Chapter 10 - Auditing

Goodwill impairment refers to The amount of amortization. A decline in value of recorded goodwill. A need for increased professional skepticism. Loss of trust from customers.

A decline in value of recorded goodwill.

Which of the following questions would auditors most likely include on an internal control questionnaire for notes payable? Are the proceeds from notes payable used to purchase noncurrent assets? Are assets that collateralize notes payable critically needed for the entity's continued existence? Are direct borrowings on notes payable authorized by the board of directors? Are two or more authorized signatures required on checks that repay notes payable?

Are direct borrowings on notes payable authorized by the board of directors?

Which of the following audit procedures would not likely be performed for audits of shareholders' equity? Read board of directors' minutes for authorization of equity transactions. Confirm outstanding common and preferred stock with stock registrar. Obtain management representation about number of shares issued and outstanding. Compare valuation of stock to published market prices

Compare valuation of stock to published market prices

Which of the following audit procedures would not likely be performed for audits of shareholders' equity? Read board of directors' minutes for authorization of equity transactions. Confirm outstanding common and preferred stock with stock registrar. Compare valuation of stock to published market prices. Obtain management representation about number of shares issued and outstanding.

Compare valuation of stock to published market prices.

Which ASB balance assertion is of the most importance to auditors for long-term liabilities? Existence Completeness Rights and obligations Valuation

Completeness

Which ASB balance assertion is of the most importance to auditors for long-term liabilities? Rights and obligations Completeness Valuation Existence

Completeness

An audit plan to examine long-term debt most likely would include steps that require Verifying the existence of the holders of the debt by direct confirmation. Inspecting the accounts payable subsidiary ledger for unrecorded long-term debt. Comparing the carrying amount of held-to-maturity securities with their year-end market values. Correlating interest expense recorded for the period with outstanding debt.

Correlating interest expense recorded for the period with outstanding debt.

Inspecting marketable securities provides primary evidence about the ASB balance assertion of Rights and obligations. Valuation. Existence. All of the choices are correct.

Existence.

Which of the following is not a relevant aspect of internal controls over estimates? External auditor involvement in developing assumptions Adequate review by appropriate levels of authority Comparison of prior estimates with subsequent results All the above are relevant aspects of internal controls over estimates.

External auditor involvement in developing assumptions

A clause in a loan agreement that is intended to keep the borrower's financial position at the same level it was when the loan was made is called a Indenture. Loan covenant. Guarantee. Collateral.

Loan covenant.

When auditing the valuation assertion of an equity method investment, which of the following is the auditor most likely to do? Inspect stock certificates. Obtain audited financial statements of the investee company. Obtain the market price of the stock as of year-end. Review management's calculations.

Obtain audited financial statements of the investee company.

Which of the following would not be a typical feature of management's control over the production of estimates? Review by the independent auditor Consideration by management of whether particular accounting estimates are consistent with the company's operational plans Preparation of estimates by qualified personnel Accumulation of relevant, sufficient, and reliable data

Review by the independent auditor

Which of the following assertions is most likely to have the highest risk of material misstatement for the goodwill account? Rights & Obligations Existence Completeness Valuation

Valuation

If it would be appropriate to confirm capital stock, the auditor would obtain the confirmation from: stockholders. management. the board of directors. an independent registrar.

an independent registrar.

The preferred method of determining fair value of transactions is: market-based values. basing them on reasonable management assumptions. external auditor estimates. detailed computations by outside experts.

market-based values.

Related party transactions: must be valued as if they were arm's length. must be assumed to be valued differently than if they were arm's length. must be disclosed in the financial statements. must be disclosed in the financial statements and the auditor's report.

must be disclosed in the financial statements.

The typical business activity of the finance and investment cycle would not include proposals for cash forecasts, capital budgets, and business expansion. analysis of excess cash funds. reconciliation of cash. sale of stocks, bonds, or notes.

reconciliation of cash.

Derivative instruments include: stocks. preferred stocks. stock options. all the above.

stock options.

To determine whether facts support management's intent to hold securities to maturity, an auditor might: study the entity's cash flow forecasts. obtain published market quotations. compare fair value of the securities to cost. confirm that the securities are held by a broker.

study the entity's cash flow forecasts.

When a client company does not maintain its own capital stock records, the auditors should obtain written confirmation from the transfer agent and registrar concerning: guarantees of preferred stock liquidation value. the number of shares issued and outstanding. the number of shares subject to agreements to repurchase. restrictions on the payment of dividends.

the number of shares issued and outstanding.

An agent of a bond issuer who handles the administrative aspects of a loan and ensures that the borrower complies with the terms of the bond indenture is called a: registrar. transfer agent. trustee. none of the above.

trustee

In auditing intangible assets, an auditor most likely would review or recompute amortization and determine whether the amortization period is reasonable in support of the ASB balance assertion of: valuation. existence. completeness. rights and obligations

valuation

In auditing intangible assets, an auditor most likely would review or recompute amortization and determine whether the amortization period is reasonable in support of the ASB balance assertion of: valuation. existence. rights and obligations. completeness.

valuation