ACCT 480 CH 13 MC
An auditor determines that there is an inherent risk that dividends may be recorded and paid before being declared. This determination is most likely tied to which of the following management assertions? a. Existence. b. Valuation. c. Completeness. d. Presentation and disclosure.
A
How does an auditor typically respond to identified risks of material misstatement associated with equity? a. The auditor will typically plan an approach that uses only substantive procedures. b. The auditor will typically plan to perform a controls reliance approach to the audit. c. The auditor does not need to respond to identified fraud risks since the risk of fraud related to stockholders' equity accounts is typically minimal. d. Because of the low level of risk of material misstatement, the auditor would only rely on preliminary analytical procedures.
A
If tests of controls result in identified control deficiencies, how will the auditor assess those deficiencies? a. By determining their severity and the impact on the opinion of internal control effectiveness. b. By estimating interest expense based on average interest rates and average debt outstanding. c. By comparing current year account balances with prior year account balances. d. By calculating the long-term debt-to-equity ratio and performing a trend analysis with prior periods.
A
In general, which of the following would an auditor not typically perform as part of gaining an understanding of the client's controls? a. All of these are used to gain an understanding of the controls. b. Observation. c. A walkthrough of the process. d. Inquiry.
A
Which of the following are entity-wide components of internal control that can mitigate the risk of material misstatement related to debt? a. All of these are entity-wide components of internal control. b. Monitoring controls. c. Risk assessment. d. Information and communication.
A
Which of the following is a typical substantive procedure related to the relevant assertion of presentation and disclosure for debt? a. Reviewing debt agreements for the restrictive covenants. b. Recalculating accrued interest. c. Vouching additions and deletions to debt. d. Confirming debt with relevant outside parties.
A
Which of the following is not a common debt covenant restriction? a. Specification of a minimum earnings per share. b. Specification of a maximum debt-equity ratio. c. Maintenance of a minimum working-capital ratio. d. Maintenance of a minimum level of retained earnings before dividends can be paid.
A
Which of the following is not important documentation for substantive procedures for debt? a. The client's articles of incorporation. b. A summary of the calculations supporting compliance with debt covenants. c. Copies of the debt agreements. d. Identification of the specific items tested.
A
Which of the following is not true regarding appropriate tests of controls? a. The client's audit committee selects controls that are important to the auditor's conclusion about whether the organization's controls adequately address the assessed risk of material misstatement for the relevant debt and equity accounts.as of the client's year end. b. The auditor will select both entity-wide and transaction controls for testing. c. The auditor selects controls that are important to the auditor's conclusion about whether the organization's controls adequately address the assessed risk of material misstatement for the relevant debt and equity accounts. d. If the auditor wants to rely on controls for the financial statement audit, the auditor would test the operating effectiveness of those controls throughout the year.
A
Which of the following statements is true regarding planning analytical procedures for debt and stockholders' equity transactions? a. The long-term debt to equity ratio could be considered by the auditor as part of the planning analytical procedures. b. Trend analysis would not typically be performed for debt. c. Because there are typically only a few stockholders' equity transactions, the auditor is not required to perform planning analytical procedures for stockholders' equity accounts. d. If unusual or unexpected relationships are identified by planning analytical procedures, the auditor should stick with the original expectations of misstatements, because this could be an anomaly and bias the audit overall.
A
Which of the following would an auditor typically not perform as part of gaining an understanding of the client's controls related to debt? a. Recalculate interest expense. b. Inquire of management about the process for reviewing compliance with debt covenants. c. Review policies related to approval required for new debt. d. Review the client's documentation of controls.
A
Which of the following would not typically be included as part of the balance sheet disclosures related to stockholders' equity? a. Price/earnings ratios for stock. b. Details on stock repurchases. c. Accumulated other comprehensive income d. Prior period adjustments to retained earnings.
A
Which of the following would the auditor consider as part of the control environment related to debt? a. Independence of the board of directors with respect to long-term financing. b. Recalculation of the underwriter's commission. c. Inspection of documentation to confirm refinancing of debt. d. Inquiry of trustee regarding the registration of current bondholders and distribution of interest payments.
A
Which of the following would the auditor not try to determine about a client's warranty estimate? a. Whether management based the estimate on verifiable, objective assumptions. b. Whether the factors and assumptions used by management deviate from historical patterns. c. Whether the estimate is reasonable in the circumstance. d. How management developed the estimate.
A
Why is valuation of most stock issuances usually considered to be relatively straightforward? a. Most stock is issued for cash. b. The number of transactions is small. c. There are no disclosure issues to worry about, since stock amounts are reported in the body of the balance sheet. d. The transactions are typically material.
A
How would an auditor generally measure the value of a stock option expense? a. By computing a weighted average value of all classes of stock authorized. b. All of these methods can be used. c. Appraised value. d. Fair value.
D
In those audits where there is a heightened risk of fraud related to stockholders' equity accounts, which of the following will the auditor typically not perform? a. Account for and vouch all proceeds from stock issues. b. Confirm with shareholders whether there are any side agreements. c. Confirm terms of equity arrangements and shares held directly with shareholders. d. Review equity authorizations in the board meeting minutes.
D
When a client does not maintain its own stock records, the auditor should obtain written confirmation from the stock transfer agent concerning which of the following? a. The number of shares subject to agreements to repurchase. b. Restrictions on the payment of dividends. c. Guarantees of preferred stock liquidation value. d. The number of shares issued and outstanding.
D
When auditing debt, which of the following is the primary substantive analytical procedure? a. Reading loan agreements. b. Tracing bond proceeds to cash receipts. c. Confirming transactions with outside parties. d. Developing an independent expectation of interest expense.
D
When auditing the premium or discount on bonds (including amortization), the auditor primarily focuses on which assertion? a. Completeness. b. Presentation and disclosure. c. Existence. d. Valuation.
D
Which of the following are typical planning analytical procedures related to debt? a. Estimate interest expense based on average interest rates and average debt outstanding. b. Calculate the total debt-to-equity ratio and perform a trend analysis with prior periods. c. Calculate the long-term debt-to-equity ratio and perform a trend analysis with prior periods. d. The auditor could perform all of the above planning analytical procedures related to debt.
D
Which of the following can organizations use to obtain financing? a. Notes. b. Mortgages. c. Bonds. d. All of these.
D
If the auditor wants to obtain evidence as to whether the dividend payment was made to the stockholders who owned the stock as of the dividend record date, which of the following would the auditor do? a. Examine the minutes of the board of directors' meetings for authorization. b. Trace the payee's name on the canceled check to the dividend records. c. Recalculate the dividends per share. d. Determine that dividend restrictions are adequately disclosed in the financial statements.
B
In those audits where there is a heightened risk of fraud related to debt, which of the following will the auditor not typically perform? a. Search public records to identify debt. b. Obtain photocopies of supporting documents. c. Send confirmations to lenders and creditors, including confirmation of compliance with any debt covenants. d. Vouch and trace loan proceeds and debt payments.
B
What type of risk is intentional failure by management to accurately disclose violations of debt covenants? a. Inherent risk. b. Fraud risk. c. Detection risk. d. Control risk.
B
When auditing the gains or losses on refinancing debt, the auditor primarily focuses on which assertion? a. Existence. b. Valuation. c. Completeness. d. Presentation and disclosure.
B
Which assertion is generally the most relevant when auditing the restrictions contained in debt? a. Completeness. b. Proper presentation and disclosure. c. Existence. d. Valuation.
B
Which of the following accounts would not typically be included in the audit of debt? a. Notes payable. b. Interest income. c. Bonds payable. d. Interest expense.
B
Which of the following factors would be least likely to affect the estimate of the warranty liability? a. Changes in sales volume. b. Changes in the sales staff. c. Changes in the nature of the warranty. d. Changes in the product.
B
Which of the following is a typical control for debt? a. The stockholders approve all new debt. b. The board of directors approves all new debt. c. Upper managers approve all new debt. d. The CFO approves all new debt.
B
Which of the following is not a common transaction affecting stockholders' equity? a. The exercises and expirations of stock options and warrants. b. Bond amortization. c. The purchase of treasury stock. d. The declaration and payment of dividends.
B
Which of the following is not a potential fraud related to debt? a. Entire loan payments are charged to either principal or interest. b. Dividends are paid in violation of restrictive covenants. c. Debt is not properly authorized. d. Long-term or short-term debt is misclassified.
B
Which of the following is not an inherent risk typically associated with the existence of dividends? a. Dividends are recorded in the wrong period. b. Dividends are not properly amortized. c. Dividends are recorded before declared. d. Dividends have not been approved before being declared.
B
Which of the following is not true about auditing stockholders' equity transactions? a. An approach using only tests of details is most commonly used to audit equity accounts. b. The dollar amount is usually immaterial. c. The number of equity transactions with outside parties is usually small. d. The auditor usually uses a substantive approach.
B
Which of the following is not true regarding planning analytical procedures performed by the auditor when planning the audit? a. If there are unusual or unexpected relationships, the planned audit procedures would be adjusted to address the potential material misstatements. b. Auditors show focus on just the numbers when performing analytical procedures. c. The auditor should have an expectation as to the nature and magnitude of any account balance changes. d. The primary planning analytical procedure for stockholders' equity accounts is a comparison of current year account balances with prior year account balances.
B
Which of the following is not typically included in the audit of debt? a. Interest expense. b. Interest income. c. Bonds payable. d. Notes payable.
B
Which of the following is the auditor's primary objective when auditing debt? a. Valuation of gains or losses on refinancing debt. b. Understatement of the debt obligation focusing on the completeness assertion. c. Proper valuation of bond premium or bond discount, including amortization valuation. d. Proper presentation and disclosure, including important restrictions contained in the debt.
B
Which of the following procedures would an auditor most likely perform when auditing management estimates of long-term liabilities? a. Inquire of management about related party transactions. b. Review past experience of the client related to warranty claims. c. Confirm inventories held at outside warehouses. d. Send confirmations to client vendors.
B
Which of the following statements about bonds is false? a. They may be issued to finance major expansions. b. They account for many of the organization's transactions. c. They may be issued to refinance existing debt. d. They are generally highly material to the financial statements.
B
Which of the following does an auditor consider when gaining an overall understanding of the client's internal controls? a. Transaction controls at the account level only. b. Entity-wide controls at the account level only. c. Entity-wide controls at the assertion level only. d. Both entity-wide controls and transaction controls at the account and assertion levels.
D
Which of the following is an inherent risk typically related to debt? a. Debt is not properly authorized. b. Interest expense is not properly accrued. c. Debt covenants are not properly disclosed. d. All of these are inherent risks related to debt.
D
Which of the following is not a key type of evidence that the auditor needs to examine with respect to pensions and postemployment benefits? a. The appropriateness of the actuarial firm's work. b. The reasonableness of significant interest rate assumptions. c. Whether the actuarial firm hired by management is independent, capable, and objective. d. The length of illnesses that pension recipients contract.
D
Which of the following is not a long-term liability account with a high risk of material misstatement? a. Pension obligations. b. Warranty reserves. c. Other postemployment benefits. d. Marketable securities.
D
Which of the following is not a potential fraud related to stockholders' equity accounts? a. Dividends are paid in violation of restrictive covenants. b. Stock sales or issuances are not authorized. c. Stock options are back-dated. d. Entire loan payments are charged to either principal or interest.
D
Which of the following is not a relevant account when auditing stockholders' equity? a. Retained earnings. b. Treasury stock. c. Dividends. d. Sinking fund for plant expansion.
D
Which of the following is not a substantive test of details for dividends? a. Agreement of the dividend amount with the payment in the cash disbursements journal. b. Examination of the minutes of the board of directors' meetings for the dividend record date. c. Examination of the minutes of the board of directors' meetings for authorization of the dividend per share amount. d. Calculation of the dividend payout ratio.
D
Which of the following is not an element of pensions and other postemployment benefits that is difficult to estimate? a. The future earnings of employees prior to retiring for defined benefit plans. b. Projected lifetime of former employees that will receive a pension. c. Long-term interest rates to discount future costs back to present value. d. Current amounts earned on pension plan assets.
D
Which of the following is not an inherent risk typically associated with dividends? a. Dividends have not been approved before being declared. b. Dividends are recorded before being declared. c. Dividends are recorded in the wrong period. d. Dividends are not properly amortized.
D
Which of the following is not important documentation for substantive procedures for capital stock and equity transactions? a. A summary of the changes in equity accounts. b. Confirmations with transfer agent or shareholders. c. The client's articles of incorporation. d. A memo regarding audit ideas generated during the brainstorming session regarding potential frauds applicable to the capital stock and equity transactions.
D
Which of the following is not true regarding restrictions on dividend payments? a. These restrictions typically arise when loan agreements prohibit the registrant from paying cash dividends without the consent of the lender. b. Amounts subject to restrictions must be disclosed. c. In certain cases, restrictions at a subsidiary-company level exist such that the registrant's subsidiary companies may not transfer amounts to the registrant without the consent of a third party. d. The auditor will typically confirm with shareholders whether there are any side agreements regarding dividend restrictions.
D
Which of the following is not true regarding the testing of transactions in the stockholders' equity accounts? a. The number of transactions is typically small. b. Most of these transactions are highly material. c. The transactions are typically tested on a 100% basis. d. The transactions are typically tested on a sampling basis.
D
Which of the following is the least important in helping the auditor develop an independent expectation of interest expense as a substantive analytical procedure? a. Examine disaggregated data by type of debt. b. Determine average debt outstanding. c. Determine average interest rates. d. Examine an interest revenue schedule.
D
Which of the following procedures is a typical substantive procedure related to the relevant assertion of completeness for debt? a. Recalculating accrued interest. b. Reviewing debt agreements for the restrictive covenants. c. Using analytical procedures to analyze interest expense. d. Confirming debt with relevant outside parties.
D
Which of the following statements best describes the auditor's typical approach to testing controls related to debt? a. The auditor would not test controls for either the integrated audit or financial statement audit. b. The auditor would test controls for integrated audit purposes, but not for financial statement audit purposes. c. The auditor would test controls for both the integrated audit and financial statement audit. d. The auditor would test controls for financial statement audit purposes, but not for integrated audit purposes.
B
Which of the following statements best describes the auditor's typical approach to testing controls related to stockholders' equity accounts? a. The auditor would test controls for both the integrated audit and financial statement audit. b. The auditor would test controls for integrated audit purposes, but not for financial statement audit purposes. c. The auditor would not test controls for either the integrated audit or financial statement audit. d. The auditor would test controls for financial statement audit purposes, but not for integrated audit purposes.
B
Which of the following substantive procedures should be included in the audit program for long-term debt? a. Verification of the existence of the bondholders. b. Review of debt loan agreements. c. Review of supporting documentation for credit entries to the bond interest income account. d. Inspection of the accounts payable master file.
B
Which of the following would an auditor not typically perform as part of gaining an understanding of the client's controls related to debt? a. Review the client's documentation of controls. b. Recalculate interest expense. c. Review policies related to approval required for new debt. d. Inquire of management about the process for reviewing compliance with debt covenants.
B
Which of the following statements is true regarding the appropriate audit procedures to perform for debt and stockholder's equity accounts? a. None of these statements is true. b. When auditing stockholders' equity transactions, the auditor commonly uses a control procedure approach, but uses only substantive procedures to test debt obligation transactions. c. Testing debt, including interest, is typically accomplished using only control procedures. d. The auditor will usually decide to test debt, including interest, using only substantive procedures.
D
Which of the following statements is true regarding the identification and assessment of the risks of material misstatements by the auditor? a. Auditing standards require the auditor to identify and assess the risks of material misstatement due to fraud at the assertion level. b. As part of brainstorming activities, the auditor should identify possible frauds that could occur. c. Auditing standards require the auditor to identify and assess the risks of material misstatement due to fraud at the financial statement level. d. All of these statements are true.
D
Which of the following would a bond indenture not provide information about? a. Whether the bond is convertible. b. The time period before repayment. c. Whether the bond is callable. d. The date the bond will be called.
D
An auditor determines that there is an inherent risk that all stock repurchased is not recorded as treasury stock. This determination is most likely tied to which of the following management assertions? a. Presentation and disclosure. b. Existence. c. Completeness. d. Valuation.
C
An auditor determines that there is an inherent risk that stock options exercised or expired remain on the organization's books. This determination is most likely tied to which of the following management assertions? a. Valuation. b. Presentation and disclosure. c. Rights and obligations. d. Existence.
C
As a starting point for testing capital stock and equity transactions, which of the following should the auditor perform? a. Trace the proceeds of stock sold to the cash receipts journal. b. Examine documentation maintained by the transfer agent. c. Review a copy of the client's articles of incorporation. d. Review the minutes of the board of directors' meetings.
C
For integrated audits, when does the auditor test the operating effectiveness of important controls? a. None of these answers is correct. b. As of the end of the second quarter of the client's fiscal year. c. As of the client's year end. d. As of the beginning of the client's fiscal year.
C
In auditing equity accounts, the auditor primarily focuses on which of the following two assertions? a. Valuation and completeness. b. Valuation and existence. c. Presentation and disclosure and valuation. d. Presentation and disclosure and completeness.
C
The inherent risk of proceeds from stock sales not being received is most likely related to which of the following management assertions? a. Presentation and disclosure. b. Completeness. c. Existence. d. Valuation.
C
Which of the following is a control the auditor would expect a client to have implemented related to equity? a. CFO and CEO authorization of all stock transactions approved by the board of directors. b. Reconciliation of equity accounts to the general ledger. c. The auditor would typically expect all of the above controls to be in place. d. A policy requiring approval by the board of directors for all stock transactions.
C
Which of the following is not a typical test of controls when auditing debt and equity transactions? a. Observation of the control being performed. b. Inquiry of personnel performing the control. c. Comparing current year account balances with prior year account balances. d. Reperformance of the control by the auditor testing the control.
C
Which of the following is not an example of typical analytical procedures related to debt? a. Perform a trend analysis of the balances in notes payable, interest expense, and accrued interest with prior periods, considering known client activities related to debt. b. Calculate the times interest earned ratio and perform a trend analysis with prior periods. c. Calculate the current ratio and perform a trend analysis with prior periods. d. Calculate the total debt-to-equity ratio and perform a trend analysis with prior periods.
C
Which of the following is not an inherent risk typically associated with debt covenant compliance issues? a. Whether compliance with debt covenants is appropriately disclosed. b. Whether compliance with debt covenants is appropriately reviewed. c. Whether debt payment transactions are properly initiated. d. Whether debt covenants are calculated accurately.
C
Which of the following is not an inherent risk typically associated with recording debt transactions? a. Failure to accrue interest expense. b. Interest expense not being properly recorded. c. Debt not being properly authorized. d. Debt not being properly classified.
C
Which of the following most accurately describes the nature of fraud related to debt described in the case of Federico Quinto Jr., CPA, presented in the Focus on Fraud feature? a. Interest expense was recorded in the wrong period. b. Long-term debt was misclassified as short-term debt. c. Debt covenants and potential violations were not appropriately presented and disclosed. d. Entire loan payments were charged to principal.
C
Which of the following most accurately describes the nature of fraud related to equity described in the case of Delphi Corporation presented in the Focus on Fraud feature? a. Proceeds from stock sales were misappropriated. b. Stock options were backdated. c. Expenses were charged directly to retained earnings, rather than to the appropriate expense accounts. d. Stock sales were not authorized.
C
Which of the following procedures is a typical substantive procedure related to the relevant assertion of valuation and allocation for debt? a. Determine the related parties resulting from debt transactions. b. Reviewing debt agreements for the restrictive covenants. c. Recalculating accrued interest. d. Confirming debt with relevant outside parties.
C
Which of the following procedures would be included in the auditor's audit program for long-term debt? a. Verification of the existence of the bondholders. b. Inspection of the accounts payable master file. c. Review debt loan agreements. d. Investigation of credits to the bond interest income account.
C
Which of the following results in a situation where an auditor has the least amount of difficulty in determining stock valuation? a. When stock is exchanged for another business. b. When stock options are issued and exercises occur. c. When stock is issued for cash. d. When stock is issued for land.
C
Which of the following statements is true regarding planning analytical procedures for debt and equity? a. Because there are typically only a few stockholders' equity transactions, the auditor is not required to perform planning analytical procedures for stockholders' equity accounts. b. The auditor would not typically perform trend analysis for debt. c. The auditor could consider the long-term debt-to-equity ratio as part of the planning analytical procedures. d. All of these are true.
C
Which of the following statements is typically not true regarding controls related to proper accounting for stock option grants? a. The analysis of the accountant regarding stock option grants is reviewed by the organization's legal counsel. b. The analysis of the accountant regarding stock option grants is reviewed by the CFO. c. The analysis of the accountant regarding stock option grants is reviewed by the board of directors. d. The proper accounting for stock option grants is researched by the organization's accountant.
C
Which of the following will an auditor not perform when looking for additions to debt? a. Obtain assurance regarding board approval of the debt through review of board meeting minutes. b. Trace the proceeds into the cash receipts records. c. Examine canceled notes. d. Trace the proceeds into the bank statement.
C
Which of the following will an auditor not perform when looking for debt reductions? a. Examine canceled notes. b. Examine payments through the cash disbursements records. c. Examine proceeds into the cash receipts records. d. Examine canceled checks.
C
An audit of the other postemployment benefits does not require estimates with respect to which of the following? a. Changes in coverage. b. Changes in human resources personnel in charge of postemployment benefits. c. Changes in average life expectancies. d. Changes in medical expenses.
B
An auditor determines that there is an inherent risk that a company has not included both the basic earnings per share and diluted earnings per share amounts in financial statements even though significant dilutive securities are part of the company's complex capital structure. This determination is most likely tied to which of the following management assertions? a. Rights and obligations. b. Presentation and disclosure. c. Valuation. d. Existence.
B
For those clients with treasury stock, which of the following would the auditor be least likely to perform? a. Obtaining confirmations from the stock transfer agent. b. Reviewing a copy of the client's articles of incorporation. c. Tracing transactions through the cash receipts journal. d. Tracing transactions through the cash disbursements journal.
B
How are most bonds marketed? a. Through auditors. b. Through an underwriter. c. Through the board of directors. d. Through employees.
B
How does an auditor typically respond to identified risks of material misstatement associated with debt? a. The auditor does not need to respond to identified fraud risks since the risk of fraud related to debt is typically minimal. b. The auditor will typically plan an approach that uses only substantive procedures. c. Because of the low level of risk of material misstatement, the auditor would only rely on planning analytical procedures. d. The auditor will typically plan to perform a controls reliance approach to the audit.
B
If the auditor determines that the client's current ratio is below a particular covenant level, which of the following would the auditor not do? a. Consider that the debt will be due and payable, if the violation is not waived. b. Issue an adverse audit opinion. c. Assume that the debt will need to be reclassified, if the violation is not waived. d. Assess the effects of the violation.
B
