Question 1

Long-term borrowing should be properly authorized.

Accepted Answer

A) True 
 B)False

Question 2

There are typically only a couple of disclosure items that need to be considered for stockholders' equity.

Accepted Answer

A) True 
 B)False

Question 3

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

Accepted Answer

A)  The entity failed to record all debt. 
B)  Discount on Bonds is misstated. 
C)  Interest income is overstated. 
D)  The entity failed to record all interest expense. 
A)  The entity failed to record all debt. 
B)  Discount on Bonds is misstated. 
C)  Interest income is overstated. 
D)  The entity failed to record all interest expense.

Question 4

Match each of the following controls with the assertion for long-term debt that it supports.

Accepted Answer

The answer of Match each of the following controls with...

Question 5

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.

Accepted Answer

a. Rekdahl should perform the following

Question 6

The primary reason for preparing a reconciliation between interest-bearing obligations outstanding during the year and interest expense presented in the financial statements is to

Accepted Answer

A)  Evaluate internal control over securities. 
B)  Determine the validity of prepaid interest expense. 
C)  Ascertain the reasonableness of imputed interest. 
D)  Detect unrecorded liabilities. 
A)  Evaluate internal control over securities. 
B)  Determine the validity of prepaid interest expense. 
C)  Ascertain the reasonableness of imputed interest. 
D)  Detect unrecorded liabilities.

Question 7

You have been assigned the duty of auditing long-term debt and retained earnings for Keys, Inc. Describe the tests you would use to support management's assertions regarding disclosure for these accounts.

Accepted Answer

Proper classification between long- and

Question 8

The registrar is responsible for preparing stock certificates and maintaining adequate stockholders' records.

Accepted Answer

A) True 
 B)False

Question 9

During the course of an audit, a CPA observes that the recorded interest expense seems to be excessive in relation to the balance in the long-term debt account. This observation could lead the auditor to suspect that

Accepted Answer

A)  Long-term debt is understated. 
B)  Discount on bonds payable is overstated. 
C)  Long-term debt is overstated. 
D)  Premium on bonds payable is understated. 
A)  Long-term debt is understated. 
B)  Discount on bonds payable is overstated. 
C)  Long-term debt is overstated. 
D)  Premium on bonds payable is understated.

Question 10

A company issued bonds for cash during the year under audit. To ascertain that this transaction was properly recorded, the auditor's best course of action is to

Accepted Answer

A)  Request a statement from the bond trustee as to the amount of the bonds issued and outstanding. 
B)  Confirm the results of the issuance with the underwriter or investment banker. 
C)  Trace the cash received from the issuance to the accounting records. 
D)  Verify that the net cash received is credited to an account entitled "Bonds Payable." 
A)  Request a statement from the bond trustee as to the amount of the bonds issued and outstanding. 
B)  Confirm the results of the issuance with the underwriter or investment banker. 
C)  Trace the cash received from the issuance to the accounting records. 
D)  Verify that the net cash received is credited to an account entitled "Bonds Payable."

Question 11

Several years ago, Conway, Inc., secured a conventional real estate mortgage loan. Which of the following audit procedures would least likely be performed by an auditor examining the mortgage balance?

Accepted Answer

A)  Examine the current year's canceled checks. 
B)  Review the mortgage amortization schedule. 
C)  Inspect public records of lien balances. 
D)  Recompute mortgage interest expense. 
A)  Examine the current year's canceled checks. 
B)  Review the mortgage amortization schedule. 
C)  Inspect public records of lien balances. 
D)  Recompute mortgage interest expense.

Question 12

An auditor usually obtains evidence of stockholders' equity transactions by reviewing the entity's

Accepted Answer

A)  Minutes of the board of directors' meetings. 
B)  Transfer agent's records. 
C)  Canceled stock certificates. 
D)  Treasury stock certificate book. 
A)  Minutes of the board of directors' meetings. 
B)  Transfer agent's records. 
C)  Canceled stock certificates. 
D)  Treasury stock certificate book.

Question 13

The dividend-disbursing agent prepares and mails dividends checks to the stockholders as of the date of declaration.

Accepted Answer

A) True 
 B)False

Question 14

If recorded interest expense is higher than the auditor's expectation calculated using recorded debt, all of the following are potential explanations except that

Accepted Answer

A)  The entity failed to record debt. 
B)  Debt was recorded as equity. 
C)  The entity used the face interest rate to calculate interest expense on a bond issued at a discount. 
D)  The entity used the face interest rate to calculate interest expense on a bond issued at a premium. 
A)  The entity failed to record debt. 
B)  Debt was recorded as equity. 
C)  The entity used the face interest rate to calculate interest expense on a bond issued at a discount. 
D)  The entity used the face interest rate to calculate interest expense on a bond issued at a premium.

Question 15

When auditing capital stock accounts, the cutoff assertion is the most important to consider.

Accepted Answer

A) True 
 B)False

Question 16

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 source documents and the general ledger.
2. Examine copies of note and bond 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.

Accepted Answer

1. Test of details of transactions-Compl

Question 17

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

Accepted Answer

A)  Determining whether restrictions have been imposed on retained earnings. 
B)  Counting treasury stock certificates. 
C)  Inspecting minutes of the board of directors to verify that cash dividends were declared. 
D)  Establishing that treasury stock is valued at cost. 
A)  Determining whether restrictions have been imposed on retained earnings. 
B)  Counting treasury stock certificates. 
C)  Inspecting minutes of the board of directors to verify that cash dividends were declared. 
D)  Establishing that treasury stock is valued at cost.

Question 18

One major issue associated with long-term debt is the classification of the short-term portion of long-term debt that is due in the next year.

Accepted Answer

A) True 
 B)False

Question 19

All corporate capital stock transactions should ultimately be traced to the

Accepted Answer

A)  Minutes of the board of directors. 
B)  Cash receipts journal. 
C)  Cash disbursements journal. 
D)  Numbered stock certificates. 
A)  Minutes of the board of directors. 
B)  Cash receipts journal. 
C)  Cash disbursements journal. 
D)  Numbered stock certificates.

Question 20

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

Accepted Answer

A) True 
 B)False

Long-term borrowing should be properly authorized.

There are typically only a couple of disclosure items that need to be considered for stockholders' equity.

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

Match each of the following controls with the assertion for long-term debt that it supports.

The primary reason for preparing a reconciliation between interest-bearing obligations outstanding during the year and interest expense presented in the financial statements is to

You have been assigned the duty of auditing long-term debt and retained earnings for Keys, Inc. Describe the tests you would use to support management's assertions regarding disclosure for these accounts.

The registrar is responsible for preparing stock certificates and maintaining adequate stockholders' records.

During the course of an audit, a CPA observes that the recorded interest expense seems to be excessive in relation to the balance in the long-term debt account. This observation could lead the auditor to suspect that

A company issued bonds for cash during the year under audit. To ascertain that this transaction was properly recorded, the auditor's best course of action is to

Several years ago, Conway, Inc., secured a conventional real estate mortgage loan. Which of the following audit procedures would least likely be performed by an auditor examining the mortgage balance?

An auditor usually obtains evidence of stockholders' equity transactions by reviewing the entity's

The dividend-disbursing agent prepares and mails dividends checks to the stockholders as of the date of declaration.

If recorded interest expense is higher than the auditor's expectation calculated using recorded debt, all of the following are potential explanations except that

When auditing capital stock accounts, the cutoff assertion is the most important to consider.

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

One major issue associated with long-term debt is the classification of the short-term portion of long-term debt that is due in the next year.

All corporate capital stock transactions should ultimately be traced to the

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

An Introduction to Assurance and Financial Statement Auditing

The Financial Statement Auditing Environment

Audit Planning, Types of Audit Tests, and Materiality

Risk Assessment

Evidence and Documentation

Internal Control in a Financial Statement Audit

Auditing Internal Control Over Financial Reporting

Audit Sampling: An Overview and Application to Tests of Controls

Audit Sampling: An Application to Substantive Tests of Account Balances

Auditing the Revenue Process

Auditing the Purchasing Process

Auditing the Human Resource Management Process

Auditing the Inventory Management Process

Auditing the Financing Investing Process: Prepaid Expenses Intangible Assets and Property Plant and Equipment

Auditing the Financinginvesting Process: Cash and Investments

Completing the Audit Engagement

Reports on Audited Financial Statements

Professional Conduct, Independence, and Quality Control

Legal Liability

Assurance, Attestation, and Internal Auditing Services

Filters

Exam 15: Auditing the Financing Investing Process: Long-Term Liabilities Stockholders Equity and Income Statement Accounts

Long-term borrowing should be properly authorized.

There are typically only a couple of disclosure items that need to be considered for stockholders' equity.

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

Match each of the following controls with the assertion for long-term debt that it supports.

The primary reason for preparing a reconciliation between interest-bearing obligations outstanding during the year and interest expense presented in the financial statements is to

You have been assigned the duty of auditing long-term debt and retained earnings for Keys, Inc. Describe the tests you would use to support management's assertions regarding disclosure for these accounts.

The registrar is responsible for preparing stock certificates and maintaining adequate stockholders' records.

During the course of an audit, a CPA observes that the recorded interest expense seems to be excessive in relation to the balance in the long-term debt account. This observation could lead the auditor to suspect that

A company issued bonds for cash during the year under audit. To ascertain that this transaction was properly recorded, the auditor's best course of action is to

Several years ago, Conway, Inc., secured a conventional real estate mortgage loan. Which of the following audit procedures would least likely be performed by an auditor examining the mortgage balance?

An auditor usually obtains evidence of stockholders' equity transactions by reviewing the entity's

The dividend-disbursing agent prepares and mails dividends checks to the stockholders as of the date of declaration.

If recorded interest expense is higher than the auditor's expectation calculated using recorded debt, all of the following are potential explanations except that

When auditing capital stock accounts, the cutoff assertion is the most important to consider.

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

One major issue associated with long-term debt is the classification of the short-term portion of long-term debt that is due in the next year.

All corporate capital stock transactions should ultimately be traced to the

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

An Introduction to Assurance and Financial Statement Auditing

The Financial Statement Auditing Environment

Audit Planning, Types of Audit Tests, and Materiality

Risk Assessment

Evidence and Documentation

Internal Control in a Financial Statement Audit

Auditing Internal Control Over Financial Reporting

Audit Sampling: An Overview and Application to Tests of Controls

Audit Sampling: An Application to Substantive Tests of Account Balances

Auditing the Revenue Process

Auditing the Purchasing Process

Auditing the Human Resource Management Process

Auditing the Inventory Management Process

Auditing the Financing Investing Process: Prepaid Expenses Intangible Assets and Property Plant and Equipment

Auditing the Financinginvesting Process: Cash and Investments

Completing the Audit Engagement

Reports on Audited Financial Statements

Professional Conduct, Independence, and Quality Control

Legal Liability

Assurance, Attestation, and Internal Auditing Services

Filters