Exam 13: Auditing Debt Obligations and Stockholders Equity Transactions

Barley Company is a medium-sized industrial firm that has been audited by your firm for several years. The only interest-bearing debt owed by Barley is a $300,000 long-term notes payable held by First National Bank. The notes were issued 4 years earlier and will mature in 8 more years. Barley is highly profitable, has no pressing needs for additional financing and has excellent internal controls of the recording of loan and related interest cost transactions. REQUIRED: 1. Based on this scenario, describe the auditing procedures that you think will be necessary for notes payable and related interest accounts. 2. How will you answer differ if instead Barley Company was unprofitable, needed additional financing and had ineffective internal controls?

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Question 1

Correct Answer:

Verified

1. Auditing necessary for Barley's notes payable and related interest accounts in this scenario would be minimal. Aside from checking interest calculations and postings to the proper accounts as a matter of audit routine, the only major audit procedure would be to confirm the amount and provisions of the note with First National Bank.
2. If Barley was unprofitable, needed additional financing, and had ineffective internal controls, the story would be much different. It would be necessary to search for unrecorded notes by obtaining standard bank confirmations with specific reference to the existence of notes payable, reviewing the bank statements and reconciliations for new notes credited directly to the bank account by the bank, and analyzing interest expense to uncover a payment to a creditor who is not included on the notes payable schedule.

Valuation is the most relevant assertion associated with an inherent risk for the cost of treasury stock that is subsequently retired and not properly allocated among the appropriate accounts.

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(True/False)

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Question 2

Correct Answer:

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True

If the auditor identifies control deficiencies, the auditor will not need to judge the severity of the deficiencies but instead would consult management about the need for a fraud audit.

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(True/False)

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Question 3

Correct Answer:

Verified

False

A substantive approach using only tests of controls is most commonly used to audit equity accounts.

(True/False)

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Question 4

Once the auditor has obtained an understanding of the inherent and fraud risks of material misstatement associated with debt obligations and stockholders' equity transactions, the auditor needs to understand the controls that the client has designed and implemented to address those risks.

(True/False)

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Question 5

In general, which of the following would an auditor not typically perform as part of gaining an understanding of the client's controls?

(Multiple Choice)

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Question 6

If tests of controls result in identified control deficiencies, how will the auditor assess those deficiencies?

(Multiple Choice)

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Question 7

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?

(Multiple Choice)

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Question 8

Typically, the most relevant assertion related to debt obligations is existence.

(True/False)

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Question 9

Which of the following is not a typical test of controls when auditing debt and equity transactions?

(Multiple Choice)

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Question 10

Which of the following statements is typically not true regarding controls related to proper accounting for stock option grants?

(Multiple Choice)

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Question 11

Which of the following is the auditor's primary objective when auditing debt obligations?

(Multiple Choice)

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Question 12

Typically, when determining the appropriate audit procedures to perform for debt accounts, the auditor will usually decide to test debt obligations, including interest, using only substantive procedures.

(True/False)

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Question 13

Which of the following does an auditor consider when gaining an overall understanding of the client's internal controls?

(Multiple Choice)

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Question 14

The transactions in the stockholders' equity accounts are typically tested using a statistical sampling approach.

(True/False)

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Question 15

An organization typically has many debt transactions during the year, with each individual transaction being material.

(True/False)

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Question 16

Existence is the most relevant assertion associated with an inherent risk for treasury stock transactions recorded in the wrong period.

(True/False)

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Question 17

When auditing the premium or discount on bonds (including amortization), the auditor primarily focuses on which assertion?

(Multiple Choice)

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Question 18

Why are audits of most stock issuance usually considered to be relatively straightforward?

(Multiple Choice)

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Question 19

Which of the following results in a situation where an auditor has the least amount of difficulty in determining stock valuation?

(Multiple Choice)

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Question 20

Showing 1 - 20 of 120

Valuation is the most relevant assertion associated with an inherent risk for the cost of treasury stock that is subsequently retired and not properly allocated among the appropriate accounts.

If the auditor identifies control deficiencies, the auditor will not need to judge the severity of the deficiencies but instead would consult management about the need for a fraud audit.

A substantive approach using only tests of controls is most commonly used to audit equity accounts.

Once the auditor has obtained an understanding of the inherent and fraud risks of material misstatement associated with debt obligations and stockholders' equity transactions, the auditor needs to understand the controls that the client has designed and implemented to address those risks.

In general, which of the following would an auditor not typically perform as part of gaining an understanding of the client's controls?

If tests of controls result in identified control deficiencies, how will the auditor assess those deficiencies?

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?

Typically, the most relevant assertion related to debt obligations is existence.

Which of the following is not a typical test of controls when auditing debt and equity transactions?

Which of the following statements is typically not true regarding controls related to proper accounting for stock option grants?

Which of the following is the auditor's primary objective when auditing debt obligations?

Typically, when determining the appropriate audit procedures to perform for debt accounts, the auditor will usually decide to test debt obligations, including interest, using only substantive procedures.

Which of the following does an auditor consider when gaining an overall understanding of the client's internal controls?

The transactions in the stockholders' equity accounts are typically tested using a statistical sampling approach.

An organization typically has many debt transactions during the year, with each individual transaction being material.

Existence is the most relevant assertion associated with an inherent risk for treasury stock transactions recorded in the wrong period.

When auditing the premium or discount on bonds (including amortization), the auditor primarily focuses on which assertion?

Why are audits of most stock issuance usually considered to be relatively straightforward?

Which of the following results in a situation where an auditor has the least amount of difficulty in determining stock valuation?

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