Audit Chapter 15

Registered bondholders receive periodic interest payments without any action on their part.

True

Smaller corporations maintain a stock certificate book and a stockholders' ledger to determine the shares outstanding.

True

The auditors generally refer to provisions in the partnership agreement when auditing the allocation of partnership income.

True

When an independent registrar and stock transfer agent is used, it is likely that the auditor will confirm the number of shares outstanding with those parties rather than the shareholders.

True

The auditors are required to confirm bond holdings directly with the bondholders.

False

The auditors should determine that the issuance of bonds was approved by the company's stockholders.

False

The formal documentation creating bond indebtedness is called the certificate.

False

When no independent stock transfer agent is 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. C) Be destroyed to prevent fraudulent reissuance. D) Be defaced and sent to the Secretary of State.

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

Company A does not employ an independent stock transfer agent, but rather issues its own stock and maintains its stock records. When outstanding shares are transferred from one holder to another, the certificate of the selling shareholder should be: A) Canceled (generally by perforation) and attached to the certificate book. B) Destroyed to prevent fraudulent reissuance. C) Retained by the selling shareholder. D) Sent to the state's registrar of investment securities.

A) Canceled (generally by perforation) and attached to the certificate book.

When auditing treasury stock, one will normally expect to see an entry in which journal? A) Cash disbursements. B) Cash receipts. C) Purchases. D) Sales.

A) Cash disbursements.

Which of the following procedures is least likely in the audit of capital stock? A) Examine all outstanding stock certificates for completeness. B) Account for the proceeds from stock issues. C) Reconcile shares outstanding with the general ledger. D) Evaluate compliance with stock option plans.

A) Examine all outstanding stock certificates for completeness.

An auditor obtains evidence of stockholders' equity transactions for a publicly traded company by reviewing the entity's: A) Minutes of board of directors meetings. B) Registrar's record of interbank transfers. C) Canceled stock certificates. D) Treasury stock certificate book.

A) Minutes of board of directors meetings.

Changes in capital stock accounts should normally be approved by: A) The board of directors. B) The audit committee. C) The stockholders. D) The president.

A) The board of directors.

Internal control over bonds payable is best when: A) The company utilizes the services of a bond trustee. B) The company segregates approval from issuance of the bonds. C) Bonds are countersigned by two officers. D) Bonds are serially numbered.

A) The company utilizes the services of a bond trustee.

Which of the following is an auditor most likely to confirm from the transfer agent and registrar? A) Total shares of stock issued. B) Restrictions on the payment of dividends. C) Total market value of outstanding shares of stock. D) Gains from sale of treasury stock.

A) Total shares of stock issued.

A review of the board of directors' minutes is least likely to result in the discovery of A) Write-off of an large accounts payable. B) Issuance of stock. C) Issuance of bonds. D) Purchase of significant property.

A) Write-off of an large accounts payable.

A registrar/transfer agent system relating to capital stock is most likely used by: A) A small, nonpublic company. B) A large, publicly traded company. C) All companies must use this type of system. D) No companies use this system anymore.

B) A large, publicly traded company.

The auditor can best verify a client's bond sinking fund transactions and year-end balance by: A) Confirmation with individual holders of retired bonds. B) Confirmation with the bond trustee. C) Recomputation of interest expense, interest payable, and amortization of bond discount or premium. D) Examination and count of the bonds retired during the year.

B) Confirmation with the bond trustee.

For audit purposes, a corporation's articles of incorporation are normally: A) Copied and placed on the owners' equity lead schedule. B) Copied and placed in the permanent file. C) Confirmed with the transfer agent. D) Ignored since they are not normally considered to be related to the internal control structure.

B) Copied and placed in the permanent file.

Which of the following is not a primary objective in the audit of interest-bearing debt? A) Establish the completeness of recorded interest-bearing debt. B) Establish the legality of outstanding debt. C) Determine that debt is properly valued. D) Determine that the presentation and disclosure of interest-bearing debt is appropriate.

B) Establish the legality of outstanding debt.

The auditors' program for the examination of long-term debt should include steps that require the: A) Verification of the existence of the bondholders. B) Identification of notes payable to related parties. C) Inspection of the accounts payable subsidiary ledger. D) Investigation of credits to the bond interest income accounts.

B) Identification of notes payable to related parties.

During its fiscal year, a company issued, at a discount, a substantial amount of first-mortgage bonds. When performing audit work in connection with the bond issue, the independent auditor should: A) Confirm the existence of the bondholders. B) Review the minutes for authorization. C) Trace the net cash received from the issuance to the bond revenue account. D) Inspect the records maintained by the bond trustee.

B) Review the minutes for authorization.

For a corporation that does not utilize the services of an independent registrar and stock transfer agent, which of the following represents a weakness in internal control over stock issuance? A) Stock certificates are prenumbered. B) Stock certificates are signed immediately upon receipt from the printer. C) Stock certificates are in the exclusive custody of a responsible officer. D) Stock certificates require the signature of two officers.

B) Stock certificates are signed immediately upon receipt from the printer.

The auditor's plan to examine interest-bearing debt most likely will include steps that require: A) Comparing the book value of the debt to its year-end market value. B) Vouching borrowing and repayment transactions. C) Verifying the proper presentation of the debt through confirmation. D) Inspecting the accounts payable subsidiary ledger for unrecorded interest-bearing debt.

B) Vouching borrowing and repayment transactions.

A large corporation entered into a very significant long-term debt agreement during the current year. Which of the following would the auditors most likely be concerned with: A) Approval by the corporation's CEO. B) Approval by the corporation's CFO. C) Approval by the corporation's Board of Directors. D) Approval by the corporation's Controller.

C) Approval by the corporation's Board of Directors.

An audit plan for the examination of the retained earnings account should include a step that requires verification of the: A) Market value used to charge retained earnings to account for a two-for-one stock split. B) Approval of the adjustment to the beginning balance as a result of a write-down of an account receivable. C) Authorization for both cash and stock dividends. D) Gain or loss resulting from disposition of treasury shares.

C) Authorization for both cash and stock dividends.

A primary responsibility of a registrar of capital stock is to: A) Determine that dividends paid do not exceed the amount allowable by law. B) Act as an independent third party between the board of directors and outside investors concerning merger, acquisition, and other major decisions. C) Avoid any overissuance of stock. D) Maintain detailed stockholder records and carrying out transfers of stock ownership.

C) Avoid any overissuance of stock.

In auditing long-term debt, an auditor would be most likely to: A) Perform analytical procedures on the bond prenumbered discount accounts. B) Examine documentation of assets purchased with bond proceeds for liens. C) Evaluate whether debt provisions have been met. D) Confirm the existence of individual long-term debt holders at year-end.

C) Evaluate whether debt provisions have been met.

In which of the following accounts would one expect a related party transaction to be easiest to detect? A) Accounts receivable. B) Accounts payable. C) Notes payable. D) Cash.

C) Notes payable.

The auditor would be least likely to be concerned about internal control as it relates to: A) Land and buildings. B) Common stock. C) Shareholder meetings. D) Minutes of board of directors' meetings.

C) Shareholder meetings.

Bond transactions are normally confirmed with: A) Individual holders of retired bonds. B) Recomputation procedures performed using interest expense. C) The bond trustee. D) Comparisons of retired bonds with those outstanding.

C) The bond trustee.

The primary reason for preparing a reconciliation between interest-bearing obligations outstanding during the year and interest expense presented 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) Detect unrecorded liabilities.

Which of the following is the most important consideration of an auditor 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/or 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 a resolution in the minutes of the board of directors' meetings.

D) Entries in the capital stock account can be traced to a resolution in the minutes of the board of directors' meetings.

When the auditors obtain an understanding of internal control for the financing cycle, documentation will frequently include a written description as well as a(n): A) List of audit objectives. B) Decision table. C) Summary of tests of controls. D) Internal control questionnaire.

D) Internal control questionnaire.

For a large publicly traded client, the auditors' examination of capital stock accounts will not normally include: A) Analysis of capital stock accounts. B) Confirmation of shares issued with the independent registrar. C) Accounting for the proceeds of major stock issues. D) Reconciliation of a stock certificate book with the general ledger.

D) Reconciliation of a stock certificate book with the general ledger.

Which of the following statements is correct relating to common stock certificates of a publicly traded company that uses the services of a transfer agent? A) Stock certificates should exist for all outstanding stock and be held by the owner of the stock. B) Stock certificates should exist for all outstanding stock and be held either by the owner of the stock or a representative of the owner (e.g., brokerage firm). C) A lack of stock certificates is ordinarily considered a material weakness in internal control. D) Stock certificates often are not issued in today's electronic environment.

D) Stock certificates often are not issued in today's electronic environment.

In the audit of the allocation of income for a partnership, the auditors would be most interested in reviewing: A) Federal Partnership Law. B) State Partnership Law. C) Board of directors minutes. D) The partnership agreement.

D) The partnership agreement.

Which of the following most likely would approve the issuance of notes payable? A) Controller. B) Payroll. C) Personnel. D) Treasurer.

D) Treasurer.

During an audit of a publicly-held company, the auditors should obtain written confirmation regarding debenture transactions from the: A) Debenture holders. B) Client's attorney. C) Internal auditors. D) Trustee.

D) Trustee.

Dividends should be authorized by the stockholders of the corporation.

False

For a continuing client, the auditors will often find that a large amount of audit time is required for capital stock due to the dollar amount recorded in the accounts.

False

Long-term liabilities that are maturing must always be classified as a current liability.

False