(b) The requirement is to interpret an equity beta of 1.4. Beta is a measure of systematic risk of the investment. Answer (b) is correct because a beta of greater than 1 means the investment’s systematic risk is higher than that of the market portfolio. Answer (a) is incorrect because the beta would have to be less than 1 for this relationship to exist. Answers (c) and (d) are incorrect because beta focuses on systematic risk.
(b) The requirement is to identify the measure of the risk of an investment relative to other investments in general. Answer (b) is correct because the beta coefficient of an individual stock is the correlation between the stock’s price and the price of the overall market. As an example, if the market goes up 5% and the individual stock’s price, on average, goes up 10%, the stock’s beta coefficient is 2.0. Answer (a) is incorrect because the coefficient of variation compares the risk of the stock to its expected return. Answer (c) is incorrect because the standard deviation measures the dispersion of the individual stock’s returns. Answer (d) is incorrect because the expected return does not measure risk.
(d) The requirement is to identify the riskier stock. Answer (d) is correct because the coefficient of variation of Mustang is higher. The coefficient of variation provides a measure of the relative variability of investments. It is calculated by dividing the standard deviation of the investment by its expected return. The coefficient of variation for Cornhusker is .75 (.15 ÷ .20) and the coefficient of variation for Mustang is .9 (0.09 ÷ .10). Answer (a) is incorrect because a higher return does not always mean higher risk. Answer (b) is incorrect because the higher standard deviation must be viewed relative to the expected return. Answer (c) is incorrect because Mustang’s coefficient of variation is higher than Cornhusker’s coefficient of variation.
(a) The requirement is to identify a conceptual difference between the attestation standards and generally accepted auditing standards. Answer (a) is correct because AT 101 states that the attestation standards do not apply to audits of historical financial statements. Answer (b) is incorrect because an independent mental attitude is required for attestation engagements. Answer (c) is incorrect because an attest engagement may be related to a business acquisition study or a feasibility study. Answer (d) is incorrect because while there is no internal control fieldwork standard under the attestation standards, both a planning and an evidence standard of fieldwork are included.
(d) The requirement is to identify the reply which is not an attestation standard. Answer (d) is correct because the attestation standards do not include a requirement that a sufficient understanding of internal control be obtained to plan the engagement. There is no internal control standard because the concept of internal control may not be relevant to certain assertions on which a CPA may be engaged to report (e.g., aspects of information about computer software). Answers (a), (b), and (c) are all incorrect because standards exist for evidence, reporting on the assertion or subject matter, and proper planning.
(c) The requirement is to identify the characteristic that is most likely to be unique to the audit work of CPAs as compared to work performed by practitioners of other professions. Answer (c) is correct because independence is absolutely required for the performance of audits; other professions do not in general require such independence. Answers (a), (b), and (d) are incorrect because the various professions require due professional care and competence and have a complex body of knowledge.
(d) The requirement is to determine what is meant by the third general standard’s requirement of due care in the performance of an audit. Answer (d) is correct because due care requires critical review at every level of supervision of the work done and the judgment exercised by those assisting in the audit. Answer (a) is incorrect because the due care standard does not directly address safeguards over access to assets and records. Answer (b) is incorrect because due care does not relate to a limited review of employee fraud and illegal acts. Answer (c) is incorrect because the first general standard addresses technical training and proficiency as an auditor.
(a) The requirement is to identify the focus of a final wrap-up review performed by a second partner who has not been involved in the audit. Answer (a) is correct because this second or “cold†review aims at determining whether the financial statements result in fair presentation in conformity with GAAP and with whether sufficient appropriate evidence has been obtained. Answer (b) is incorrect because most frequently fraud involving the client’s management and its employees have not been discovered and, even if they have been, the focus of the review is still on the fairness of presentation of the financial statements. Answers (c) and (d) are incorrect because decisions on materiality and communications with the audit committee are only two of the many matters the review may address in an effort to address fairness of presentation of the financial statements.
(a) The requirement is to identify the categories of financial statement assertions. Answer (a) is correct because the professional standards establish financial statement assertions for account balances, classes of transactions and disclosures. Answer (b) is incorrect because financial statement assertions are established for disclosures. Answer (c) is incorrect because financial statement assertions are established for classes of transactions. Answer (d) is incorrect because financial statement assertions are established for both classes of transactions and disclosures.
(d) The requirement is to identify the item that is not a financial statement assertion relating to account balances. Answer (d) is correct because valuation and allocation is an account balance assertion, not valuation and competence. Answer (a) is incorrect because completeness is an assertion relating to account balances. Answer (b) is incorrect because existence is an assertion relating to account balances. Answer (c) is incorrect because rights and obligations is an assertion relating to account balances.
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