Asked by SuperHumanUniverse5148 on coursehero.com 1-1 What are the information and established criteria for the audit of Jones Company's financial statements by a CPA firm? 1-2 In the conduct of audits of financial statements, it would be a serious breach of responsibility if the auditor did not thoroughly understand accounting. However, many competent accountants do not have an understanding of the auditing process. What causes this difference? 1-3 Discuss changes in
accounting and business operations over the last decade that have increased the need for independent audits. 1-4 Identify the three main ways information risk can be reduced. What are the advantages and disadvantages of each? 1-5 Explain how the increased use of fair value accounting might increase information risk. 1-6 Explain audit services, attestation services, and assurance services, and give examples of each. 1-7 List five examples of specific operational audits that can be conducted by an
internal auditor in a manufacturing company. 1- 8 What knowledge does the auditor need about the client's business in an audit of historical financial statements? Explain how this knowledge may be useful in performing other assurance or consulting services for the client. Answered by kipesharegina on coursehero.com um dolor sit amet, consectetur adipiscing elit. Nam lacinia pulvinar tortor nec facilisis. Pellentesque
dapibus efficitur laoreet. Nam risus ante, dapibus a molestie consequat, ultrices ac magna. Fusce dui lectus, congue vel laoreet ac, dictum vitae odio. Donec aliquet. Lorem ipsum dolor sit Unlock access to this and over Have an account? Log In Step-by-step explanationum dolor sit amet, consectetur adipiscing elit. Nam lacinia pulvinar tortor nec facilisis. Pellentesque dapibus efficitur laoreet. Nam risus ante, dapibus a molestie consequat, ultrices ac magna. Fusce dui lectus, congue vel laoreet ac, dictum vitae odio. Donec aliquet. Lorem ipsum dolor sit amet, consectetur a What Is Fair Value?Fair value is the estimated price at which an asset is bought or sold when both the buyer and seller freely agree on a price. To determine the fair value of a product or financial investment, an individual or business may look at actual market transactions for similar assets, estimate the expected earnings of the asset, and determine the cost to replace the asset. Key Takeaways
Fair ValueUnderstanding Fair ValueFair Value in InvestingA common way to determine a stock's fair value is to list it on a publicly-traded stock exchange. As shares trade, investor demand creates the appropriate bid and ask prices, or market value, and influences an investor's fair value estimate. An investor can compare their fair value estimate with the market value to decide to buy or sell. The fair value is often the price that an investor pays that will generate their desired growth and rate of return. If the fair value of a stock share is $100, and the market price is $95, an investor may consider the stock undervalued and buy the stock. If the market price is $120, the investor will likely forego the purchase as the market value does not align with their idea of fair value. The fair value of a derivative is determined by the value of an underlying asset. When an investor buys a 50 call option, they are buying the right to purchase 100 shares of stock at $50 per share for a specific period. If the stock’s market price increases, the value of the option on the stock also increases. In the futures market, fair value is the equilibrium price for a futures contract or the point where the supply of goods matches demand. This is equal to the spot price and accounts for compounded interest and lost dividends resulting from the futures contract ownership versus a physical stock purchase. Fair Value of Stock Index Futures
Fair Value = Cash × ( 1 + r × ( x 360 ) ) − Dividends where:
Cash = Current value of security r = Interest rate charged by broker x =
Number of days remaining in contract Dividends = Number of dividends investor would receive before expiration date
\begin{aligned}&\text{Fair Value} = \text{Cash} \times \Big ( 1 + r \times \big ( \frac{ x }{ 360 } \big ) \Big ) - \text{Dividends} \\&\textbf{where:} \\&\text{Cash} = \text{Current value of security} \\&r = \text{Interest rate charged by broker} \\&x = \text{Number of days remaining in contract} \\&\text{Dividends} = \text{Number of dividends investor would} \\&\text{receive before expiration date} \\\end{aligned}
Fair Value=Cash×(1+r×(360x))−Dividendswhere:Cash=Current value of securityr=Interest rate charged by brokerx=Number of days remaining in contractDividends=Number of dividends investor wouldreceive before expiration date Fair Value in AccountingThe International Accounting Standards Board recognizes the fair value of certain assets and liabilities as the price at which an asset can be sold or a liability settled. Fair value accounting, or mark-to-market accounting, is the practice of calculating the value of a company’s assets and liabilities based on the current market value. If a construction business acquired a truck worth $20,000 in 2019 and decided to sell the truck in 2022, comparable sale listings of the same used truck may include two trucks priced at $12,000 and $14,000. The estimated fair value of the truck may be determined as the average current market value, or $13,000. It is difficult to determine a fair value for an asset if there is not an active market for it. Accountants will use discounted cash flows will determine a fair value by determining the cash outflow to purchase the equipment and the cash inflows generated by using the equipment over its useful life. Fair value is also used in a consolidation when a subsidiary company’s financial statements are combined or consolidated
with those of a parent company. The parent company buys an interest in a subsidiary, and the subsidiary’s assets and liabilities are presented at fair market value for each account. Fair Value vs. Market ValueFair value is a broad measure of an asset's intrinsic worth and requires determining the right price between two parties depending on their interests, risk factors, and future goals for the asset. Fair value is most often used to gauge the true worth or intrinsic value of an asset. Market value is the observed and actual value for which an asset or liability is exchanged. It reflects the current value of the investment as determined by actual market transactions, and can fluctuate more
frequently than fair value. What Is the Intrinsic Value of a Stock?Fair value is the price an investor pays for a stock and may be considered the present value of the stock, when the stock's intrinsic value is considered and the stock's growth potential.
The intrinsic value is calculated by dividing the value of the next year’s dividend by the rate of return minus the growth rate. P = D 1 r − g where: P = Current stock price D 1 = Value of next year’s dividend g = Constant growth rate expected r = Required rate of return \begin{aligned}&P = \frac{ D1 }{ r } - g \\&\textbf{where:} \\&P = \text{Current stock price} \\&D1 = \text{Value of next year's dividend} \\&g = \text{Constant growth rate expected} \\&r = \text{Required rate of return} \\\end{aligned} P=rD1−gwhere:P=Current stock priceD1=Value of next year’s dividendg=Constant growth rate expectedr=Required rate of return How Is Fair Value Considered In the Accounting of Financial Assets?Generally Accepted Accounting Principles and International Financial Reporting Standards use fair value in accounts comprised of derivatives and hedges, employee stock options, and financial assets and accept that financial markets are efficient and their prevailing prices are reliable measures of fair value. How Does the Securities and Exchange Commission Regulate Fair Value?In 2020, the SEC implemented rule 2a-5 under the Investment Company Act of 1940 requiring funds to value their portfolio investments using the market value of their portfolio securities when market quotations are “readily available.” If data is not readily available or if the investment is not a security, the Act requires the fund to use the investment’s fair value. The fair value is determined in good faith by the fund’s board who are required to establish fair value methodologies and oversee pricing services. What Is Historical Cost Accounting?Fair value accounting measures assets and liabilities at estimates of their current value whereas historical cost accounting measures the value of an asset based on the original cost of an asset. What Methods Are Used to Determine Fair Value?A market approach uses the prices associated with actual market transactions for similar assets to derive a fair value. An income approach uses estimated future cash flows or earnings to determine the present value fair value. A cost approach uses the estimated cost to replace an asset to help find an item's fair value. The Bottom LineFair value is the estimated price at which an asset is bought or sold when both the buyer and seller freely agree on a price. Individuals and businesses may compare current market value, growth potential, and replacement cost to determine the fair value of an asset. Fair value calculations help investors make financial choices and fair value accounting practices determine the value of assets and liabilities based on current market value. How the increased use of fair value accounting might increase information risk?Fair value accounting is based on materiality levels during an audit. The materiality levels will usually be based off of industry conditions of similar businesses. Since mangers usually base materiality on industry conditions using faulty information, information risk will increase.
What are some potential disadvantages of fair value accounting?The use of fair value accounting may further affect a down market adversely. For example, after an asset has been revalued downward because of drops in the current market trading prices, the lower value of the asset could trigger greater selling of the asset at a potentially even more depressed price.
What are the problems with fair value in accounting?Three issues that discourage accountants and investors from endorsing fair value accounting are the use of estimates determined by the preparers of the financial statements, the lower reliability, and the lack of comparability.
What are the major causes of information risk?The four primary causes of information risk are remoteness of information, biases and motives of the provider, voluminous data, and the existence of complex exchange transactions. The three main ways to reduce information risk are: 1. User verifies the information.
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