Auditing & Assurance Chapter 10

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

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

Which of the following is not an off-balance-sheet item?

Capitalized lease

ABC Company has issued a bond that pays five percent interest semiannually 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?

Completeness

Performing analytical procedures on debt and related accounts to ensure that all debt is properly included in the period under audit and that some notes have not been omitted

Completeness

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

Confirm investments with registrar.

The decision of a company to have a transfer agent handle exchanges of shares is related primarily to which of the functional responsibilities?

Custody

Vouching borrowing and repayment terms

Cutoff

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

Detect unrecorded liabilities.

Review and test reports of investment activity for the investment committee

Ensure policies written are being followed

Inspect monthly brokerage reports on securities owned, purchased, and sold

Ensure reports tie to client activity

Trace several transactions for purchases and sales of investments through the accounting system

Ensure transactions are recorded and classified properly

Confirming debt

Existence

Evaluating whether debt provisions and covenants have been met

Presentation and disclosure

Which of the following would not be a typical feature of management's control over the production of estimates?

Review by the independent auditor

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

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

When a client company does not maintain its own capital stock records, the auditors should obtain written confirmation from the transfer agent and registrar concerning

The number of shares issued and outstanding.

If a company keeps investments in a bank safe deposit box, which of the following two people ideally should have access to the safe deposit box?

The president and vice president for finance

Which of the following is not a typical assertion relating to owners' equity?

The valuation of shares issued for noncash consideration is reflected at book value.

Loan covenants are used for which of the following reasons?

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

Examining copies of the actual signed note payable to determine the correct dollar amount of the liability

Valuation

Inspect reports by internal auditors on their review of securities and derivatives

Verify that internal auditors' observations are consistent with those of external auditors

Appropriate audit inquiries regarding estimates include all of the following except:

Why are they prepared?

If it would be appropriate to confirm capital stock, the auditor would obtain the confirmation from

an independent registrar.

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.

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

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

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

bonded

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

cash

An audit team's purpose in reviewing the documentation concerning the renewal of a note payable shortly after the balance-sheet date most likely is to obtain evidence concerning management's assertions about

classification.

The typical assertions related to investments and related accounts would not include the PCAOB assertion that

goodwill is valued at market value.

A transfer agent

handles the exchange of shares, canceling the shares surrendered by sellers and issuing new certificates.

Sometimes auditors may ______ securities on hand.

inspect

The typical business activity in the financing and investment cycle that requires an accounting entry is

investment of excess funds in temporary or long-term securities.

When auditing the market value of an investment, an auditor would be least likely to

make his or her own determination of market prices.

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

modify

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

note

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

The focus of controls in the finance and investment cycle is on

proper authorizations and competent personnel.

The typical business activity of the finance and investment cycle would not include

reconciliation of cash.

Loan covenants

require the borrower to maintain certain financial characteristics.

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

rights and obligations.

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

risk

An investment committee is a standing committee of _______.

the board of directors

Keeping track of securities owners for payment of interest or dividends is usually done by the company's

transfer agent.

Bond transactions are typically confirmed directly with the _______.

trustee

Taking a "big bath" in the financial statements refers to

understating income.