Exam 10: Finance and Investment Cycle

Red Corporation had a temporary cash squeeze near its balance-sheet date.It needed cash badly for a seasonal dip in sales.However,a loan covenant requiring a certain debt/equity ratio would be violated if any additional money were borrowed.To remedy this,the top two officers of the Corporation set up another corporation,Pink,Inc.Red made a large sale of inventory to Pink.at cost.Pink used the inventory as collateral for a three-month loan from a local bank.The money from the loan was used to pay Red for the accounts receivable resulting from the "sale." The officers intended to have Red buy back the inventory from Pink at the end of the three-month period at a price that would allow Pink to pay off the loan plus interest. Required: a.How would this transaction designed by the two officers enable Red to maintain its required debt/equity ratio while obtaining the cash it needed? b.What tests of controls and substantive tests would enable an auditor to detect this scheme?

In auditing intangible assets,an auditor most likely would review or recompute amortization and determine whether the amortization period is reasonable in support of the ASB balance assertion of

A _________________________ handles the exchange of shares,canceling the shares surrendered by sellers and issuing new certificates to buyers.

The preferred method of determining fair value of transactions is

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

Owners' equity transactions usually are not well documented.

When circumstances call for extended procedures,information on outstanding stock may be ________________________________________________.

If a company keeps investments in a bank safe deposit box,which of the following two people ideally should have access to the safe deposit box?

A ______________________________ is a control feature relied upon when a standard internal control procedure is not in place.

The responsibility for financing and investment transactions is basically in the hands of _____________________________________.

Taking a "big bath" in the financial statements refers to

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

Which of the following management assertions for long-term liabilities is related to the ASB balance assertion of completeness?

The primary audit concern with the verification of long-term liabilities is that all _________________ are recorded and that the ___________________ is properly paid or ____________.

The focus of substantive tests in the finance and investment cycle is on

When the client holds a large amount of negotiable securities,auditors need to plan to guard against

Confirmation and inquiry procedures are not required for a class of items loosely termed off-balance-sheet information.

The primary audit concern with the verification of long-term liabilities is that all liabilities are recorded and that the interest expense is properly paid or accrued.

Which of the following is the most important audit consideration when examining the stockholders' equity section of a client's balance sheet?

When there are no independent agents,most audit evidence about capital stock is gathered by confirmation directly with the stockholders.