Exam 15: Auditing the Financinginvesting Process: Long-Term Liabilities, Stockholders' Equity, and Income Statement Accounts

What kind of information would typically be found on an income statement account analysis working paper? What kind of tests can an auditor perform using this information? Why would an auditor conduct additional analysis on an income statement account?

Which of the following is an important consideration of an auditor when examining the stockholders' equity section of an entity's balance sheet?

Reviewing notes paid or renewed after the balance sheet date to determine if there are unrecorded liabilities at year-end can be used to test the assertion of:

Match the balance sheet account with the income statement account that is typically audited at the same time. -Investments

For most companies, stockholders' equity only includes the following three accounts: preferred stock, paid-in capital, and retained earnings.

For each of the following substantive procedures, first note whether it is a test of details of transactions or a test of details of account balances. Then decide for which assertion the test provides the best evidence. 1. Trace large cash receipts and payments to the general ledger. 2. Examine copies of note, bond, and financing lease agreements. 3. Recompute accrued interest payable. 4. Review debt activity for a few days before and after year-end to determine whether transactions are included in the proper period. 5. Examine due dates on notes and bonds for proper classification between current and long-term debt.

Generally, all dividends that are declared and paid will be audited.

A substantive strategy is typically used to audit stockholders' equity because:

Reviewing interest expense to examine payments to debt holders not listed on the debt analysis schedule is a procedure that can be used to test the audit assertion of:

Which audit procedure is most closely related to management's assertions about the presentation of stockholders' equity?

In the audit of a medium-sized manufacturing concern, which one of the following areas can be expected to require the least amount of audit time?

Match the balance sheet account with the income statement account that is typically audited at the same time. -Prepaid Insurance

Match each of the following controls with the assertion for long-term debt that it supports. -Premiums and discounts on bond and notes payables are properly amortized using the effective interest rate method

Which of the following transactions is an auditor most likely to examine when auditing the retained earnings account?

Of the following, which is an important procedure that an auditor should use when making an overall review of the income statement?

Match each of the following controls with the assertion for long-term debt that it supports. -A subsidiary ledger is maintained that contains information about all the long-term debt and the amount recorded in this ledger is reconciled to the general ledger

During the course of an audit, a CPA's substantive analytical procedure provides an expected interest expense that is significantly higher than the amount recorded in the entity's accounting records. This observation would most likely lead the auditor to suspect that:

Substantive analytical procedures can be used extensively to test revenue and expense accounts.

Erik Rekdahl, senior-in-charge, is auditing Koonce Katfood, Inc.'s long-term debt for the year ended December 31. Long-term debt is composed of two bond issues, which are due in 10 and 15 years, respectively. The debt is held by two insurance companies. Rekdahl has examined the bond agreements for each issue. The agreements provide that if Koonce fails to comply with the covenants of the contract, the debt becomes payable immediately. Rekdahl identified the following covenants when reviewing the bond agreements: "The debtor company shall endeavor to maintain a working capital ratio of 2 to 1 at all times, and in any fiscal year following a failure to maintain said ratio, the company shall restrict compensation of officers to a total of $650,000. Officers include the chairperson of the board and the president." "The debtor company shall keep all property that is security for these debt agreements insured against loss by fire to the extent of 100 percent of its actual value. Policies of insurance comprising this protection shall be filed with the trustee." "The company is required to restrict 40 percent of retained earnings from availability for paying dividends." "A sinking fund shall be established with the First Morgan Bank of Austin, and semiannual payments of $500,000 shall be deposited in the fund. The bank may, at its discretion, purchase bonds from either issue." a. Provide any audit steps that Rekdahl should conduct to determine if the company is in compliance with the bond indentures. b. List any reporting requirements that the financial statements or footnotes should include.

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