When a Client Engages in Transactions Involving Derivatives, the Auditor

question 12

Multiple Choice

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

• A) Develop an understanding of the economic substance of each 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:

Precautionary Cash Balances

Precautionary cash balances refer to money held by both businesses and individuals to meet unexpected expenses or financial emergencies.

Unexpected Expenditures

Expenses that were not planned or budgeted for, often requiring immediate payment.

Risk-Averse

A description of an investor or decision-maker who prefers to minimize uncertainty or potential loss, favoring safer over riskier options.

Financial Intermediary

An institution that acts as a middleman between savers and borrowers, including banks, investment companies, and insurance companies.