This problem builds on the previous problem using the same parameters, only valuing a call option instead of a bond. Using Monte Carlo, simulate the Vasicek process for 3 years. For each simulation trial, at the end of 3 years, use the Vasicek formula to compute the price of a 1-year zero-Coupon bond, P3 (3, 4). (Note that this price will depend upon the short-term interest rate in your simulation trial after 3 years.) For each trial compute max (0, P3 (3, 4) − 0.95), and discount this at where h is the time step. Take the mean of these calculations and compare your answer to that obtained using the formula in footnote 10. If you have several thousand iterations, it should be close.
> Explain the theory of the fraud triangle.
> Identify the six situational categories that cause non-shareable problems from Cressey’s research.
> What role do fraud examination and financial forensic skills have in the corporate governance area?
> Why are manhole covers round?
> Anthony and Cleopatra are lying dead on the floor in a villa. Nearby on the floor is a broken bowl. There is no mark on either of their bodies and they were not poisoned. With this information, determine how they died.
> In the criminal justice system, how is probation different from parole?
> What are the different types of consulting and litigation support activities for fraud and forensic professionals?
> What approaches are used by investigators to obtain documents?
> Under what circumstances would a Miranda Warning be required?
> What are some red flags that may indicate that fraud is occurring?
> What is meant by inventory “shrinkage?”
> In cash larceny schemes, what methods may be used to conceal these schemes at the point of sale?
> What techniques are generally used to conceal a receivables skimming scheme?
> Why is sales skimming called an “off- book” fraud?
> What is the role of the external auditor in the financial reporting process?
> What constitutes evidence?
> How can financial statement fraud be deterred?
> A woman shoots her husband. Then she holds him under water for over 5 minutes. Finally, she hangs him. But 5 minutes later they both go out together and enjoy a wonderful dinner together. How can this be?
> Match threats in the first column to appropriate control procedures in the second column. More than one control may be applicable. Threat Control Procedure Failing to take available purchase discounts for prompt payment. Only accept deliveries for
> Revlon hired Logisticon to install a real-time invoice and inventory processing system. Seven months later, when the system crashed, Revlon blamed the Logisticon programming bugs they discovered and withheld payment on the contract. Logisticon contended
> Match the terms in the left column with their definitions from the right column: 1. Bill of materials a. A factor that causes costs to change. 2. Operations list b. A measure of the number of good units produced in a period of time. 3. Master
> Use Table 14-1 to create a questionnaire checklist that can be used to evaluate controls for each of the basic activities in the production cycle (product design, planning and scheduling, production operations, and cost accounting). a. For each control i
> Use Table 13-2 to create a questionnaire checklist that can be used to evaluate controls for each of the basic activities in the expenditure cycle (ordering goods, receiving, approving supplier invoices, and cash disbursements). a. For each control issue
> (Hint: For help on steps b and c, see the article “Dial a Forecast,” by James A. Weisel, in the December 2006 issue of the Journal of Accountancy. The Journal of Accountancy is available in print or online at the AICPA’s Web site: www.aicpa.org Required
> Match the terms in the left column with their appropriate definition in the right column. Terms Definitions economic order quantity A document that creates a legal obligation to buy and pay for goods or services. materials requirements planning
> How would you respond to the treasurer of a small charity who tells you that the organization does not use a separate checking account for payroll because the benefits are not worth the extra monthly service fee?
> Match the term in the left column with its definition in the right column. 1. CRM system a. Document used to authorize reducing the balance in a customer account 2. Open-invoice method b. Process of dividing customer account master file into subset
> Why do you think that surveys continue to find that a sizable percentage of organizations either do not have formal disaster recovery and business continuity plans or have not tested and revised those plans for more than a year?
> What is the difference between authentication and authorization?
> In what situations would you expect to model a relationship between an agent and a resource?
> Identify the DFD elements in the following narrative: A customer purchases a few items from a local grocery store. Jill, a salesclerk, enters the transaction in the cash register and takes the customer’s money. At closing, Jill gives both the cash and th
> Although XBRL facilitates the electronic exchange of financial information, some external users do not think it goes far enough. They would like access to the entire general ledger, not just to XBRL-tagged financial reports that summarize general ledger
> Most DBMS packages contain data definition, data manipulation, and data query languages. For each of the following, indicate which language would be used and why.
> a. Identify three potential users and design a subschema for each. Justify your design by explaining why each user needs access to the subschema data elements. b. Use Microsoft Access or some other relational database product to create the schema tables.
> Required: Download the spreadsheet for this problem from the course website and perform the following tasks: 1. Explore Excel’s AutoFilter function. a. At the bottom of the table, in cell C79 enter the words “Total (sum)” and in cell D79 enter the SUM fu
> Answer all of the following multiple-choice questions. 1. Which of the following pairs of duties combines the functions of custody and authorization in a manner that would allow an employee to conceal the theft of a customer’s payment? a. Handling cash r
> Clint Grace has been business over 30 years and has definite ideas about how his ten retail stores should be run. He is financially conservative and is reluctant to make expenditures that do not have a clear financial payoff. Store profitability has decl
> Match the following terms with their definitions: 1. business continuity plan (BCP) a. A file used to store information for long periods of time. 2. completeness check b. A plan that describes how to resume IT functionality after a disaster. 3.
> Under what conditions (if any) should a company install a forced-distribution rating system for PFP?
> What would you say to those who argue that establishing attractive career programs for employees will only enhance their own marketability and enable them to leave the firm faster?
> Suppose you observe the following continuously compounded zero-coupon bond yields: 0.06766 (1-year), 0.05827 (2-year), 0.04879 (3-year), 0.04402 (4-year), 0.03922 (5-year). For each maturity year compute the zero-coupon bond prices, effective annual zero
> Suppose you observe the following 1-year implied forward rates: 0.050000 (1- year), 0.034061 (2-year), 0.036012 (3-year), 0.024092 (4-year), 0.001470 (5-year). For each maturity year compute the zero-coupon bond prices, effective annual and continuously
> Consider the expression in equation (26.6). What is the exact probability that, over a 1-day horizon, stock A will have a loss? V = $3m x e0.15-0.5x0.3)+0.3,z (26.6)
> Using the same assumptions as in Example 26.3, compute VaR with and without the mean, assuming correlations of −1, −0.5, 0, 0.5, and 1. Is risk eliminated with a correlation of −1? If not, why not?
> Assuming a $10m investment in one stock, compute the 95% and 99% VaR for stocks A and B over 1-day, 10-day, and 20-day horizons.
> Let S = $100, K = $105, r = 8%, T = 0.5, and δ = 0. Let u = 1.3, d = 0.8, and n =1. a. What are the premium, ∆, and B for a European call? b. What are the premium, ∆, and B for a European put?
> Suppose the exchange rate is 0.95 $/=C, the euro-denominated continuously compounded interest rate is 4%, the dollar-denominated continuously compounded interest rate is 6%, and the price of a 1-year 0.93-strike European call on the euro is $0.0571. What
> A stock currently sells for $32.00. A 6-month call option with a strike of $30.00 has a premium of $4.29, and a 6-month put with the same strike has a premium of $2.64. Assume a 4% continuously compounded risk-free rate. What is the present value of divi
> What is the price of a 3-year interest rate cap with an 11.5% (effective annual) cap rate? For the first three problems, use the following information: Bond maturity (years) 1 2 3 4. Bond price 0.9259 0.8495 0.7722 0.7020 1-year forward price volatil
> Verify that the 1-year yield volatility of the 4-year zero-coupon bond price generated by the tree in Figure 25.5 is 0.14. FIGURE 25.5 Year O Year 1 Year 2 Year 3 20.03% Black-Derman-Toy interest rate tree constructed using the data in Table 25.1. Ea
> Suppose that 1- and 2-year oil forward prices are $22/barrel and $23/barrel. The 1-and 2-year interest rates are 6% and 6.5%. Show that the new 2-year swap price is $22.483.
> Using the assumptions in Tables 8.5 and 8.6, verify that equation (8.13) equals 6%. Equation (8.13) TABLE 8.5 Unhedged and hedged cash flows for a dollar-based firm with euro-denominated debt. Unhedged Euro Cash Flow Hedged Exchange Rate Dollar Cash
> Using the zero-coupon bond prices and oil forward prices in Table 8.9, what is the price of an 8-period swap for which two barrels of oil are delivered in even-numbered quarters and one barrel of oil in odd-numbered quarters? TABLE 8.9 Quarter 2 3 4
> Using the information in Table 8.9, what is the swap price of a 4-quarter oil swap with the first settlement occurring in the third quarter? TABLE 8.9 Quarter 1 2 3 4 5 7 8 Oil forward price 21 21.1 20.8 20.5 20.2 20 19.9 19.8 Gas swap price Zero-cou
> Suppose the stock price is $35 and the continuously compounded interest rate is 5%. a. What is the 6-month forward price, assuming dividends are zero? b. If the 6-month forward price is $35.50, what is the annualized forward premium? c. If the forward pr
> Suppose you observe the following effective annual zero-coupon bond yields: 0.030 (1-year), 0.035 (2-year), 0.040 (3-year), 0.045 (4-year), 0.050 (5-year). For each maturity year compute the zero-coupon bond prices, continuously compounded zero-coupon bo
> A stock currently sells for $32.00. A 6-month call option with a strike of $35.00 has a premium of $2.27. Assuming a 4% continuously compounded risk-free rate and a 6% continuous dividend yield, what is the price of the associated put option?
> What are comparative financial statements? What issue is introduced when entities present information in comparative format?
> What are auditors’ reporting options when going-concern uncertainties are noted?
> Is the reference in the auditors’ report to work performed by component auditors a scope limitation? Explain.
> If a scope limitation exists but auditors are able to perform alternative procedures, how is the standard (unmodified) report modified to reflect the scope limitation?
> For what reasons do auditors obtain an understanding of a client’s internal control?
> What date should be used on the auditors’ report?
> What is a management letter? Are management letters required by generally accepted auditing standards?
> What are subsequently discovered facts?
> What is a subsequent event?
> Why are adjusting entries and note disclosures labeled “proposed”?
> What responsibility do auditors have for evaluating a client’s ability to continue as a going concern?
> How should auditors respond if the client refuses to furnish written representations?
> Why are written representation and attorney letters obtained near the end of the evidence gathering process and dated on the date of the auditor’s report?
> What are auditors’ responsibilities with respect to accounting estimates made by management?
> What additional issues are involved with miscellaneous, other, and clearing accounts?
> What is a control activity?
> What are roll-forward procedures? Provide some examples.
> What effect can related-party transactions have in some cases of asset valuation? (Refer to the Go for the Gold case.)
> You have been instructed to create an aging schedule for ELM’s accounts receivable using IDEA. For the purposes of this exercise, assume the aging begins on the date that the customer is invoiced and should only include valid accounts receivable (e.g., a
> Use the information related to ELM’s payment and discount policy (referenced earlier) to analyze the company’s discount program and late payments. All dates for payments are based off the date the customer is invoiced. Required: a. Are there any compani
> What constitutes the authorization for notes payable? What documentary evidence could auditors examine to confirm this authorization?
> Loan covenants are used for which of the following reasons? a. To protect the lender from the borrower’s substantially weakening of the latter’s financial position. b. To protect the borrower from the lender’s calling the loan early. c. To protect the au
> Which of the following audit procedures would not likely be performed for audits of shareholders’ equity? a. Read board of directors’ minutes for authorization of equity transactions. b. Confirm outstanding common and preferred stock with stock registrar
> An audit plan for the examination of the retained earnings account should include a step that requires verification of the (choose two steps) a. Market value used to charge retained earnings to account for a 2-for-1 stock split. b. Approval of the adjust
> When independent stock transfer agents are not employed and the corporation issues its own stock and maintains stock records, canceled stock certificates should a. Be defaced to prevent reissuance and attached to their corresponding stubs. b. Not be defa
> A related party is a person or entity that a. Has a family tie to a management member. b. Does business with the company. c. Can exert significant influence over or be influenced by the company. d. Is a member of the company’s management team or board of
> Why is the timing of the auditors’ appointment an important matter in the conduct of a financial statement audit?
> What analytical procedures might reveal obsolete or slow-moving inventory?
> What could be happening when a client’s managers take notes of auditors’ test counts while an inventory is being counted?
> What inventory costing methods does GAAP recognize?
> Which of the following is an internal control weakness for a company whose inventory of supplies consists of a large number of individual items? a. Supplies of relatively little value are expensed when purchased. b. The cycle basis is used for physical c
> In the audit of accounts receivable, auditors develop specific audit assertions related to the receivables. They then design specific substantive procedures to obtain evidence about each of these assertions. Here is a selection of accounts receivable ass
> When tracing using the cutoff information from the December 31 inventory count of Thermo-Tempur Mattresses, you note the following information: The purchases list shows that the following items were recorded in December. The documentation indicates t
> How would a policy of mandatory vacations have helped discover the Beta fraud?
> If Lee had not been seen taking employees out in a limousine, how else could she have been caught?
> Your long-time client, Central Office Supply, has been rapidly expanding, and the board of directors is considering taking the company public. CEO Terry Puckett has heard that costs of operating a public company have increased significantly as a result o
> What evidence could the verbal inquiry audit procedure provide in “Printing (Copying) Money”?
> What is an audit plan? During which stage of the audit is an audit plan prepared?
> What key control concept was missing at Argus Productions?
> What methods are used to audit other expense accounts?
> What items in a client’s PP&E and depreciation schedule give auditors points of departure (assertions) for audit procedures?
> In substantive procedures, why is the emphasis on the completeness assertion for liabilities instead of on the existence assertion as in the audit of assets?
> Where could an auditor look to find evidence of (a) losses on purchase commitments or (b) unrecorded liabilities to vendors?
