AUDIT CH 22 & 23

Cash equivalents are short​ term, highly liquid assets with a maturity​ of? A. 3 months or less B. 1 month or less C. 6 months or less D. 1 year or less

A. 3 months or less

A company breaks a Debt Covenant and defaults on their​ loan, triggering an acceleration clause. This clause makes all outstanding loan and accrued interest payable immediately. What is one consequence of the​ default? A. All outstanding amounts related to the loan will need to be classified as​ Short-Term Liability as of the Balance Sheet date B. All outstanding amounts related to the loan will need to be classified as​ Long-Term Liability as of the Balance Sheet date C. There is no consequence D. The auditor will no longer need to test Additions of New Debt in the Debt rollforward

A. All outstanding amounts related to the loan will need to be classified as​ Short-Term Liability as of the Balance Sheet date

The auditor is interested in verifying key terms of debt agreements that client enters into for a number of reasons discussed in class. Which of the following terms of the debt agreement will NOT influence the inputs to the​ auditor's development of an expectation for Interest Expense​ (i.e., Substantive Analytic of Interest​ Expense)? A. Debt covenants B. Loan amount C. Repayment schedule D. Interest rate

A. Debt covenants

What assertion is the auditor most concerned about when auditing Cash​ & Cash​ Equivalents? A. Existence B. Completeness C. Valuation D. Presentation​ & disclosure

A. Existence

What document does the following definition relate​ to? ​"Cash that does not belong to the company anymore and is not reflected on its books but has not been fully processed so it is reflected in the​ client's bank​ account" A. Outstanding check B. Sales invoice C. Deposit in transit D. Purchase order

A. Outstanding check

When performing a Substantive​ Analytic, the auditor develops an expectation of what the account balance should be and compares it to the​ client's recorded balance for that account. Which of the following does NOT need to be true of the relationship between the data used to develop the​ expectation? (Hint: In our Interest Expense Substantive Analytic​ example, the data being used is the average outstanding loan balance and the average interest​ rate) A. Prompt B. Precise C. Plausible D. Predictable

A. Prompt

The cash confirmation provides strong evidence for the​ Existence, Valuation, and Rights​ & Obligations of Cash.​ However, it does not provide strong evidence for the Completeness of Cash.​ Why? A. The auditor asks the bank to confirm details of specific client bank accounts. The client could have​ account(s) with a different bank that the auditor is unaware of and does not confirm B. ​Cash-Completeness typically has a lower inherent risk C. The bank employee is not required to be truthful in their response D. The​ auditor, not the​ client, is responsible for sending the bank confirmation

A. The auditor asks the bank to confirm details of specific client bank accounts. The client could have​ account(s) with a different bank that the auditor is unaware of and does not confirm

The starting point for the verification of the balance in the general bank account is to obtain A. a bank reconciliation from the client. B. a cutoff bank statement directly from the bank. C. the​ client's year-end bank statement. D. the​ client's cash account from the general ledger.

A. a bank reconciliation from the client.

Actual interest expense is significantly higher than the​ auditor's estimate. This would most likely lead the auditor to conclude that the client has not A. recorded all​ long-term interest-bearing debt in the accounting records. B. recorded all interest expense paid or accrued. C. properly recorded interest income. D. properly accounted for the discount of bonds payable account.

A. recorded all​ long-term interest-bearing debt in the accounting records.

The bank reconciliation A. should be performed by someone independent of the handling or recording of cash receipts. B. ensures that no cash has been embezzled. C. must be done on a daily basis if the client uses electronic banking. D. should be performed by someone who handles cash disbursements.

A. should be performed by someone independent of the handling or recording of cash receipts.

The auditors test the​ client's monthly bank reconciliation to verify whether the​ client's recorded bank balance is the same amount as the actual cash in the bank. Which of the following would not explain a difference between the​ company's cash balance and the​ bank's balance for the​ client? A. other reconciling items B. Checks are written by the client in the same month the checks clear the bank. C. deposits in transit D. outstanding checks

B. Checks are written by the client in the same month the checks clear the bank.

The Debt Footnote includes a disclosure that requires the company to show Future Minimum Payments on Debt. What is true of this​ disclosure? A. Companies must only disclose the minimum payments for each of the 5 years after the balance sheet date B. Companies must disclose the minimum payments for each of the 5 years after the balance sheet​ date, as well as all minimum payments due in years thereafter C. Companies must disclose the minimum payments for each of the 3 years after the balance sheet​ date, as well as all minimum payments due in years thereafter D. Companies must only disclose the minimum payments for each of the 3 years after the balance sheet date

B. Companies must disclose the minimum payments for each of the 5 years after the balance sheet​ date, as well as all minimum payments due in years thereafter

What document does this definition relate​ to? ​"Cash that belongs to the company and is reflected on its​ books, but has not been fully processed so it is not reflected in the​ client's bank​ account" A. Sales invoice B. Deposit in transit C. Outstanding check D. Purchase order

B. Deposit in transit

Which of the following audit tests would provide evidence regarding the​ balance-related audit objective of existence for an audit of notes​ payable? A. Examine balance sheet for proper presentation and disclosure of notes payable. B. Examine corporate minutes for loan approval. C. Foot the notes payable list for notes payable and accrued interest. D. Examine due dates on duplicate copies of notes.

B. Examine corporate minutes for loan approval.

Which of the following is not an important control over notes​ payable? A. There exist proper documents and records. B. Notes payable are issued when the business climate is favorable. C. There is proper authorization over the issuance of new notes payable. D. Adequate controls exist over repayment of interest and principal.

B. Notes payable are issued when the business climate is favorable.

An imprest petty cash fund would least likely be used to pay for which of the following​ items? A. minor office supplies B. monthly interest expense C. stamps for small mailings D. small contributions to a local charity

B. monthly interest expense

In addition to confirming bank balances of your audit​ client, a bank confirmation would normally contain A. the​ client's business prospects. B. the​ client's bank loans with due​ date, interest​ rate, and collateral requested. C. the​ client's credit history as regards to paying back loans. D. the​ client's managements bank account information.

B. the​ client's bank loans with due​ date, interest​ rate, and collateral requested.

Your client maintains a bank reconciliation. You are concerned the client is improperly omitting checks from the Outstanding Check listing​ (i.e., outstanding check listing is​ understated). What effect would this have on the Cash​ 'Balance per​ Books'? A. Balance per books is understated B. Balance per books is not impacted C. Balance per books is overstated D. Balance per books agrees with balance per bank

C. Balance per books is overstated

A Debt Confirmation does not provide strong evidence for which of the following assertions related to the balance of Debt at year​ end? A. Valuation B. Rights and Obligations C. Completeness D. Existence

C. Completeness

The auditor uses a Substantive Analytic to test interest expense. After performing the​ analytic, the auditor finds that their expectation of Interest Expense is significantly higher than the amount recorded by the client in the GL. The auditor would most likely be concerned about what assertion related to Interest​ Expense? A. Rights​ & Obligations B. Presentation​ & Disclosure C. Completeness D. Existence

C. Completeness

What assertions typically have higher inherent risk for​ Debt? A. Existence and Valuation B. Existence and Presentation​ & Disclosure C. Completeness and Presentation​ & Disclosure D. Valuation and Presentation​ & Disclosure

C. Completeness and Presentation​ & Disclosure

In auditing the December 2020 financial​ statements, an auditor starts with the listing of Deposits in Transit in the December 2020 bank​ reconciliation; she then inspects bank deposit slips and the January 2021 bank statement to see if the deposit was in fact deposited before year end and if it cleared the bank within​ 2-3 days after year end. With respect to the ending balance of​ cash, the auditor is testing what​ assertion? A. Rights​ & Obligations B. Completeness C. Existence D. Presentation​ & disclosure

C. Existence

Which of the following procedures is the best to gather evidence for​ Debt-Completeness? A. Debt Confirmation B. Inspect the Debt​ (Loan) agreements supporting Additions​ (New Debt) in the Debt Rollforward C. Read BOD minutes and identify any new loans authorized by the​ Board; Ensure that the outstanding loan related to the borrowing is recorded in the GL D. Recalculate the amounts due within 1 year to determine how much of the outstanding loan should be classified as a​ Short-Term Liability on the Balance Sheet. Recalculate amounts due in more than 1 year to determine how much of the outstanding loan should be classified as a​ Long-Term Liability on the Balance Sheet.

C. Read BOD minutes and identify any new loans authorized by the​ Board; Ensure that the outstanding loan related to the borrowing is recorded in the GL

Which of the following statements is correct regarding the capital acquisition and payment​ cycle? A. Audit procedures for notes payable and interest income are often performed simultaneously. B. A primary emphasis in auditing debt is on existence. C. There are relatively few transactions and each transaction is typically highly material. D. Bonds are frequently issued by companies in small amounts.

C. There are relatively few transactions and each transaction is typically highly material.

The​ auditor's independent estimate of interest expense from notes payable uses average interest rates and A. only notes payable to major lenders. B. ​year-end notes payable outstanding. C. average notes payable outstanding. D. only notes payable above the level of materiality.

C. average notes payable outstanding.

The audit objective to determine that notes payable in the schedule actually exist is verified by the test of details of balances procedure to A. foot the notes payable list. B. recalculate interest expense. C. confirm notes payable. D. examine the balance sheet for proper disclosure of noncurrent portions.

C. confirm notes payable.

Which of the following would normally be discovered as part of the audit of the bank​ reconciliation? A. payment to an employee for more hours than she or he worked B. duplicate payment of a​ vendor's invoice C. failure to include a deposit in transit on the bank reconciliation D. failure to bill a customer

C. failure to include a deposit in transit on the bank reconciliation

The auditor sends a confimation to the​ client's bank. Who will complete and return the confirmation to the​ auditor? A. The client employee responsible for reconciling cash B. The client C. The​ bank's auditor D. A bank employee

D. A bank employee

An important control over Debt is that all new debt is properly authorized. Who typically authorizes the issuance of new​ debt? A. CEO B. Legal Counsel C. CFO D. Board of directors

D. Board of directors

Which of the following statements is​ true? A. Only private companies can use private equity financing B. Only private companies can use private debt financing C. Only public companies can use private debt financing D. Both public and private companies can use private debt financing

D. Both public and private companies can use private debt financing

When testing​ 'Additions (New​ Debt)' in the Debt​ Rollforward, the auditor will need to obtain which of the following​ documents? A. Sales invoice​ & loan agreement B. Purchase order​ & loan agreement C. Cash disbursement​ & loan agreement D. Cash receipt​ & loan agreement

D. Cash receipt​ & loan agreement

Which of the following components of the Debt Rollforward are confirmed by the​ auditor? In other​ words, for which of these components would the auditor send a debt confirmation to the lending​ institution? A. New Debt​ (Additions) B. Payments C. Beggining balance D. Ending balance

D. Ending balance

If a bank does not respond to a bank confirmation​ request, the auditor would most likely A. Perform alternative procedures/Y Send a second request/N Ask the client to communicate with the bank to ask them to complete and return the confirmation/Y B. Perform alternative procedures/Y Send a second request/Y Ask the client to communicate with the bank to ask them to complete and return the confirmation/N C. Perform alternative procedures/N Send a second request/N Ask the client to communicate with the bank to ask them to complete and return the confirmation/Y D. Perform alternative procedures/N Send a second request/Y Ask the client to communicate with the bank to ask them to complete and return the confirmation/Y

D. Perform alternative procedures/N Send a second request/Y Ask the client to communicate with the bank to ask them to complete and return the confirmation/Y

Which of the following is the most common audit procedure to address the risk that the Outstanding Checks listing on the​ company's bank reconciliation is improperly excluding valid Outstanding Checks​ (i.e., that the listing is​ understated)? A. Start with Subsequent Bank statement. Identify deposits clearing the bank shortly after​ year-end. Obtain a copy of the check and check cut date and ensure that checks deposited before​ year-end but clearing after​ year-end are included in the Outstanding Check listing. B. Start with Outstanding Check listing. Select several outstanding checks and follow them into the Subsequent Bank statement. If a check was cut shortly after​ year-end, remove it from the Deposit in Transit listing. C. Start with Outstanding Check listing. Select several outstanding checks and follow them into the Subsequent Bank statement. If a check was cut shortly after​ year-end, remove it from the Outstanding Check listing. D. Start with Subsequent Bank Statement. Identify withdrawls clearing the bank shortly after​ year-end. Obtain a copy of the check and check cut date and ensure that checks cut before​ year-end but clearing after​ year-end are included in the Outstanding Check listing.

D. Start with Subsequent Bank Statement. Identify withdrawls clearing the bank shortly after​ year-end. Obtain a copy of the check and check cut date and ensure that checks cut before​ year-end but clearing after​ year-end are included in the Outstanding Check listing.

What is the benefit of using a 3rd party electronic platform to send bank​ confirmations? A. The confirmation is automatically returned and does not require the bank employee to respond to the electronic request B. It is more expensive than sending a paper confirmation through the mail C. The client does not need to sign the confirmation before the auditor sends it to the bank D. Using a secure online network maintained by an independent third party where all the responders to confirmations are validated before they can respond to an​ auditor's confirmation request reduces the chances that the integrity of the confirmation process is compromised

D. Using a secure online network maintained by an independent third party where all the responders to confirmations are validated before they can respond to an​ auditor's confirmation request reduces the chances that the integrity of the confirmation process is compromised

Responsibility for the issuance of new notes payable would normally be vested in the A. purchasing department. B. accounts payable department. C. accounting department. D. board of directors.

D. board of directors.

A major consideration in the audit of the general cash balance is the possibility of fraud. The auditor must extend his or her procedures in the audit of​ year-end cash to determine the possibility of a material fraud when there are A. large cash receipts and disbursements during the year. B. large cash balances at the end of the year. C. no imprest accounts used for payroll. D. inadequate internal controls.

D. inadequate internal controls.

Which of the following is not an objective of the​ auditor's examination of notes​ payable? A. to determine whether transactions regarding the principal and interest of notes are properly authorized B. to determine whether internal controls are adequate C. to determine whether the liability for notes and related interest expense and accrued liabilities are properly stated D. to determine whether​ client's financing arrangements are effective and efficient

D. to determine whether​ client's financing arrangements are effective and efficient

The client may mail the bank confirmation requests if the auditor believes doing so will increase the likelihood that the confirmation will be returned promptly. True False

False

The starting point for the verification of the balance in the general bank account is to obtain a bank​ cut-off statement. True False

False

Audit schedules for most of the accounts in the capital acquisition and repayment cycle include the beginning​ balance, a list of transactions that occurred in the​ account, and the ending balance. True False

True

If loans require significant restrictions on the activities of the​ company, they must be disclosed in the footnotes. True False

True

Ordinarily, all​ deposits-in-transit listed on the​ year-end bank reconciliation should appear as deposits on the cutoff bank statement. True False

True

The bank reconciliation control is enhanced when a qualified employee reviews the monthly reconciliation as soon as possible after its completion. True False

True

The interest rate to be paid on an outstanding loan can either be fixed or floating​ (variable). True False

True

The presentation of cash in the financial statements is normal​ straight-forward unless restrictions on cash or compensating balance agreements with a bank exist. True False

True

Which analytical procedures are most important in verifying notes​ payable? Which types of misstatements can the auditor uncover by the use of these​ tests? The most important analytical procedures used to verify notes payable is _________. By the use of this​ test, auditors can uncover misstatements in _____________.

a test of interest expense interest calculations or possible unrecorded notes payable

a. Which of the following controls will most likely justify a reduced assessed level of control risk for the completeness assertion for notes​ payable? A. Before approving disbursement of principal payments on notes​ payable, the treasurer reviews terms in the note. B. The accounting staff reviews board of director minutes for any indication of any transactions involving outstanding debt to make sure all borrowings are included in the general ledger. C. Accounting maintains a detailed schedule of outstanding notes payable that is reconciled monthly to the general ledger. D. All borrowings that exceed​ $500,000 require approval from the board of directors before loan contracts can be finalized. b. When an auditor observes that the recorded interest expense seems to be excessive in relation to the balance in the bonds payable​ account, the auditor might suspect that A. bonds payable are understated. B. premium on bonds payable is overstated. C. bonds payable are overstated. D. discount on bonds payable is understated. c. In the audit of notes​ payable, which​ balance-related audit objective is generally one of the most important for the auditor to​ verify? A. Notes payable due to related parties are properly reflected on the balance sheet. B. Existing notes payable are included on the balance sheet as of year end. C. Notes payable reflected on the balance sheet at the end of the year exist. D. Notes payable are reflected at net realizable value as of the balance sheet date.

a. B. The accounting staff reviews board of director minutes for any indication of any transactions involving outstanding debt to make sure all borrowings are included in the general ledger. b. A. bonds payable are understated. c. B. Existing notes payable are included on the balance sheet as of year end.