CFE Exam Quiz 60

Comprehensive bases of accounting include:
• Government or regulatory agency accounting
• Tax basis accounting
• Cash receipts and disbursements, or modified cash receipts and disbursements
• Any other basis with a definite set of criteria applied to all material items, such as the
price-level basis of accounting

The balance sheet shows a “snapshot” of a company’s financial situation at a specific point in time, generally the last day of the accounting period. The balance sheet is an expansion of the accounting equation, assets = liabilities + owners’ equity. That is, it lists a company’s assets on one side and its liabilities and owners’ equity on the other side. The nature of the accounting equation means that the two sides of the statement should balance, hence the name “balance sheet.”

The auditor shall obtain written representations from management that:
• It acknowledges its responsibility for the design, implementation, and maintenance of internal control to prevent and detect fraud;
• It has disclosed to the auditor the results of its assessment of the risk that the financial statements may be materially misstated as a result of fraud;
• It has disclosed to the auditor its knowledge of fraud.
• It has disclosed to the auditor its knowledge of any allegations of fraud, or suspected fraud, affecting the entity’s financial statements communicated by employees, former employees, analysts, regulators, or others.

Examples of assets include cash, receivables, inventory, property, and equipment, as well as intangible items of value such as patents, licenses, and trademarks. To qualify as an asset, an item must (1) be owned by the entity and (2) provide future benefit.

The original member countries of the OECD are Austria, Belgium, Canada, Denmark, France, Germany, Greece, Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, the United Kingdom, and the United States.

The owners’ equity in a firm generally represents amounts from two sources—owner contributions (usually referred to as common or capital stock, or paid-in capital) and undistributed earnings (usually referred to as retained earnings).

Responsibilities of the Auditor
An auditor conducting an audit in accordance with ISAs is responsible for obtaining reasonable assurance that the financial statements taken as a whole are free from material misstatement, whether caused by error or fraud.

While the auditor may be able to identify potential opportunities for fraud to be perpetrated, it is difficult for the auditor to determine whether misstatements in judgement areas such as accounting estimates are caused by fraud or error.

Assets are segregated on the balance sheet based on liquidity or how soon they are expected to be converted to cash. Current assets, includes all those assets that are expected to be converted to cash, sold, or used up within one year, includes cash, accounts receivable, & prepaid items.

Following the current assets are the long-term assets, or those assets that will likely not be converted to cash in the near future.

A company’s fixed assets are presented net of accumulated depreciation, and intangible assets are presented net of accumulated amortization

An effective document retention policy requires that a company
(1) establish retention protocols before it foresees litigation or official investigation;
(2) develop, review, and/or amend a policy for compliance with applicable state and federal laws and regulations;
(3) ensure the reasonableness of the policy according to the company’s business practices;
(4) provide a concise explanation of what is to be destroyed and when;
(5) provide adequate protocols for management of electronic documents; and
(6) clearly set forth when the policy should be immobilised due to a pending investigation or foreseeable litigation.

Financial statements include presentations of financial data and accompanying notes
prepared in conformity with either generally accepted accounting principles or some other
comprehensive basis of accounting. The following is a list of such financial statements:
• Balance sheet
• Statement of income or statement of operations
• Statement of retained earnings
• Statement of cash flows
• Statement of changes in owners’ equity
• Statement of assets and liabilities that does not include owners’ equity accounts
• Statement of revenue and expenses
• Summary of operations
• Statement of operations by product lines
• Statement of cash receipts and disbursements

Operating expenses are those costs that a company incurs to support and sustain its business operations. Generally, these expenses include items such as advertising, management’s salaries, office supplies, repairs and maintenance, rent, utilities, depreciation, interest, and taxes.

The statement of cash flows is broken down into three sections: cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities.

The OECD Principles of Corporate Governance provide specific guidance for policymakers, regulators, and market participants in improving the legal, institutional, and regulatory framework that underpins corporate governance, with a focus on publicly traded companies.

The accounts reflected on the income statement are temporary; at the end of each fiscal year, they are reduced to a zero balance (closed), with the resulting net income (or loss) added to (or subtracted from) retained earnings on the balance sheet. Two basic types of accounts are reported on the income statement—revenues and expenses.
Most companies present net sales or net service revenues as the first line item on the income statement

All types of documents produced by an organisation must be initially accounted for. This includes tangible and electronic documents, and is never limited to financial documents. Accounting records, corporate tax records, bank records, employment records, various workplace records (including in-house e-mails and client correspondence), and legal records must be considered when constructing a DRP for a particular organisation.

The OECD Principles of Corporate Governance cover six main areas, which are divided into chapters.
The Principles:
• Request governments to have in place an effective institutional and legal framework to support good corporate governance practices (Chapter I);
• Call for a corporate governance framework that protects and facilitates the exercise of shareholders’ rights (Chapter II);
• Strongly support the equal treatment of all shareholders, including minority and foreign shareholders (Chapter III);
• Recognise the importance of the role of stakeholders in corporate governance (Chapter IV);
• Look at the importance of timely, accurate, and transparent disclosure mechanisms (Chapter V); and
• Deal with board structures, responsibilities, and procedures (Chapter VI).

According to the COSO report, enterprise risk management encompasses:
• Aligning risk appetite and strategy.
• Enhancing risk response decisions.
• Reducing operational surprises and losses.
• Identifying and managing multiple and cross-enterprise risks.
• Seizing opportunities.
• Improving deployment of capital.

The statement of cash flows reports a company’s sources and uses of cash during the accounting period. This statement is often used by potential investors and other interested parties in tandem with the income statement to determine the true financial performance of a company during the period being reported.

A DRP manager is responsible for:
• Implementing the DRP;
• Ensuring that employees understand and follow the DRP’s purpose;
• Providing oversight on actual retention and destruction of documents;
• Ensuring proper storage of documents;
• Periodically following up with counsel to ensure proper retention periods are in place;
• Suspending the destruction of documents upon foreseeable litigation; and
• Informing corporate officers, directors, and employees of changes in relation to the DRP.

Cash inflows from investing activities usually arise from the sale of fixed assets (e.g., property and equipment), investments (e.g., the stocks and bonds of other companies), or intangible assets (e.g., patents and trademarks). Similarly, cash outflows from investing activities include any cash paid for the purchase of fixed assets, investments, or intangible assets.

Fraudulent financial reporting may be accomplished by the following:
• Manipulation, falsification (including forgery), or alteration of accounting records or supporting documentation from which the financial statements are prepared.
• Misrepresentation in, or intentional omission from, the financial statements of events, transactions, or other significant information.
• Intentional misapplication of accounting principles relating to amounts, classification, manner of presentation, or disclosure.

Cash flows from financing activities involve the cash received or paid in connection with issuing debt and equity securities. Cash inflows in this category occur when a company sells its own stock, issues bonds, or takes out a loan. A company’s cash outflows from financing activities include paying cash dividends to shareholders, acquiring shares of its own stock (called treasury stock), and repaying debt.

The statement of owners’ equity details the changes in the total owners’ equity amount listed on the balance sheet.

An organisation’s board of directors and senior management generally set the code of conduct for the company. This code of conduct is often referred to as the company’s “ethic” and is the standard by which all employees are expected to conduct themselves.

Internal Control is a process…designed to provide reasonable assurance regarding the achievement of objectives in the following categories:
a) reliability of financial reporting,
b) effectiveness and efficiency of operations, and
c) compliance with applicable laws and regulations.

The professional auditing organisations—the American Institute of Certified Public Accountants, The Institute of Internal Auditors, and the American Accounting Association, among others—established the Treadway Commission to underwrite a study and make recommendations.

The objectives of the auditor, as outlined in ISA 240, are:
a) To identify and assess the risks of material misstatement of the financial statements due to fraud;
b) To obtain sufficient appropriate audit evidence about the assessed risks of material misstatement due to fraud, through designing and implementing appropriate responses; and
c) To respond appropriately to identified or suspected fraud.

The three conditions that are generally present when fraud exists:
• An incentive or pressure to commit fraud;
• A perceived opportunity to commit fraud; and
• An ability to rationalise the fraudulent action.

In the case of a large entity, there may be factors that generally constrain improper conduct by management, such as:
• Effective oversight by those charged with governance
• An effective internal audit function
• The existence and enforcement of a written code of conduct

When establishing a document retention policy, it is imperative that the organisation consider all federal and state laws and regulations regarding record-keeping requirements. Industries such as health care, banking, and auditing contain trade-specific rules for documenting and retaining records. Furthermore, companies should continuously check for legal updates concerning these requirements.