Ch.10
20. Which of the following controls would be most effective in assuring that the proper custody of assets in the investing cycle is maintained? A. Direct access to securities in the safety deposit box is limited to only one corporate officer. B. Personnel who post investment transactions to the general ledger are not permitted to update the investment subsidiary ledger. C. The purchase and sale of investments are executed on the specific authorization of the board of directors. D. The recorded balances in the investment subsidiary ledger are periodically compared with the contents of the safety deposit box by independent personnel.
D
3. The typical assertions related to investments and related accounts would not include the PCAOB assertion that A. Capitalized intangible costs relate to intangibles acquired in exchange transactions. B. Amortization is properly calculated. C. Research and development costs are properly classified. D. Goodwill is valued at market value.
D
33. Records of stock and bond certificates are usually maintained by the company's A. Treasurer B. Chief Financial Officer C. Transfer Agent D. Registrar
D
35. Documentation of a count of equity securities should include all of the following except A. Interest rate. B. Serial numbers. C. Number of shares. D. Market value.
D
42. Jones was engaged to examine the financial statements of Gamma Corporation for the year ended June 30. Having completed an examination of the investment securities, which of the following is the best method of verifying the accuracy of recorded dividend income? A. Tracing recorded dividend income to cash receipts records and validated deposit slips. B. Performing analytical procedures and statistical sampling. C. Comparing recorded dividends with amounts appearing on federal information Form 1099. D. Comparing recorded dividends with a standard financial reporting service's record of dividends.
D
44. In connection with the audit of an issue of long-term bonds payable, the audit team should A. Determine whether bondholders are persons other than owners, directors, or officers of the company issuing the bond. B. Calculate the effective interest rate to see if it is substantially the same as the rates for similar issues. C. Decide whether the bond issue was made without violating state or local law. D. Ascertain that the client has obtained the opinion of counsel on the legality of the issue.
D
45. Which of the following is the most important audit consideration when examining the stockholders' equity section of a client's balance sheet? A. Changes in the capital stock account are verified by an independent stock transfer agent. B. Stock dividends and 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 resolutions in the minutes of meetings of the board of directors.
D
47. The primary reason for preparing a reconciliation between interest-bearing obligations outstanding during the year and interest expense 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
48. The auditors should insist that a representative of the client be present during the inspection and count of securities to A. Lend authority to the auditors' directives. B. Detect forged securities. C. Coordinate the return of all securities to proper locations. D. Acknowledge the receipt of securities returned.
D
55. A client has a large and active investment portfolio that is kept in a bank safe deposit box. If the auditors are unable to count securities at the balance sheet date, they most likely will A. Request the bank to confirm to the auditors the contents of the safe deposit box at the balance sheet date. B. Examine supporting evidence for transactions occurring during the year. C. Count the securities at a subsequent date and confirm with the bank whether securities were added or removed since the balance sheet date. D. Request the client to have the bank seal the safe deposit box until the auditors can count the securities at a subsequent date.
D
59. Which of the following questions would auditors most likely include on an internal control questionnaire for notes payable? A. Are assets that collateralize notes payable critically needed for the entity's continued existence? B. Are two or more authorized signatures required on checks that repay notes payable? C. Are the proceeds from notes payable used for the purchase of noncurrent assets? D. Are direct borrowings on notes payable authorized by the board of directors?
D
60. An audit team's purpose in reviewing the documentation concerning the renewal of a note payable shortly after the balance sheet date most likely is to obtain evidence concerning management's assertions about A. Existence. B. Valuation. C. Completeness. D. Classification.
D
64. The typical business activity of the financing and investment cycle that requires an accounting entry is A. Short-and long-term forecasts. B. Meetings with investment bankers. C. Proposals to board of directors for investing excess monies. D. Investment of excess funds in temporary or long-term securities.
D
68. In an audit test of recorded interest expense and accrued interest the auditor was able to detect that the recorded interest expense was greater than the calculations showed. This may indicate A. A failure to accrue interest. B. Interest payments are in default. C. Interest payments were charged to another account. D. Interest was paid on an unknown debt or unrecorded liability.
D
71. Which of the following is not a typical assertion relating to owners' equity? A. The number of shares shown as issued is in fact issued. B. The accounting is proper for options, warrants, and other stock issue plans, and related disclosure is adequate. C. All owners' equity transactions have been authorized by the board of directors. D. The valuation of shares issued for non cash consideration is reflected at book value.
D
9. If it would be appropriate to confirm capital stock, the auditor would obtain the confirmation from A. Management. B. The board of directors. C. Stockholders. D. An independent registrar.
D
52. An audit plan for the examination of the retained earnings account should include a step that requires verification of the (choose two steps) A. Market value used to charge retained earnings to account for a 2-for-1 stock split. B. Approval of the adjustment to the beginning balance as a result of a write-down of account receivables. C. Authorization for both cash and stock dividends. D. Gain or loss resulting from disposition of treasury shares. E. C & D
E
14. Which of the following management assertions for long-term liabilities is related to the ASB balance assertion of completeness? A. All material long term liabilities are recorded. B. New long term liabilities and debt extinguishments are properly authorized. C. Terms, conditions, and restrictions relating to noncurrent debt are adequately disclosed. D. Disclosures of maturities for the next five years are accurate and adequate.
A
19. To determine whether facts support management's intent to hold securities to maturity, an auditor might A. Study the entity's cash flow forecasts. B. Obtain published market quotations. C. Compare fair value of the securities to cost. D. Confirm that the securities are held by a broker.
A
23. In auditing intangible assets, an auditor most likely would review or recompute amortization and determine whether the amortization period is reasonable in support of the ASB balance assertion of A. Valuation. B. Existence. C. Completeness. D. Rights and obligations.
A
25. The focus of controls in the finance and investment cycle is on A. Proper authorizations and competent personnel. B. Computer controls over transactions. C. Physical security of assets. D. Prenumbered documents.
A
26. The focus of substantive tests in the finance and investment cycle is on A. Reconciliation of detailed listings with general ledger amounts. B. Proper cut-off. C. Search for unrecorded items. D. Gaining an understanding and verifying amounts and calculations.
A
28. Which of the following is not a relevant aspect of internal controls over estimates? A. External auditor involvement in developing assumptions. B. Adequate review by appropriate levels of authority. C. Comparison of prior estimates with subsequent results. D. All the above are relevant aspects of internal controls over estimates.
A
49. When independent stock transfer agents are not employed and the corporation issues its own stock 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 be 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
51. All corporate capital stock transactions should ultimately be traced to the A. Minutes of the meetings of the board of directors. B. Cash receipts journal. C. Cash disbursements journal. D. Numbered stock certificates.
A
53. When an entity uses a trust company as custodian of its marketable securities, the possibility of concealing fraud most likely would be reduced if the A. Trust company has no direct contact with the entity employees responsible for maintaining investment accounting records. B. Securities are registered in the name of the trust company rather than the entity itself. C. Interest and dividend checks are mailed directly to an entity employee who is authorized to sell securities. D. The trust company places the securities in a bank safe deposit vault under the custodian's exclusive control.
A
67. The typical assertion relating to investments and related accounts in a manufacturing company would not include the assertion that A. All investments are valued at cost. B. Investment securities are on hand or held in safekeeping by a trustee. C. Investment income has been received and recorded. D. Investments are adequately classified and described in the balance sheet, including disclosures.
A
70. When a company keeps its own stock records, which of the following procedures is not required? A. Confirm outstanding common stock with stock registrar agent. B. Inspect the stock record stubs for certificate numbers and number of shares. C. Inspect the unissued certificates. D. Obtain written representation about the number of shares issued and outstanding.
A
40. Loan covenants are used for which of the following reasons? A. To protect the lender from the borrower substantially weakening the borrower's financial position. B. To protect the borrower from the lender calling the loan early. C. To protect the auditors from false information by the borrower. D. To protect shareholders from management taking on too much debt.
A - to protect the lender
11. Which ASB balance assertion is of the most importance to auditors for long-term liabilities? A. Existence. B. Completeness. C. Rights and obligations. D. Valuation.
B
17. A transfer agent A. Keeps the stockholder list and, from time to time, determines the shareholders eligible to receive dividends. B. Handles the exchange of shares, canceling the shares surrendered by sellers and issuing new certificates. C. Records notes and bonds payable. D. Makes investment decisions for an entity.
B
24. In confirming with an outside agent, such as a financial institution, that the agent is holding investment securities in the client's name, an auditor most likely gathers evidence in support of ASB balance assertion of existence and A. Valuation. B. Rights and obligations. C. Completeness. D. Accuracy.
B
27. Compensating controls in the finance and investment cycle A. Feature separation of duties by upper management. B. Feature involvement of two or more persons handling all important responsibilities. C. Include involvement by the external auditor. D. Include all the above.
B
29. Loan covenants A. Describe the collateral of the loan. B. Require the borrower to maintain certain financial characteristics. C. Describe the lender's responsibilities. D. Include all the above.
B
37. Appropriate audit inquiries regarding estimates include all of the following except A. Who prepares the estimates? B. Why are they prepared? C. What data are used? D. When are they prepared?
B
38. Which of the following is not an off-balance-sheet item? A. Purchase commitment. B. Capitalized lease. C. Loan commitment. D. Synthetic lease.
B
4. The decision of a company to have a transfer agent handle exchanges of shares is related primarily to which of the functional responsibilities? A. Rights and obligations. B. Custody. C. Recordkeeping. D. Periodic reconciliation.
B
50. When a client company does not maintain its own capital stock records, the auditors should obtain written confirmation from the transfer agent and registrar concerning A. Restrictions on the payment of dividends. B. The number of shares issued and outstanding. C. Guarantees of preferred stock liquidation value. D. The number of shares subject to agreements to repurchase.
B
56. An audit team testing long-term investments would ordinarily use analytical procedures to ascertain the reasonableness of the A. Existence of unrealized gains or losses. B. Completeness of recorded investment income. C. Classification as available-for-sale or trading securities. D. Valuation of trading securities.
B
58. An audit plan to examine long-term debt most likely would include steps that require A. Comparing the carrying amount of held-to-maturity securities with their year-end market values. B. Correlating interest expense recorded for the period with outstanding debt. C. Verifying the existence of the holders of the debt by direct confirmation. D. Inspecting the accounts payable subsidiary ledger for unrecorded long-term debt.
B
61. Which of the following audit procedures would not likely be performed for audits of investments? A. Read board of directors' minutes for authorization of investment strategies. B. Confirm investments with registrar. C. Confirm investments with broker or trustee. D. Compare valuation to published market prices.
B
63. ABC Company has 100 shares of IBM stock that is held as an investment. The stock was purchased three years ago and has been in the client's safe deposit box along with other investment securities. During an inspection of securities held by the client, the auditor noted the 100 shares of IBM stock had a different CUSIP number than the number listed when purchased and the number verified during the previous audit. Which of the following would be the auditor's main concern about this discovery? A. The certificates in the safe deposit box were forgeries. B. There was unauthorized buying and selling of investment securities. C. The securities may be misclassified on the balance sheet. D. The securities were no longer owned by ABC Company.
B
65. If investments are kept by the company in a bank safe deposit box, ideally, which of the following two people should have access to the safe deposit box? A. A director and president. B. President and vice president for finance. C. A director and vice president for finance. D. A director and general ledger accountant.
B
7. Which of the following is not a substantive audit procedure for estimates of management? A. Recalculating the mathematical estimate. B. Observing whether estimates are prepared by qualified personnel. C. Developing an independent estimate based on alternative assumptions. D. Comparing the estimates of management to subsequently discovered facts before the end of fieldwork.
B
72. When auditing the valuation assertion of an equity method investment, which of the following is the auditor most likely to do? A. Inspect stock certificates. B. Obtain audited financial statements of the investee company. C. Obtain the market price of the stock as of year-end. D. Review management's calculations.
B
1. The typical business activity of the finance and investment cycle would not include A. Proposals for cash forecasts, capital budgets, and business expansion. B. Analyses of excess cash funds. C. Reconciliation of cash. D. Sale of stocks, bonds, or notes.
C
10. In Case 10.4 (No Treasure in this Treasure Planet), Disney overvalued net assets by capitalizing unrecoverable production costs. The lesson for the auditors in this case was: A. Always recalculate the client's figures, regardless of how simple they appear. B. Maintain professional skepticism when evaluating clients' estimates. C. Always look into the background of the client before accepting an engagement. D. None of the above.
C
12. "Are interest payments and accruals monitored for due dates and financial statement dates?" is an internal control questionnaire item that is related to the ASB transaction assertion of A. Occurrence. B. Completeness. C. Cutoff. D. Accuracy.
C
13. Which of the following would not be a typical feature of management's control over the production of estimates? A. Accumulation of relevant, sufficient, and reliable data. B. Preparation of estimates by qualified personnel. C. Review by the independent auditor. D. Consideration by management of whether particular accounting estimates are consistent with the company's operational plans.
C
18. In the audit of notes payable, an auditor testing the ASB balance assertion of accuracy and valuation most likely would A. Read directors' and finance committee's minutes for authorization of financing transactions. B. Select a sample of paid notes and trace interest expense to the general ledger account. C. Select a sample of paid notes and recalculate interest expense for the period under audit. D. Select a sample of notes payable and vouch cash receipt to the bank statement.
C
2. Selecting a sample of paid notes and tracing interest to the general ledger account is a test of the PCAOB assertion for A. Accounting. B. Valuation or allocation. C. Completeness. D. Existence or occurrence.
C
21. 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 bond payable amount for reasonableness. D. Confirm the existence of individual bondholders at year end.
C
22. During an audit of an entity's stockholders' equity accounts, the auditor determines whether there are restrictions on retained earnings resulting from loans, agreements, or state law. This audit procedure most likely is intended to verify the ASB presentation and disclosure assertion of A. Occurrence. B. Completeness. C. Rights and Obligations. D. Understandability.
C
30. Related party transactions A. Must be valued as if they were arm's length. B. Must be assumed to be valued differently than if they were arm's length. C. Must be disclosed in the financial statements. D. Must be disclosed in the financial statements and the auditor's report.
C
31. Taking a "big bath" in the financial statements refers to A. Overstating income. B. Overstating revenues. C. Understating income. D. An economic downturn.
C
32. Keeping track of securities owners for payment of interest or dividends is usually done by the company's A. Treasurer B. Broker C. Transfer Agent D. Registrar
C
34. Tests of controls in the finance and investment cycle A. Normally focus on tests of transactions. B. Primarily involve observing physical security of assets. C. Typically amount to inquiries and observations related to management involvement. D. Can significantly reduce the extent of substantive tests.
C
36. Which of the following is not an estimate required in the finance and investment cycle? A. Actuarial assumptions for pension accruals. B. Residual values for leases. C. Stated market value of publicly traded stocks. D. All the above are estimates.
C
39. Which of the following approaches is most suitable for auditing the finance and investment cycle? A. Perform extensive tests of controls and limit substantive procedures to analytical procedures. B. Ignore internal controls and perform extensive substantive procedures. C. Gain an understanding of internal controls and perform extensive substantive procedures. D. Ignore internal controls and limit substantive procedures to analytical procedures.
C
41. A related party is a person or entity that A. Has a family tie to a management member. B. Does business with the company. C. Can exert significant influence over or be influenced by the company. D. Is a member of the company's management.
C
43. When the client holds a large amount of negotiable securities, auditors need to plan to guard against A. Unauthorized negotiation of the securities before they are counted. B. Unrecorded sales of securities after they are counted. C. Substitution of securities already counted for other securities that should be on hand but are not. D. Substitution of authentic securities with counterfeit securities.
C
46. If the auditors discover that the carrying amount of a client's investments is overstated because of a loss in value that is other than a temporary decline in market value, they should insist that A. The approximate market value of the investments be shown in parentheses on the face of the balance sheet. B. The investments be classified as long term for balance sheet purposes with full disclosure in the footnotes. C. The loss in value be recognized in the financial statements. D. The equity section of the balance sheet separately show a charge equal to the amount of the loss.
C
5. ABC Company has issued a bond that pays 5% interest semi-annually to bond holders on record June 30 and December 30. Payments are made on July 15 and January 15. ABC Company has a December 31 fiscal year end. The auditor vouches the January 15, 2010 payment to the liabilities recorded on the December 31, 2009 balance sheet. Which of the following ASB balance assertions is the auditor testing? A. Existence. B. Rights and obligations. C. Completeness. D. Valuation.
C
54. An audit team would most likely verify the interest earned on bond investments by A. Vouching the receipt and deposit of interest checks. B. Confirming the bond interest rate with the issuer of the bonds. C. Recomputing the interest earned on the basis of face amount, interest rate, and period held. D. Testing internal controls relevant to cash receipts.
C
57. In auditing for unrecorded long-term bonds payable, an audit team most likely will 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 bond payable amount for reasonableness. D. Confirm the existence of individual bondholders at year-end.
C
62. Which of the following audit procedures would not likely be performed for audits of shareholders' equity? A. Read board of directors' minutes for authorization of equity transactions. B. Confirm outstanding common and preferred stock with stock registrar. C. Compare valuation of stock to published market prices. D. Obtain management representation about number of shares issued and outstanding.
C
66. Selecting a sample of notes payable transactions and vouching payments to cancelled checks is a test of the ASB balance assertion of A. Accuracy. B. Completeness. C. Existence. D. Presentation.
C
69. When auditing market value of an investment an auditor would be least likely to A. Examine quoted market prices. B. Evaluate management's procedure for determining market prices. C. Make his/her own determination of market prices. D. Confirm market prices with a broker.
C
73. An agent of a bond issuer who handles the administrative aspects of a loan and ensures that the borrower complies with the terms of the bond indenture is called a A. Registrar. B. Transfer agent. C. Trustee. D. None of the above.
C
8. Which of the following would not be a place in which owners' equity transactions would be documented? A. Capital budget. B. Minutes of the meetings of the board of directors. C. Proxy statements. D. Securities offering registration statements.
Capital budget
15. The preferred method of determining fair value of transactions is A. Market based values. B. Based on reasonable management assumptions. C. External auditor estimates. D. Detailed computations by outside experts.
Market based values
16. Derivative instruments include A. Stocks. B. Preferred stocks. C. Stock options. D. All the above.
Stock options
6. Auditors count investment securities held by the client primarily to test the ASB balance assertion of A. Existence. B. Rights and obligations. C. Completeness. D. Valuation.
existence
