A Substantive Strategy Is Typically Used to Audit Stockholders' Equity

question 62

Multiple Choice

A substantive strategy is typically used to audit stockholders' equity because

• A) The number of transactions is small.
• B) Controls over stockholders' equity transactions typically are weak.
• C) A reliance strategy is most efficient.
• D) A substantive strategy likely was used in prior years.

Grasp the equity method and fair value method of accounting for investments.

Know how to account for investment transactions, including purchases, dividends, and sales.

Understand the preparation and purpose of consolidated financial statements.

Recognize the impact of ownership percentages on accounting methods.

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Definitions:

Return On Assets

A profitability ratio that measures how effectively a company uses its assets to generate profit, typically expressed as a percentage.

Evaluating Management

The process of assessing the effectiveness of a company's management team in achieving business goals and strategies.

Forecasting Profits

The process of estimating the future financial performance of a company, specifically regarding its profits.

Risk

The potential for loss or the chance that an investment's actual return will differ from the expected return, including the possibility of losing some or all of the original investment.