Accounting Principles and Auditing Quiz

Podcast

Play an AI-generated podcast conversation about this lesson

Questions and Answers

What is the correct order of current assets?

Receivables, cash, inventories, prepayments

Cash, receivables, inventories, prepayments

Prepayments, inventories, cash, receivables

Inventories, prepayments, receivables, cash (correct)

What does materiality in financial statements refer to?

The potential influence on user decisions (correct)

The timing of cash transactions

The format of presenting financial data

The amount of detail in the statement

Which of the following statements is true about internal auditors?

They are dependent on external governance

They report solely to shareholders

They independently review wider organizational issues (correct)

Their only role is financial statement verification

What is the primary objective of external auditors?

To add credibility and reliability to financial reports Signup and view all the answers

What is a qualified audit opinion?

A statement addressing reservations about the financial statements Signup and view all the answers

Under which concept do transactions and events get reported?

Accruals (matching) concept Signup and view all the answers

What are the four main characteristics of financial information?

Comparability, timeliness, understandability, verifiability Signup and view all the answers

Who do internal auditors primarily report to?

The internal board and senior management Signup and view all the answers

What is required for a financial statement to achieve 'fair presentation'?

It must be prepared under the going concern concept Signup and view all the answers

Which financial statement is NOT required by IAS 1?

Statement of operational efficiency Signup and view all the answers

Which of the following best describes the principle-based system of regulation in accounting?

It allows for more judgment in the application of accounting principles. Signup and view all the answers

What does the Going Concern concept assume about a business?

The business will operate indefinitely. Signup and view all the answers

Which regulations must a public limited company adhere to?

Companies Act, IAS, and IFRS Signup and view all the answers

What is the primary purpose of retaining earnings in a company?

To invest in new ventures or save for future needs Signup and view all the answers

What type of audit report is generally preferred by organizations?

Unqualified audit report Signup and view all the answers

What is the primary purpose of Corporate Governance?

To safeguard owners of the company Signup and view all the answers

When can a creditor initiate a winding-up petition?

Three weeks after the due payment date Signup and view all the answers

What is necessary for a company to be classified as a subsidiary?

It must be owned and controlled by another company Signup and view all the answers

What requirement must a group company meet according to Section 240 of the income taxes Act of 1988?

Be based in the UK with one or more subsidiaries Signup and view all the answers

How does a parent company maintain control over its subsidiaries?

By having voting rights and appointing key management personnel Signup and view all the answers

What does IAS 8 specify regarding changes in accounting estimates?

They should be applied prospectively Signup and view all the answers

What aspect does IAS 8 emphasize for organizations when reporting accounting policies?

Specific principles and the basis for judgements made Signup and view all the answers

What type of returns does a parent company expect from a subsidiary?

Variable returns such as dividends or interest Signup and view all the answers

Why must there be a minimum of 3 non-executive directors on a corporate board?

To ensure impartial decision-making and audits Signup and view all the answers

What is the definition of a group company in the UK?

A group is a company that is owned and controlled by another company. Signup and view all the answers

Which section of the Income Taxes Act 1988 must a group company satisfy?

Section 240 Signup and view all the answers

What is NOT a requirement for a group company in the UK?

Having control by a foreign company. Signup and view all the answers

Which of the following statements correctly describes the nature of a group company?

A group company must have one or more subsidiaries. Signup and view all the answers

Which section of the Companies Act 2006 is associated with the definition of a group company?

Section 101 Signup and view all the answers

How should organizations report changes in accounting estimates according to IAS 8?

On a prospective basis. Signup and view all the answers

Which of the following is NOT a method for reporting changes in accounting estimates?

On an estimated future basis. Signup and view all the answers

What is a common misconception about how changes in accounting estimates should be reported?

They must be reported on a retrospective basis. Signup and view all the answers

Which option best describes the reporting requirement for changes in accounting estimates?

They should be reflected in future financial statements. Signup and view all the answers

What should organizations avoid when reporting changes in accounting estimates?

Confusing changes with error corrections. Signup and view all the answers

What approach does USA GAAP primarily use?

It follows a principle-based approach. Signup and view all the answers

Which of the following statements best describes USA GAAP's alignment with accounting standards?

It incorporates general principles guiding reporting. Signup and view all the answers

Which characteristic is NOT associated with a principle-based accounting approach like USA GAAP?

Strict adherence to specific rules. Signup and view all the answers

What is a potential disadvantage of a principle-based approach compared to a rules-based approach in accounting?

It may result in inconsistencies in interpretation. Signup and view all the answers

In the context of USA GAAP, which statement is true regarding the necessity of adherence to established guidelines?

Adherence is mandatory for all organizations. Signup and view all the answers

Study Notes

Corporate Governance

Corporate governance is a system for directing, managing and controlling companies to safeguard owners' interests.
Boards must have a minimum of three non-executive directors.
The purpose of these recommendations is to ensure that decisions are carefully considered, and not knee-jerk reactions to competitor actions. Strategic direction and decision-making processes are monitored and followed up on.
Decisions should be carefully considered, not knee-jerk reactions, competitor reactions should be measured.
Non-executive directors are critical for strategic decision-making and ensuring appropriate oversight within the company.
A company's governance should include details of decision-making, reactions and monitoring.

Subsidiaries

A subsidiary is a company owned and controlled by another company.

Groups

A group company can include its UK business and one or more subsidiaries compliant with Section 240 of the Income Tax Act of 1988.

Subsidiary Control

The parent company controls the subsidiary through voting rights to appoint, or remove key personnel, and to direct its activities.
Variable returns (dividends or interest) and changes in investment value are considered.
An investor (parent) can control a subsidiary even if its not active in directing activities.
This control can involve directing relevant activities, influencing voting rights, appointing/removing personnel, and managing exposure to returns.
Exposure to returns includes variable factors like dividends, interest or fluctuations in investment value.

IAS 8 Accounting Policies

Changes in accounting estimates should be applied prospectively (looking forward).
If there are changes in accounting policies or identified errors that affect prior figures, they must be specifically documented. This involves explaining the basis for any judgments, assumptions, and estimates used.
The basis for judgements, estimations and assumptions should be explicit.

Financial Statements

Financial statements are prepared under the going concern concept, assuming the business will continue to trade.
Materiality means that omissions or misstatements would influence decisions.
Financial statements must follow the accrual method, matching transactions with periods, even if cash flow is different.
Financial statements must use words and numbers to accurately represent economic transactions.
Financial statements include items like inventories, receivables, prepayments, and cash, following an established order, as stated in the framework.

Internal Auditors

Internal auditors assess and report on the efficiency of systems and processes.
These assessments facilitate improvement in those systems and account for wider organisational issues, like reputation, employee relations, and environmental impact.
Internal auditors provide an unbiased, objective view on these systems.
They offer consulting to improve systems and processes.

External Auditors

External auditors examine financial statements to ensure they’re presented fairly.
They report differences between financial statement provisions and real-world operations.
Internal and external auditors have different objectives and reporting structures (one internal to the company and one external, to shareholders or the public).
External auditors review financial statements for fair presentation, and provide an opinion on their fairness.

Audit Opinions

A qualified audit opinion indicates an issue or problem with financial statements.

Conceptual Framework

Financial information needs to be comparable, timely, understandable and verifiable.

Financial Statement Formats (IAS 1)

Financial statements must include the statement of profit or loss/comprehensive income, statement of financial position, statement of changes in equity and statement of cash flows.

Accounting Regulation Systems

Principle-based systems offer flexibility but require more judgment than rules-based systems.

Accounting Regulations for Organisations

Unincorporated organisations must follow generally accepted accounting principles (GAAP) or other relevant accounting frameworks.
Public limited companies follow International Financial Reporting Standards (IFRS).

Going Concern Concept

The going concern concept assumes a business will operate long-term.

Director Duties (Companies Act)

Directors must act in good faith to promote company success for all members.

US GAAP

A rules-based approach that governs accounting practices.

Creative Accounting

Creative accounting is the use of accounting rules to present figures in a misleading way.

Audit Report Type

An unqualified audit report is preferred by an organisation as it indicates no significant issues with its financial statements.

Retained Earnings

Historical profits after accounting for dividends.

Creditor Dispute Resolution

A creditor can initiate a winding-up petition if a debt isn't paid within a specified period.

IAS 8 Accounting Policy Changes

Organisations must retrospectively report changes in accounting policies and corrections of errors.

Transactions between the organisation and related parties must be disclosed to provide transparency.

Inventories (IAS 2)

Inventories should be valued at the lower of cost or net realizable value (NRV).

FRS 101 and 105 Disclosure Framework

FRS 101 allows reduced disclosures for specific types of entities.

FRS 102 Financial Reporting Standard

This standard applies when IFRS, FRS 101 and FRS 105 are not applicable and the entity is not a profit-oriented company.

Operating Expenses

Operating expenses are costs incurred in running a business.

Studying That Suits You

Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

Description

Test your knowledge of key concepts in accounting and auditing, including current assets, financial statement characteristics, and the roles of internal and external auditors. This quiz covers essential principles and regulations that govern financial practices in organizations.