Auditing Chapter 10

request the client to have the bank seal the safe deposit box until the auditors can count the securities at a subsequent date.

A client has large and active investment portfolio that is kept in a bank safe deposit box. If the auditors are unable to count securities at the balance sheet date, they most likely will _________________.

Can exert significant influence over or be influenced by the company.

A related party is a person or entity that __________________________________.

There had been unauthorized buying and selling of investment securities.

ABC Company has 100 shares of IBM stock that it holds as an investment. The stock was purchased 3 years ago and has been in the client's safe deposit box along with other investment securities. During an inspection of securities held by the client, the auditor noted the 100 shares of IBM stock had a different CUSIP number than the number listed when purchased and the number verified during the previous audit. What is the auditor's main concern about this discovery?

Minutes of the meetings of the board of directors.

All corporate capital stock transactions should ultimately be traced to _______.

1. Authorization for both cash and stock dividends declared and paid. 2. Gain or loss resulting from disposition of treasury shares.

An audit plan for the exmaination of the retained earnings account should include a step that requires verification of the __________ & ___________.

Correlating interest expense recorded for the period with outstanding debt.

An audit plan to examine long-term debt most likely would include steps that require ___________________.

Completeness of recorded investment income.

An audit team testing long-term investments would ordinarily use analytical procedures to ascertain the reasonableness of the ____________.

Recomputing the interest earned on the basis of face amount, interest rate, and period held.

An audit team would most likely verify the interest rate earned on bond investments by __________.

Classification

An audit team's purpose in reviewing the documentation concerning the renewal of a note payable shortly after the balance-sheet date most likely is to obtain evidence concerning management's assertion about ______.

The loss in value be recognized in the financial statements.

If the auditors discover that the carrying amount of a client's investments is overstated because of a loss in value that is other than a temporary decline in market value, they should insist that ______ ____________________________.

Compare interest expense with the bond payable amount for reasonableness.

In auditing for unrecorded long-term bonds payable, an audit team most likely will ___________________.

Ascertain that the client has obtained the opinion of counsel on the legality of the issue.

In connection with a long-term bonds payable, the audit team should ________________.

1. presentation and disclosure. 2. Verify that transfers from the trading portfolio to the held-to-maturity investment portfolio have been properly recorded. ALSO but not as good: Trace investment transactions to minutes of the board of directors meetings to determine that transactions were properly authorized.

Investments are properly described and classified in the financial statements. Note the management assertion that best applies and list the audit procedure that would be best suited to test the assertion.

1. Valuation 2. Determine whether any other-than-temporary impairments in the carrying value of investments have been properly recorded.

Investments are properly valued at the balance-sheet date.

Comparing recorded dividends with a standard financial reporting service's record of dividends.

Jones was engaged to examine the financial statements of Gamma Corporation for the year ended June 30. Having completed an examination of the investment securities, what is the best method of verifying the accuracy of recorded dividend income?

To protect the lender from the borrower's substantially weakening of the latter's financial position.

List one reason loan covenants are used.

Gain an understanding of internal controls and limit substantive procedures to analytical procedures

List one suitable approach for auditing the finance and investment cycle.

1. 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. 2. Compare valuation of stock to published market prices.

List the audit procedures that would likely occur during an audit of shareholders equity and one procedure that would likely NOT happen.

1. rights and obligations 2. Obtain positive confirmations as of the balance sheet date of investments held by independent custodians.

Recorded investments represent investments actually owned at the balance sheet date.

Acknowledge the receipt of securities returned.

The auditors should insist that a representative of the client be present during the inspection and count of securities to _______________________.

Detect unrecorded liabilities.

The primary reason for preparing a reconciliation between interest-bearing obligations outstanding during the year and interest expense in the financial statements is to ______.

1. Confirm investments with registrar. 2. Read board of directors' minutes for authorization of investment strategies; Confirm investments with broker or trustee; Compare valuation to published market prices.

What audit procedure would NOT be performed for audits of investments? Which procedure would?

Entries in the capital stock account can be traced to resolutions in the minutes of meetings of the board of directors.

What is the most important audit consideration when examining the stockholders' equity section of a client's balance sheet?

The number of shares issued and outstanding.

When a client company does not maintain its own capital stock records, the auditors should obtain a written confirmation from the transfer agent and registrar concerning ___________________________.

Trust company has no direct contact with the entity employees responsible for maintaining investment accounting records.

When an entity uses a trust company as custodian of its marketable securities, the possibility of concealing fraud most likely would be reduced is what happened?

be defaced to prevent re-issuance and attached to their corresponding stubs

When independent stock transfer agents are not employed and the corporation issues its own stock and maintains stock records, canceled stock certificates should _________________________.

Substitution of securities already counted for other securities that should be on hand but are not.

When the client holds a large amount of negotiable securities, auditors need to plan to guard against. what?

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

Which question would auditors most likely include on an internal control questionnaire for notes payable?