Question 1

Which of the following would the auditor consider as part of the control environment related to debt obligations?

Accepted Answer

A)  Inquiry of trustee regarding the registration of current bondholders and distribution of interest payments. 
B)  Recalculation of the underwriter's commission. 
C)  Independence of the board of directors with respect to long-term financing. 
D)  Inspection of documentation to confirm refinancing of debt. 
A)  Inquiry of trustee regarding the registration of current bondholders and distribution of interest payments. 
B)  Recalculation of the underwriter's commission. 
C)  Independence of the board of directors with respect to long-term financing. 
D)  Inspection of documentation to confirm refinancing of debt.

Question 2

For additions to debt, the auditor traces the proceeds into the cash receipts records and the bank statement.

Accepted Answer

A) True 
 B)False

Question 3

For both debt accounts and stockholders' equity accounts, the boxes of evidence would typically be filled only with evidence obtained through substantive procedures.

Accepted Answer

A) True 
 B)False

Question 4

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?

Accepted Answer

A)  Recalculate the dividends per share. 
B)  Examine the minutes of the board of directors meetings for authorization. 
C)  Trace the payee's name on the canceled check to the dividend records. 
D)  Determine that dividend restrictions are adequately disclosed in the financial statements. 
A)  Recalculate the dividends per share. 
B)  Examine the minutes of the board of directors meetings for authorization. 
C)  Trace the payee's name on the canceled check to the dividend records. 
D)  Determine that dividend restrictions are adequately disclosed in the financial statements.

Question 5

If an auditor discovers that a company intentionally applied loan payments to interest rather than principal, this would result in fraudulent overstatement of income.

Accepted Answer

A) True 
 B)False

Question 6

Trend analyses are typically used as preliminary analytical procedures related to debt obligations.

Accepted Answer

A) True 
 B)False

Question 7

For integrated audits, a typical test of controls may include an inquiry of personnel performing the control.

Accepted Answer

A) True 
 B)False

Question 8

The Thomas Corporation took out a 20-year mortgage on a new headquarters building on June 30, 2014 for $3,000,000 and pledged its only manufacturing facility and the land on which it stands as collateral. The monthly payment to the mortgagor is $25,000 and was first paid on July 1, 2014. Your firm has audited this client before, but the client has never had a mortgage in previous years. You are in charge of the current year audit for Thomas, which has a balance sheet date of December 31, 2014.
REQUIRED:1. Explain why it is desirable to prepare a schedule for the permanent file regarding the mortgage. What type of information should this include.
2. Explain why the audit of mortgage payable, interest expense, and interest payable should all be performed together.
3. List audit procedures that are typically performed to verify the issue of the mortgage, the mortgage and the interest payable account balances at December 31, 2014, and the balance in interest expense for 2014.
4. What type of information should be disclosed in the footnotes for this mortgage to help the auditor determine whether the completeness and presentation/disclosure assertions are satisfied?

Accepted Answer

1. It is a good idea to prepare an audit

Question 9

Which of the following procedures would be included in the auditor's audit program for long-term debt?

Accepted Answer

A)  Investigation of credits to the bond interest income account. 
B)  Inspection of the accounts payable master file. 
C)  Verification of the existence of the bondholders. 
D)  Review debt loan agreements. 
A)  Investigation of credits to the bond interest income account. 
B)  Inspection of the accounts payable master file. 
C)  Verification of the existence of the bondholders. 
D)  Review debt loan agreements.

Question 10

Which of the following is a typical control for debt obligations?

Accepted Answer

A)  The board of directors approves all new debt. 
B)  The stockholders approve all new debt. 
C)  The CFO approves all new debt. 
D)  Upper managers approve all new debt. 
A)  The board of directors approves all new debt. 
B)  The stockholders approve all new debt. 
C)  The CFO approves all new debt. 
D)  Upper managers approve all new debt.

Question 11

When planning the audit related to stockholders' equity transactions, the auditor is not required to perform preliminary analytical procedures.

Accepted Answer

A) True 
 B)False

Question 12

A potential fraud risk associated with debt obligations is the intentional misclassification of short-term debt as long-term debt.

Accepted Answer

A) True 
 B)False

Question 13

Inherent risks related to debt obligations primarily concern the authorization of debt, receipt of funds, recording debt transactions, and compliance with any debt covenants.

Accepted Answer

A) True 
 B)False

Question 14

Which of the following statements about bonds is false?

Accepted Answer

A)  They may be issued to finance major expansions. 
B)  They may be issued to refinance existing debt. 
C)  They account for many of the organization's transactions. 
D)  They are generally highly material to the financial statements. 
A)  They may be issued to finance major expansions. 
B)  They may be issued to refinance existing debt. 
C)  They account for many of the organization's transactions. 
D)  They are generally highly material to the financial statements.

Question 15

When planning the audit related to debt obligations, the auditor should not have expectations as to the nature and magnitude of any account balance changes because they might bias the outcome of the audit.

Accepted Answer

A) True 
 B)False

Question 16

Presentation and disclosure is the most relevant audit assertion associated with the inherent risk of using inaccurate periods of service for stock options.

Accepted Answer

A) True 
 B)False

Question 17

When obtaining evidence about internal control operating effectiveness, the auditor will select only entity-wide controls for testing.

Accepted Answer

A) True 
 B)False

Question 18

Which of the following is the least important in helping the auditor develop an independent expectation of interest expense as a substantive analytical procedure?

Accepted Answer

A)  Determine average interest rates. 
B)  Determine average debt outstanding. 
C)  Examine disaggregated data by type of debt. 
D)  Examine an interest revenue schedule. 
A)  Determine average interest rates. 
B)  Determine average debt outstanding. 
C)  Examine disaggregated data by type of debt. 
D)  Examine an interest revenue schedule.

Question 19

Which of the following procedures is a typical substantive procedure related to the relevant assertion of completeness for debt obligations?

Accepted Answer

A)  Recalculating accrued interest. 
B)  Reviewing debt agreements for the restrictive covenants. 
C)  Using analytical procedures to analyze interest expense. 
D)  Confirming debt obligations with relevant outside parties. 
A)  Recalculating accrued interest. 
B)  Reviewing debt agreements for the restrictive covenants. 
C)  Using analytical procedures to analyze interest expense. 
D)  Confirming debt obligations with relevant outside parties.

Question 20

For integrated audits, when does the auditor test the operating effectiveness of important controls?

Accepted Answer

A)  As of the beginning of the client's fiscal year. 
B)  As of the client's year end. 
C)  As of the end of the second quarter of the client's fiscal year. 
D)  None of these answers is correct. 
A)  As of the beginning of the client's fiscal year. 
B)  As of the client's year end. 
C)  As of the end of the second quarter of the client's fiscal year. 
D)  None of these answers is correct.

Which of the following would the auditor consider as part of the control environment related to debt obligations?

For additions to debt, the auditor traces the proceeds into the cash receipts records and the bank statement.

For both debt accounts and stockholders' equity accounts, the boxes of evidence would typically be filled only with evidence obtained through substantive procedures.

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?

If an auditor discovers that a company intentionally applied loan payments to interest rather than principal, this would result in fraudulent overstatement of income.

Trend analyses are typically used as preliminary analytical procedures related to debt obligations.

For integrated audits, a typical test of controls may include an inquiry of personnel performing the control.

Which of the following procedures would be included in the auditor's audit program for long-term debt?

Which of the following is a typical control for debt obligations?

When planning the audit related to stockholders' equity transactions, the auditor is not required to perform preliminary analytical procedures.

A potential fraud risk associated with debt obligations is the intentional misclassification of short-term debt as long-term debt.

Inherent risks related to debt obligations primarily concern the authorization of debt, receipt of funds, recording debt transactions, and compliance with any debt covenants.

Which of the following statements about bonds is false?

When planning the audit related to debt obligations, the auditor should not have expectations as to the nature and magnitude of any account balance changes because they might bias the outcome of the audit.

Presentation and disclosure is the most relevant audit assertion associated with the inherent risk of using inaccurate periods of service for stock options.

When obtaining evidence about internal control operating effectiveness, the auditor will select only entity-wide controls for testing.

Which of the following is the least important in helping the auditor develop an independent expectation of interest expense as a substantive analytical procedure?

Which of the following procedures is a typical substantive procedure related to the relevant assertion of completeness for debt obligations?

For integrated audits, when does the auditor test the operating effectiveness of important controls?

Auditing: Integral to the Economy

The Auditors Responsibilities Regarding Fraud and Mechanisms to Address Fraud: Regulation and Corporate Governance

Internal Control Over Financial Reporting: Responsibilities of Management and the External Auditors

Professional Liability, Auditor Judgment Frameworks, and Professional Responsibilities

Professional Auditing Standards and the Audit Opinion Formulation Process

A Framework for Audit Evidence

Planning the Audit: Identifying and Responding to the Risks of Material Misstatement

Specialized Audit Tools: Sampling and Generalized Audit Software

Auditing the Revenue Cycle

Auditing Cash and Marketable Securities

Auditing Inventory, Goods and Services, and Accounts Payable: the Acquisition and Payment Cycle

Auditing Long-Lived Assets: Acquisition, Use, Impairment, and Disposal

Activities Required in Completing a Quality Audit

Audit Reports on Financial Statements

Advanced Topics Concerning Complex Auditing Judgments

Other Services Provided by Audit Firms

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Exam 13: Auditing Debt Obligations and Stockholders Equity Transactions

Which of the following would the auditor consider as part of the control environment related to debt obligations?

For additions to debt, the auditor traces the proceeds into the cash receipts records and the bank statement.

For both debt accounts and stockholders' equity accounts, the boxes of evidence would typically be filled only with evidence obtained through substantive procedures.

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?

If an auditor discovers that a company intentionally applied loan payments to interest rather than principal, this would result in fraudulent overstatement of income.

Trend analyses are typically used as preliminary analytical procedures related to debt obligations.

For integrated audits, a typical test of controls may include an inquiry of personnel performing the control.

Which of the following procedures would be included in the auditor's audit program for long-term debt?

Which of the following is a typical control for debt obligations?

When planning the audit related to stockholders' equity transactions, the auditor is not required to perform preliminary analytical procedures.

A potential fraud risk associated with debt obligations is the intentional misclassification of short-term debt as long-term debt.

Inherent risks related to debt obligations primarily concern the authorization of debt, receipt of funds, recording debt transactions, and compliance with any debt covenants.

Which of the following statements about bonds is false?

When planning the audit related to debt obligations, the auditor should not have expectations as to the nature and magnitude of any account balance changes because they might bias the outcome of the audit.

Presentation and disclosure is the most relevant audit assertion associated with the inherent risk of using inaccurate periods of service for stock options.

When obtaining evidence about internal control operating effectiveness, the auditor will select only entity-wide controls for testing.

Which of the following is the least important in helping the auditor develop an independent expectation of interest expense as a substantive analytical procedure?

Which of the following procedures is a typical substantive procedure related to the relevant assertion of completeness for debt obligations?

For integrated audits, when does the auditor test the operating effectiveness of important controls?

Auditing: Integral to the Economy

The Auditors Responsibilities Regarding Fraud and Mechanisms to Address Fraud: Regulation and Corporate Governance

Internal Control Over Financial Reporting: Responsibilities of Management and the External Auditors

Professional Liability, Auditor Judgment Frameworks, and Professional Responsibilities

Professional Auditing Standards and the Audit Opinion Formulation Process

A Framework for Audit Evidence

Planning the Audit: Identifying and Responding to the Risks of Material Misstatement

Specialized Audit Tools: Sampling and Generalized Audit Software

Auditing the Revenue Cycle

Auditing Cash and Marketable Securities

Auditing Inventory, Goods and Services, and Accounts Payable: the Acquisition and Payment Cycle

Auditing Long-Lived Assets: Acquisition, Use, Impairment, and Disposal

Activities Required in Completing a Quality Audit

Audit Reports on Financial Statements

Advanced Topics Concerning Complex Auditing Judgments

Other Services Provided by Audit Firms

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