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Substantive Audit Testing: Financing and

Investing Cycle

MULTIPLE CHOICE:

1. Which of the following expressions is least likely to be

included in a client's representation letter?

a. No events have occurred subsequent to the balance sheet

date that require adjustment to, or disclosure in,

the financial statements.

b. The company has complied with all aspects of

contractual agreements that would have a material

effect on the financial statements in the event of

noncompliance.

c. Management acknowledges responsibility for illegal

actions committed by employees.

d. Management has made available all financial statements

and related data.

ANSWER: C

2. When reviewing working papers, an audit supervisor will be

primarily concerned with determining whether the

a. Audit programs have been carried out without deviation.

b. Working papers adequately support the audit findings,

conclusions, and reports.

c. Working papers reflect adherence to budget constraints.

d. Auditing department's standard formats and tick marks

have been used consistently.

ANSWER: B

3. A written representation from a client's management which,

among other matters, acknowledges responsibility for the

fair presentation of financial statements, should normally

be signed by the

a. Chief executive officer and the chief financial

officer.

b. Chief financial officer and the chairman of the

board of directors.

c. Chairman of the audit committee of the board of

directors.

d. Chief executive officer, and the chairman of the

board of directors, and the client's lawyer.

ANSWER: A

Chapter 13 Substantive Audit Testing: Financing and Investing Cycle 214

4. Generally accepted auditing standards require the auditor to

apply analytical procedures in both the planning and review

stages of the audit. The major reason for applying

analytical procedures as part of audit review is

a. To identify abnormalities that warrant audit attention.

b. To assist the auditor in establishing materiality

thresholds.

c. To ascertain that the auditor has gathered adequate

evidence to resolve suspicions arising during the

planning stages of the audit.

d. To provide documentary evidence in the event of future

litigation.

ANSWER: C

5. The existence of a related party transaction may be

indicated when another entity

a. Sells real estate to the corporation at a price that

is comparable to its appraised value.

b. Absorbs expenses of the corporation.

c. Borrows from the corporation at a rate of interest

which equals the current market rate.

d. Lends to the corporation at a rate of interest which

equals the current market rate.

ANSWER: B

6. The main purpose of the auditor/client conference held at

the close of audit field work is to

a. Discuss unresolved matters and audit fee arrangements.

b. Review proposed audit adjustments, internal control

weaknesses, and needed disclosures, and agree on the

type of audit report to be rendered.

c. Discuss areas of major audit risk and use of client

personnel to assist in high risk areas.

d. Arrange for a meeting with outside legal counsel for

the purpose of discussing pending litigation.

ANSWER: B

7. After discovering that a related party transaction exists,

the auditor should be aware that the

a. Substance of the transaction could be significantly

different from its form.

b. Adequacy of disclosure of the transaction is secondary

to its legal form.

c. Transaction is assumed to be outside the ordinary

course of business.

d. Financial statements should recognize the legal form

of the transaction rather than its substance.

Chapter 13 Substantive Audit Testing: Financing and Investing Cycle

215

ANSWER: A

8. Which of the following matters describes a "reportable

condition" that should be included in the auditor's

communication of the same?

a. A significant audit adjustment was required because a

major year-end adjustment was inadvertently overlooked

by the client.

b. The client's recently installed on-line real-time

computer system lacks necessary input editing features.

c. A major customer of the client is verging on

bankruptcy.

d. The auditors do not agree with the economic feasibility

of the client's proposed acquisition of a new

subsidiary.

ANSWER: B

9. An attorney is responding to an independent auditor as a

result of the audit client's letter of inquiry. The

attorney may appropriately limit the response to

a. Asserted claims and litigation.

b. Matters to which the attorney has given substantive

attention in the form of legal consultation or

representation.

c. Asserted, overtly threatened, or pending claims and

litigation.

d. Items which have an extremely high probability of

being resolved to the client's detriment.

ANSWER: B

10. An auditor is verifying a company's ownership of equipment

What is the best evidence of ownership?

a. The current year's depreciation expense journal entry.

b. A canceled check written to acquire the equipment.

c. An interview with the equipment custodian verifying

company ownership.

d. The presence of the equipment on the company's balance

sheet.

ANSWER: B

11. If a lawyer refuses to furnish corroborating information

regarding litigation, claims, and assessments, the auditor

should

a. Honor the confidentiality of the client-lawyer

relationship.

b. Consider the refusal to be tantamount to a scope


limitation.

c. Seek to obtain the corroborating information from

management.

d. Disclose this fact in a footnote to the financial

statements.

ANSWER: B

12. In auditing investments for proper valuation, the auditor

should do all but the following:

a. Confirm securities held in safekeeping off the client's

premises.

b. Vouch purchases and sales of securities by tracing to

brokers' advices and canceled checks.

c. Compare cost and market by reference to year end market

values for selected securities.

d. Recalculate gain or loss on disposals.

ANSWER: A

13. When examining a client's statement of cash flows for audit

evidence, an auditor will rely primarily upon

a. Determination of the amount of working capital at

year-end.

b. Cross-referencing to balances and transactions reviewed

in connection with the examination of the other

financial statements.

c. Analysis of significant ratios of prior years as

compared to the current year.

d. The guidance provided by the APB Opinion on the

statement of cash flows.

ANSWER: B

14. A limitation on the scope of the auditor's examination

sufficient to preclude an unqualified opinion will always

result when management

a. Prevents the auditor from reviewing the working papers

of the predecessor auditor.

b. Engages the auditor after the year-end physical

inventory count is completed.

c. Fails to correct a material internal control weakness

that had been identified during the prior year's audit.

d. Refuses to furnish a client representation letter to

the auditor.

ANSWER: D

15. When an audit is made in accordance with generally accepted

auditing standards, the auditor should always


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a. Test control procedures by reprocessing a representa-

tive sample of completed transactions.

b. Examine all negotiable and nonnegotiable securities,

regardless of location.

c. Obtain certain written representations from management.

d. Observe the taking of the physical inventory on the

balance sheet date.

ANSWER: C

16. Which of the following audit procedures provides the best

evidence about the collectability of notes receivable?

a. Confirmation of note receivable balances with the

debtors.

b. Examination of notes for appropriate debtors'

signatures.

c. Examination of cash receipts records to determine

promptness of interest and principal payments.

d. Reconciliation of the detail of notes receivable and

the provision for uncollectible amounts to the general

ledger control.

ANSWER: C

17. An audit program for the examination of the retained

earnings account should include a step that requires

verification of the

a. Market value used to charge retained earnings for a

two-for-one stock split.

b. Approval of the adjustment to the beginning balance as

a result of a write-down of an account receivable.

c. Authorization for both cash and stock dividends.

d. Gain or loss resulting from disposition of treasury

shares.

ANSWER: C

18. In testing the reasonableness of interest income, an auditor

could most effectively use analytical tests involving

a. The beginning balance in the investments account for

fixed income securities.

b. The average monthly balance in the investments account

for fixed income securities.

c. The ending balance in the investments accounts for

fixed income securities.

d. Documentary support of specific entries in the account.

ANSWER: B


19. Which of the following would provide the best form of

evidential matter pertaining to the annual valuation of a

long-term investment in which the independent auditor's

client owns a 30% voting interest?

a. Market quotations of the investee company's stock.

b. Current fair value of the investee company's assets.

c. Historical cost of the investee company's assets.

d. Audited financial statements of the investee company.

ANSWER: D

20. Which of the following is a "Type I" subsequent event?

a. The client's Long Island warehouse was destroyed by

fire two weeks following the balance sheet date. The

warehouse and its contents were uninsured and

represented 15% of the client's total assets.

b. As the result of an uninsured flood loss, one of the

client's major customers declared bankruptcy. The

client doesn't expect to recover more than 5% of the

outstanding receivable which accounts for 30% of total

accounts receivable. The flood and bankruptcy

declaration both occurred after the balance date but

before the release of the audit report. No additional

provision for loss had been made as of year end.

c. Three weeks after the balance sheet date, a major

strike was called by the labor union representing 80%

of the client's work force.

d. After the balance sheet date, but prior to release of

the audit report, a product liability judgment against

the client was rendered by a judge. The judgment

assessed damages and fines totaling 30% of audited net

income. The events giving rise to the judgment

occurred prior to the balance sheet date. The client

does not plan to appeal the decision.

ANSWER: D

21. Which of the following statements regarding the audit of

negotiable notes receivable is not correct?

a. The auditor should confirm all notes receivable as of

the balance sheet date.

b. Materiality of the amount involved is a factor

considered when selecting the accounts to be confirmed.

c. Physical inspection of a note by the auditor does not

provide conclusive evidence.

d. Notes receivable discounted with recourse need to be

confirmed.

ANSWER: A


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22. Which of the following matters should not be included in the

auditor's letter of communication with the client's audit

committee?

a. An audit adjustment was required reducing inventory by

40%.

b. Management was reluctant to answer the auditor's

questions concerning the economic substance of material

related party transactions.

c. Contrary to a previous understanding, the client did

not have an adjusted trial balance completed prior to

the commencing of audit field work. Moreover, several

errors were detected by the audit team as a result of

significant weaknesses in internal control.

d. An internal control weakness discovered during the

previous year's audit was corrected during the current

year.

ANSWER: D

23. Apex, Incorporated issued common stock to acquire another

company, in an acquisition that was accounted for as a

pooling of interests. The auditor examining this

transaction would be least interested in

a. The net book value of the acquired company.

b. The par value of the stock that was issued.

c. Whether or not the acquisition was approved by the

board of directors of Apex, Incorporated.

d. Whether the fair market value of the acquired assets

were independently appraised.

ANSWER: D

24. An internal auditor discovered an error in a receivable due

from a major stockholder. The receivable's balance accounts

for less than one percent of the company's total

receivables. Would the auditor be likely to consider the

error material?

a. Yes, if relative risk is low.

b. No, if there will be further transactions with

this stockholder.

c. Yes, because a related party is involved.

d. No, because a small dollar amount is in error.

ANSWER: C

25. Two months before the year end, the bookkeeper erroneously

recorded the receipt of a long-term bank loan by a debit to

cash and a credit to sales. Which of the following is the

most effective procedure for detecting this type of error?


a. Analyze the notes payable journal.

b. Analyze bank confirmation information.

c. Prepare a year-end bank reconciliation.

d. Prepare a year-end bank transfer schedule.

ANSWER: B

26. Of the following statements regarding further analysis of

materiality thresholds during audit review, which one is

true?

a. Audit adjustments reducing net income may suggest a

need to lower individual item and aggregate materiality

thresholds.

b. Audit adjustments reducing net income may suggest a

need to lower the individual item threshold, but

should not affect aggregate materiality thresholds.

c. Audit adjustments that increase net income may suggest

a need to lower aggregate materiality thresholds.

d. An increase in the assessment of control risk suggests

a need to lower the individual item materiality

threshold.

ANSWER: A

27. A written understanding between the auditor and the client

concerning the auditor's responsibility for the discovery of

illegal acts is usually set forth in a(an)

a. Client representation letter.

b. Letter of audit inquiry.

c. Management letter.

d. Engagement letter.

ANSWER: D

28. A letter from the company's attorney in response to

inquiries about possible litigation is best described as:

a. Confirmation evidence.

b. Analytical evidence.

c. Documentary evidence.

d. Physical evidence.

ANSWER: A

29. The auditor can best verify a client's bond sinking fund

transactions and year-end balance by

a. Confirmation with individual holders of retired bonds.

b. Confirmation with the bond trustee.

c. Recomputation of interest expense, interest payable,

and amortization of bond discount or premium.


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d. Examination and count of the bonds retired during the

year.

ANSWER: B

30. Which of the following procedures would an auditor

ordinarily perform during the review of subsequent

events?

a. An analysis of related party transactions for the

discovery of possible fraud.

b. A review of the cut-off bank statements for the period

after the year-end.

c. An inquiry of the client's legal counsel concerning

litigation.

d. An investigation of material weaknesses in internal

control previously communicated to the client.

ANSWER: C

31. Which of the following is not an audit procedure which the

independent auditor would perform with respect to

litigation, claims, and assessments.

a. Inquire of and discuss with management the policies

and procedures adopted for identifying, evaluating, and

accounting for litigation, claims, and assessments.

b. Obtain from management a description and evaluation

of litigation, claims, and assessments that existed at

the balance sheet date.

c. Obtain assurance from management that it has disclosed

all unasserted claims that the lawyer has advised are

probable of assertion and must be disclosed.

d. Confirm directly with the client's lawyer that all

claims have been recorded in the financial statements.

ANSWER: D

32. The auditee has acquired another company by purchase. Which

of the following would be the best audit procedure to test

the appropriateness of the allocation of cost to tangible

assets?

a. Determine whether assets have been recorded at their

book value at the date of purchase.

b. Evaluate procedures used to estimate and record fair

market values for purchased assets.

c. Evaluate the reasonableness of recorded values by use

of replacement cost data.

d. Evaluate the reasonableness of recorded values by

discussion with operating personnel.

ANSWER: B


33. A CPA has received an attorney's letter in which no

significant disagreements with the client's assessments of

contingent liabilities were noted. The resignation of the

client's lawyer shortly after receipt of the letter should

alert the auditor that

a. Undisclosed unasserted claims may have arisen.

b. The attorney was unable to form a conclusion with

respect to the significance of litigation, claims, and

assessments.

c. The auditor must begin a completely new examination of

contingent liabilities.

d. An adverse opinion will be necessary

ANSWER: A

34. An audit procedure that provides evidence about proper

valuation of marketable securities arising from a short-term

investment of excess cash is

a. Comparison of carrying value with current market quotations.

b. Confirmation of securities held by broker.

c. Recalculation of investment carrying value by applying

the equity method.

d. Calculation of premium or discount amortization.

ANSWER: A

35. Hall accepted an engagement to audit the 2002 financial

statements of XYZ Company. XYZ completed the preparation of

the 2002 financial statements on February 13, 2003, and Hall

began the field work on February 17, 2003. Hall completed

the field work on March 24, 2003, and completed the report

on March 28, 2003. The client's representation letter

normally would be dated

a. February 13, 2003

b. February 17, 2003

c. March 24, 2003

d. March 28, 2003

ANSWER: C

36. The auditee has just acquired another company by purchasing

all its assets. As a result of the purchase, "goodwill" has

been recorded on the auditee's books. Which of the

following comparisons would be the most appropriate audit

test for the amount of recorded goodwill?

a. The purchase price and the book value of assets

purchased.

b. The figure for goodwill specified in the contract for


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purchase.

c. Earnings in excess of 15% of net assets for the past

five years.

d. The purchase price and the fair market value of assets

purchased.

ANSWER: D

37. All corporate capital stock transactions should ultimately

be traced to the

a. Minutes of the Board of Directors.

b. Cash receipts journal.

c. Cash disbursements journal.

d. Numbered stock certificates.

ANSWER: A

38. A logical substantive test for accrued interest receivable

would be to

a. Compare the interest income with published interest-

investment records.

b. Verify the interest income by a calculation based on

the face amount of notes and the nominal interest rate.

c. Verify the cost, carrying value, and market value of

notes receivable.

d. Recalculate interest earned and compare it to the

amounts received.

ANSWER: D

39. In verifying the amount of goodwill recorded by a client,

the most convincing evidence which an auditor can obtain is

by comparing the recorded value of assets acquired with the

a. Assessed value as evidenced by tax bills.

b. Seller's book value as evidenced by financial

statements.

c. Insured value as evidenced by insurance policies.

d. Appraised value as evidenced by independent appraisals.

ANSWER: D

40. An auditor who wishes to substantiate the gross balance of

the account "Trade Notes Receivable" is considering the

advisability of performing the four procedures listed below.

Which pair of procedures is best suited to this objective?

I. Age the receivables.

II. Confirm the notes with the makers.

III. Inspect the notes.

IV. Trace a sample of postings from the sales journal to

the notes receivable ledger.


a. I and III.

b. I and IV.

c. II and III.

d. II and IV.

ANSWER: C

41. Jones was engaged to examine the financial statements of

Gamma Corporation for the year ended June 30, 2002. Having

completed an examination of the investment securities, which

of the following is the best method of verifying the

accuracy of recorded dividend income?

a. Tracing recorded dividend income to cash receipts

records and validated deposit slips.

b. Utilizing analytical review techniques and statistical

sampling.

c. Comparing recorded dividends with amounts appearing on

federal information forms 1099.

d. Comparing recorded dividends with a standard financial

reporting service's record of dividends.

ANSWER: D

42. An auditor's program to examine long-term debt most likely

would include steps that require

a. Comparing the carrying amount of the debt to its year-

end market value.

b. Correlating interest expense recorded for the period

with outstanding debt.

c. Verifying the existence of the holders of the debt by

direct confirmation.

d. Inspecting the accounts payable subsidiary ledger for

unrecorded long-term debt.

ANSWER: B

COMPLETION:

43. Two alternative means for determining that recorded

securities exist are and .

ANSWER: INSPECTION (EXAMINATION), CONFIRMATION

44. When examining securities, the auditor should prepare a

workpaper (count sheet) that lists such data as serial

number of the securities certificate, registered owner, and

number of shares or par value. This workpaper should then


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be compared with the client's investment record for

agreement. In this regard, the auditor tests for existence

of securities by tracing from (investment

record or count sheet) to the (investment

record or count sheet); and the auditor tests for

completeness by tracing from the to

the .

ANSWER: INVESTMENT RECORD, COUNT SHEET, COUNT

SHEET, INVESTMENT RECORD

45. Auditing intracompany transactions for consistency and

completeness is known as a test for .

ANSWER: ACCOUNTING SYMMETRY

46. If investments in unconsolidated subsidiaries are accounted for under the equity method, the auditor may need to insist

that the financial statements of these subsidiaries be

.

ANSWER: AUDITED

47. Examining long-term debt agreements helps the auditor

identify necessary and .

ANSWER: ACCRUALS, DISCLOSURES

48. Although a Type II subsequent event does not require

adjustment, it may require .

ANSWER: DISCLOSURE

49. An audit workpaper listing unresolved matters and the

ultimate disposition of these matters is commonly referred

to as a(n) workpaper.

ANSWER: OPEN ITEMS

50. The vehicle that is designed to make management more aware

of their primary responsibility for fairness of financial

presentation is known as the .

ANSWER: CLIENT REPRESENTATION LETTER

MATCHING:

51. Match each of the listed objectives with the auditing

procedure that best meets the objective.


A. Examine securities and record serial numbers for later

comparison with recorded accountability.

B. Examine audited financial statements of 30% owned

subsidiary.

C. Verify by reference to Standard & Poors or Moodys. D. Inquire of management as to nature of investments and

reasons for holding them.

E. Obtain bank confirmations.

F. Examine minutes of board of directors meetings. G. Recalculate on a test basis.

H. Examine loan agreements.

I. Examine copy of corporate charter in permanent file.

K. Trace from securities count sheets to investment ledger.

_____1. Has dividend revenue been properly reflected in the

accounts?

_____2. Are securities properly classified as to current or

noncurrent?

_____3. Have liabilities and capital stock transactions been

properly authorized

_____4. Have details relating to preferred and common stock been

adequately disclosed?

_____5. Has unamortized discount on bonds payable been properly

determined and reflected in the financial statements?

_____6. Are securities properly valued using the equity method?

_____7. Have all securities examined been recorded?

_____8. Do the securities purported to be owned by the client

exist?

_____9. Have all loans been recorded?

_____10. Do any of the clients borrowing arrangements impose restrictions on dividends or on additional borrowing?

SOLUTION:

1. C

2. D

3. F

4. I

5. G


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6. B

7. K

8. A

9. E

10. H

PROBLEM/ESSAY:

52. For each of the following situations, (1) identify the

financial statement effect(s) of the error or fraud, (2) describe

procedures enabling the auditor to detect the misstatement, and

(3) draft the audit adjustment(s) suggested by the procedures.

(a) An unsecured loan for $3.2 million was granted to Maria

Juarez, the chief executive officer of Compton, Inc., at the

beginning of 2002. On December 31, 2002, the company drew a

check for $3.2 million on Bank A for deposit in Bank B. The

transaction was recorded by a debit to cash in Bank B and a credit to loans receivable-officers. The check was not listed as outstanding on Bank A. It did appear as a credit on the

December 31 bank statement received from Bank B. On January 2,

2003, the company made a journal entry debiting loans receivable-officers and crediting cash in Bank A for $3.2 million. The loan accounted for 35% of the entitys total assets.

(b) George Luminas, chief executive officer of Jako

Manufacturing, used a wholly-owned subsidiary to channel funds

for his personal use. To effect the transfer, he had the

subsidiary borrow money by issuing notes guaranteed by Jako to

various banks. The borrowed funds, $2,300,000, were then

transferred to Jako and Jako made cash advances of $1,200,000 to

the subsidiary which then transferred the funds to Luminas in the

form of unsecured loans. The transfers from the subsidiary to

Jako were recorded as customer deposits and the advances from Jako to the subsidiary were debited to the customer deposits account. To avoid auditor detection of the economic substance of

these transactions, Jako did not include the subsidiary in its

consolidated financial statements; nor did the company inform the

auditors of the existence of either the subsidiary or the loan

guarantee. These are the only transactions completed by the

subsidiary during the year under audit. The following balances

appear on the books of Jako and the wholly-owned subsidiary:

Jako: Customer Deposits $1,100,000 credit

Subsidiary: Notes Payable-Banks $2,300,000 credit

Receivable from Parent $2,300,000 debit

Payable to Parent $1,200,000 credit

Receivable from Officers $1,200,000 debit


SOLUTION:

(a)

(1) This set of journal entries is an example of fraudulent

misrepresentation in the form of kiting and the effect is to

overstate cash in bank and understate loans receivable.

(2) The auditors should detect the fraud by obtaining

cutoff bank statements from both banks and performing analysis of

interbank transfers for a few days before and after the balance

sheet date.

(3) Recommended audit adjustment:

Loans receivable-officers $3,200,000

Cash in Bank A $3,200,000

(b)

(1) In addition to misrepresenting Jakos financial position, these transactions constitute misappropriation fraud by

the CEO, assuming Luminas has no intention of repaying the loans.

The effect is to understate loans payable to banks - given the loan guarantee and the lack of subsidiary financial resources,

these are really loans made by the banks to Jako. Loans receivable from officers is also understated. (2) The following auditing procedures should identify the

related party and related party transactions:

a. Examination of directors minutes should reveal authorization to establish the subsidiary.

b. Analysis of the customer deposits account and confirmation of balances with customers should disclose the

substance of this account.

c. Bank confirmation letters expressly requesting

information regarding any existing loan guarantees should enable

the auditors to detect the loans.

(3) Recommended audit adjustment:

Customer deposits $1,100,000

Receivable from officers $1,200,000

Notes payable-banks $2,300,000

53. Assume that you are the audit manager in charge of the Gregs Auto Parts audit, and that Sara Engles, the in-charge senior

auditor, has presented you with an "open items" audit workpaper

describing the following unresolved issues:

1. Gregs Auto Parts, as of March 31, 2003, its fiscal year-end, had inventory on consignment in the


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warehouse of its principal customer in Dallas awaiting

sale during the Spring buying season. Engles had the

client request the customer to confirm the existence

and ownership of the inventory, but a reply has not

been received as of the close of audit field work, May

17, 2003. The goods represent 11% of the total

finished goods inventory.

2. Engles requested a copy of the debt restructuring

agreement that would permit reclassifying certain

current liabilities as short-term obligations expected to be refinanced. The copy was not received as of the close of audit field work. If not reclassified, Gregs balance sheet will show a current ratio of 1:1 and a

quick ratio of 1:2.

3. A loan to Ben Williams, Gregs Auto Parts chief executive officer, is purportedly secured by collateral

consisting of negotiable securities. As of the close

of audit field work, Engles has yet to examine this

collateral. A request for brokers confirmation has not been received. The loan is classified as a current

asset and represents 20% of total current assets.

Required:

a. For each of the open items described above, identify the

primary audit risk if the issue is not satisfactorily resolved.

b. How would you resolve each item (i.e., what audit

procedure(s) would you recommend?)

SOLUTION:

1. RISK: If the inventory does not exist, or if it is not

owned by Gregs Auto Parts, ending inventory and net income will be overstated.

AUDITING PROCEDURES: Ask the client to request the

customer to return the confirmation. Also arrange to have

correspondent auditors in Dallas inspect the inventory on a test

basis.

2. RISK: If the debt has not been restructured, the

auditors, given the current and quick ratios, may need to add a

paragraph to their audit report expressing doubt as to the

ability of Gregs Auto Parts to continue as a going concern. AUDITING PROCEDURES: Ask the client to request the

creditor to confirm the existence of the agreement directly to

the auditors along with a signed copy of the agreement.

3. RISK: If this is in reality an unsecured loan, and if

Williams is either unable or unwilling to repay it promptly, the

clients current debt paying ability becomes even more precarious.


AUDITING PROCEDURES: Arrange for inspection of the

securities either by Engles or by correspondent auditors if the

broker is located some distance from the clients headquarters.

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