acquisition. This can be a challenge, as the value can be influenced by a variety of factors, including market conditions, the quality and nature of the assets, and the terms of the acquisition agreement. The auditor must use appropriate valuation methods and techniques to arrive at an accurate fair market value.

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.

Accepted Answer

There have been several cases in which companies have manipulated their pension obligation assumptions to smooth their earnings. Therefore, it is crucial for auditors to exercise appropriate professional skepticism in this area.

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.

Accepted Answer

Valuation of assets for the purpose of acquisition accounting can be complex as it involves accounting for goodwill, intangible assets, and potential revaluation of assets to fair value. While the target company may maintain some assets at their fair market value, it is not always the case.

Question 10

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

Accepted Answer

During an acquisition, there may be restructuring charges and expenses related to integrating the acquired company, such as severance packages, reorganization costs, and asset impairments. These charges and expenses can be estimated and a liability recorded in the financial statements.

Question 11

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

Accepted Answer

Although the FASB has refined the accounting for business combinations, there is always the possibility that further changes and updates may be made in the future. Additionally, the adoption and implementation of these changes may require ongoing training and education for accountants.

Question 12

Goodwill within operating segments can be offset (netted).

Accepted Answer

Goodwill within operating segments can indeed be offset or netted. This means that if a company has goodwill in one operating segment and a corresponding amount of negative goodwill (also known as a bargain purchase) in another operating segment, the two amounts can be netted against each other to reduce the amount of overall goodwill on the company's balance sheet. This offsetting is only allowed within operating segments, not between them.

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.

Accepted Answer

The auditor cannot solely rely on management inquiry for all disclosures relating to bond indentures, as they are required to read and understand the relevant portions of the indenture to ensure their accuracy and completeness. Simply relying on management inquiry would not be sufficient to meet auditing standards.

Question 14

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

Accepted Answer

Audit tests for goodwill and other asset impairments involve significant judgment on the part of the auditor, as it involves assessing the likelihood of impairment, selecting appropriate valuation methods, and determining the appropriate accounting treatment. The auditor must exercise professional judgment in performing these tests to ensure that financial statements fairly present the extent of impairment, if any.

Question 15

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

Accepted Answer

The answer of Testing of goodwill for possible impairment is...

Question 16

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

Accepted Answer

A comprehensive audit program for stockholders' equity should include a step requiring the examination of all minutes, bylaws, and articles of incorporation to ensure compliance with laws and regulations, proper authorization of stock issuances and dividends, and accuracy of capital stock accounts.

Question 17

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

Accepted Answer

The impairment of goodwill should be reviewed for potential impairment at least annually, or more frequently if there is a significant adverse change in the business environment. If such a change occurs, the impairment of goodwill should be addressed immediately, including recalculating the goodwill impairment test.

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.

Accepted Answer

This statement is true. Goodwill is the amount paid by a company over the fair market value of the identifiable assets it acquires during a business acquisition. It represents the value of the intangible assets of the acquired company, such as reputation, brand name, customer loyalty, and intellectual property. Goodwill is considered an intangible asset on the acquiring company's balance sheet and is subject to annual impairment tests.

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.

Accepted Answer

The auditor has a responsibility to use professional skepticism for significant assumptions used by actuaries, even though they are independent professionals. This is because the auditor is still responsible for evaluating the reasonableness of the assumptions and ensuring that the financial statements are fairly presented.

Question 20

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

Accepted Answer

Goodwill is not amortized; instead, it is tested annually for impairment according to accounting standards like IFRS and US GAAP.

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