Compliance and Auditing Financial Reporting Compliance 2 — Questions and Answers
Question 1: What is 'fair value accounting' and when is it required under US GAAP?
- Valuing assets at their original purchase price
- Measuring assets and liabilities at their current market value as required by specific GAAP standards (Correct answer)
- Applying equal value to all company assets
- Using historical cost for all balance sheet items
Correct answer: Measuring assets and liabilities at their current market value as required by specific GAAP standards
Fair value accounting measures assets and liabilities at the price that would be received to sell an asset or paid to transfer a liability in an orderly market transaction, required by standards like ASC 820.
Question 2: Which type of audit opinion is issued when a company's financial statements contain a material departure from GAAP?
- Unqualified opinion
- Qualified opinion
- Adverse opinion (Correct answer)
- Disclaimer of opinion
Correct answer: Adverse opinion
An adverse opinion is issued when the auditor concludes that the financial statements are materially misstated and do not present fairly in accordance with GAAP, indicating the statements are unreliable.
Question 3: What are 'related party transactions' and why do they require special disclosure?
- Transactions between the company and its employees
- Transactions between the company and entities with which it has a special relationship, requiring disclosure due to potential conflicts of interest (Correct answer)
- International transactions involving currency exchange
- Transactions processed by related accounting systems
Correct answer: Transactions between the company and entities with which it has a special relationship, requiring disclosure due to potential conflicts of interest
Related party transactions involve dealings between a company and entities with special relationships (executives, major shareholders, affiliates) that may not be at arm's length and require disclosure under GAAP to alert users to potential conflicts of interest.
Question 4: What is a 'going concern' opinion and what does it signal to investors?
- A positive opinion indicating strong financial health
- An auditor's conclusion that there is substantial doubt about the company's ability to continue as a going concern (Correct answer)
- An opinion about whether the company should continue operations
- A standard component of every clean audit opinion
Correct answer: An auditor's conclusion that there is substantial doubt about the company's ability to continue as a going concern
A going concern opinion is issued when auditors have substantial doubt about whether a company can continue operations for the next 12 months based on financial conditions and other factors.
Question 5: Which SEC regulation requires companies to disclose significant events within four business days?
- Form 10-K
- Form 10-Q
- Form 8-K (Correct answer)
- Form Proxy Statement (DEF 14A)
Correct answer: Form 8-K
Form 8-K must be filed with the SEC within four business days of significant corporate events such as material agreements, leadership changes, bankruptcy filings, or restatements.
Question 6: What is 'financial restatement' and what compliance obligations does it trigger?
- Restating financial goals for the next fiscal year
- Correcting previously issued financial statements that contained material errors, triggering regulatory and disclosure requirements (Correct answer)
- Restating employee financial benefits
- Revising budget projections mid-year
Correct answer: Correcting previously issued financial statements that contained material errors, triggering regulatory and disclosure requirements
A financial restatement corrects material errors in previously issued financial statements and triggers requirements to file amended SEC reports, notify investors, and often retest related internal controls.
Compliance and Auditing Financial Reporting Compliance 2
What is 'fair value accounting' and when is it required under US GAAP?