Audit Ch 15, CH 15 (TB), AC 432 Chp 15, chapter 17, Audit Ch 15, Audit Ch 15, Chapter 15, Audit Ch 15, Audit Ch 15, Chapter 15 Exam 2, Audit Ch 15, Audit Ch. 8 MC, Auditing Profession and Planning

For cash dividends, auditors: (Select all that apply) a. determine the dates and amounts of dividends authorized b. verify amounts received for stock issuance c. determine the proper amount has been transferred to capital stock d. verify the amounts paid

A, D

For corporate clients, owner's equity consists of: (Select all that apply) a. capital stock accounts b. bonds payable c. ownership transfer d. retained earnings

A, D

The financing cycle includes procedures for authorizing, executing, and recording transactions that involve: (Select all that apply) a. mortgages b. deferred taxes c. unearned revenues d. bank loans e. capital stock

A, D, E

When no independent stock transfer agent is employed and the corporation issues its own stocks and maintains stock records, canceled stock certificates should: A. Be defaced to prevent reissuance and attached to their corresponding stubs. B. Not be defaced but segregated from other stock. C. Be destroyed to prevent fraudulent reissuance. D. Be defaced and sent to the Secretary of State.

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

Company A does not employ an independent stock transfer agent, but rather issues its own stock and maintains its stock records. When outstanding shares are transferred from one holder to another the certificate of the selling shareholder should be: A. Canceled (generally by perforation) and attached to the certificate book. B. Destroyed to prevent fraudulent reissuance. C. Retained by the selling shareholder. D. Sent to the state's registrar of investment securities.

A. Canceled (generally by perforation) and attached to the certificate book.

An auditor who is auditing for acquired treasury stock will normally expect to see an entry in which journal? A. Cash disbursements. B. Cash receipts C. Purchases. D. Sales.

A. Cash disbursements.

The auditor's inventory observation test counts are traced to the client's inventory listing to test for which of the following financial statement assertions? A. Completeness. B. Rights and obligations. C. Valuation or allocation. D. Presentation and disclosure.

A. Completeness.

Which of the following procedures is least likely in the audit of capital stock? A. Examine all outstanding stock certificates for completeness. B. Account for the proceeds from stock issues. C. Reconcile shares outstanding with the general ledger. D. Evaluate compliance with stock option plans.

A. Examine all outstanding stock certificates for completeness.

The analysis of stockholder's equity typically includes few transactions but material amounts so auditors typically perform the analysis:

at the YE date

Auditors examine the relationship between recorded interest expense and the average principal amount of debt outstanding during the year as a test of which audit objective?

completeness

The auditors can best verify a client's bond sinking fund transactions and year-end balance by:

confirmation with the bond trustee

The auditors can best verify a client's bond sinking fund transactions and year-end balance by: recomputation of interest expense, interest payable, and amortization of bond discount or premium. examination and count of the bonds retired during the year. confirmation with individual holders of retired bonds. confirmation with the bond trustee.

confirmation with the bond trustee

Typical internal control for debt include: (Select all that apply) a. authorizing of capital stock transactions b. monitoring compliance with debt provisions c. new debt authorized by appropriate management d. utilizing the services of an independent registrar

B, C

Auditors review the partnership contract to: (Select all that apply) a. review the shareholders agreement for dividends b. determine the distribution of net income is appropriate c. verify the existence of treasury stock d. verify partners' capital accounts are maintained at prescribed levels

B, D

A registrar/transfer agent system relating to capital stock is most likely used by: A. A small, nonpublic company. B. A large, publicly traded company. C. All companies must use this type of system. D. No companies use this system anymore.

B. A large, publicly traded company.

An auditor selected items for test counts while observing a client's physical inventory. The auditor then traced the test counts to the client's inventory listing. This procedure most likely obtained evidence concerning management's assertion of A. Rights and obligations. B. Completeness. C. Existence or occurrence. D. Valuation.

B. Completeness.

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. D. Examination and count of the bonds retired during the year.

B. Confirmation with the bond trustee.

For audit purposes, a corporation's articles of incorporation are normally: A. Copied and placed on the owners' equity lead schedule. B. Copied and placed in the permanent file. C. Confirmed with the transfer agent. D. Ignored since they are not normally considered to be related to the internal control structure.

B. Copied and placed in the permanent file.

Which of the following is not a primary objective in the audit of interest-bearing debt? A. Establish the completeness of recorded interest-bearing debt. B. Establish the legality of outstanding debt. C. Determine that debt is properly valued. D. Determine that the presentation and disclosure of interest-bearing debt is appropriate.

B. Establish the legality of outstanding debt.

The auditors' program for the examination of long-term debt should include steps that require the: A. Verification of the existence of the bondholders. B. Examination of any bond trust indenture. C. Inspection of the accounts payable subsidiary ledger. D. Investigation of credits to the bond interest income accounts.

B. Examination of any bond trust indenture.

Appropriations of retained earnings require specific authorization by the:

Board Of Directors

The auditors' plan for the examination of long-term debt should include steps that require the:

examination of copies of debt agreements

To determine bonds outstanding were authorized, auditors review:

minutes of BOD meetings

An auditor usually obtains evidence of stockholders' equity transactions by reviewing the entity's:

minutes of board of directors meetings

All corporate capital stock transactions should ultimately be traced to the:

minutes of the board of directors

The record of serially numbered certificates with attached stubs used to track the number of shares, names of shareholders and serial number of certificates is called: a. stock registrar b. stockholders ledger c. stock certificate book d. stock transfer agent

C

The use of dividend paying agent in dividend distributions: a. has no effect on the possibility of errors or fraud b. increases the possibility of errors or fraud c. reduces the possibility of errors or fraud

C

To determine bonds outstanding were authorized, auditors review: a. bank deposits b. confirmation letters c. minutes of BOD meetings

C

To verify details of complex financing arrangements, auditors: a. review notes payable agreements in the permanent file b. examine disclosure in the notes c. send a separate confirmation letter to the financial institution

C

Which internal control feature allows auditors to account for all stock certificates? a. BOD authorization b. stock certificate book c. serial numbers

C

Which of the following is least likely to be an audit objective for debt? a) Determine the existence of recorded debt b) Establish the completeness of recorded debt c) Determine that the client has rights to receive proceeds relating to the redemption of debt d) Determine that the valuation of debt is in accordance with GAAP

C

Which of the following is most likely to be an audit objective in the audit of owners' equity? a) establish that recorded owners' equity includes all long-term debt and equity balances b) determine that common stock is valued at current market value c) determine that the presentation and disclosure of owners' equity is appropriate d) determine that the existence of recorded owner's equity is in conformity with equity accounting rule valuations

C

Auditors confirm the number of shares issued and outstanding with: (Select all that apply) a. BOD b. individual stockholders c. independent registrar d. stock transfer agent

C, D

Auditors test debt recorded at FV using: (Select all that apply) a. debt analysis b. confirmations c. unobservable inputs d. observable inputs

C, D

The board should authorize the following: (Select all that apply) a. market price for shares to be issued b. stock transfer price between stockholders c. number of shares to be issued and price per share d. valuation of non cash assets received in payment for shares

C, D

The use of an independent trustee is supported by the fact that the trustee does not have access to the company's: (Select all that apply) a. list of employees b. research and development plans c. accounting records d. assets

C, D

Multiplying the stock market price times the number of shares listed as outstanding by the registrar is a frequently used analytical procedure to test the completeness assertion for common stock.

False

Since owner's equity accounts are typically large in amount, the audit time devoted to them is typically extensive in amount.

False

T or F: A complete set of financial statements includes both a statement of retained earnings and a statement of stockholders' equity.

False

T or F: In the audit of a corporation that does not utilize the services of an independent stock registrar and transfer agent, the auditors should always confirm all outstanding shares by direct communication with stockholders.

False

T or F: In the verification of debit entries to retained earnings for small stock dividends, the auditors' only concern about dollar amounts is that the amount per share corresponds to the declaration by the board of directors.

False

T or F: Multiplying the stock market price times the number of shares listed as outstanding by the registrar is a frequently used analytical procedure to test the completeness assertion for common stock.

False

T or F: Since owner's equity accounts are typically large in amount, the audit time devoted to them is typically extensive in amount.

False

T or F: The auditors have no responsibility to determine compliance with restrictions imposed by borrowing agreements since these restrictions do not affect accounting principles.

False

T or F: The auditors should personally evaluate the legality of all new issues of debt by the client.

False

T or F: The authority to issue interest-bearing debt generally lies with the stockholders of the corporation.

False

T or F: The stock certificate book of a corporation provides a separate record of the total number of shares owned by each stockholder.

False

T or F: The use of a stockholders ledger eliminates the need for a stock certificate book.

False

T or F: Treasury stock should be confirmed directly with shareholders.

False

T or F: When outstanding shares are transferred from one investor to another, owners' equity increases when the transfer is at a higher price than paid by the original investor.

False

The auditors have no responsibility to determine compliance with restrictions imposed by borrowing agreements since these restrictions do not affect accounting principles.

False

The auditors should personally evaluate the legality of all new issues of debt by the client.

False

The authority to issue interest-bearing debt generally lies with the stockholders of the corporation.

False

The stock certificate book of a corporation provides a separate record of the total number of shares owned by each stockholder.

False

The use of a stockholders ledger eliminates the need for a stock certificate book.

False

Treasury stock should be confirmed directly with shareholders.

False

When outstanding shares are transferred from one investor to another, owners' equity increases when the transfer is at a higher price than paid by the original investor.

False

The audit procedure of confirmation is least appropriate with respect to: The trustee of an issue of bonds payable. Holders of common stock. Holders of notes payable. Holders of notes receivable.

Holders of common stock.

An auditor is most likely to trace treasury stock purchase transactions to the:

numbered stock certificates on hand

Auditors should determine whether the company has met all requirements and restrictions imposed upon it by debt agreements to obtain evidence regarding the ____________ audit objective.

Presentation and disclosure

In a small corporation that does not use a dividend-paying agent, which person is responsible for preparing a list of stockholders as of the date of record, the number of shares held by each, and the amount of dividends each is to receive?

secretary

In an audit of a sole proprietorship, a common difficulty is lack of:

segregation of personal net worth and business capital

To verify details of complex financing arrangements, auditors:

send a separate confirmation letter to the financial institution

Which internal control feature allows auditors to account for all stock certificates?

serial numbers

A transfer agent and a registrar are most likely to provide the auditor with evidence on:

shares issued and outstanding

Cash or other assets set aside for the retirement of a debt.

sinking fund

The record of serially numbered certificates with attached stubs used to track the number of shares, names of shareholders and serial number of certificates is called:

stock certificate book

To establish the amount of outstanding stock, auditors should reconcile general ledger accounts for capital stock with stockholders ledger and the:

stock certificate book

An institution charged with responsibility for avoiding over issuance of a corporation's stock.

stock registrar

The primary responsibility of this party is to control the issuance of stock and prevent any over issuance of stock.

stock registrar

An institution responsbile for maintaining detailed records of shareholders and handling changes of ownership of stock ownership.

stock transfer agent

If the general partner of a partnership is unwilling to allow the auditors to examine the partnership contract, the auditors ordinarily will not be able to issue an unmodified opinion on the partnership's financial statements.

True

Notes payable to financial institutions are confirmed as a part of the confirmation of cash deposit balances.

True

T or F: Debentures are liabilities that are backed only by the general credit of the issuing company.

True

T or F: If the general partner of a partnership is unwilling to allow the auditors to examine the partnership contract, the auditors ordinarily will not be able to issue an unmodified opinion on the partnership's financial statements.

True

T or F: Notes payable to financial institutions are confirmed as a part of the confirmation of cash deposit balances.

True

T or F: The audit of interest expense may reveal the existence of unrecorded debt.

True

T or F: The audit procedure of confirmation by direct communication with a creditor is more likely to be applied to a note holder than to a bondholder.

True

T or F: The company transfer agent is responsible for transferring stock from one investor to another.

True

T or F: The discovery of related-party transactions is generally easier in the area of notes payable than in accounts payable.

True

T or F: When a "sinking fund" exists, the auditors should be able to identify cash or other assets set aside for the retirement of a debt.

True

The audit of interest expense may reveal the existence of unrecorded debt.

True

The audit procedure of confirmation by direct communication with a creditor is more likely to be applied to a note holder than to a bondholder.

True

The company transfer agent is responsible for transferring stock from one investor to another.

True

The discovery of related-party transactions is generally easier in the area of notes payable than in accounts payable.

True

When a "sinking fund" exists, the auditors should be able to identify cash or other assets set aside for the retirement of a debt.

True

Bond transactions are typically confirmed directly with the _______.

Trustee

During an examination of a publicly held company, the auditor should obtain written confirmation regarding debenture transactions from the:

Trustee

For stock options, auditors must determine that the number of shares held in reserve at the BS date do not exceed the corporation's authorized but ___________ stock.

Unissued

An auditor most likely would analyze inventory turnover rates to obtain evidence concerning management's assertions about Existence or occurrence. Valuation or allocation. Presentation and disclosure. Obligations and Rights.

Valuation or allocation. Assertions about valuation or allocation deal with whether asset, liability, revenue, and expense components have been included in the financial statements at appropriate amounts. An auditor would look at inventory turnover rates to determine if the inventory amount on the balance sheet and the cost of goods sold amount on the income statement are reasonable, in relation to each other.

23. 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.

a

24. A substantive strategy is typically used to audit stockholders' equity because A. the number of transactions is small. B. controls over stockholders' equity transactions typically are weak. C. a reliance strategy is most efficient. D. a substantive strategy likely was used in prior years.

a

Auditors can document their understanding of internal control over capital stock transactions in all of the following except the:

audit program

Auditors should trace information in confirmation replies for shares outstanding to: a. corporate records b. contracts with underwriters c. the SEC registration statements

A

Auditors vouch the cash received from the issuance of notes, bonds, or mortgages to: a. validated bank deposit slips b. canceled notes payable c. payment checks

A

Types of long-term debt include: (Select all that apply) a. secured bonds b. debentures c. capital stock d. unearned revenue

A, B

Types of long-term debt include:

1. secured bonds 2. debentures

Auditors should examine payments on notes payable and verify the payment amounts to: a. the note repayment schedule b. trustee schedule c. the confirmation by the financial institution

A

The use of an independent trustee is supported by the fact that the trustee does not have access to the company's:

1. accounting records 2. assets

For corporate clients, owner's equity consists of:

1. capital stock accounts 2. retained earnings

Auditors should trace proceeds from the issuance of capital stock to:

1. cash records 2. bank statements

For cash dividends, auditors:

1. determine the dates and amounts of dividends authorized 2. verify the amounts paid

Auditors review the partnership contract to:

1. determine the distribution of net income is appropriate 2. verify partners' capital accounts are maintained at prescribed levels

Auditors confirm the number of shares issued and outstanding with:

1. independent registrar 2. stock transfer agent

For stock option plans auditors need to obtain detailed analyses for stock options:

1. issued 2. outstanding 3. authorized

Typical internal control for debt include:

1. monitoring compliance with debt provisions 2. new debt authorized by appropriate management

The financing cycle includes procedures for authorizing, executing, and recording transactions that involve:

1. mortgages 2. bank loans 3. capital stock

The board should authorize the following:

1. number of shares to be issued and price per share 2. valuation of non cash assets received in payment for shares

Auditors need to determine that notes are classified by:

1. types of payees 2. maturity

Auditors test debt recorded at FV using:

1. unobservable inputs 2. observable inputs

*An auditor most likely would inspect loan agreements under which an entity's inventories are pledged to support management's financial statement assertion of: a. presentation and disclosure b. valuation or allocation c. existence or occurence d. completeness

A

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

A

An audit plan for the examination of the retained earnings account should include a step that requires verification of the: a. authorization for both cash and stock dividends. b. approval of the adjustment to the beginning balance as a result of a write-down of an account receivable. c. market value used to charge retained earnings to account for a two-for-one split. d. gain or loss resulting from disposition of treasury shares.

A

An auditor is most likely to trace treasury stock purchase transactions to the: a) numbered stock certificates on hand b) articles of incorporation c) year's interest expense d) minutes of the audit committee

A

An auditor usually obtains evidence of stockholders' equity transactions by reviewing the entity's: a. minutes of board of directors meetings b. transfer agent's records c. canceled stock certificates d. treasury stock certificate book

A

Analytical procedures for interest-bearing debt include comparing interest expense with: a. amount in prior year's BS b. amount in prior year's IS c. discount amortization d. budgeted debt for next year

A

Appropriations of retained earnings require specific authorization by the: a. BOD b. treasurer of company c. management

A

Auditors can document their understanding of internal control over capital stock transactions in all of the following except the: a. audit program b. internal control questionnaire c. written description d. flowchart

A

Auditors examine copies of notes payable and trace details to: a. the debt analysis working paper b. checks c. confirmation responses

A

In an audit of a sole proprietorship, a common difficulty is lack of: a) segregation of personal net worth and business capital b) availability of the owner c) agreement as to the distribution between retained earnings and owners' capital d) proper measures of dividends

A

In the continuing audit of a manufacturing company of medium size, which of the following areas would you expect to require the least amount of audit time? a) owners' equity b) revenue c) assets d) liabilities

A

The analysis of stockholder's equity typically includes few transactions but material amounts so auditors typically perform the analysis: a. at the YE date b. at the beginning of the fiscal year c. at interim before the YE date

A

The auditors would be most likely to find unrecorded long-term liabilities by analyzing: a) Interest payments b) Discounts on long-term liabilities c) Premiums on long-term liabilities d) Recorded long-term liability accounts

A

The typical approach to auditing debt is: a. test of details of transactions b. test of ending balance c. analytical procedures

A

Where an independent stock transfer agent is not employed and the corporation issues its own stocks and maintains stock records, canceled stock certificates should: a. be defaced to prevent reissuance and attached to their corresponding stubs b. not be defaced but segregated from other stock certificates and retained in a canceled certificates file c. be destroyed to prevent fraudulent reissuance d. be defaced and sent to the secretary of state

A

Match the financing cycle misstatement with its example. a. Improper reporting of debt b. Incomplete recording of debt 1. Loan recorded as debit to cash and credit to revenue account 2. Loan not recorded and proceeds maintained "off the books"

A - 1 B - 2

Match the party with their typical role in debt. a. BOD b. Treasurer c. Independent trustee 1. Prepare report on financing explaining need for funds 2. Protect creditors' interests and maintains detailed records of the registered owners of the bonds 3. Approve borrowing including bank and reviews reports of the amount received

A - 3 B - 1 C - 2

For stock option plans auditors need to obtain detailed analyses for stock options: (Select all that apply) a. issued b. outstanding c. retired d. authorized

A, B, D

An independent auditor is concerned about her responsibility for uncovering illegal acts that have been committed by an audit client. Which of the following statements is not true? A company records false sales in its financial statements in order to obtain a bank loan. Defalcation has occurred. One reason that an auditor might not be expected to discover all client illegal acts is that some of these acts may involve nonfinancial problems. One reason that an auditor might not be expected to discover all client illegal acts is that some of these acts may be well hidden from the auditors. A reporting company is guilty of polluting the local river and will be subjected to a heavy monetary fine if caught. This is an example of an indirect illegal act.

A company records false sales in its financial statements in order to obtain a bank loan. Defalcation has occurred. The manipulation of information to make a company look different than it actually is should be referred to as "fraudulent financial reporting." Defalcation is theft. An auditor is not expected to uncover all illegal acts for several reasons. For example, some problems (such as pollution) simply do not refer directly to financial reporting. In addition, the audit client will often make a concerted effort to hide illegal acts so that the auditor is unaware. Finally, a direct illegal act has already had an impact on the financial statements. An indirect illegal act will only impact the financial statements if the company is ever caught and punished.

In registering with the Public Company Accounting Oversight Board (PCAOB), a CPA firm must provide significant information. Which of the following is not a required disclosure? A list of all audit clients. Information about any criminal actions pending against the firm. The annual fees from each client that is an issuer of securities, divided between audit and non-audit services. A list of all accountants participating in the audit of each client that is an issuer of securities.

A list of all audit clients. The CPA firm only needs to provide a list of the audit clients who issue securities. If a company does not issue securities, it is not viewed as a public company and does not come under the jurisdiction of the PCAOB.

A basic objective of a CPA firm is to provide professional services to conform to professional standards. Reasonable assurance of achieving this basic objective is provided through: Continuing professional education. Compliance with generally accepted reporting standards. A system of peer review. A system of quality control.

A system of quality control. A CPA firm should establish adequate quality control policies and procedures to provide reasonable assurance that it follows professional standards on every engagement. The AICPA has issued Statements on Quality Control Standards , in order to provide CPA firms with guidance in establishing quality control policies.

Auditors need to determine that notes are classified by: (Select all that apply) a. types of payees b. maturity c. interest rate d. debt provisions

A, B

An auditor obtains evidence of stockholders' equity transactions for a publicly traded company by reviewing the entity's: A. Minutes of board of directors meetings. B. Registrar's record of interbank transfers. C. Canceled stock certificates. D. Treasury stock certificate book.

A. Minutes of board of directors meetings.

An auditor most likely would inspect loan agreements under which an entity's inventories are pledged to support management's financial statement assertion of A. Rights and obligations. B. Valuation or allocation. C. Existence or occurrence. D. Completeness.

A. Rights and obligations.

In testing for unrecorded retirements of equipment, an auditor most likely would A. Select items of equipment from the accounting records and then locate them during the plant tour. B. Compare depreciation journal entries with similar prior-year entries in search of fully depreciated equipment. C. Inspect items of equipment observed during the plant tour and then trace them to the equipment subsidiary ledger. D. Scan the general journal for unusual equipment additions and excessive debits to repairs and maintenance expense.

A. Select items of equipment from the accounting records and then locate them during the plant tour.

Which of the following auditing procedures most likely would provide assurance about a manufacturing entity's inventory valuation? A. Testing the entity's computation of standard overhead rates. B. Obtaining confirmation of inventories pledged under loan agreements. C. Reviewing shipping and receiving cut-off procedures for inventories. D. Tracing test counts to the entity's inventory listing.

A. Testing the entity's computation of standard overhead rates.

Changes in capital stock accounts should normally be approved by: A. The board of directors. B. The audit committee. C. The stockholders. D. The president.

A. The board of directors.

Internal control over bonds payable is best when: A. The company utilizes the services of a bond trustee. B. The company segregates approval from issuance of the bonds. C. Bonds are countersigned by two officers. D. Bonds are serially numbered.

A. The company utilizes the services of a bond trustee.

Which of the following is an auditor most likely to confirm from the transfer agent and registrar? A. Total shares of stock issued. B. Restrictions on the payment of dividends. C. Total market value of outstanding shares of stock. D. Gains from sale of treasury stock.

A. Total shares of stock issued.

Determining that proper amounts of depreciation are expensed most likely provides assurance about which management assertion about account balances related to fixed assets at the end of the period? A. Valuation and allocation. B. Completeness. C. Rights and obligations. D. Existence.

A. Valuation and allocation.

An auditor most likely would make inquiries of production and sales personnel concerning possible obsolete or slow-moving inventory to support management's financial statement assertion of A. Valuation or allocation. B. Rights and obligations. C. Existence or occurrence. D. Cut-off.

A. Valuation or allocation.

In testing the existence assertion for an asset, an auditor ordinarily works from the Supporting evidence to the accounting records. Potentially unrecorded items to the financial statements. Financial statements to the potentially unrecorded items. Accounting records to the supporting evidence.

Accounting records to the supporting evidence. The existence assertion is concerned that all items recorded in the accounting records are valid (not fictitious). Therefore, the auditor is testing what has been recorded and the direction of the test is from the accounting records to the supporting documentation.

Audits of long-term debt most likely could involve all of these except

All could be involved

Confirmation of bank loans provides primary evidence concerning

All of these

In the audit of long-term debt, the auditor should be aware of possible

All of these

The auditor audits retirements of long-term debt to determine whether

All of these

The auditor examines lease agreements primarily to determine whether

All of these

Apex Incorporated issued common stock to acquire another company in an acquisition that was accounted for as a purchase. Which of these would be unnecessary to audit the transaction?

All would be necessary to audit the transaction.

When a company has treasury stock certificates on hand, a year end count of the certificates by the auditor is:

Always required

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

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

Which of the following questions would most likely be found on an auditor's internal control questionnaire related to notes payable?

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

In connection with the audit of a current issue of long term bonds payable, the auditor should:

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

The assessed level of detection risk in an audit is inversely related to which of the following? Risk of failing to discover material misstatements. Assurance provided by substantive tests. Preliminary judgment about materiality levels. Risk of misapplying auditing procedures.

Assurance provided by substantive tests. Detection risk is the risk that the auditor's procedures will not detect an error in an account when in fact one exists. As the auditor's assurance that there are no errors in an account balance is increased by the application of substantive procedures, the auditor's assessment of detection risk will decrease.

Noncompliance with debt may affect the ____________ of debt, as long-term debt can become current.

Classification

All of the following sets of AICPA professional guidance contain both "presumptively mandatory" and "unconditional" professional requirements EXCEPT: Statements on Quality Control Standards Statements on Auditing Standards Auditing Statements of Position Statements on Standards for Accounting and Review Services

Auditing Statements of Position Auditing Statements of Position issued by the AICPA are considered interpretive publications and not auditing standards. While such guidance should be considered by auditors in public practice, this guidance does not contain requirements for auditors.

An audit program for the examination of the retained earnings account should include a step that requires verification of the:

Authorization for both cash and stock dividends.

For each issue of capital stock, auditors need information on the number of shares __________ and issued; par or stated value and dividend rates.

Authorized

A likely reason that consideration of client compliance with debt provisions is important to an audit is that violation of such debt provisions may affect the total recorded: a) Number of debt restrictions b) current liabilities c) long-term assets d) capital stock

B

A transfer agent and a registrar are most likely to provide the auditor with evidence on: a) restrictions on the payment of accounts payable b) shares issued and outstanding c) preferred stock liquidation value d) transfers occurring between management and related parties

B

Auditors review stock option plans and shares issued when options are granted to obtain evidence regarding which audit objective? a. cutoff b. presentation c. valuation

B

Copies of bond indentures should be maintained in the: a. current year working paper file b. permanent file c. prior year working paper file

B

In a small corporation that does not use a dividend-paying agent, which person is responsible for preparing a list of stockholders as of the date of record, the number of shares held by each, and the amount of dividends each is to receive? a. controller b. secretary c. treasurer

B

Testing for unrecorded liabilities, evaluating compliance with debt provisions, and tests of interest expense are performed: a. in the period in advance of the BS date b. after the close of the period being audited c. either before or after the BS date

B

The audit procedure of confirmation is least appropriate with respect to: a) The trustee of an issue of bonds payable b) holders of common stock c) holders of notes receivable d) holders of notes payable

B

The auditors' plan for the examination of long-term debt should include steps that require the: a) verification of the existence of the bondholders b) examination of copies of debt agreements c) inspection of the accounts payable subsidiary ledger d) investigation of credits to the bond interest income account

B

The presentation of stockholder's equity should include all of the following except: a. treasury stock at cost as a deduction from combined total of paid-in capital and retained earnings b. changes in retained earnings during the year c. the title of each capital stock issue; par or stated value, numbers of shares authorized, issued and in treasury

B

To establish the amount of outstanding stock, auditors should reconcile general ledger accounts for capital stock with stockholders ledger and the: a. contract with underwriters b. stock certificate book c. registration statements

B

When auditing stockholders' equity accounts, the auditors determine whether there are restrictions on retained earnings resulting from loans or other causes. The primary audit objective of this procedure is normally to verify management's assertion of: a. existence or occurrence. b. presentation and disclosure. c. completeness. d. valuation or allocation.

B

Auditors should trace proceeds from the issuance of capital stock to: (Select all that apply) a. stockholder agreements b. cash records c. bank statements d. BOD meeting minutes

B, C

Periodic or cycle counts of selected inventory items are made at various times during the year rather than a single inventory count at year end. Which of the following is necessary if the auditor plans to observe inventories at interim dates? A. Complete recounts by independent teams are performed. B. Perpetual inventory records are maintained. C. Unit cost records are integrated with production accounting records. D. Inventory balances are rarely at low levels.

B. Perpetual inventory records are maintained.

A client maintains perpetual inventory records in both quantities and dollars. If the assessed level of control risk is high, an auditor would probably A. Increase the extent of tests of controls of the inventory cycle. B. Request that the client schedule the physical inventory count at the end of the year. C. Insist that the client perform physical counts of inventory items several times during the year. D. Apply gross profit tests to ascertain the reasonableness of the physical counts.

B. Request that the client schedule the physical inventory count at the end of the year.

During its fiscal year, a company issued, at a discount, a substantial amount of first-mortgage bonds. When performing audit work in connection with the bond issue, the independent auditor should: A. Confirm the existence of the bondholders. B. Review the minutes for authorization. C. Trace the net cash received from the issuance to the bond revenue account. D. Inspect the records maintained by the bond trustee.

B. Review the minutes for authorization.

For a corporation that does not utilize the services of an independent registrar and stock transfer agent, which of the following represents a weakness in internal control over stock issuance? A. Stock certificates are prenumbered. B. Stock certificates are signed immediately upon receipt from the printer. C. Stock certificates are in the exclusive custody of a responsible officer. D. Stock certificates require the signature of two officers.

B. Stock certificates are signed immediately upon receipt from the printer.

The auditor's program to examine interest-bearing debt most likely will include steps that require: A. Comparing the book value of the debt to its year-end market value. B. Vouching borrowing and repayment transactions. C. Verifying the proper presentation of the debt through confirmation. D. Inspecting the accounts payable subsidiary ledger for unrecorded interest-bearing debt.

B. Vouching borrowing and repayment transactions.

Where an independent stock transfer agent is not employed and the corporation issues its own stocks and maintains stock records, canceled stock certificates should: Be defaced to prevent reissuance and attached to their corresponding stubs. Not be defaced but segregated from other stock certificates and retained in a canceled certificates file. Be destroyed to prevent fraudulent reissuance. Be defaced and sent to the secretary of state.

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

Copies of loan agreements relating to a bond issue should be put in the auditor's: a. prior year working papers b. current year working papers c. permanent file

C

During the course of an audit, a CPA observes that the recorded interest expense seems to be excessive in relation to the balance in the long-term debt account. This observation could lead the auditors to suspect that: a. premium on bonds payable is understated. b. long-term debt is overstated. c. long-term debt is understated. d. discount on bonds payable is overstated.

C

During the year being audited a company guaranteed the debt of an affiliate. Which of the following best describes the audit procedure that would make the auditor aware of the guarantee? a. Review the legal letter returned by the company's outside legal counsel. b. Review the possibility of such guarantees with the chief accountant. c. Review minutes and resolutions of the board of directors. d. Review prior year's working papers with respect to such guarantees.

C

In addition to bank statements, auditors can also trace proceeds from capital stock issues to: a. BOD meeting minutes b. treasury stock transactions c. registration statements of the SEC

C

In connection with the examination of bonds payable, the auditors would expect to find in a trust indenture: a. the yield to maturity of the bonds issued. b. the names of the original subscribers to the bond issue. c. the issue date and maturity date of the bond. d. the company's debt to equity ratio at the time of issuance.

C

Match the definition to the appropriate term. a. common stock b. debenture bond c. sinking fund d. stock certificate book e. stock certificate holder f. stock registrar g. stock transfer agent h. treasury stock i. trust indenture Cash or other assets set aside for the retirement of a debt.

C

Secured liabilities should be disclosed in the notes to the financial statements and cross-referenced to: a. related party b. type of payee c. pledged assets

C

The auditors can best verify a client's bond sinking fund transactions and year-end balance by: a) recomputation of interest expense, interest payable, and amortization of bond discount or premium b) confirmation with individual holders of retired bonds c) confirmation with the bond trustee d) examination and count of the bonds retired during the year

C

When auditing inventories, an auditor would least likely verify that A. The financial statement presentation of inventories is appropriate. B. Damaged goods and obsolete items have been properly accounted for. C. All inventory owned by the client is on hand at the time of the count. D. The client has used proper inventory pricing.

C. All inventory owned by the client is on hand at the time of the count.

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 to account 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.

C. Authorization for both cash and stock dividends.

A primary responsibility of a registrar of capital stock is to: A. Determine that dividends paid do not exceed the amount allowable by law. B. Act as an independent third party between the board of directors and outside investors concerning merger, acquisition, and other major decisions. C. Avoid any over issuance of stock. D. Maintain detailed stockholder records and carrying out transfers of stock ownership.

C. Avoid any over issuance of stock.

In auditing long-term debt, an auditor would be most likely to: A. Perform analytical procedures on the bond prenumbered discount accounts. B. Examine documentation of assets purchased with bond proceeds for liens. C. Compare interest expense with the long-term debt amount for reasonableness. D. Confirm the existence of individual long-term debt holders at year-end.

C. Compare interest expense with the long-term debt amount for reasonableness.

To gain assurance that all inventory items in a client's inventory listing schedule are valid, an auditor most likely would trace A. Inventory tags noted during the auditor's observation to items listed in the inventory listing schedule. B. Inventory tags noted during the auditor's observation to items listed in receiving reports and vendor's invoices. C. Items listed in the inventory listing schedule to inventory tags and the auditor's recorded count sheets. D. Items listed in receiving reports and vendors' invoices to the inventory listing schedule.

C. Items listed in the inventory listing schedule to inventory tags and the auditor's recorded count sheets.

In which of the following accounts would one expect a related party transaction to be easiest to detect? A. Accounts receivable. B. Accounts payable. C. Notes payable. D. Cash.

C. Notes payable.

An auditor most likely would inspect loan agreements under which an entity's inventories are pledged in order to support management's financial statement assertion of A. Existence or occurrence. B. Completeness. C. Presentation and disclosure. D. Valuation or allocation.

C. Presentation and disclosure.

Bond transactions are normally confirmed with: A. Individual holders of retired bonds. B. Recomputation procedures performed using interest expense. C. The bond trustee. D. Comparisons of retired bonds with those outstanding.

C. The bond trustee.

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

Cash

Charlie Chaucer has been in CPA practice for over 30 years and is well respected in the profession. He has been asked to speak about the AICPA's Code of Professional Conduct, but has not reviewed the independence guidelines in several years. When he notices the section about loans to and from clients, he becomes worried that his independence to a local client, Chipper Falls Credit Union, may be impaired. In which of the following scenarios would Charlie's independence be impaired under the AICPA's independence guidelines? Charlie has a car loan through Chipper Falls Credit union for his son's car, which is collateral for the loan. Charlie's mortgage on his home, which was obtained through Chipper Regional Bank, was sold to Chipper Falls Credit Union. Charlie's mortgage on a vacation home, on which Charlie has forgotten to make payments for the last several months, was obtained through Chipper Falls before Charlie became the credit union's auditor. None of the above

Charlie's mortgage on a vacation home, on which Charlie has forgotten to make payments for the last several months, was obtained through Chipper Falls before Charlie became the credit union's auditor. Because Charlie has failed to make payments on his loan, it no longer qualifies as a "grandfathered" loan under the AICPA guidelines. Therefore, his independence is impaired. The other loans listed are permitted under the independence guidelines because they are normal types of loans and do not create unusual situations or stress.

The Haynsworth CPA firm is auditing Agnestic Corporation. The auditors have come to the conclusion that certain illegal acts may have occurred during the year so that additional testing will be necessary. Which of the following is most likely to have led to this assessment? The design of the company's internal control policies and procedures has not been revised in four years. Related party transactions have occurred throughout the year. Confirmation of accounts receivable indicates that several recorded balances appear to be understated. Checks were written to "cash" during the year despite policies to the contrary.

Checks were written to "cash" during the year despite policies to the contrary. Internal control policies and procedures only need to be revised when they are no longer functioning as intended. A well-designed system might not need to be revised often. Related party transactions are common in many companies and do not, by themselves, indicate any type of illegal activities. Confirmation of receivables which show a pattern of overstatement can possibly indicate that money has been received and then stolen by company employees. However, understatements are more likely to occur because of slowness in posting new sales transactions. Checks should never be written to "cash" because documenting the use made of the money can be very difficult. Hence, checks can be written to "cash" to access money that will then be used for illegal activities.

Auditors review renewals of notes maturing after the BS date to determine proper ___________ of these liabilities.

Classification

Which of the following is an illustration of a liability to clients under common law? Federal government prosecutes auditor for knowingly issuing an incorrect audit report. Client sues auditor for not discovering a theft of assets by an employee. Bank sues auditor for not discovering that borrower's financial statements are misstated. Combined group of stockholders sue auditor for not discovering materially misstated financial statements.

Client sues auditor for not discovering a theft of assets by an employee. The client sues auditor for not discovering a theft of assets by an employee is an example of a liability under common law. Since the CPA had a duty to perform, which require him/her to exercise 'due profession care', the misappropriation of assets by one employee should have been uncovered through an audit program which revealed the lack of separation of duties with regard to the employee.

Cutoff tests designed to detect credit sales made before the end of the year that have been recorded in the subsequent year provide assurance about management's assertion of Presentation and disclosure. Existence or occurrence. Completeness. Rights and obligations.

Completeness. The completeness assertion means that nothing has been omitted from the financial statements that should be recorded during a particular period. By performing a cutoff test the auditor is searching for items that have been omitted from the financial statements of the current period.

Auditing depreciation expense most likely could involve all of these except

Confirmation

The auditors can best verify a client's bond sinking fund transactions and year-end balance by: Recomputation of interest expense, interest payable, and amortization of bond discount or premium. Confirmation with individual holders of retired bonds. Confirmation with the bond trustee. Examination and count of the bonds retired during the year.

Confirmation with the bond trustee.

A likely reason that consideration of client compliance with debt provisions is important to an audit is that violation of such debt provisions may affect the total recorded: Number of debt restrictions. Current liabilities. Long-term assets. Capital stock

Current liabilities

Auditors examine the relationship between recorded interest expense and the average principal amount of debt outstanding during the year as a test of which audit objective? a. accuracy b. valuation c. cutoff d. completeness

D

Bond transactions are usually confirmed directly with: a. mortgagee b. payee c. financial institutions d. trustees

D

Florida Corporation declared a 100% stock dividend during 200X. In connection with the examination of Florida's financial statements, Florida's auditors should determine that: a. the stock dividend was properly recorded at fair market value. b. Florida's stockholders have authorized the issuance of 100% stock dividends. c. stockholders received their additional shares by confirming year-end holdings with them. d. the additional shares issued do not exceed the number of authorized but previously unissued shares.

D

If a company employs a capital stock registrar and/or transfer agent, the registrar or agent, or both, should be requested to confirm directly to the auditors the number of shares of each class of stock: a. authorized at the balance sheet date. b. authorized, issued, and outstanding during the year. c. surrendered and canceled during the year. d. issued and outstanding at the balance sheet date.

D

In the audit of a medium-sized manufacturing concern, which one of the following areas would be expected to require the least amount of audit time? a. Liabilities. b. Revenue. c. Assets. d. Owners' equity.

D

The auditors can best verify a client's bond sinking fund transactions and year-end balance by: a. examination and count of the bonds retired during the year. b. confirmation with individual holders of retired bonds. c. recomputation of interest expense, interest payable, and amortization of bond discount or premium. d. confirmation with the bond trustee.

D

The primary responsibility of a bank acting as registrar of capital stock is to: a. ascertain that dividends declared do not exceed the statutory amount allowable in the state of incorporation b. account for stock certificates by comparing the total shares outstanding to the total in shareholders' subsidiary ledger c. act as an independent third party between the BOD and outside investors concerning mergers, acquisitions, and the sale of treasury stock d. verify that stock is issued in accordance with the authorization of the board of directors and the articles of incorporation

D

The primary responsibility of this party is to control the issuance of stock and prevent any over issuance of stock. a. controller b. treasurer c. stock transfer agent d. stock registrar

D

Where no independent stock transfer agent is employed and the corporation issues its own stock and maintains stock records, canceled stock certificates should: a. not be defaced, but segregated from other stock certificates and retained in a canceled certificates file. b. be defaced and sent to the secretary of state. c. be destroyed to prevent fraudulent reissuance. d. be defaced to prevent reissuance, and attached to their corresponding stubs.

D

Which of the following questions would most likely be found on an auditor's internal control questionnaire related to notes payable? A) Are two or more authorized signatures required on checks that repay notes payable? B) Are the proceeds from notes payable used for the purchase of non-current assets? C) Are assets that collateralize notes payable critically needed for the entity's continued existence? D) Are direct borrowings on notes payable authorized by the board of directors?

D

Auditors often request that the audit client send a letter of inquiry to those attorneys who have been consulted with respect to litigation, claims, or assessments. The primary reason for this request is to provide the auditor with: A. An estimate of the dollar amount of the probable loss. B. An expert opinion as to whether a loss is possible, probable or remote. C. Information concerning the progress of cases to date. D. Corroborative audit evidence.

D. Corroborative audit evidence.

While observing a client's annual physical inventory, an auditor recorded test counts for several items and noticed that certain test counts were higher than the recorded quantities in the client's perpetual records. This situation could be the result of the client's failure to record A. Purchase discounts. B. Purchase returns. C. Sales. D. Sales returns.

D. Sales returns.

The primary reason for preparing a reconciliation between interest-bearing obligations outstanding during the year and interest expense presented in the financial statements is to: A. Evaluate internal control over securities. B. Determine the validity of prepaid interest expense. C. Ascertain the reasonableness of imputed interest. D. Detect unrecorded liabilities.

D. Detect unrecorded liabilities.

An auditor reviews the reconciliation of payroll tax forms that a client is responsible for filing in order to A. Verify that payroll taxes are deducted from employees' gross pay. B. Determine whether internal control activities are operating effectively. C. Uncover fictitious employees who are receiving payroll checks. D. Identify potential liabilities for unpaid payroll taxes.

D. Identify potential liabilities for unpaid payroll taxes.

When the auditors obtain an understanding of internal control for the financing cycle documentation will frequently include a written description as well as a(n): A. List of audit objectives. B. Decision table. C. Summary of tests of controls. D. Internal control questionnaire.

D. Internal control questionnaire.

Which of the following management assertions is an auditor most likely testing if the audit objective states that all inventory on hand is reflected in the ending inventory balance? A. The entity has rights to the inventory. B. Inventory is properly valued. C. Inventory is valid and exists. D. Inventory is complete.

D. Inventory is complete.

To obtain assurance that all inventory items in a client's inventory listing are valid, an auditor most likely would agree A. Inventory tags noted during the auditor's observation to items listed in receiving reports and vendors' invoices. B. Items listed in receiving reports and vendor's invoices to the inventory listing. C. Inventory tags noted during the auditor's observation to items in the inventory listing. D. Items in the inventory listing to inventory tags and the auditor's recorded count sheets.

D. Items in the inventory listing to inventory tags and the auditor's recorded count sheets.

Which of the following procedures would be most appropriate for testing the completeness assertion as it applies to inventory? A. Scanning perpetual inventory, production, and purchasing records. B. Examining paid vendor's invoices. C. Tracing inventory items from the tag listing back to the physical inventory quantities. D. Performing cut-off procedures for shipping and receiving.

D. Performing cut-off procedures for shipping and receiving.

For a large publicly traded client the auditors' examination of capital stock accounts will not normally include: A. Analysis of capital stock accounts. B. Confirmation of shares issued with the independent registrar. C. Accounting for the proceeds of major stock issues. D. Reconciliation of a stock certificate book with the general ledger.

D. Reconciliation of a stock certificate book with the general ledger.

In the verification of debit entries to retained earnings for small stock dividends, the auditors' only concern about dollar amounts is that the amount per share corresponds to the declaration by the board of directors.

False

Which of the following statements is correct relating to common stock certificates of a publicly traded company that uses the services of a transfer agent? A. Stock certificates should exist for all outstanding stock and be held by the owner of the stock. B. Stock certificates should exist for all outstanding stock and be held either by the owner of the stock or a representative of the owner (e.g., brokerage firm). C. A lack of stock certificates is ordinarily considered a material weakness in internal control. D. Stock certificates often are not issued in today's electronic environment.

D. Stock certificates often are not issued in today's electronic environment.

Which of the following most likely would approve the issuance of notes payable? A. Controller. B. Payroll. C. Personnel. D. Treasurer.

D. Treasurer.

During an audit of a publicly-held company, the auditors should obtain written confirmation regarding debenture transactions from the: A. Debenture holders. B. Client's attorney. C. Internal auditors. D. Trustee.

D. Trustee.

An auditor most likely would analyze inventory turnover rates to obtain evidence concerning management's assertions about A. Existence or occurrence. B. Rights and obligations. C. Completeness. D. Valuation or allocation.

D. Valuation or allocation.

Inquiries of warehouse personnel concerning possible obsolete or slow-moving inventory items provide assurance about management's assertion of A. Completeness. B. Existence. C. Rights and obligations. D. Valuation.

D. Valuation.

Under which of the following conditions may an auditor's observation procedure for inventory be performed during or after the end of the period under audit? A. When the client maintains periodic inventory records. B. When the auditor finds minimal variations in client records and test counts in prior periods. C. When total inventory has not varied more than 5% in the last five years. D. When well-kept perpetual inventory records are checked by the client periodically by comparisons with physical counts.

D. When well-kept perpetual inventory records are checked by the client periodically by comparisons with physical counts

Holly is joining the audit team of Big Minty Corporation. Her first assignment is to assist with the assessment of fraud risk during the audit planning stage. Under AICPA professional standards, Polly should perform all of the following procedures EXCEPT Designing the audit to detect all errors due to fraudulent financial reporting A discussion among the audit team about how and where the client's financial statements may be at risk for material misstatement due to fraud Designing the audit to provide reasonable assurance of detecting misstatements that are material to the financial statements, whether due to error or fraud Considering the potential for management override of internal controls

Designing the audit to detect all errors due to fraudulent financial reporting The audit must be designed to provide reasonable assurance that material misstatements, due to error or fraud, are detected. Considering management override of controls and the audit team discussion of fraud risk are to be performed during audit planning under AICPA standards.

Which of the following is least likely to be an audit objective for debt?

Determine that the client has rights to receive proceeds relating to the redemption of debt

Which of the following is least likely to be an audit objective for debt? Determine the existence of recorded debt. Establish the completeness of recorded debt. Determine that the client has rights to receive proceeds relating to the redemption of debt. Determine that the valuation of debt is in accordance with generally accepted accounting principles.

Determine that the client has rights to receive proceeds relating to the redemption of debt.

Which of the following is most likely to be an audit objective in the audit of owners' equity? Establish that recorded owners' equity includes all long-term debt and equity balances. Determine that common stock is valued at current market value. Determine that the presentation and disclosure of owners' equity are appropriate. Determine that the existence of recorded owner's equity is in conformity with equity accounting rule valuations.

Determine that the presentation and disclosure of owners' equity are appropriate.

During the initial planning phase of an audit, a CPA most likely would Inquire of the client's attorney as to whether any unrecorded claims are probable of assertion. Identify specific internal control activities that are likely to prevent fraud. Discuss the timing of the audit procedure with the client's management. Evaluate the reasonableness of the client's accounting estimates.

Discuss the timing of the audit procedure with the client's management. During the planning phase of an audit the CPA would most likely coordinate with client personnel, requiring a discussion of the timing of audit procedures, such as physical count of inventory.

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

Entries in the capital stock account can be traced to a resolution in the minutes of the board of directors meetings

The auditors' plan for the examination of long-term debt should include steps that require the: Verification of the existence of the bondholders. Examination of copies of debt agreements. Inspection of the accounts payable subsidiary ledger. Investigation of credits to the bond interest income account.

Examination of copies of debt agreements.

Which of the following is a customary audit procedure for the verification of the legal ownership of real property?

Examination of deeds and title guaranty policies on hand

The auditor may conclude that depreciation expense is insufficient by noting

Excessive losses on assets retired

The confirmation of accounts receivable provides evidence about management's assertion of rights and obligations. For what other assertion does the confirmation of accounts receivable balances provide primary evidence?

Existence. The existence (and occurrence) assertion refers to the validity of an item. When a customer replies to a confirmation request, the customer does apparently exist. If the customer did not exist the original confirmation would have been returned as undeliverable by the post office.

An auditor analyzes repair and maintenance expense to determine whether all

Expenditures for plant additions have not been charged to expense

Match the definition to the appropriate term. a. common stock b. debenture bond c. sinking fund d. stock certificate book e. stock certificate holder f. stock registrar g. stock transfer agent h. treasury stock i. trust indenture An institution charged with responsibility for avoiding over issuance of a corporation's stock.

F

Corporations maintain either a stock certificate book or a stockholders' ledger. True False

FALSE

Dividends should be authorized by the stockholders of the corporation. True False

FALSE

Long-term liabilities that are maturing must always be classified as a current liability. True False

FALSE

The auditors are required to confirm bond holdings directly with the bondholders. True False

FALSE

The auditors should determine that the issuance of bonds was approved by the company's stockholders. True False

FALSE

The compensation cost of employee stock options should be measured at ___________ creating challenges for auditors to determine appropriate valuation.

Fair value

A complete set of financial statements includes both a statement of retained earnings and a statement of stockholders' equity.

False

In the audit of a corporation that does not utilize the services of an independent stock registrar and transfer agent, the auditors should always confirm all outstanding shares by direct communication with stockholders.

False

In designing the audit program, an auditor should establish specific audit objectives that relate primarily to the

Financial statement assertions. In obtaining audit evidence in support of financial statement assertions, the auditor must develop specific audit objectives related to those assertions.

Match the definition to the appropriate term. a. common stock b. debenture bond c. sinking fund d. stock certificate book e. stock certificate holder f. stock registrar g. stock transfer agent h. treasury stock i. trust indenture An institution responsbile for maintaining detailed records of shareholders and handling changes of ownership of stock ownership.

G

Match the definition to the appropriate term. a. common stock b. debenture bond c. sinking fund d. stock certificate book e. stock certificate holder f. stock registrar g. stock transfer agent h. treasury stock i. trust indenture Shares of its own stock acquired by a corporation for the purpose of being reissued at a later date.

H

Match the definition to the appropriate term. a. common stock b. debenture bond c. sinking fund d. stock certificate book e. stock certificate holder f. stock registrar g. stock transfer agent h. treasury stock i. trust indenture The formal agreement between bondholders and the issuer as to the terms of the debt.

I

An independent auditor carries out an audit to reduce the risk that there is a material misstatement in any of the five assertions made by management about the financial statements it has produced. If that risk can be reduced to an acceptably low level, the auditor provides reasonable assurance that the statements are presented fairly according to US generally accepted accounting principles. For which of the following does the auditor not have to seek to reduce the level of risk? Fraudulent financial reporting. Indirect illegal act. An error (an unintentional misstatement). Misappropriation

Indirect illegal act. An indirect illegal act is one where an illegal act has occurred but, to date, it has had no impact on any financial statement balance. Normally, if the company's action is discovered, the company will be subjected to a fine or some other type of punishment that will create a financial impact. Thus, an indirect illegal act is a type of contingency. However, because most such actions are outside of the scope of the auditor's work (and are usually well hidden by the perpetrator), the audit is not designed to reduce the level of risk for that type of problem.

In planning an audit of a new client, an auditor most likely would consider the methods used to process accounting information because such methods Affect the auditor's preliminary judgment about materiality levels. Assist in evaluating the planned audit objectives. Influence the design of internal control. Determine the auditor's acceptable level of audit risk.

Influence the design of internal control. Official standards state that the auditor should consider the methods the entity uses to process accounting information because such methods influence the design of the internal control structure. The extent to which computer processing is used in accounting applications, as well as the complexity of that processing, may also influence the nature, timing, and extent of audit procedures. The other answer choices are incorrect because materiality, audit objectives, and acceptable level of audit risk are not based on the methods used to process accounting information.

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

Permanent

Braginetz Corporation acts as its own registrar and transfer agent and has assigned these responsibilities to the company secretary. The CPA primarily will rely upon:

Inspection of the stock book at year-end and accounting for all certificate numbers.

The auditors would be most likely to find unrecorded long-term liabilities by analyzing:

Interest payments

The auditors would be most likely to find unrecorded long-term liabilities by analyzing: Interest payments. Discounts on long-term liabilities. Premiums on long-term liabilities. Recorded long-term liability accounts.

Interest payments

The treasurer of a company has stolen $10,000 in cash from the company. At the end of the year, he is afraid that he will be caught so he transfers $10,000 from one company bank account to another. He records the deposit on December 31 of the first year so that $10,000 cash is added. He does not record the withdrawal from the other account until January 1 of the second year. As a result, for one day, the company looks like it has $10,000 more than it really does. What is this deception called?

Kiting When money is moved from one account to another but the deposit and the withdrawal are recorded in different time periods to inflate the amount of cash being reported, the term "kiting" is used to identify that fraud.

During the course of an audit, a CPA observes that the recorded interest expense seems to be excessive in relation to the balance in the long term debt account. This observation could lead the auditor to suspect that:

Long term debt is understated.

Which of the following elements underlies the application of generally accepted auditing standards, particularly the standards of fieldwork and reporting? Adequate disclosure. Quality control. Materiality and audit risk. Client acceptance.

Materiality and audit risk. Audit planning involves developing an overall strategy related to collecting and evaluating the evidence to be obtained. By testing and understanding internal control, the auditors can assess whether it offers assurance that the financial statements will be free from material errors and fraud. These assessments enable the auditors to evaluate the risks of material misstatement of the financial statements.

An auditor usually obtains evidence of stockholders' equity transactions by reviewing the entity's: Minutes of board of directors meetings. Transfer agent's records. Canceled stock certificates. Treasury stock certificate book.

Minutes of board of directors meetings.

All corporate capital stock transactions should ultimately be traced to the: Minutes of the board of directors. Cash receipts journal. Cash disbursements journal. Numbered stock certificates.

Minutes of the board of directors.

Which of these would the auditor most likely discover from a tour of the client=s facilities?

Necessary maintenance has not been performed.

With respect to the detection of illegal acts, which have an indirect effect on the financial statements, auditing standards state that the auditor provides: Assurance that they will be detected, if highly material. Assurance that they will be detected, if material. No assurance that they will be detected. The same reasonable assurance provided for other items.

No assurance that they will be detected. Illegal acts that have a material but indirect effect on the financial statements are those acts that are removed from transactions and events reflected in the financial statements. The auditor should be aware that they have occurred, although an audit provides no assurance that they will be detected.

he accounting firm of Light & Sabre, CPAs is a regional expert in auditing employee benefit plans. Light & Sabre is currently conducting the audit of the employee benefit plan of Je D'ai Corporation. Under the appropriate independence guidelines for auditors of such plans, a direct or material indirect financial interest in the plan is acceptable for which of the following individuals? Juan, a partner in an office in another city, who is not involved in the audit The firm, Light & Sabre Anakin, who is a junior auditor on the engagement None of the above

None of the above Department of Labor (DOL) guidelines are stricter than those of the AICPA. All of the parties indicated here are considered "members" under the DOL guidelines and are, therefore, prohibited from having any direct or indirect financial interest in the audited plan.

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

Note

An auditor is most likely to trace treasury stock purchase transactions to the: Numbered stock certificates on hand. Articles of incorporation. Year's interest expense. Minutes of the audit committee.

Numbered stock certificates on hand.

Which of the following procedures would an auditor perform to test the controls relating to management's assertion about the completeness of cash receipts for cash sales at a retail outlet? Observe the consistency of the employees' use of cash registers and tapes. Compare the cash balance in the general ledger with the bank confirmation request. Inquire about the employees' access to recorded but undeposited cash. Trace the deposit in the cash receipt journal to the cash balance in the general ledger.

Observe the consistency of the employees' use of cash registers and tapes. Assertions about completeness are tested by testing whether or not all cash is recorded. If the employees consistently use cash registers and tapes, it is probable that all the cash is recorded.

Auditors design substantive procedures that substantiate the existence of owner's equity and the ___________ of the related transactions.

Occurrence

In the continuing audit of a manufacturing company of medium size, which of the following areas would you expect to require the least amount of audit time? Owners' equity. Revenue. Assets. Liabilities.

Owner's equity

In the audit of a medium-sized manufacturing concern, which one of the following areas would be expected to require the least amount of audit time? Liabilities. Owners' equity. Assets. Revenue.

Owners' equity

In the audit of a medium-sized manufacturing concern, which one of the following areas would be expected to require the least amount of audit time?

Owners' equity.

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

Payments

An auditor most likely would inspect loan agreements under which an entity's inventories are pledged to support management's financial statement assertion of: Presentation and disclosure. Valuation or allocation. Existence or occurrence. Completeness.

Presentation and disclosure.

An auditor most likely would inspect loan agreements under which an entity's inventories are pledged to support management's financial statement assertion of: Presentation and disclosure. Valuation or allocation. Existence or occurrence. Completeness.

Presentation and disclosure. Assertions about presentation and disclosure deal with whether particular components of the financial statements are properly classified, described, and disclosed. An auditor would inspect loan agreements regarding pledged inventories to determine that management has adequately disclosed the security arrangements.

In auditing a client's retained earnings account, an auditor should determine whether there are any restrictions on retained earnings that result from loans, agreements, or state law. This procedure is designed to corroborate which financial statement assertion made by management? Valuation and allocation. Existence or occurrence. Presentation and disclosure. Rights and obligations.

Presentation and disclosure. Restriction on retained earnings should be disclosed in the financial statements. Therefore, the auditor is interested in knowing whether all of the needed information is being presented in the financial statements.

A CPA firm's personnel partner periodically studies the CPA firm's personnel advancement experience to ascertain whether individuals meeting stated criteria are assigned increased degrees of responsibility. This is evidence of the CPA firm's adherence to prescribed standards of Fieldwork. Supervision and review. Due professional care. Quality control.

Quality control. Quality control standards apply to auditors of both public and private companies. The PCAOB has adopted the AICPA's quality control standards. The following is a list of the 5 quality control elements. Quality control is a process to provide the firm with reasonable assurance that its personnel comply with the applicable professional standards. The elements of a system of quality control are: 1. independence, integrity and objectivity; 2. personnel management; 3. acceptance and continuation of clients; 4. engagement performance; and 5. monitoring. Due professional care and fieldwork relate to GAAS. Supervision and review is a component of Quality Control (the engagement performance element.)

The board must approve all dividend declarations including the amount per share, the date of declaration, date of __________, and date of payment.

Record

The audit work performed by each assistant should be reviewed to determine whether it was adequately performed and to evaluate whether the

Results are consistent with the conclusions to be presented in the auditor's report. The first standard of field work requires supervision of assistants, if any. Supervision involves directing the efforts of assistants who are involved in accomplishing the objectives of the audit and determining whether those objectives were accomplished. An element of supervision is reviewing the work performed by each assistant to determine whether it was adequately performed and to evaluate whether the results are consistent with the conclusions to be presented in the auditor's report.

During the year being audited a company guaranteed the debt of an affiliate. Which of the following best describes the audit procedure that would make the auditor aware of the guarantee? Review the legal letter returned by the company's outside legal counsel. Review the possibility of such guarantees with the chief accountant. Review prior year's working papers with respect to such guarantees. Review minutes and resolutions of the board of directors.

Review minutes and resolutions of the board of directors

During the year being audited a company guaranteed the debt of an affiliate. Which of the following best describes the audit procedure that would make the auditor aware of the guarantee?

Review minutes and resolutions of the board of directors.

Which of the following audit procedures would be least likely to lead the auditor to find misrecorded fixed asset disposals?

Review of miscellaneous income

Which of the following is the basic fundamental concept that underlies the audit process? Skepticism. Materiality. Risk. All of the above.

Risk. Risk is the basic fundamental concept that underlies the audit process. It is the acceptance by auditors that there is some level of uncertainty in performing the audit function.

The element of the audit planning process most likely to be agreed upon with the client before implementation of the audit strategy is the determination of the Schedules and analyses to be prepared by the client's staff. Methods of statistical sampling to be used in confirming accounts receivable. Pending legal matters to be included in the inquiry of the client's attorney. Evidence to be gathered to provide a sufficient basis for the auditor's opinion.

Schedules and analyses to be prepared by the client's staff. The other answers involve judgment by the auditor only and as such the decision process only involves the auditor. Schedules and analyses to be prepared by the client's staff, however, would necessarily have to involve the client since the client will be preparing the schedules.

In an audit of a sole proprietorship, a common difficulty is lack of: Segregation of personal net worth and business capital. Availability of the owner. Agreement as to the distribution between retained earnings and owners' capital. Proper measures of dividends.

Segregation of personal net worth and business capital.

A transfer agent and a registrar are most likely to provide the auditor with evidence on: Restrictions on the payment of accounts payable. Shares issued and outstanding. Preferred stock liquidation value. Transfers occurring between management and related parties.

Shares issued and outstanding.

In the verification of _____________ dividends, auditors determine that the proper amounts have been transferred from retained earnings to capital stock and paid-in capital.

Stock

To determine the total number of shares owned by any one person the auditor can review the __________ ledger.

Stockholders

For a continuing client, the auditors will often find that audit time required for capital stock is small in relation to the dollars recorded in the accounts. True False

TRUE

Registered bondholders receive periodic interest payments without any action on their part. True False

TRUE

The auditors generally refer to provisions in the partnership agreement when auditing the allocation of partnership income. True False

TRUE

The formal documentation creating bond indebtedness is called the indenture. True False

TRUE

When an independent registrar and stock transfer agent is used, it is likely that the auditor will confirm the number of shares outstanding with those parties rather than the shareholders. True False

TRUE

Audit programs should be designed so that

The audit evidence gathered supports the auditor's conclusions. The fieldwork standards require that an audit program be designed so that sufficient evidence is gathered to support the auditor's conclusions.

When allocating materiality, most practitioners choose to allocate to: The income statement because they are most important. The balance sheet accounts because there are fewer. Both balance sheet and income statement accounts because there could be errors on either. All of the financial statements because they are all equally important.

The balance sheet accounts because there are fewer. Most practitioners allocate materiality to balance sheet rather than income statement accounts, because most income statement misstatements have an equal effect on the balance sheet due to the double-entry bookkeeping system. It is inappropriate to allocate the preliminary to both statements because doing so will result in double counting.

The risk of material misstatement refers to:

The combination of inherent risk and control risk. Inherent risk (IR) measures the auditor's assessment of the likelihood that there are material misstatements in a segment before considering the effectiveness of internal control. Control risk (CR) measures the auditor's assessment of whether the misstatement will be prevented or detected on a timely basis by the client's internal control. Multiplying IR by CR results in the combination referred to (SAS 107) as the risk of material misstatement.

The Peyton Company is being audited for the first time by Manning CPAs. The auditing firm is assessing the amount of risk that will be faced and is looking at several possible risk factors. Which of the following is least likely to be viewed as a significant risk associated with the audit of the financial statements? A new product line has just been introduced. The corporation considered expanding into Mexico and Canada but chose to keep operations within the United States. The company has recently switched over to a new computer system to manage its inventory balances. A new company just entered the market as a direct competitor of Peyton.

The corporation considered expanding into Mexico and Canada but chose to keep operations within the United States. Anything that is new will raise the level of risk because the auditor has to judge how well the company adapts to that change. Problems can include new employees, new systems, new products, new territories, new competitors, and new accounting pronouncements. Companies must be able to adapt to such changes and the risk that they will fail to do adequately is always a concern. However, the decision not to expand, even if that choice was a bad one, should not have an adverse impact on the risk of material misstatements in the financial statements.

Which of the following would an auditor most likely use in determining the auditor's preliminary judgment about materiality?

The entity's financial statements of the prior year. The auditor is directed by auditing standards to consider, among other things, prior periods' financial results and financial positions.

An auditor is analyzing documents created by a client company in connection with the purchase of a large warehouse. In studying the ten-year loan that was taken out to pay for the acquisition, the auditor discovers that the company must maintain a current ratio of at least 2-to-1 or the debt can be immediately called by the bank. The current ratio is well over 2-to-1 at the moment. What impact does this requirement have on the auditor's investigation of the financial statements? The loan must be recorded as a current liability rather than as a noncurrent liability. The requirement impacts the capitalized cost of the warehouse. The requirement impacts the book value reported for the liability. The requirement must be disclosed in the notes to the financial statements.

The requirement must be disclosed in the notes to the financial statements. Because the requirement has been met to date, no change is needed in any of the reported balances. However, the presentation of the financial statements is still in question; the information about the loan covenant must be properly disclosed. Because of the requirement, the auditor is concerned with the presentation and disclosure assertion in connection with the financial statements.

To succeed in an action against the auditor, the client company must be able to show that: There is a close causal connection between the auditor's behavior and the damages suffered by the client. The auditor was grossly negligent. The auditor was fraudulent. There was a written contract.

There is a close causal connection between the auditor's behavior and the damages suffered by the client. To succeed in an action against the auditor, the client must be able to show that: (1) the CPA had a duty to perform, (2) the CPA breached the contract, (3) the client suffered losses and (4) there is a close causal connection between the auditor's behavior and the damages suffered by the client.

The audit firm of Samson and Delilah is looking at the inventory procurement system of an audit client. The auditors have now made the determination that the inherent risk is higher than had originally been expected. Which of the following statements is most likely to be true? The company's internal control within this system is weaker than had been anticipated. The company's internal control within this system is stronger than had been anticipated. The auditors might have to increase the desired amount of detection risk to a higher level than originally anticipated. This discovery should have no impact on the desired level of audit risk for this particular system.

This discovery should have no impact on the desired level of audit risk for this particular system. Auditors typically assess inherent risk (the risk that a material misstatement might occur in accounting for a particular account or balance) and then assess control risk (the risk that a material misstatement that actually occurs will be able to get through the reporting company's internal control and wind up within the reported financial statements). The two assessments of inherent risk and control risk are independent. However, detection risk is the likelihood that a material misstatement that is created and gets through the internal control systems will also get through the testing by the independent auditor. If either inherent risk or control risk is especially high, then enough substantive testing must be done by the auditor so that detection risk is reduced low enough to compensate. In that way, even if inherent risk is high, the reduction of detection risk will offset that impact so that overall audit risk remains unchanged.

Auditors should inspect any shares of ___________ stock owned by the company that are on hand or confirm the transactions with the transfer agent.

Treasury

Debentures are liabilities that are backed only by the general credit of the issuing company.

True

An auditor concluded that no excessive costs for idle plant were charged to inventory. This conclusion most likely related to the auditor's objective to obtain evidence about the financial statement assertions regarding inventory, including presentation and disclosure and Valuation or allocation. Completeness. Existence. Obligations and Rights.

Valuation or allocation. Assertions about valuation or allocation deal with whether asset, liability, revenue, and expense components have been included in the financial statements at appropriate amounts. If the auditor is concluding that no excessive costs were charged to inventory, he or she has gathered evidence regarding valuation of amounts in the inventory account.

Darn Yarn Co. is audited by Scoop & Sweet, CPAs. Which of the following parties is not considered a "covered member" for purposes of the AICPA Code of Professional Conduct independence standards? Rob Jolly, who provides 40 hours of tax services to Darn Yarn every year Candy Cohen, a partner in the office of Scoop & Sweet from which the audit is conducted Van Wafer, a secretary who faxes, mails, and files audit documentation for the Darn Yarn audit, and other audits, as needed Brandy Carsen, human resources manager at Scoop & Sweet who determines pay raises for members of the audit team

Van Wafer, a secretary who faxes, mails, and files audit documentation for the Darn Yarn audit, and other audits, as needed Rob qualifies as a covered member, since he provides ten or more hours of non-attest services to the client. Candy is a partner in the same office and Brandy is in a position to influence the attest team, so both are covered members. Therefore, only Van, who performs only routine clerical duties, is not required to be independent under the provisions of the AICPA Code of Professional Conduct.

The primary responsibility of a bank acting as registrar of capital stock is to: Ascertain that dividends declared do not exceed the statutory amount allowable in the state of incorporation. Account for stock certificates by comparing the total shares outstanding to the total in the shareholders' subsidiary ledger. Act as an independent third party between the board of directors and outside investors concerning mergers, acquisitions, and the sale of treasury stock. Verify that stock is issued in accordance with the authorization of the board of directors and the articles of incorporation.

Verify that stock is issued in accordance with the authorization of the board of directors and the articles of incorporation.

The auditors audit program to examine long-term debt should include steps for

Verifying balances of debt through confirmation

27. The auditor gathers evidence about dividends that are declared and paid primarily because of A. concerns with violations of corporate bylaws or debt covenants. B. the large dollar value of the transactions. C. the ease with which the transactions can be audited. D. fraud concerns.

a

28. In the audit of a medium-sized manufacturing concern, which one of the following areas can be expected to require the least amount of audit time? A. Retained earnings. B. Revenue. C. Assets. D. Liabilities.

a

30. In connection with the examination of bonds payable, an auditor would expect to find in a bond agreement A. the issue date and maturity date of the bond. B. the names of the original subscribers to the bond issue. C. the yield to maturity of the bonds issued. D. the company's debt-to-equity ratio at the time of issuance.

a

41. During the course of an audit, a CPA observes that the recorded interest expense seems to be excessive in relation to the balance in the long-term debt account. This observation could lead the auditor to suspect that A. long-term debt is understated. B. discount on bonds payable is overstated. C. long-term debt is overstated. D. premium on bonds payable is understated.

a

43. Where no independent stock transfer agents are employed and the corporation issues its own stocks and maintains stock records, canceled stock certificates should A. be defaced to prevent reissuance and attached to their corresponding stubs. B. not be defaced, but segregated from other stock certificates and retained in a canceled certificates file. C. be destroyed to prevent fraudulent reissuance. D. be defaced and sent to the Secretary of State.

a

45. Examining cancelled stock certificates addresses the assertion of A. occurrence. B. disclosures. C. valuation. D. completeness.

a

47. Which audit procedure is most closely related to management's assertions about the presentation and disclosure of stockholders' equity? A. Determining whether restrictions have been imposed on retained earnings. B. Counting treasury stock certificates. C. Inspecting minutes of the board of directors to verify that cash dividends were declared. D. Establishing that treasury stock is valued at cost.

a

An auditor usually obtains evidence of stockholders' equity transactions by reviewing the entity's A. minutes of the board of directors' meetings. B. transfer agent's records. C. canceled stock certificates. D. treasury stock certificate book.

a

Select the following definitions (or partial definitions) to the appropriate term. Each term may be used once or not at all. a. An institution charged with responsibility for avoiding overissuance of a corporation's stock b. An institution responsible for maintaining detailed records of shareholders and handling changes of ownership of stock ownership C. Cash or other assets set aside for the retirement of a debt d. Shares of its own stock acquired by a corporation for the purpose of being reissued at a later date e. The formal agreement between bondholders and the issuer as to the terms of the debt

a. An institution charged with responsibility for avoiding overissuance of a corporation's stock *Stock Registar b. An institution responsible for maintaining detailed records of shareholders and handling changes of ownership of stock ownership *Stock transfer agent C. Cash or other assets set aside for the retirement of a debt *Sinking fund d. Shares of its own stock acquired by a corporation for the purpose of being reissued at a later date *Treasure stock e. The formal agreement between bondholders and the issuer as to the terms of the debt *Trust indenture

Testing for unrecorded liabilities, evaluating compliance with debt provisions, and tests of interest expense are performed:

after the close of the period being audited

Analytical procedures for interest-bearing debt include comparing interest expense with:

amount in prior year's BS

An audit plan for the examination of the retained earnings account should include a step that requires verification of the: gain or loss resulting from disposition of treasury shares. approval of the adjustment to the beginning balance as a result of a write-down of an account receivable. authorization for both cash and stock dividends. market value used to charge retained earnings to account for a two-for-one split.

authorization for both cash and stock dividends

An audit plan for the examination of the retained earnings account should include a step that requires verification of the:

authorization for both cash and stock dividends.

18. A control which ensures that long-term borrowing is properly initiated by appropriate individuals addresses the control assertion of A. occurrence. B. authorization. C. completeness. D. valuation.

b

21. Valuation and allocation is most likely an issue for long-term debt if A. bonds are sold on the open market. B. bonds are issued at a discount or premium. C. the loans are from banks. D. the company has many short-term leases.

b

22. Reviewing notes paid or renewed after the balance sheet date to determine if there are unrecorded liabilities at year-end can be used to test the assertion of A. existence. B. completeness. C. rights and obligations. D. valuation and allocation.

b

31. During the year under audit, a company has completed a private placement of a substantial amount of bonds. Which of the following is the most important step in the auditor's program for the audit of bonds payable? A. Confirming the interest rate with the bond trustee. B. Tracing the cash received from the issue to the accounting records. C. Examining the bond agreement for a sinking fund provision. D. Recomputing the annual interest cost and the effective yield.

b

During an audit, Wicks learns that the entity was granted a 3-month waiver of the repayment of principal on the installment loan with Blank Bank without an extension of the maturity date, which is one year in the future. With respect to this loan, the audit program used by Wicks is least likely to include a verification of the A. interest expense for the year. B. balloon payment. C. total liability at year-end. D. installment loan payments.

b

During its fiscal year, a company issued, at a discount, a substantial amount of bonds. When performing audit work in connection with the bond issue, the independent auditor should A. confirm the existence of the bond holders. B. review the board of directors' minutes for authorization. C. trace the net cash received from the issuance to the bond payable account. D. inspect the records maintained by the bond trustee.

b

Of the following, which is the most important procedure that an auditor should use when making an overall review of the income statement? A. Select sales and expense items and trace amounts to related supporting documents. B. Compare actual revenues and expenses with the corresponding figures of the previous year and investigate significant differences. C. Obtain, from the proper entity representative, inventory certificates for the beginning and ending inventory amounts that were used to determine cost of sales. D. Ascertain that the net income amount in the statement of cash flows agrees with the net income amount in the income statement.

b

Reviewing interest expense to examine payments to debt holders not listed on the debt analysis schedule is a procedure that can be used to test the audit assertion of A. occurrence. B. completeness. C. cutoff. D. accuracy.

b

The auditor's program for the examination of long-term debt should include steps that require the A. verification of the existence of the bond holders. B. examination of any bond agreement. C. inspection of the accounts payable subsidiary ledger. D. investigation of credits to the bond interest income account.

b

Two months before 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. Analysis of the notes payable journal. B. Analysis of bank confirmation information. C. Preparation of a year-end bank reconciliation. D. Preparation of a year-end bank transfer schedule.

b

Where an independent stock transfer agent is not employed and the corporation issues its own stocks and maintains stock records, canceled stock certificates should:

be defaced to prevent reissuance and attached to their corresponding stubs

Where no independent stock transfer agent is employed and the corporation issues its own stock and maintains stock records, canceled stock certificates should: not be defaced, but segregated from other stock certificates and retained in a canceled certificates file. be defaced to prevent reissuance, and attached to their corresponding stubs. be defaced and sent to the secretary of state. be destroyed to prevent fraudulent reissuance.

be defaced to prevent reissuance, and attached to their corresponding stubs

Where no independent stock transfer agent is 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.

16. Several years ago, Conway, Inc., secured a conventional real estate mortgage loan. Which of the following audit procedures would least likely be performed by an auditor examining the mortgage balance? A. Examine the current year's canceled checks. B. Review the mortgage amortization schedule. C. Inspect public records of lien balances. D. Recompute mortgage interest expense.

c

26. The auditor is concerned with establishing that dividends are paid to stockholders of the entity owning stock as of the A. issue date. B. declaration date. C. record date. D. payment date.

c

36. In auditing long-term bonds payable, an auditor most likely would A. perform analytical procedures on the bond premium and discount accounts. B. examine documentation of assets purchased with bond proceeds for liens. C. compare interest expense with the bonds payable amount for reasonableness. D. confirm the existence of individual bond holders at year-end.

c

38. Which audit procedure is most closely related to management's assertion regarding presentation and disclosure of liabilities? A. Tracing cash received from a bond issue to the accounting records. B. Confirmation with the bond trustee of amounts owed on a private placement of bonds. C. Reviewing the renewal of a note payable immediately after the balance sheet. D. Inspection of public records of lien balances.

c

48. An audit program for the examination of the retained earnings account should include a step that requires verification of the A. gain or loss resulting from disposition of treasury shares. B. market value used to charge retained earnings to account for a two-for-one stock split. C. authorization for both cash and stock dividends. D. approval of the adjustment to the beginning balance as a result of a write-down of an account receivable.

c

A company issued bonds for cash during the year under audit. To ascertain that this transaction was properly recorded, the auditor's best course of action is to A. request a statement from the bond trustee as to the amount of the bonds issued and outstanding. B. confirm the results of the issuance with the underwriter or investment banker. C. trace the cash received from the issuance to the accounting records. D. verify that the net cash received is credited to an account entitled "Bonds Payable."

c

The auditor can best verify an entity's bond sinking fund transactions and year-end balance by A. recomputation of interest expense, interest payable, and amortization of bond discount or premium. B. confirmation with individual holders of retired bonds. C. confirmation with the bond trustee. D. examination and count of the bonds retired during the year.

c

The presentation of stockholder's equity should include all of the following except:

changes in retained earnings during the year

The auditors can best verify a client's bond sinking fund transactions and year-end balance by:

confirmation with the bond trustee.

Auditors should trace information in confirmation replies for shares outstanding to:

corporate records

A likely reason that consideration of client compliance with debt provisions is important to an audit is that violation of such debt provisions may affect the total recorded:

current liabilities

19. The primary reason for preparing a reconciliation between interest-bearing obligations outstanding during the year and interest expense presented in the financial statements is to A. evaluate internal control over securities. B. determine the validity of prepaid interest expense. C. ascertain the reasonableness of imputed interest. D. detect unrecorded liabilities.

d

34. During the course of an audit, a CPA's substantive analytical procedure provides an expected interest expense that is significantly higher than the amount recorded in the entity's accounting records. This observation would most likely lead the auditor to suspect that A. the entity failed to record all debt. B. discount on Bonds is misstated. C. interest income is overstated. D. the entity failed to record all interest expense.

d

35. During an examination of a public company, the auditor should obtain written confirmation regarding bond transactions from the A. bond broker. B. entity's attorney. C. internal auditors. D. trustee.

d

39. If recorded interest expense is higher than the auditor's expectation calculated using recorded debt, all of the following are potential explanations except that A. the entity failed to record debt. B. debt was recorded as equity. C. the entity used the face interest rate to calculate interest expense on a bond issued at a discount. D. the entity used the face interest rate to calculate interest expense on a bond issued at a premium.

d

44. In performing tests concerning the granting of stock options, an auditor should A. confirm the transaction with the Secretary of State in the state of incorporation. B. verify the existence of option holders in the entity's payroll records or stock ledgers. C. determine that sufficient treasury stock is available to cover any new stock issued. D. trace the authorization for the transaction to a vote of the board of directors.

d

46. An audit of stockholders' equity ordinarily should include A. tracing individual dividend payments to the capital stock records. B. reviewing minutes of board meetings to determine the number of shares outstanding. C. confirming shares outstanding with state officials. D. determining that dividend declarations comply with debt agreements.

d

52. Which of the following is the most important consideration of an auditor when examining the stockholders' equity section of an entity's balance sheet? A. Changes in the capital stock account are verified by an independent stock transfer agent. B. Stock dividends and/or stock splits during the year under audit were approved by the stockholders. C. Stock dividends are capitalized at par or stated value on the dividend declaration date. D. Entries in the capital stock account can be traced to a resolution in the minutes of the board of directors' meetings.

d

An auditor compares revenues and expenses reported for the year being audited (current year) with those of the prior year and investigates all changes exceeding 10%. By this procedure, the auditor would be most likely to learn that A. an increase in property tax rates has not been recognized in the entity's accrual. B. the current year provision for uncollectible accounts is inadequate, because of worsening economic conditions. C. fourth quarter payroll taxes were not paid. D. the entity changed its capitalization policy for small tools in the current year.

d

Before expressing an opinion concerning the results of operations, the auditor would most likely proceed with the examination of the income statement by A. applying a rigid measurement standard designed to test for understatement of net income. B. analyzing the beginning and ending balance sheet inventory amounts. C. making net income comparisons to published industry trends and ratios. D. examining income statement accounts concurrently with the related balance sheet accounts.

d

Many of Granada Corporation's convertible bond holders have converted their bonds into stock during the year under examination. The independent auditor should review Granada Corporation's statement of cash flows to ascertain that it shows A. only cash used to reduce convertible debt. B. only cash provided by issuance of stock. C. cash provided by the issuance of stock and used to reduce convertible debt. D. nothing relating to the conversion because it does not affect cash.

d

Overall analysis of income statement accounts may bring to light errors, omissions, and inconsistencies not disclosed in the overall analysis of balance sheet accounts. The income statement analysis can best be accomplished by comparing monthly A. income statement ratios to balance sheet ratios. B. revenue and expense account balances to the monthly reported net income. C. income statement ratios to published industry averages. D. revenue and expense account totals to the corresponding figures of the preceding years.

d

Which of the following transactions is an auditor most likely to examine when auditing the retained earnings account? A. Changing from one method of depreciation to another. B. Adjusting the percentage used to estimate the allowance for doubtful accounts. C. Changing from the FIFO to LIFO method of inventory valuation. D. Correcting an error in depreciation in a prior year.

d

Which of the following is most likely to be an audit objective in the audit of owners' equity?

determine that the presentation and disclosure of owners' equity is appropriate

The audit procedure of confirmation is least appropriate with respect to:

holders of common stock

If a company employs a capital stock registrar and/or transfer agent, the registrar or agent, or both, should be requested to confirm directly to the auditors the number of shares of each class of stock: authorized, issued, and outstanding during the year. authorized at the balance sheet date. surrendered and canceled during the year. issued and outstanding at the balance sheet date.

issued and outstanding at the balance sheet date

If a company employs a capital stock registrar and/or transfer agent, the registrar or agent, or both, should be requested to confirm directly to the auditors the number of shares of each class of stock:

issued and outstanding at the balance sheet date.

During the course of an audit, a CPA observes that the recorded interest expense seems to be excessive in relation to the balance in the long-term debt account. This observation could lead the auditors to suspect that: premium on bonds payable is understated. long-term debt is overstated. long-term debt is understated. discount on bonds payable is overstated.

long-term debt is understated

During the course of an audit, a CPA observes that the recorded interest expense seems to be excessive in relation to the balance in the long-term debt account. This observation could lead the auditors to suspect that:

long-term debt is understated.

In the continuing audit of a manufacturing company of medium size, which of the following areas would you expect to require the least amount of audit time?

owners' equity

Copies of bond indentures should be maintained in the:

permanent file

Copies of loan agreements relating to a bond issue should be put in the auditor's:

permanent file

Secured liabilities should be disclosed in the notes to the financial statements and cross-referenced to:

pledged assets

Auditors review stock option plans and shares issued when options are granted to obtain evidence regarding which audit objective?

presentation

*An auditor most likely would inspect loan agreements under which an entity's inventories are pledged to support management's financial statement assertion of:

presentation and disclosure

When auditing stockholders' equity accounts, the auditors determine whether there are restrictions on retained earnings resulting from loans or other causes. The primary audit objective of this procedure is normally to verify management's assertion of: existence or occurrence. valuation or allocation. completeness. presentation and disclosure.

presentation and disclosure

When auditing stockholders' equity accounts, the auditors determine whether there are restrictions on retained earnings resulting from loans or other causes. The primary audit objective of this procedure is normally to verify management's assertion of:

presentation and disclosure.

The use of dividend paying agent in dividend distributions:

reduces the possibility of errors or fraud

In addition to bank statements, auditors can also trace proceeds from capital stock issues to:

registration statements of the SEC

The typical approach to auditing debt is:

test of details of transactions

Florida Corporation declared a 100% stock dividend during 200X. In connection with the examination of Florida's financial statements, Florida's auditors should determine that:

the additional shares issued do not exceed the number of authorized but previously unissued shares

Florida Corporation declared a 100% stock dividend during 200X. In connection with the examination of Florida's financial statements, Florida's auditors should determine that: the additional shares issued do not exceed the number of authorized but previously unissued shares. the stock dividend was properly recorded at fair market value. stockholders received their additional shares by confirming year-end holdings with them. Florida's stockholders have authorized the issuance of 100% stock dividends.

the additional shares issued do not exceed the number of authorized but previously unissued shares

Auditors examine copies of notes payable and trace details to:

the debt analysis working paper

In connection with the examination of bonds payable, the auditors would expect to find in a trust indenture: the yield to maturity of the bonds issued. the names of the original subscribers to the bond issue. the issue date and maturity date of the bond. the company's debt to equity ratio at the time of issuance.

the issue date and maturity date of the bond

In connection with the examination of bonds payable, the auditors would expect to find in a trust indenture:

the issue date and maturity date of the bond.

Auditors should examine payments on notes payable and verify the payment amounts to:

the note repayment schedule

Shares of its own stock acquired by a corporation for the purpose of being reissued at a later date.

treasury stock

The formal agreement between bondholders and the issuer as to the terms of the debt.

trust indenture

Bond transactions are usually confirmed directly with:

trustees

Auditors vouch the cash received from the issuance of notes, bonds, or mortgages to:

validated bank deposit slips

The primary responsibility of a bank acting as registrar of capital stock is to:

verify that stock is issued in accordance with the authorization of the board of directors and the articles of incorporation