Question 1

Significant,unanticipated and effective competition that enhances the value of the products and services of a company are events that require the recording of an increase to the goodwill of the related operating unit.

Accepted Answer

Goodwill is not adjusted for changes in competition or market conditions. It is only adjusted during impairment testing or when there is a business combination.

Question 2

Accounting principles require goodwill arising from acquisitions to be amortized over the lesser of the estimated undiscounted cash flows at the operating unit level or 20 years.

Accepted Answer

Accounting principles require goodwill arising from acquisitions to be tested for impairment annually and written down if its carrying amount exceeds its fair value. There is no requirement to amortize goodwill over a specific time period.

Question 3

The intangible assets of a newly acquired business must be identified and valued for proper recording in the combination.

Accepted Answer

Intangible assets such as patents, trademarks, copyrights, customer lists, and goodwill must be identified and valued for proper recording in the combination. Failure to do so can result in inaccurate financial statements and potential legal issues.

Question 4

Examples of evidence typically examined by the audit team in a post-acquisition restructuring include severance agreements with terminated employees.

Accepted Answer

Severance agreements with terminated employees are one type of evidence that may be examined by the audit team during a post-acquisition restructuring audit. Other evidence that may be examined includes financial statements, legal documents, and internal control processes.

Question 5

A company is required to systematically release over-estimated restructuring liabilities into earnings each period to adequately match revenues with expenses.

Accepted Answer

Companies are required to estimate restructuring liabilities accurately and adjust them as necessary, but they should not systematically overestimate them to manipulate earnings. This would violate accounting principles and could mislead stakeholders.

Question 6

If an operating unit is sold,the goodwill related to that unit may remain on the books of the reporting entity until replaced by another acquisition.

Accepted Answer

When an operating unit is sold, the goodwill associated with that unit should be removed from the books of the reporting entity as it is no longer applicable to the entity's operations.

Question 7

Impairment of goodwill may be signaled by the significant impairment of a group of property,plant and equipment.

Accepted Answer

Impairment of goodwill can be indicated by the significant impairment of a group of property, plant, and equipment as they may be closely related to the generation of cash flows and the overall performance of the business.

Question 8

The purchase of a company by the acquirer through stock presents valuation issues related to the market price of the stock on the date of closing.

Accepted Answer

When purchasing a company through stock, the acquirer must value the target company's shares to determine the exchange ratio. The market price of the acquirer's stock on the date of closing is important because it determines the value of the consideration paid to the target company's shareholders. This presents valuation issues that must be carefully considered.

Question 9

When an auditor is uncomfortable with the work of a valuation expert pertaining to the fair value of the assets and liabilities acquired in an acquisition,another third-party specialist may be utilized to further test the evidence.

Accepted Answer

If the auditor is uncomfortable with the work of a valuation expert, a third-party specialist may be utilized to further test the evidence. This is a common practice in auditing to ensure the accuracy and reliability of financial statement information.

Question 10

The reputation and independence of the valuation expert directly affect the competency of the evidence utilized for audit purposes.

Accepted Answer

The reputation and independence of the valuation expert can impact the credibility and quality of the evidence obtained for audit purposes. A qualified and unbiased expert is more likely to provide reliable valuation information, which can enhance the auditor's ability to make sound judgments and conclusions. On the other hand, a compromised or questionable expert can result in incomplete, inaccurate, or unreliable valuation data, which can negatively impact the audit quality. Therefore, it is crucial for auditors to assess the qualifications, reputation, and independence of valuation experts before relying on their work as audit evidence.

Question 11

In a restructuring,the specific commitment to compensate named individuals for severance results in the recognition of expenses and corresponding liabilities.

Accepted Answer

When a company commits to compensating named individuals for severance as part of a restructuring, this commitment creates an obligation or liability for the company. As a result, the company recognizes an expense for the expected cost of this severance compensation and records a corresponding liability on its balance sheet.

Question 12

Once the impairment of goodwill has been signaled,the amount of the impairment loss is calculated as the difference between the implied fair value of the goodwill and its carrying amount.

Accepted Answer

The statement accurately describes the process of calculating an impairment loss for goodwill.

Question 13

Auditors should ensure that clients place a "more than adequate" liability on the books for restructuring charges that are created as a result of acquisitions to be conservative.

Accepted Answer

Auditors should ensure that liabilities are recorded accurately and in accordance with accounting standards, not "more than adequate," as this could misrepresent the financial position.

Question 14

Purchases of companies or divisions must be accomplished through payment of cash to make the cost of the acquisition straightforward.

Accepted Answer

Purchases of companies or divisions can also be accomplished through other forms of payment such as stocks or bonds.

Question 15

In acquisitions that are material to the purchasing entity,the auditor can just accept the specialist's appraisal and management's assessment of the fair value of the assets.

Accepted Answer

The auditor must evaluate the specialist's appraisal, assess management's financial reporting process and controls, and perform procedures to obtain sufficient evidence to support the fair value of the assets. Simply accepting the specialist's appraisal and management's assessment without further evaluation would be considered inadequate auditing procedures.

Question 16

Goodwill must be specifically identified with an operating unit or reporting unit for impairment consideration.

Accepted Answer

Goodwill cannot be considered for impairment testing as a standalone asset; it must be associated with a specific operating or reporting unit.

Question 17

Once impairment losses have been taken in previous periods,any recovery of goodwill value may be used to increase the recorded balance of the intangible asset.

Accepted Answer

Goodwill impairment losses cannot be reversed under current accounting standards, even if the value of the goodwill subsequently recovers.

Question 18

Auditors should continually update themselves on generally accepted accounting principles relative to the accounting for restructurings as they continue to evolve.

Accepted Answer

It is important for auditors to stay current on applicable accounting principles to ensure they are providing accurate and reliable financial statements for their clients. Restructurings have specific accounting rules, and these may change over time, so auditors need to keep themselves informed.

Question 19

The initial offer to purchase another entity may change due to terms that cover post-audit valuation changes.

Accepted Answer

If terms are included in the offer that cover post-audit valuation changes, then it is possible that the initial offer may change based on those changes.

Question 20

Performance terms in the acquisition agreement will usually not result in additional payments as the risks have already passed to the buyer.

Accepted Answer

Performance terms, such as earn-outs, can result in additional payments if certain conditions or milestones are met post-acquisition, transferring some risk back to the seller.

Quiz 14: Audit of Longer-Term Liabilities, equity, acquisitions, and Related-Entity Transactions, long-Term Liabilities, and Equity