Chapter 15

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

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

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

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 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

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

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

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

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

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

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

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

A

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

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

Authorized

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

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 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

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

D

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

False

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

*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 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

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

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

A, B

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

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

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

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 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

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

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

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

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

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 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

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

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

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

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 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

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

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

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

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

Fair value

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

False

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

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

Treasury

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

Bond transactions are typically confirmed directly with 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

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

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

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

Cash

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

Classification

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

Classification

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

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

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

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

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

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

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

False

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

Note

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

Occurrence

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

Payments

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

Permanent

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

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

Record

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