Q&A Hero

Q: Locking petty cash in a safe is an example of __________________________.

Q: Yesterday, Berryman Investments was selling for $90 per share. Today, the company completed a 7-for-2 stock split. If the total market value was unchanged by the split, what is the price of the stock today?a. $23.21b. $24.43c. $25.71d. $27.00e. $28.35

Q: The internal audit department recalculates payroll for several employees each pay period. This is an example of __________________________.

Q: Use the internal control procedures listed below to complete statements 6 through 12.segregation of duties specific authorizationgeneral authorization accounting recordsaccess controls independent verificationsupervisionA clerk reorders 250 items when the inventory falls below 25 items. This is an example of __________________________.

Q: Which of the following statements is correct? a. An open-market dividend reinvestment plan will be most attractive to companies that need new equity and would otherwise have to issue additional shares of common stock through investment bankers. b. Stock repurchases tend to reduce financial leverage. c. If a company declares a 2-for-1 stock split, its stock price should roughly double. d. One advantage of adopting the residual dividend policy is that this makes it easier for corporations to meet the requirements of Modigliani and Miller's dividend clientele theory. e. If a firm repurchases some of its stock in the open market, then shareholders who sell their stock for more than they paid for it will be subject to capital gains taxes.

Q: Which of the following statements is CORRECT?a. Back before the SEC was created in the 1930s, companies would declare reverse splits in order to boost their stock prices. However, this was determined to be a deceptive practice, and it is illegal today.b. Stock splits create more administrative problems for investors than stock dividends, especially determining the tax basis of their shares when they decide to sell them, so today stock dividends are used far more often than stock splits.c. When a company declares a stock split, the price of the stock typically declines-by about 50% after a 2-for-1 split-and this necessarily reduces the total market value of the equity.d. If a firm's stock price is quite high relative to most stocks-say $500 per share-then it can declare a stock split of say 10-for-1 so as to bring the price down to something close to $50. Moreover, if the price is relatively low-say $2 per share-then it can declare a "reverse split" of say 1-for-25 so as to bring the price up to somewhere around $50 per share.e. When firms are deciding on the size of stock splits-say whether to declare a 2-for-1 split or a 3-for-1 split, it is best to declare the smaller one, in this case the 2-for-1 split, because then the after-split price will be higher than if the 3-for-1 split had been used.

Q: Indicate whether each procedure is a preventive or detective control.a. authorizing a credit sale Preventive Detectiveb. preparing a bank reconciliation Preventive Detectivec. locking the warehouse Preventive Detectived. preparing a trial balance Preventive Detectivee. counting inventory Preventive Detective

Q: What are management responsibilities under section 302 and 404?

Q: Poff Industries' stock currently sells for $120 a share. You own 100 shares of the stock. The company is contemplating a 2-for-1 stock split. Which of the following best describes what your position will be after such a split takes place? a. You will have 200 shares of stock, and the stock will trade at or near $60 a share. b. You will have 100 shares of stock, and the stock will trade at or near $60 a share. c. You will have 50 shares of stock, and the stock will trade at or near $120 a share. d. You will have 50 shares of stock, and the stock will trade at or near $60 a share. e. You will have 200 shares of stock, and the stock will trade at or near $120 a share.

Q: Even if a stock split has no information content, and even if the dividend per share adjusted for the split is not increased, there can still be a real benefit (i.e., a higher value for shareholders) from such a split, but any such benefit is probably small. a. True b. False

Q: What are the five internal control components described in the COSO framework

Q: A reverse split reduces the number of shares outstanding. a. True b. False

Q: Explain the purpose of the PCAOB

Q: Stock dividends and stock splits should, at least conceptually, have the same effect on shareholders' wealth. a. True b. False

Q: List the four broad objectives of the internal control system.

Q: Which of the following is NOT an implication of section 302 of the Sarbanes-Oxley Act? a. Auditors must determine, whether changes in internal control has, or is likely to, materially affect internal control over financial reporting. b. Auditors must interview management regarding significant changes in the design or operation of internal control that occurred since the last audit. c. Corporate management (including the CEO) must certify monthly and annually their organization's internal controls over financial reporting. d. Management must disclose any material changes in the company's internal controls that have occurred during the most recent fiscal quarter.

Q: Which of the following statements is correct? a. The clientele effect can explain why so many firms change their dividend policies so often. b. One advantage of adopting the residual dividend policy is that this policy makes it easier for corporations to develop a specific and well-identified dividend clientele. c. New-stock dividend reinvestment plans are similar to stock dividends because they both increase the number of shares outstanding but don't change the firm's total amount of book equity. d. Investors who receive stock dividends must pay taxes on the value of the new shares in the year the stock dividends are received. e. If a firm follows the residual dividend policy, then a sudden increase in the number of profitable projects is likely to reduce the firm's dividend payout.

Q: The financial statements of an organization reflect a set of management assertions about the financial health of the business. All of the following describe types of assertions except a. that all of the assets and equities on the balance sheet exist b. that all employees are properly trained to carry out their assigned duties c. that all transactions on the income statement actually occurred d. that all allocated amounts such as depreciation are calculated on a systematic and rational basis

Q: Consider two very different firms, M and N. Firm M is a mature firm in a mature industry. Its annual net income and net cash flows are both consistently high and stable. However, M's growth prospects are quite limited, so its capital budget is small relative to its net income. Firm N is a relatively new firm in a new and growing industry. Its markets and products have not stabilized, so its annual operating income fluctuates considerably. However, N has substantial growth opportunities, and its capital budget is expected to be large relative to its net income for the foreseeable future. Which of the following statements is correct? a. Firm M probably has a higher dividend payout ratio than Firm N. b. If the corporate tax rate increases, the debt ratio of both firms is likely to decline. c. The two firms are equally likely to pay high dividends. d. Firm N is likely to have a clientele of shareholders who want to receive consistent, stable dividend income. e. Firm M probably has a lower debt ratio than Firm N.

Q: Attestation services require all of the following except a. written assertions and a practitioner's written report b. the engagement is designed to conduct risk assessment of the client's systems to verify their degree of SOX compliance c. the formal establishment of measurements criteria d. the engagement is limited to examination, review, and application of agreed-upon procedures

Q: Which of the following statements is correct? a. If a company has an established clientele of investors who prefer a high dividend payout, and if management wants to keep stockholders happy, it should not follow the strict residual dividend policy. b. If a firm follows a strict residual dividend policy, then, holding all else constant, its dividend payout ratio will tend to rise whenever the firm's investment opportunities improve. c. If Congress eliminates taxes on capital gains but leaves the personal tax rate on dividends unchanged, this would motivate companies to increase their dividend payout ratios. d. Despite its drawbacks, following the residual dividend policy will tend to stabilize actual cash dividends, and this will make it easier for firms to attract a clientele that prefers high dividends, such as retirees. e. One advantage of dividend reinvestment plans is that they enable investors to avoid paying taxes on the dividends they receive.

Q: Inherent risk a. exists because all control structures are flawed in some ways. b. is the likelihood that material misstatements exist in the financial statements of the firm. c. is associated with the unique characteristics of the business or industry of the client. d. is the likelihood that the auditor will not find material misstatements.

Q: Which of the following statements is correct? a. One advantage of the residual dividend policy is that it leads to a stable dividend payout, which investors like. b. An increase in the stock price when a company decreases its dividend is consistent with signaling theory as postulated by MM. c. If the "clientele effect" is correct, then for a company whose earnings fluctuate, a policy of paying a constant percentage of net income will probably maximize the stock price. d. Stock repurchases make the most sense at times when a company believes its stock is undervalued. e. Firms with a lot of good investment opportunities and a relatively small amount of cash tend to have above average payout ratios.

Q: Which of the following is true? a. In the CBIS environment, auditors gather evidence relating only to the contents of databases, not the reliability of the computer system. b. Conducting an audit is a systematic and logical process that applies to all forms of information systems. c. Substantive tests establish whether internal controls are functioning properly. d. IT auditors prepare the audit report if the system is computerized.

Q: If a firm adheres strictly to the residual dividend policy, the issuance of new common stock would suggest that a. the dividend payout ratio is increasing. b. no dividends were paid during the year. c. the dividend payout ratio is decreasing. d. the dollar amount of investments has decreased. e. the dividend payout ratio has remained constant.

Q: Control risk is a. the probability that the auditor will render an unqualified opinion on financial statements that are materially misstated b. associated with the unique characteristics of the business or industry of the client c. the likelihood that the control structure is flawed because controls are either absent or inadequate to prevent or detect errors in the accounts d. the risk that auditors are willing to take that errors not detected or prevented by the control structure will also not be detected by the auditor

Q: If a firm adheres strictly to the residual dividend policy, then if its optimal capital budget requires the use of all earnings for a given year (along with new debt according to the optimal debt/total assets ratio), then the firm should pay a. no dividends to common stockholders. b. dividends only out of funds raised by the sale of new common stock. c. dividends only out of funds raised by borrowing money (i.e., issue debt). d. dividends only out of funds raised by selling off fixed assets. e. no dividends except out of past retained earnings.

Q: All of the following are components of audit risk except a. control risk b. legal risk c. detection risk d. inherent risk

Q: Norton Electrical has quite a few positive NPV projects from which to choose. The problem is that it has more of these projects than it can finance without issuing new stock and the board of directors refuses to issue any new shares in the foreseeable future. Norton's projected net income is $150.0 million, its target capital structure is 25% debt and 75% equity, and its target payout ratio is 65%. The CFO now wants to determine how the maximum capital budget would be affected by changes in capital structure policy and/or the target dividend payout policy. Versus the current policy, how much larger could the capital budget be if (1) the target debt ratio were raised to 75%, other things held constant, (2) the target payout ratio were lowered to 20%, other things held constant, and (3) the debt ratio and payout were both changed by the indicated amounts. Increase in Capital Budget Increase Lower Debt to 75% Payout to 20% Do both a. $114.0 $73.3 $333.9 b. $120.0 $77.2 $351.5 c. $126.4 $81.2 $370.0 d. $133.0 $85.5 $389.5 e. $140.0 $90.0 $410.0

Q: Tests of controls include a. confirming accounts receivable b. counting inventory c. completing questionnaires d. counting cash

Q: Getler Inc.'s projected capital budget is $2,000,000, its target capital structure is 40% debt and 60% equity, and its forecasted net income is $1,000,000. If the company follows a residual dividend policy, how much dividends will it pay or, alternatively, how much new stock must it issue? Dividends Stock Issued a. $514,425 $162,901 b. $541,500 $171,475 c. $570,000 $180,500 d. $600,000 $190,000 e. $ 0 $200,000

Q: Substantive tests include a. examining the safety deposit box for stock certificates b. reviewing systems documentation c. completing questionnaires d. observation

Q: Warren Supply Inc. is evaluating its capital budget. The company finances with debt and common equity, but because of market conditions, wants to avoid issuing any new common stock during the coming year. It is forecasting an EPS of $3.00 for the coming year on its 500,000 outstanding shares of stock. Its capital budget is forecasted at $800,000, and it is committed to maintaining a $2.00 dividend per share. Given these constraints, what percentage of the capital budget must be financed with debt?a. 30.54%b. 32.15%c. 33.84%d. 35.63%e. 37.50%

Q: When planning the audit, information is gathered by all of the following methods except a. completing questionnaires b. interviewing management c. observing activities d. confirming accounts receivable

Q: All of the following are steps in an IT audit except a. substantive testing b. tests of controls c. post-audit testing d. audit planning

Q: David Rose Inc. forecasts a capital budget of $500,000 next year with forecasted net income of $400,000. The company wants to maintain a target capital structure of 30% debt and 70% equity. If the company follows the residual dividend policy, how much in dividends, if any, will it pay?a. $42,869b. $45,125c. $47,500d. $50,000e. $52,500

Q: Silvana Inc. projects the following data for the coming year. If the firm follows the residual dividend policy and also maintains its target capital structure, what will its payout ratio be?EBIT $2,000,000 Capital budget $850,000Interest rate 10% % Debt 40%Debt outstanding $5,000,000 % Equity 60%Shares outstanding $5,000,000 Tax rate 40%a. 37.2%b. 39.1%c. 41.2%d. 43.3%e. 45.5%

Q: Which statement is not correct? a. Auditors gather evidence using tests of controls and substantive tests. b. The most important element in determining the level of materiality is the mathematical formula. c. Auditors express an opinion in their audit report. d. Auditors compare evidence to established criteria.

Q: United Builders wants to maintain a target capital structure with 30% debt and 70% equity. Its forecasted net income is $550,000, and because of market conditions, the company will not issue any new stock during the coming year. If the firm follows the residual dividend policy, what is the maximum capital budget that is consistent with maintaining the target capital structure?a. $673,652b. $709,107c. $746,429d. $785,714e. $825,000

Q: Internal auditors assist external auditors with financial audits to a. reduce audit fees b. ensure independence c. represent the interests of management d. the statement is not true; internal auditors are not permitted to assist external auditors with financial audits

Q: The fundamental difference between internal and external auditing is that a. internal auditors represent the interests of the organization and external auditors represent outsiders b. internal auditors perform IT audits and external auditors perform financial statement audits c. internal auditors focus on financial statement audits and external auditors focus on operational audits and financial statement audits d. external auditors assist internal auditors but internal auditors cannot assist external auditors

Q: The capital budget forecast for the Santano Company is $725,000. The CFO wants to maintain a target capital structure of 45% debt and 55% equity, and it also wants to pay dividends of $500,000. If the company follows the residual dividend policy, how much income must it earn, and what will its dividend payout ratio be? Net Income Payout a. $ 898,750 55.63% b. $ 943,688 58.41% c. $ 990,872 61.34% d. $1,040,415 64.40% e. $1,092,436 67.62%

Q: Typically, internal auditors perform all of the following tasks except a. Fraud detection b. evaluation of operational efficiency c. review of compliance with legal obligations d. internal auditors perform all of the above tasks

Q: Victor Rumsfeld Inc.'s dividend policy is under review by its board. Its projected capital budget is $2,000,000, its target capital structure is 60% debt and 40% equity, and its forecasted net income is $600,000. If the company follows a residual dividend policy, what total dividends, if any, will it pay out?a. $240,000b. $228,000c. $216,600d. $205,770e. $0

Q: Which statement is not true? a. Auditors must maintain independence. b. IT auditors attest to the integrity of the computer system. c. IT auditing is independent of the general financial audit. d. IT auditing can be performed by both external and internal auditors.

Q: Harvey's Industrial Plumbing Supply's target capital structure consists of 40% debt and 60% equity. Its capital budget this year is forecast to be $650,000. It also wants to pay a dividend of $225,000. If the company follows the residual dividend policy, how much net income must it earn to meet its capital requirements, pay the dividend, and keep the capital structure in balance?a. $584,250b. $615,000c. $645,750d. $678,038e. $711,939

Q: McCann Publishing has a target capital structure of 35% debt and 65% equity. This year's capital budget is $850,000 and it wants to pay a dividend of $400,000. If the company follows a residual dividend policy, how much net income must it earn to meet its capital budgeting requirements and pay the dividend, all while keeping its capital structure in balance?a. $904,875b. $952,500c. $1,000,125d. $1,050,131e. $1,102,638

Q: Which concept is not an integral part of an audit? a. evaluating internal controls b. preparing financial statements c. expressing an opinion d. analyzing financial data

Q: Sanchez Company has planned capital expenditures that total $2,000,000. The company wants to maintain a target capital structure that is 35% debt and 65% equity. The company forecasts that its net income this year will be $1,800,000. If the company follows a residual dividend policy, what will be its total dividend payment? a. $100,000 b. $200,000 c. $300,000 d. $400,000 e. $500,000

Q: Which of the following situations is not a segregation of duties violation? a. The treasurer has the authority to sign checks but gives the signature block to the assistant treasurer to run the check-signing machine. b. The warehouse clerk, who has the custodial responsibility over inventory in the warehouse, selects the vendor and authorizes purchases when inventories are low. c. The sales manager has the responsibility to approve credit and the authority to write off accounts. d. The department time clerk is given the undistributed payroll checks to mail to absent employees. e. The accounting clerk who shares the record keeping responsibility for the accounts receivable subsidiary ledger performs the monthly reconciliation of the subsidiary ledger and the control account.

Q: Rohter Galeano Inc. is considering how to set its dividend policy. It has a capital budget of $3,000,000. The company wants to maintain a target capital structure that is 15% debt and 85% equity. The company forecasts that its net income this year will be $3,500,000. If the company follows a residual dividend policy, what will be its total dividend payment? a. $205,000 b. $500,000 c. $950,000 d. $2,550,000 e. $3,050,000

Q: Management can expect various benefits to follow from implementing a system of strong internal control. Which of the following benefits is least likely to occur? a. reduced cost of an external audit. b. prevents employee collusion to commit fraud. c. availability of reliable data for decision-making purposes. d. some assurance of compliance with the Foreign Corrupt Practices Act of 1977. e. some assurance that important documents and records are protected.

Q: The capital budget of Creative Ventures Inc. is $1,000,000. The company wants to maintain a target capital structure that is 30% debt and 70% equity. The company forecasts that its net income this year will be $800,000. If the company follows a residual dividend policy, what will be its total dividend payment? a. $100,000 b. $200,000 c. $300,000 d. $400,000 e. $500,000

Q: Internal control system have limitations. These include all of the following except a. possibility of honest error b. circumvention c. management override d. stability of systems

Q: Control activities under SAS 109/COSO include a. IT Controls, preventative controls, and Corrective controls b. physical controls, preventative controls, and corrective controls. c. general controls, application controls, and physical controls. d. transaction authorizations, segregation of duties, and risk assessment

Q: Grandin Inc. is evaluating its dividend policy. It has a capital budget of $625,000, and it wants to maintain a target capital structure of 60% debt and 40% equity. The company forecasts a net income of $475,000. If it follows the residual dividend policy, what is its forecasted dividend payout ratio?a. 40.61%b. 42.75%c. 45.00%d. 47.37%e. 49.74%

Q: The office manager forgot to record in the accounting records the daily bank deposit. Which control procedure would most likely prevent or detect this error? a. segregation of duties b. independent verification c. accounting records d. supervision

Q: The projected capital budget of Kandell Corporation is $1,000,000, its target capital structure is 60% debt and 40% equity, and its forecasted net income is $550,000. If the company follows a residual dividend policy, what total dividends, if any, will it pay out?a. $122,176b. $128,606c. $135,375d. $142,500e. $150,000

Q: The board of directors consists entirely of personal friends of the chief executive officer. This indicates a weakness in a. the accounting system b. the control environment c. control procedures d. this is not a weakness

Q: Reynolds Paper Products Corporation follows a strict residual dividend policy. All else equal, which of the following factors would be most likely to lead to an increase in the firm's dividend per share? a. The company increases the percentage of equity in its target capital structure. b. The number of profitable potential projects increases. c. Congress lowers the tax rate on capital gains. The remainder of the tax code is not changed. d. Earnings are unchanged, but the firm issues new shares of common stock. e. The firm's net income increases.

Q: The importance to the accounting profession of the Sarbanes-Oxely Act is that a. bribery will be eliminated b. management will not override the company's internal controls c. management are required to certify their internal control system d. firms will not be exposed to lawsuits

Q: Which of the following would be most likely to lead to a decrease in a firm's dividend payout ratio? a. Its access to the capital markets increases. b. Its R&D efforts pay off, and it now has more high-return investment opportunities. c. Its accounts receivable decrease due to a change in its credit policy. d. Its stock price has increased over the last year by a greater percentage than the increase in the broad stock market averages. e. Its earnings become more stable.

Q: An accounting system that maintains an adequate audit trail is implementing which internal control procedure? a. access controls b. segregation of functions c. independent verification d. accounting records

Q: If the shape of the curve depicting a firm's WACC versus its debt ratio is more like a sharp "V", as opposed to a shallow "U", it will be easier for the firm to maintain a steady dividend in the face of varying investment opportunities or earnings from year to year. a. True b. False

Q: When duties cannot be segregated, the most important internal control procedure is a. supervision b. independent verification c. access controls d. accounting records

Q: If management wants to maximize its stock price, and if it believes that the dividend irrelevance theory is correct, then it must adhere to the residual distribution policy. a. True b. False

Q: The decision to extend credit beyond the normal credit limit is an example of a. independent verification b. authorization c. segregation of functions d. supervision

Q: If a firm adopts a residual distribution policy, distributions are determined as a residual after funding the capital budget. Therefore, the better the firm's investment opportunities, the lower its payout ratio should be. a. True b. False

Q: Which of the following is not an internal control procedure? a. authorization b. management's operating style c. independent verification d. accounting records

Q: In the real world, dividends a. are usually more stable than earnings. b. fluctuate more widely than earnings. c. tend to be a lower percentage of earnings for mature firms. d. are usually changed every year to reflect earnings changes, and these changes are randomly higher or lower, depending on whether earnings increased or decreased. e. are usually set as a fixed percentage of earnings, e.g., at 40% of earnings, so if EPS = $2.00, then DPS will equal $0.80. Once the percentage is set, then dividend policy is on "automatic pilot" and the actual dividend depends strictly on earnings.

Q: Which of the following is the best reason to separate duties in a manual system? a. to avoid collusion between the programmer and the computer operator b. to ensure that supervision is not required c. to prevent the record keeper from authorizing transactions d. to enable the firm to function more efficiently

Q: Which of the following statements about dividend policies is correct? a. One reason that companies tend to avoid stock repurchases is that dividend payments are taxed at a lower rate than gains on stock repurchases. b. One advantage of dividend reinvestment plans is that they allow shareholders to avoid paying taxes on the dividends that they choose to reinvest. c. One key advantage of a residual dividend policy is that it enables a company to follow a stable dividend policy. d. The clientele effect suggests that companies should follow a stable dividend policy. e. Modigliani and Miller argue that investors prefer dividends to capital gains because dividends are more certain than capital gains. They call this the "bird-in-the hand" effect.

Q: According to COSO, an effective accounting system performs all of the following except a. identifies and records all valid financial transactions b. records financial transactions in the appropriate accounting period c. separates the duties of data entry and report generation d. records all financial transactions promptly

Q: If the signaling, hypothesis (which is also called the information content hypothesis) is correct, then changes in dividend policy can have an important effect on the firm's value and capital costs. a. True b. False

Q: Which of the following should not influence a firm's dividend policy decision? a. A strong preference by most shareholders for current cash income versus capital gains. b. Constraints imposed by the firm's bond indenture. c. The fact that much of the firm's equipment has been leased rather than bought and owned. d. The fact that Congress is considering changes in the tax law regarding the taxation of dividends versus capital gains. e. The firm's ability to accelerate or delay investment projects.

Q: Which of the following indicates a strong internal control environment? a. the internal audit group reports to the audit committee of the board of directors b. there is no segregation of duties between organization functions c. there are questions about the integrity of management d. adverse business conditions exist in the industry

Q: Myron Gordon and John Lintner believe that the required return on equity increases as the dividend payout ratio is decreased. Their argument is based on the assumption that a. investors require that the dividend yield and capital gains yield equal a constant. b. capital gains are taxed at a higher rate than dividends. c. investors view dividends as being less risky than potential future capital gains. d. investors value a dollar of expected capital gains more highly than a dollar of expected dividends because of the lower tax rate on capital gains. e. investors are indifferent between dividends and capital gains.

Q: Which of the following suggests a weakness in the internal control environment? a. the firm has an up-to-date organizational chart b. monthly reports comparing actual performance to budget are distributed to managers c. performance evaluations are prepared every three years d. the audit committee meets quarterly with the external auditors

Q: Which of the following is not an element of the internal control environment? a. management philosophy and operating style b. organizational structure of the firm c. well-designed documents and records d. the functioning of the board of directors and the audit committee

Q: One implication of the bird-in-the-hand theory of dividends is that a given reduction in dividend yield must be offset by a more than proportionate increase in growth in order to keep a firm's required return constant, other things held constant. a. True b. False