ACC404 CH. 10

The auditors should insist that a representative of the client be present during the inspection and count of securities to Detect forged securities. Lend authority to the auditors' directives. Acknowledge the receipt of securities returned. Coordinate the return of all securities to proper locations.

Acknowledge the receipt of securities returned.

Which of the following internal control activities would most likely justify reducing the assessment of the risks of material misstatement for long-term notes payable? The use of prenumbered purchase orders to prevent unrecorded notes. All direct borrowings on notes payable are authorized by the board of directors. Any use of assets for collateral on long-term notes payable are analyzed for criticality to operations. Proceeds from long-term notes payable are included in regular review of budgets to ensure adequacy of cash flow availability.

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

Which of the following questions would auditors 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 the proceeds from notes payable used to purchase noncurrent assets? Are direct borrowings on notes payable authorized by the board of directors? Are two or more authorized signatures required on checks that repay notes payable?

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

In connection with the audit of an issue of long-term bonds payable, the audit team should Calculate the effective interest rate to see whether it is substantially the same as the rates charged for similar issues. Ascertain that the client has obtained the opinion of counsel on the legality of the issue. Decide whether the bond issue was made without violating state or local laws or regulations. Determine whether bondholders are persons other than owners, directors, or officers of the company issuing the bond.

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

An audit plan for the examination of the retained earnings account should include a step that requires verification of the (Click the check box next the two answers that apply.) Market value used to charge retained earnings to account for a 2-for-1 stock split. Approval of the adjustment to the beginning balance as a result of a write-down of account receivables. Authorization for both cash and stock dividends declared and paid. Gain or loss resulting from disposition of treasury shares.

Authorization for both cash and stock dividends declared and paid. Gain or loss resulting from disposition of treasury shares.

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

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

A related party is a person or entity that Is a member of the company's management team or board of directors. Has a family tie to a management member. Does business with the company. Can exert significant influence over or be influenced by the company.

Can exert significant influence over or be influenced by the company.

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 Valuation. Existence. Completeness. Classification.

Classification.

In auditing for unrecorded long-term bonds payable, an audit team most likely will Perform analytical procedures on the bond premium and discount accounts. Examine documentation of assets purchased with bond proceeds for liens. Confirm the existence of individual bondholders at year-end. Compare interest expense with the bond payable amount for reasonableness.

Compare interest expense with the bond payable amount for reasonableness.

Which of the following audit procedures would not likely be performed for audits of shareholders' equity? Read board of directors' minutes for authorization of equity transactions. Obtain management representation about number of shares issued and outstanding. Compare valuation of stock to published market prices. Confirm outstanding common and preferred stock with stock registrar.

Compare valuation of stock to published market prices.

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? Tracing recorded dividend income to cash receipts records and validated deposit slips. Comparing recorded dividends with a standard financial reporting service's record of dividends. Comparing recorded dividends with amounts appearing on federal information Form 1099. Performing analytical procedures and statistical sampling.

Comparing recorded dividends with a standard financial reporting service's record of dividends.

Assertions for retained earnings

Completeness

Assertions for capital stock

Completeness Presentation and disclosure

An audit team testing long-term investments would ordinarily use analytical procedures to ascertain the reasonableness of the Existence of unrealized gains or losses. Classification as available-for-sale or trading securities. Valuation of trading securities. Completeness of recorded investment income.

Completeness of recorded investment income.

Which of the following audit procedures would not likely be performed for audits of investments? Confirm investments with registrar. Read board of directors' minutes for authorization of investment strategies. Compare valuation to published market prices. Confirm investments with broker or trustee.

Confirm investments with registrar.

An audit plan to examine long-term debt most likely would include steps that require Inspecting the accounts payable subsidiary ledger for unrecorded long-term debt. Comparing the carrying amount of held-to-maturity securities with their year-end market values. Verifying the existence of the holders of the debt by direct confirmation. Correlating interest expense recorded for the period with outstanding debt.

Correlating interest expense recorded for the period with outstanding debt.

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

Detect unrecorded liabilities.

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

Entries in the capital stock account can be traced to resolutions in the minutes of meetings of the board of directors.

Assertions for investments

Existence/occurrence Completeness Valuation Presentation and disclosure

Assertions for long-term debt

Existence/occurrence Completeness Valuation Presentation and disclosure

True or false: A securities count should never be done as part of interim testing.

False

True or false: Reliance on controls normally reduces the extent of auditors' substantive procedures on finance and investment cycle accounts.

False

Which of the following approaches is most suitable for auditing the finance and investment cycle? Perform extensive tests of controls and limit substantive procedures to analytical procedures. Ignore internal controls and perform extensive substantive procedures. Ignore internal controls and limit substantive procedures to analytical procedures. Gain an understanding of internal controls and perform extensive substantive procedures.

Gain an understanding of internal controls and perform extensive substantive procedures.

Difficult-to-value assets include ______.

Investments in debt and equity securities or unique assets Derivative instruments Certain financial instruments Intangible assets, including goodwill Loans and other receivables that are possibly impaired Pension and other postretirement assets and liabilities

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

Minutes of the meetings of the board of directors.

An audit team would most likely verify the interest earned on bond investments by Vouching the receipt and deposit of interest checks. Testing internal controls relevant to cash receipts. Recomputing the interest earned on the basis of face amount, interest rate, and period held. Confirming the bond interest rate with the issuer of the bonds.

Recomputing the interest earned on the basis of face amount, interest rate, and period held.

Which of the following statements are correct? Auditors normally examine samples of significant finance and investment transactions for tests of controls Reliance on controls does not normally reduce the extent of substantive procedures on finance and investment cycle accounts A lack of controls in the finance and investment cycle can lead to significant extended procedures Tests of controls in the finance and investment cycle for nonpublic clients may be limited to entity level

Reliance on controls does not normally reduce the extent of substantive procedures on finance and investment cycle accounts; A lack of controls in the finance and investment cycle can lead to significant extended procedures; Tests of controls in the finance and investment cycle for nonpublic clients may be limited to entity level

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 Examine supporting evidence for transactions occurring during the year. Count the securities at a subsequent date and confirm with the bank whether securities were added or removed since the balance-sheet date. Request the client to have the bank seal the safe deposit box until the auditors can count the securities at a subsequent date. Request the bank to confirm to the auditors the contents of the safe deposit box at the balance-sheet date.

Request the client to have the bank seal the safe deposit box until the auditors can count the securities at a subsequent date.

When the client holds a large amount of negotiable securities, auditors need to plan to guard against Unrecorded sales of securities after they are counted. Unauthorized negotiation of the securities before they are counted. Substitution of authentic securities with counterfeit securities. Substitution of securities already counted for other securities that should be on hand but are not.

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

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 The equity section of the balance sheet separately show a charge equal to the amount of the loss. The loss in value be recognized in the financial statements. The approximate market value of the investments be shown in parentheses on the face of the balance sheet. The investments be classified as long term for balance-sheet purposes with full disclosure in the footnotes.

The loss in value be recognized in the financial statements.

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 Guarantees of preferred stock liquidation value. The number of shares subject to agreements to repurchase. The number of shares issued and outstanding. Restrictions on the payment of dividends.

The number of shares issued and outstanding.

ABC Company has 100 shares of IBM stock that it holds 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? ABC Company no longer owns the securities. There had been unauthorized buying and selling of investment securities. The certificates in the safe deposit box were forgeries. The securities may be misclassified on the balance sheet.

There had been unauthorized buying and selling of investment securities.

Which of the following statements are true? The majority of companies in the U.S. are entirely equity finances Government debentures are relatively complex to audit There is not a "typical" finance and investment cycle that applies to all companies Investment type can have a huge influence on the effort required by the auditor

There is not a "typical" finance and investment cycle that applies to all companies; Investment type can have a huge influence on the effort required by the auditor

Loan covenants are used for which of the following reasons? To protect the borrower from the lender's calling the loan early. To protect shareholders from management taking on too much debt. To protect the lender from the borrower's financial position substantially weakening. To protect the auditors from false information by the borrower.

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

True or false: Authorization is a critical issue for most of the transactions in the financing and investing cycle.

True

True or false: Special-purpose entities are off-book arrangements that may be used to enrich company officers and hide debt under the guise of creating joint ventures.

True

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 Securities are registered in the name of the trust company rather than the entity itself. The trust company places the securities in a bank safe deposit vault under the custodian's exclusive control. Interest and dividend checks are mailed directly to an entity employee who is authorized to sell securities. Trust company has no direct contact with the entity employees responsible for maintaining investment accounting records.

Trust company has no direct contact with the entity employees responsible for maintaining investment accounting records.

Which of the following assertions is most likely to have the highest risk of material misstatement for the goodwill account? Existence. Completeness. Valuation. Rights & Obligations.

Valuation.

An approximation of a financial statement element, item or account is called a(n) _____ _____.

accounting estimate

Salvage values, security valuations, goodwill impairment and imputed interest rates are all examples of _____ _____.

accounting estimates

Loan covenant violations ______.

allow the lender to call the debt; may lead to an audit report modification; may cause managers to misstate other accounts

Auditors must ensure that a sale made to related parties is the equivalent of a(n) _____ - _____ transaction.

arm's length

Material misstatements can incur when ______.

assets are overstated due to impairment; impairment write-offs have been delayed

The classification of a security as trading or _____ _____ _____ affects whether changes in value influence net income.

available for sale

When the market is down, managers are motivated to classify securities as ______ to remove the losses from net income.

available for sale

All investment policies should be approved by the ______.

board of directors or investment committee

Plans for asset purchases and business acquisitions are detailed in a(n) _____ budget.

capital

The authorization for the purchase of large assets will likely reside in the ______.

capital budget

Completeness and presentation and disclosure are the only relevant assertions for ______.

capital stock

Financial planning starts with the ______.

cash flow forecast

An activity used because a specific standard control activity is not in place is called a(n) ______ control.

compensating

An activity used because a specific standard control activity is not is place is called a(n) _____ control.

compensating

When auditing long-term liabilities and related accounting, the most important balance sheet assertions are ______.

completeness; presentation and disclosure

When auditing long-term liabilities and related accounting, the most important balance sheet assertions are _____ along with _____ and _____.

completeness; presentation; disclosure

Problems in the finance and investment cycle can occur because ______.

complex transactions make accounting difficult; transactions are infrequent; of intentional errors in management estimates

To obtain responses on a class of items termed off-balance-sheet information, auditors may use _____ and _____ procedures.

confirmation; inquiry

Difficult-to-value assets include ______.

debt and equity securities; intangible assets; pension assets and liabilities; derivatives

An instrument that takes its value from another asset or index is a(n) _____.

derivative

Inquiries should be made regarding the nature of investments and the reasons for holding them, especially _____ securities used for hedging activities.

derivative

Interest rate swaps, options and futures contracts are all examples of _____.

derivatives

Complex transactions are ______ the balance sheet.

difficult to audit even if they reach

Only high-ranking officers should have access to negotiable certificates and two people should be required to access the documents which is known as _____ _____ or in its strictest form, joint custody.

dual control

Off-balance sheet transactions include ______.

endorsements on discounted notes; letters of credit; repurchase agreements

Off-balance-sheet information includes ______.

endorsements; insurance policies; loan agreements

Auditors need to obtain audited financial statements of the investee company when the _____ method of accounting is used for investments.

equity

Auditing fair value measurements is similar to auditing accounting _____.

estimate

The auditor's primary relevant assertion concerns surrounding typical marketable securities are _____.

existence and; valuation

The auditor's primary relevant assertion concerns surrounding typical marketable securities are _____ and _____ of the securities.

existence; valuation

Difficult-to-value assets include ______.

financial instruments; goodwill; investments in unique assets

Off-balance sheet transactions ______.

have been reduced by new accounting standards; often cause financial reporting and disclosure problems; include fixed price commitments

The classification of a derivative instrument as a(n) _____ influences the presentation and characterization of fluctuations in value.

hedge

Marketable debt security investment classified as ______ are not subject to mark-to-market accounting on the face of financial statements.

held-to-maturity

When considering controls over those who do record keeping in the finance and investment cycle ______.

hiring practices may be considered; employee turnover is a significant risk factor; evidence from prior audits can indicate employee competence levels

Regarding the finance and investment cycle, most relevant assertions and the amount of work to be done is ______.

hugely impacted by the type of investment

New leasing standards ______.

increase risk for lease auditing; increase disclosure requirements; reduce the risk of off-balance sheet transactions

A written agreement between bond issuers and bondholders is called a bond _____.

indenture

The amount and terms of bonds payable, mortgages payable, and other formal debt instruments can be verified by reading the bond _____.

indenture

Complex transactions that can be used as vehicles to hide fraud include ______.

instruments with both debt and equity characteristics; mergers and acquisitions

Existence/occurrence, completeness, valuation and presentation and disclosure are all relevant assertions for ______.

investments; long-term debt

A securities count ______.

is similar to a physical inventory count; should only be done with client personnel present; may be part of interim testing

When it is not possible for one person to access a safe, cabinet or drawer, a strict form of dual control, known as _____ _____ has been implemented.

joint custody

According to KPMG, "the process of reaching a decision or drawing a conclusion where there are a number of possible alternative solutions" is ______.

judgment

"Calculated liabilities and credits" include ______.

lease obligations; foreign currency translation gains; deferred income taxes

Clauses in borrowing agreements intended to keep the borrower's financial position at a level that will ensure repayment are called _____ _____.

loan covenants

With the exception of stock-based compensation plans, audits of stockholders' equity are considered to be ______ risk.

low

Record keeping complications for many types of investments and intangibles arise from ______.

maintenance of the accounts over time

Transactions in the finance and investment cycle ______.

may require third parties to control management; are often large and complex; include transactions that are difficult to value

Investment policy approval ______.

must be understood and tested by auditors; should rest with those charged with governance

Transactions in the finance and investment cycle ______.

must be understood by the client's accountants; can be inherently risky for the auditor; have been a leading cause of financial statement restatements

Auditors' tests of controls over the estimation process include ______.

observations; making inquiries

Transactions in the financing and investment cycle ______.

occur infrequently; vary greatly in type; are for large dollar amounts

"Calculated liabilities and credits" ______.

often involve significant management estimates; are accounting transactions calculated using basic company data; transactions require lengthly auditor discussion

Auditors considering the design of internal controls in the finance and investment cycle typically ______.

perform a walkthrough

Common problems in the finance and investment cycle are often the result of failure to ______.

record and disclosure transactions; appropriately adjust asset valuations as needed

ASC 718 requires that employee stock-based compensation plans be ______.

recorded when the award is granted; expensed over the compensation period; credited to paid-in-capital

Certificate records are kept by a(n) _____ who updates the records based on information from the transfer agent.

registrar

One that can exert significant influence over another is a(n) _____ party.

related

New leasing standards ______.

require all leases greater then 12 months to be capitalized; require all leases to be accounted for using imputed present value estimates

Record keeping for many types of investments and intangibles ______.

require management estimates; are ripe areas for understatement of expenses (liabilities; and overstatement of assets); involve complex accounting standards

Auditors typically approach audits of ______ transactions with a reliance approach.

routine

Off-book arrangements that are supposedly used to create joint ventures for new businesses but may be fraudulent are called _____ - _____ entities.

special purpose

Audits of accounting estimates generally take a(n) _____ approach.

substantive

When auditing fair value measurements the auditor must determine if the valuation principles used are ______.

supported by documentation; properly disclosed; consistently applied

GAAP requires that impairments to asset values should normally be ______.

taken as losses when they occur

Control risk for relevant assertions in the finance and investment cycle may be reduced if ______ is heavily involved in risk assessment and process evaluation.

the audit committee

Market valuation is required for securities classified as ______.

trading; available for sale

Company stocks and bonds are normally handled by an intermediary called a(n) _____ _____.

transfer agent

Auditors considering the design of internal controls in the finance and investment cycle typically perform a(n) _____ which involves starting with an inquiry of management about how processes are completed.

walkthrough