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?

Overall analysis of income statement accounts may bring to light errors,omissions,and inconsistencies not disclosed in the overall analysis of balance sheet accounts.The income statement analysis can best be accomplished by comparing monthly

An auditor compares revenues and expenses reported for the year being audited (current year)with those of the prior year and investigates all changes exceeding 10%.By this procedure,the auditor would be most likely to learn that

Three types of transactions usually occur in stockholders' equity: issuance of stock,repurchase of stock,and payment of dividends.

The occurrence assertion is being tested when the auditor vouches stock repurchases to the canceled stock certificates.

Identify the four major assertions made regarding stockholders' equity and describe one control activity for each.

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

The auditor gathers evidence about dividends that are declared and paid primarily because of

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

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

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

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

Two months before year-end,the bookkeeper erroneously recorded the receipt of a long-term bank loan by a debit to cash and a credit to sales.Which of the following is the most effective procedure for detecting this type of error?

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.

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

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

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

During an audit,Wicks learns that the audit client was granted a 3-month waiver of the repayment of principal on the installment loan with Blank Bank without an extension of the maturity date,which is one year in the future.With respect to this loan,the audit program used by Wicks is least likely to include a verification of the

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

In performing tests concerning the granting of stock options,an auditor should