Auditing Chapter 10 Questions

In performing a count of negotiable securities, an auditor records the details of the count on a security count worksheet. What other information is usually included on this worksheet?

An acknowledgment by a client representative that the securities were returned intact.

An auditor's analytical procedures indicate a lower than expected return on an equity method investment. This situation most likely could have been caused by

An error in recording amortization of the excess of the investor's cost over the investment's underlying book value.

An audit plan for the examination of the retained earnings account should include a step that requires verification of the...

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

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.

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.

A related party is a person or entity that...

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

During an audit of an entity's stockholders' equity accounts, the auditor determines whether there are restrictions on retained earnings resulting from loans, agreements, or state law. This audit procedure most likely is intended to verify management's assertions related to

Classification and understandability

In auditing long-term bonds payable, an auditor most likely would:

Compare interest expense with the bond payable amount for reasonableness.

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

Compare interest expense with the bond payable amount for reasonableness. (The recorded interest expense should reconcile with the outstanding bonds payable. If interest expense appears excessive relative to the recorded bonds payable, unrecorded long-term liabilities may exist.)

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, what 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.

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

Completeness of recorded investment income.

Which audit procedure would not likely be performed for audits of investments?

Confirm investments with registrar.

In establishing the existence and ownership of a long-term investment in the form of publicly-traded stock, an auditor should inspect the securities or:

Confirm the number of shares owned that are held by an independent custodian.

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.

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.

When a client engages in transactions involving derivatives, the auditor should:

Develop an understanding of the economic substance of each derivative.

An auditor is testing the reasonableness of dividend income from investments in publicly-held companies. The auditor most likely would compute the amount that should have been received and recorded by the client by:

Electronically accessing the details of dividend records on the Internet.

An auditor's inquiries of management disclosed that the entity recently invested in a series of energy derivatives to hedge against the risks associated with fluctuating oil prices. Under these circumstances, the auditor should

Examine the contracts for possible risk exposure and the need to recognize losses.

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

Minutes of the meetings of the board of directors.

When a company's stock record books are maintained by an outside registrar or transfer agent, the auditor should obtain confirmation from the registrar or transfer agent concerning the:

Number of shares issued and outstanding.

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.

An auditor usually determines whether dividend income from publicly-held investments is reasonable by computing the amounts that should have been received by referring to

Records produced by investment services.

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.

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 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.

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.

ABC stock 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. What would be the auditor's main concern about this discover?

There had been unauthorized buying and selling of investment securities.

Loan covenants are used for what reason?

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

In performing tests concerning the granting of stock options, an auditor should:

Trace the authorization for the transaction to a vote of the board of directors.

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.

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.

An auditor scans a client's investment records for the period just before and just after the year-end to determine that any transfers between categories of investments have been properly recorded. The primary purpose of this procedure is to obtain evidence about management's financial statement assertions of:

Understandability and classification, and valuation and accuracy.

Which of the following sets of information does an auditor usually confirm on one form? a. Accounts receivable and accrued interest receivable. b. Cash in bank and collateral for loans. c. Inventory on consignment and contingent liabilities. d. Accounts payable and purchase commitments.

b. Cash in bank and collateral for loans.

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.

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

c. Compare valuation of stock to published market prices

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

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

Which of the following controls would a company most likely use to safeguard marketable securities when an independent trust agent is not employed? a. The internal auditor and the controller independently trace all purchases and sales of marketable securities from the subsidiary ledgers to the general ledger. b. The chairman of the board verifies the marketable securities, which are kept in a bank safe-deposit box, each year on the balance sheet date. c. Two company officials have joint control of marketable securities, which are kept in a bank safe-deposit box. d. The investment committee of the board of directors periodically reviews the investment decisions delegated to the treasurer.

c. Two company officials have joint control of marketable securities, which are kept in a bank safe-deposit box

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 assertion about...

classification

Which of the following questions would auditors most likely include on an internal control questionnaire for notes payable? a. Are assets that collateralize notes payable critically needed for the entity's continuing existence? b. Are two or more authorized signatures required on checks that repay notes payable? c. Are the proceeds from notes payable used to purchase noncurrent assets? d. Are direct borrowings on notes payable authorized by the board of directors?

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

Which of the following is the most important audit consideration 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 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 resolutions in the minutes of meetings of the board of directors.

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