Connect Access Card for Principles of Auditing & Other Assurance Services
21st Edition
ISBN: 9781260299366
Author: Ray Whittington, Kurt Pany
Publisher: McGraw-Hill Education
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Chapter 15, Problem 23RQ
To determine
Provide three conditions that might put the restriction on the
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Define the phrase “earnings management.” Under what conditions, if any, is earnings management acceptable? Do auditors’ responsibilities include actively searching for instances of earnings management by clients? Defend your answers.
Define materiality. How does materiality come into play when assessing financial statement restatements? Other than materiality, what is the one word that might be the most distinguishing factor between ethical earnings management and unethical earnings management?
Which of the following situations would raise an auditor's concern about the risk of fraudulent reporting? Inability to generate positive cash flows from operations, while reporting large increases in earnings, Management's lack of interest in increasing the dividend paid on common stock, Large amounts of liquid assets that are easily convertible into cash, Inability to borrow necessary capital without obtaining waivers on debt covenants
Chapter 15 Solutions
Connect Access Card for Principles of Auditing & Other Assurance Services
Ch. 15 - What does the trust indenture used by a...Ch. 15 - Long-term creditors often insist upon placing...Ch. 15 - Prob. 3RQCh. 15 - Prob. 4RQCh. 15 - Prob. 5RQCh. 15 - Prob. 6RQCh. 15 - Prob. 7RQCh. 15 - Prob. 8RQCh. 15 - Prob. 9RQCh. 15 - Prob. 10RQ
Ch. 15 - Mansfield Corporation has outstanding an issue of...Ch. 15 - Prob. 12RQCh. 15 - Prob. 13RQCh. 15 - What do you consider to be the most important...Ch. 15 - What is the primary responsibility of an...Ch. 15 - In the audit of a small corporation that issues...Ch. 15 - Prob. 17RQCh. 15 - Prob. 18RQCh. 15 - Prob. 19RQCh. 15 - Corporations sometimes issue their own capital...Ch. 15 - Prob. 21RQCh. 15 - Prob. 22RQCh. 15 - Prob. 23RQCh. 15 - Prob. 24RQCh. 15 - Prob. 25RQCh. 15 - Prob. 26RQCh. 15 - Prob. 27QRACh. 15 - Prob. 28QRACh. 15 - Prob. 29QRACh. 15 - You are retained by Columbia Corporation to audit...Ch. 15 - Prob. 31QRACh. 15 - Prob. 32AOQCh. 15 - Prob. 32BOQCh. 15 - Prob. 32COQCh. 15 - Prob. 32DOQCh. 15 - Prob. 32EOQCh. 15 - When a client uses paper stock certificates, an...Ch. 15 - Prob. 32GOQCh. 15 - The auditors can best verify a clients bond...Ch. 15 - Prob. 32IOQCh. 15 - All corporate capital stock transactions should...Ch. 15 - Prob. 32KOQCh. 15 - Prob. 32LOQCh. 15 - Prob. 32MOQCh. 15 - Prob. 32NOQCh. 15 - Prob. 32OOQCh. 15 - An auditor most likely would inspect loan...Ch. 15 - Prob. 32QOQCh. 15 - Match the following definitions (or partial...Ch. 15 - Prob. 34PCh. 15 - Prob. 35PCh. 15 - Prob. 36PCh. 15 - Prob. 37P
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- What is the primary difference between the two methods for disaggregating ROE and how does each method inform the analysis of a company’s financial performance?arrow_forwardDescribe pro forma income and the importance of pro forma income in the evaluation of the income statement. Choose at least two items that are excluded from pro forma income. Suggest to management why including the items would be misleading to investors and creditors.arrow_forwardIn an attestation engagement, a CPA practitioner is engaged toa. Compile a company’s financial forecast based on management’s assumptions without expressing any form of assurance.b. Prepare a written report containing a conclusion about the reliability of a management assertion.c. Prepare a tax return using information the CPA has not audited or reviewed.d. Give expert testimony in court on particular facts in a corporate income tax controversy.arrow_forward
- which of the following application would an auditor apply to determine the probability of a corporation's account balance being in error? A) overinvolvement rations B) probability rules C) bayes theorem D) emprical formulaarrow_forwardMaines and Wahlen94 state in their research paper on the reliability of accounting information: “Accrual estimates require judgment and discretion, which some firms under certain incentive conditions will exploit to report non-neutral accruals estimates within GAAP. Accounting standards can enhance the information in accrual estimates by linking them to the underlying economic constructs they portray.” Explain what the authors meant by this statement with respect to the possible existence of earnings management.arrow_forwardWhy is an entity permitted to change an accounting policy? A. The change would allow the entity to present a more favorable profit picture.B. The change would result in the financial statements providing more reliable and relevant information about financial position, financial performance and cash flowsC. The change is made by the internal auditorD. The change is made by the CPAarrow_forward
- Needles talks about the use of a continuum ranging from questionable or highly conservative to fraud to assess the amount to be recorded for an estimated expense. Do you believe that the choice of an overly conservative or overly aggressive amount would reflect earnings management? Explain.arrow_forwardDiscuss the arguments for each position. Some individuals maintain that the only proper accounting treatment for all marketable securities is current value, while others maintain that this treatment might allow companies to manage earnings.arrow_forwardYou are testing the dividend income recorded by LASTNATO company. Which auditprocedure is least likely to validate the existence/occurrence assertion: choices: Recalculation of dividend incomeVouching of remittance slips of dividend incomeReading the minutes of meetingAll of the choices will address the existence/occurrence assertion.arrow_forward
- Accountant’s Report: Who are the independent CPA’s? What kind of opinion did they express? Should this opinion increase the reliability of the financial statements? Why? Income (Operations) Statement: Is this a comparative statement? Is this a consolidated statement? What is the profit margin percentage? What is the effective income tax rate? Are there any discontinued operations, extraordinary items, or cumulative effective changes in accounting principles (if so, what are they)? Which earnings per share (EPS) are reported (descriptions and amounts)? Are there any unusual items? Balance Sheet: Determine the categories of plant assets. (hint: refer to the footnotes) Are there any unpaid or deferred income tax liabilities? How many classes of capital stock are shown? How many classes have been issued? Does the stock(s) sell at or above par or stated value? What percent of total assets is provided by stockholders’ equity? What percent of stockholders’ equity is represented…arrow_forwardFill in the blanks below with the accounting principle, assumption, or related item that best completes the sentence. ________________________ and _______________________ are the two fundamental qualities that make accounting information useful for decision making. Information that helps users confirm or correct prior expectations has _________________ ___________________. ________________________ enables users to identify the real similarities and differences in economic events between companies. _________________ is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Information is _______________________ if omitting it or misstating it could influence decisions that users make on the basis of the reported financial information. The ________________________ characteristic requires that the same accounting method be used from one accounting…arrow_forwardEvaluate the following statements from an ethical perspective:“Earnings management in a narrow sense is the behavior of management to play with the discretionary accrual component to determine high or low earnings.”“Earnings are potentially managed, because financial accounting standards still provide alternative methods.”arrow_forward
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