Question 1

Which assertion is generally the most relevant when auditing the restrictions contained in debt obligations?

Accepted Answer

A)  Completeness. 
B)  Valuation. 
C)  Proper presentation and disclosure. 
D)  Existence. 
A)  Completeness. 
B)  Valuation. 
C)  Proper presentation and disclosure. 
D)  Existence.

Question 2

To determine whether notes have been paid in full, the auditor would obtain the most appropriate evidence by examining the board of directors meeting minutes.

Accepted Answer

A) True 
 B)False

Question 3

As a starting point for testing capital stock and equity transactions, which of the following should the auditor perform?

Accepted Answer

A)  Trace the proceeds of stock sold to the cash receipts journal. 
B)  Review the minutes of the board of directors meetings. 
C)  Examine documentation maintained by the transfer agent. 
D)  Review a copy of the client's articles of incorporation. 
A)  Trace the proceeds of stock sold to the cash receipts journal. 
B)  Review the minutes of the board of directors meetings. 
C)  Examine documentation maintained by the transfer agent. 
D)  Review a copy of the client's articles of incorporation.

Question 4

Which of the following is not true regarding appropriate tests of controls?

Accepted Answer

A)  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. 
B)  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. 
C)  The auditor will select both entity-wide and transaction controls for testing. 
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)  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. 
B)  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. 
C)  The auditor will select both entity-wide and transaction controls for testing. 
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.

Question 5

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?

Accepted Answer

A)  Completeness. 
B)  Presentation and disclosure. 
C)  Valuation. 
D)  Existence. 
A)  Completeness. 
B)  Presentation and disclosure. 
C)  Valuation. 
D)  Existence.

Question 6

Completeness is the most relevant assertion associated with an inherent risk for dividends that are recorded and paid before being declared.

Accepted Answer

A) True 
 B)False

Question 7

The potential dilutive effect of convertible debt or preferred stock, stock options, and warrants should be disclosed in accordance with relevant accounting guidance in computing primary and fully diluted earnings per share.

Accepted Answer

A) True 
 B)False

Question 8

When documenting controls, the auditor can provide this documentation in various formats including a control matrix, a control risk assessment questionnaire, and/or a memo.

Accepted Answer

A) True 
 B)False

Question 9

You are engaged in the audit of Bordon Corporation, whose records have not previously been audited by your firm. The company has an independent transfer agent, as well as a registrar for its capital stock. The transfer agent maintains the record of stockholders, while the registrar checks that there is no overissue of stock. Both the transfer agent and registrar are required to validate stock certificates.
One of the seniors on the audit proposes that confirmations be obtained from both the transfer agent and registrar regarding the outstanding stock balance at the balance sheet date. If the confirmations agree with the books, then he proposes that no additional work is to be performed on the capital stock account.
REQUIRED:
Do you agree or disagree that this will be sufficient? If yes, give the justification for your position. If no, state specifically all additional steps you would take and why you would take them.

Accepted Answer

The senior's proposal of limiting work t

Question 10

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?

Accepted Answer

A)  Assess the effects of the violation. 
B)  Assume that the debt will need to be reclassified, if the violation is not waived. 
C)  Consider that the debt will be due and payable, if the violation is not waived. 
D)  Issue an adverse audit opinion. 
A)  Assess the effects of the violation. 
B)  Assume that the debt will need to be reclassified, if the violation is not waived. 
C)  Consider that the debt will be due and payable, if the violation is not waived. 
D)  Issue an adverse audit opinion.

Question 11

Which of the following is not true regarding restrictions on dividend payments?

Accepted Answer

A)  These restrictions typically arise when loan agreements prohibit the registrant from paying cash dividends without the consent of the lender. 
B)  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. 
C)  Amounts subject to restrictions must be disclosed. 
D)  The auditor will typically confirm with shareholders whether there are any side agreements regarding dividend restrictions. 
A)  These restrictions typically arise when loan agreements prohibit the registrant from paying cash dividends without the consent of the lender. 
B)  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. 
C)  Amounts subject to restrictions must be disclosed. 
D)  The auditor will typically confirm with shareholders whether there are any side agreements regarding dividend restrictions.

Question 12

Which of the following is not an inherent risk typically associated with the existence of dividends?

Accepted Answer

A)  Dividends are recorded in the wrong period. 
B)  Dividends are recorded before declared. 
C)  Dividends are not properly amortized. 
D)  Dividends have not been approved before being declared. 
A)  Dividends are recorded in the wrong period. 
B)  Dividends are recorded before declared. 
C)  Dividends are not properly amortized. 
D)  Dividends have not been approved before being declared.

Question 13

Which of the following would a bond indenture not provide information about?

Accepted Answer

A)  The time period before repayment. 
B)  Whether the bond is convertible. 
C)  Whether the bond is callable. 
D)  The date the bond will be called. 
A)  The time period before repayment. 
B)  Whether the bond is convertible. 
C)  Whether the bond is callable. 
D)  The date the bond will be called.

Question 14

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

Accepted Answer

A)  Determine the related parties resulting from debt transactions. 
B)  Reviewing debt agreements for the restrictive covenants. 
C)  Recalculating accrued interest. 
D)  Confirming debt obligations with relevant outside parties. 
A)  Determine the related parties resulting from debt transactions. 
B)  Reviewing debt agreements for the restrictive covenants. 
C)  Recalculating accrued interest. 
D)  Confirming debt obligations with relevant outside parties.

Question 15

In those audits where there is a heightened risk of fraud related to debt obligations, which of the following will the auditor not typically perform?

Accepted Answer

A)  Search public records to identify debt obligations. 
B)  Vouch and trace loan proceeds and debt payments. 
C)  Send confirmations to lenders and creditors, including confirmation of compliance with any debt covenants. 
D)  Obtain photocopies of supporting documents. 
A)  Search public records to identify debt obligations. 
B)  Vouch and trace loan proceeds and debt payments. 
C)  Send confirmations to lenders and creditors, including confirmation of compliance with any debt covenants. 
D)  Obtain photocopies of supporting documents.

Question 16

Confirmations are not substantive procedure designed to obtain evidence on the completeness of debt obligations.

Accepted Answer

A) True 
 B)False

Question 17

A typical control for stockholders' equity transactions is for the board of directors to approve all stock transactions (including options and warrants).

Accepted Answer

A) True 
 B)False

Question 18

Relevant accounts when auditing stockholders' equity include leasehold improvements.

Accepted Answer

A) True 
 B)False

Question 19

The following covenants are extracted from the indenture for McMorris Industries' 20 year-bond. The indenture provides that failure to comply with its terms in any respect automatically advances the due date of the loan to the date of noncompliance.
REQUIRED: Assume that each of these is an independent scenario and identify the audit steps that should be taken or reporting requirements necessary in connection with (a) through (d).
a. The debtor company shall endeavor to maintain a working capital ratio of 2.5 to 1 at all times, and, in any fiscal year following a failure to maintain this ratio, the company shall restrict compensation of the CEO and executive officers to a total of no more than $1,000,000. Executive officers for this purpose shall include the chairman of the board of directors, the president, all vice presidents, the secretary, and the treasurer.
b. The debtor company shall insure all property that is security for this debt against loss by hurricane to the extent of 90% of its actual value. Insurance policies securing this protection shall be filed with the trustee.
c. The debtor company shall pay all taxes legally assessed against the property that serves as security for this debt within the time provided by law for payment without penalty and shall deposit receipted tax bills or equally acceptable evidence of payment of same with the trustee.
d. A sinking fund shall be established and deposited with the trustee by semiannual payments of $450,000, from which the trustee shall, at his/her discretion, purchase bonds of this issue.

Accepted Answer

any failure, or likely failure, of McMor

Question 20

How are most bonds marketed?

Accepted Answer

A)  Through the board of directors. 
B)  Through an underwriter. 
C)  Through auditors. 
D)  Through employees. 
A)  Through the board of directors. 
B)  Through an underwriter. 
C)  Through auditors. 
D)  Through employees.

Which assertion is generally the most relevant when auditing the restrictions contained in debt obligations?

To determine whether notes have been paid in full, the auditor would obtain the most appropriate evidence by examining the board of directors meeting minutes.

As a starting point for testing capital stock and equity transactions, which of the following should the auditor perform?

Which of the following is not true regarding appropriate tests of controls?

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?

Completeness is the most relevant assertion associated with an inherent risk for dividends that are recorded and paid before being declared.

The potential dilutive effect of convertible debt or preferred stock, stock options, and warrants should be disclosed in accordance with relevant accounting guidance in computing primary and fully diluted earnings per share.

When documenting controls, the auditor can provide this documentation in various formats including a control matrix, a control risk assessment questionnaire, and/or a memo.

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?

Which of the following is not true regarding restrictions on dividend payments?

Which of the following is not an inherent risk typically associated with the existence of dividends?

Which of the following would a bond indenture not provide information about?

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

In those audits where there is a heightened risk of fraud related to debt obligations, which of the following will the auditor not typically perform?

Confirmations are not substantive procedure designed to obtain evidence on the completeness of debt obligations.

A typical control for stockholders' equity transactions is for the board of directors to approve all stock transactions (including options and warrants).

Relevant accounts when auditing stockholders' equity include leasehold improvements.

How are most bonds marketed?

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 assertion is generally the most relevant when auditing the restrictions contained in debt obligations?

To determine whether notes have been paid in full, the auditor would obtain the most appropriate evidence by examining the board of directors meeting minutes.

As a starting point for testing capital stock and equity transactions, which of the following should the auditor perform?

Which of the following is not true regarding appropriate tests of controls?

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?

Completeness is the most relevant assertion associated with an inherent risk for dividends that are recorded and paid before being declared.

The potential dilutive effect of convertible debt or preferred stock, stock options, and warrants should be disclosed in accordance with relevant accounting guidance in computing primary and fully diluted earnings per share.

When documenting controls, the auditor can provide this documentation in various formats including a control matrix, a control risk assessment questionnaire, and/or a memo.

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?

Which of the following is not true regarding restrictions on dividend payments?

Which of the following is not an inherent risk typically associated with the existence of dividends?

Which of the following would a bond indenture not provide information about?

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

In those audits where there is a heightened risk of fraud related to debt obligations, which of the following will the auditor not typically perform?

Confirmations are not substantive procedure designed to obtain evidence on the completeness of debt obligations.

A typical control for stockholders' equity transactions is for the board of directors to approve all stock transactions (including options and warrants).

Relevant accounts when auditing stockholders' equity include leasehold improvements.

How are most bonds marketed?

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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