When a Client Engages in Transactions Involving Derivatives,the Auditor Should

question 46

Multiple Choice

When a client engages in transactions involving derivatives,the auditor should:

• A)Review agreements underlying the derivative.
• B)Confirm with the client's broker whether the derivatives are for trading purposes.
• C)Notify the audit committee about the risks involved in derivative transactions.
• D)Add an explanatory paragraph to the auditor's report describing the risks associated with each derivative.

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Definitions:

Special Order

A customer request for a product or service that is not generally available or outside the business’s normal operations, often requiring special pricing or production considerations.

Capacity

The maximum level of output that a company can sustain to make a product or provide a service under normal conditions.

Activity-Based System

A method in accounting that allocates costs to specific activities based on their use of resources, aimed at providing more accurate cost information.

Non-Volume-Based Costs

Costs that do not vary directly with the volume of production or sales, often encompassing fixed costs like rent or salaries.