ACC 241 - Auditing, Chapter 10: Finance and Investment Cycle

10.25 A related party is a person or entity that

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

10.33 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.

Compensating controls in the finance and investment cycle

Feature involvement of two or more persons handling all important responsibilities.

10.32 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 loss in value be recognized in the financial statements.

10.36 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.

10.38 An audit plan for the examination of the retained earnings account should include a step that requires verification of the (choose two steps)

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

Tests of controls in the finance and investment cycle.

Amount to inquiries and observations related to management involvement

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

An independent registrar

10.31 Which of the following is the most important audit consideration when examining the stockholders' equity section of a client's balance sheet?

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

10.23 Which of the following approaches is most suitable for auditing the finance and investment cycle?

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

Loan covenants are used for which of the following reasons?

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

10.29 Which of the following assertions is most likely to have the highest risk of material misstatement for the goodwill account?

Valuation

10.34 The auditors should insist that a representative of the client be present during the inspection and count of securities to

Acknowledge the receipt of securities returned.

10.28 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?

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

10.45 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 questions would an auditor most likely include on an internal control questionnaire?

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

10.30 In connection with the audit of an issue of long-term bonds payable, the audit team should

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

10.35 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.

10.46 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.

10.43 In auditing for unrecorded long-term bonds payable, an audit team most likely will

Compare interest expense with the bond payable amount for reasonableness.

10.48 Which of the following audit procedures would not likely be performed for audits of shareholders' equity?

Compare valuation of stock to published market prices.

10.26 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?

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

10.42 An audit team testing long-term investments would ordinarily use analytical procedures to ascertain the reasonableness of the

Completeness of recorded investment income.

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

Confirm investments with registrar.

10.44 An audit plan to examine long-term debt most likely would include steps that require

Correlating interest expense recorded for the period with outstanding debt.

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

Make his or her own determination of market prices.

Documentation of a count of marketable securities should include all of the following except

Market value.

10.37 All corporate capital stock transactions should ultimately be traced to the

Minutes of the meetings of the board of directors.

10.40 An audit team would most likely verify the interest earned on bond investments by

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

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

Reconciliation of cash

10.41 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

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

10.27 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.

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 controls would be most effective in assuring that the proper custody of assets in the investing cycle is maintained?

The recorded balances in the investment subsidiary ledger are periodically compared with the contents of the safety deposit box by independent personnel

10.49 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?

There had been unauthorized buying and selling of investment securities.

10.24 Loan covenants are used for which of the following reasons?

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

10.39 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

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