Ch 15 Audit

The board of directors should authorize the:

-number of shares to be issued -valuation of noncash assets received in payment for shares.

Auditors test debt recorded at fair value using:

-observable inputs -unobservable inputs. .

Auditors confirm debt with:

-payees using confirmation requests -bond trustees -financial institutions using standard confirmation forms.

To achieve effective control, many corporations assign the task of paying interest to the trustee for:

-registered bonds -bearer bonds

For corporate clients, owner's equity consists of:

-retained earnings -capital stock accounts

For cash dividends, auditors:

-verify the amounts paid -determine the dates and amounts of dividends authorized.

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

minutes of board of directors meetings.

To determine bonds outstanding were authorized, auditors review:

minutes of directors' meetings

All corporate capital stock transactions should ultimately be traced to the

minutes of the board of directors.

For the current year debt working papers, auditors should obtain analyses of general ledger accounts for:

notes payable interest payable

When a client uses paper stock certificates, an auditor is most likely to trace treasury stock purchase transactions to the:

numbered stock certificates on hand.

the board must approve all dividend declarations including the amount per share, the date of declaration, date of record, and date

of payment

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

owners' equity

Copies of bond indentures should be maintained in the:

permanent

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.

Auditors review payments after the balance sheet date but before the end of the audit engagement to:

provide additional evidence on the liability.

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

registration statements of the SEC

In 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.

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

shares issued and outstanding.

A device for protecting the long-term creditor is the requirements of a ____ fund or redemption fund to be held by a trustee.

sinking

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

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

stock certificate book,

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

stock certificate numbers

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

stockholders ledger

Auditors need to vouch changes in capital stock accounts to:

supporting documents and records.

An important document auditors need to audit partners' accounts is:

the partnership contract.

The stockholder list and dividends checks are approved by the:

treasurer

A major inherent risk of debt is:

understatement of debt

A major potential audit problem is

understatement of debt

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

unissued

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.

For companies not served by a transfer agent, auditors usually prepare a list of shareholders and the number of shares owned by each for the:

permanent file.

Auditors must determine that the information provided about debt, including major provisions of loan agreements, is appropriate, to satisfy the

presentation and disclosure audit objective

Material misstatements related to the financing cycle may occur when:

-a loan is not recorded -debt is recorded as a revenue.

Auditors should obtain an understanding of the client's internal control procedures for these activities related to capital stock transactions.

-authorizing -recording

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

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

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.

The acquisition and repayment of capital is sometimes referred to as the

financing cycle

The use of dividend paying agent in dividend distributions:

reduces the possibility of errors or fraud.

Bond transactions are usually confirmed directly with:

trustees

Auditors need to determine that notes are classified by:

-maturity -types of payees

when auditing owner's equity accounts, auditors also obtain evidence about the related accounts of:

-capital stock discounts -capital stock premiums -dividends payable

Auditors should reconcile the general ledger control account, stockholders ledger and stock certificate book to:

-establish the amount of outstanding stock -rule out the possibility of an overissuance of shares.

Auditor can document their understanding of internal control over capital stock transactions by using:

-flowcharts -internal control questionnaires -written descriptions

Audit procedures for debt:

-include a documentation of internal control -use dual-purpose transaction testing.

Auditors generally perform audit work related to debt in advance of the balance sheet date.

FALSE

One of the auditors' roles in the audit of debt is to judge the legality of a bond issue, q

FALSE

The audit work for capital stock is usually far less than that required for assets, liabilities, revenue or expense.

TRUE

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

after the close of the period being audited.

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

after the year-end date.

Internal control over bonds payable is strengthened by the use of:

an independent trustee.

The typical audit process for sole proprietorship capital accounts is to:

analyze changes in proprietorship accounts during the year.

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

authorized

When a client uses paper stock certificates, canceled stock certificates should:

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

Appropriations of retained earnings require specific authorization by the:

board of directors

The bylaws of a corporation usually require that borrowing is approved by the:

board of directors.

Auditors review renewals of notes maturing after the balance sheet date to determine proper _____ of these liabilities.

classification

Long-term liabilities that maturity within one year are:

classified as long-term if the client has the intent and ability to refinance.

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

completeness

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

confirmation with the bond trustee.

Auditors use their understanding of the client and its environment to directly:

consider inherent risks including fraud risks related to owners' equity.

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.

Types of long-term debt include:

debentures -secure bonds

An analysis of the notes payable account serves a number of purposes, including verification of payments, the propriety or

debits and credits and the year end balance.

Noncompliance with debt covenants is a business risk related to

debt.

Treasury stock is usually shown as a

deduction in the equity section.

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 are appropriate.

Testing for debt generally uses _____- _____ transaction testing as auditors are able to substitute individual transactions and test controls at the same time.

dual- purpose

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

examination of copies of debt agreements.

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

fair value

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

holders of common stock

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

interest payments.

The primary responsibility of the stock registar

is to control the issuance of stock and prevent any over issuance of stock.