Internet problem solution materiality and tolerable

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Unformatted text preview: Answer: Microsoft’s income before taxes for 2008 was $23.814 billion. Thus, engagement materiality could range from $714.4 million (3%) to $1.429 billion (6%). Although student responses will vary, a higher materiality seems appropriate given Microsoft’s market position and overall financial condition. b. Given Microsoft’s 2008 balance sheet, what asset line items would be allocated the highest amount of tolerable misstatement? Why? Answer: The two largest asset line items are “Cash and short-term investments” at $23.662 billion and “Accounts Receivable” at $13.589 billion. These accounts would likely receive the largest allocation of tolerable misstatement. A large allocation of tolerable misstatement to “Goodwill” which has a balance of $12.108 billion is also likely due to the valuation issues. (Note: Internet problems address current issues using Internet sources. Because Internet sites are subject to change, Internet problems and solutions may change. Current information on Internet problems is available at www.pearsonglobaleditions.com/arens.) 9-80 Chapter 1 Multiple-Choice Questions 1. easy c Recording, classifying, and summarizing economic events in a logical manner for the purpose of providing financial information for decision making is commonly called: a. finance. b. auditing. c. accounting. d. economics. 2. easy c In the audit of historical financial statements, which of the following accounting bases is the most common? a. Regulatory accounting principles. b. Cash basis of accounting. c. Generally accepted accounting principles. d. Liquidation basis of accounting. 3. easy b Any service that requires a CPA firm to issue a report about the reliability of an assertion that is made by another party is a(n): a. accounting and bookkeeping service. b. attestation service. c. assurance service. d. tax service. 4. easy a Three common types of attestation services are: a. audits, reviews, and “other” attestation services. b. audits, verifications, and “other” attestation services. c. reviews, verifications, and “other” attestation services. d. audits, reviews, and verifications. 5. (SOX) easy d The organization that is responsible for providing oversight for auditors of public companies is called the ________. a. Auditing Standards Board. b. American Institute of Certified Public Accountants. c. Public Oversight Board. d. Public Company Accounting Oversight Board. 6. (SOX) easy c The Sarbanes-Oxley Act applies to which of the following companies? a. All companies. b. Privately held companies. c. Public companies. d. All public companies and privately held companies with assets greater than $500 million. 7. medium d Providing quantitative information that management and others can use to make decisions is the function of: a. management information systems. b. auditing. c. finance. d. accounting. 1-81 8. medium d An audit of historical financial statements most commonly includes the: a. balance sheet, the income statement, and the statement of cash flows. b. income statement, the statement of cash flows, and the statement of net working capital. c. statement of cash flows, the balance sheet, and the retained earnings statement. d. balance sheet, the income statement, and the statement of cash flows. 9. medium c The ___________ rate may be defined as approximately the rate a bank could earn by investing in U.S. treasury notes for the same length as the length of a business loan. a. nominal b. stated c. risk-free d. prevailing 10. medium b The use of the Certified Public Accountant title is regulated by: a. the federal government. b. state law through a licensing department or agency of each state. c. the American Institute of Certified Public Accountants through the licensing departments of the tax and auditing committees. d. the Securities and Exchange Commission. 11. medium c An operational audit has as one of its objectives to: a. determine whether the financial statements fairly present the entity’s operations. b. evaluate the feasibility of attaining the entity’s operational objectives. c. make recommendations for improving performance. d. report on the entity’s relative success in attaining profit maximization. 12. medium d An audit of historical financial statements is most often performed to determine whether the: a. organization is operating efficiently and effectively. b. entity is following specific procedures or rules set down by some higher authority. c. management team is fulfilling its fiduciary responsibilities to shareholders. d. none of these choices. 13. medium a An examination of part of an organization’s procedures and methods for the purpose of evaluating efficiency and effectiveness is what type of audit? a. Operational audit. b. Compliance audit. c. Financial statement audit. d. Production audit. 14. medium b An audit to determine whether an entity is following specific procedures or rules set down by some higher authority is classified as a(n): a. audit of financial statements. b. complia...
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