Ch. 10 HW

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

Acknowledge the receipt of securities returned.

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

Be defaced to prevent reissuance and attached to their corresponding stubs.

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

Correlating interest expense recorded for the period with outstanding debt.

Sometimes auditors may ______securities on hand.

Inspect

Waivers must be dated the same date as the _______.

balance sheet

A waiver needs to be received from the ______.

bank/lender

Covenant violations should still be disclosed in the ________.

financial statements

Covenants are typically calculated as of _____.

year-end

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

Detect unrecorded liabilities.

Which of the following approaches is most suitable for auditing the finance and investment cycle?

Gain an understanding of internal controls and perform extensive substantive procedures.

Confirmations should include a request that the bank confirm ____ borrowings

all

Notes payable to financial institutions are often confirmed together with the _______ accounts

cash

Auditors need to determine whether debt _____ have been met.

covenants

Which of the following internal control activities would most likely justify reducing the assessment of the risks of material misstatement for long-term notes payable?

All direct borrowings on notes payable are authorized by the board of directors.

Which of the following questions would auditors most likely include on an internal control questionnaire for notes payable?

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

In connection with the audit of an issue of long-term bonds payable, the audit team should

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

A related party is a person or entity that

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

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 assertions about

Classification

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

Compare interest expense with the bond payable amount for reasonableness.

Which of the following audit procedures would not likely be performed for audits of shareholders' equity?

Compare valuation of stock to published market prices.

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, which of the following is the best method of verifying the accuracy of recorded dividend income?

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

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

Completeness of recorded investment income.

Which of the following audit procedures would not likely be performed for audits of investments?

Confirm investments with registrar.

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

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

All corporate capital stock transactions should ultimately be traced to the

Minutes of the meetings of the board of directors.

After testing internal controls related to investments, it may be necessary to ______the risk of material misstatement.

Modify

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

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

A client has a 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

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

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

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

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

The loss in value be recognized in the financial statements.

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

The number of shares issued and outstanding.

Loan covenants are used for which of the following reasons?

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

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

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

Which of the following assertions is most likely to have the highest risk of material misstatement for the goodwill account?

Valuation

An investment committee is a standing committee of _______.

board of directors

An important step in testing investments is to ensure all persons with access to investments are properly ______.

bonded

_______ transactions are examined for all large debt agreements.

individual

Confirmations should be drafted on client ______.

letterhead

A notes payable analysis shows the beginning balance, additional notes, and the ending balance of each individual ______.

note

Waivers must extend for a period of ________.

one year

Debits to a mortgage payable account typically are _______ on the account.

payments

A copy of debt agreements is typically housed in the ______ file.

permanent

Actual signed copies of the notes are often put in the auditors' ________ file.

permanent

A sample internal control questionnaire question may ask about _________ inherent in the investment policy.

risk

Bond transactions are typically confirmed directly with the _______.

trustee