Question 1

The auditor can use analytical procedures in the audit of interest expense related to long-term debt.Describe how this is done.

Accepted Answer

Through confirmation and other audit procedures,the auditor knows the loan balance at the beginning and the end of the year,knows the number and amount of the payments and increases on the loan,and the interest rate on the debt.The auditor can estimate interest expense by multiplying the average balance of the loan by the average interest rate during the year.If the loan balance or the interest rate has fluctuated widely during the year,the auditor can estimate interest expense on a quarterly or monthly basis.However derived,the auditor will then compare the estimated amount of interest expense for the year to the amount recorded in the accounts and decide if the recorded amount is reasonable.If the auditor decides that there is a significant difference between the two amounts,additional audit work will be required.

Question 2

Off the balance sheet means that ________.

Accepted Answer

A) obligations and commitments are recorded only in the income statement accounts 
B) obligations and commitments are recorded only in the statement of cash flows 
C) capital budgets are properly authorized and approved 
D) obligations and commitments are not recorded in the accounts of the company 
A) obligations and commitments are recorded only in the income statement accounts 
B) obligations and commitments are recorded only in the statement of cash flows 
C) capital budgets are properly authorized and approved 
D) obligations and commitments are not recorded in the accounts of the company D

Question 3

Auditors should expect to find the authorizing signatures of the CEO,CFO,chair of the board of directors,and perhaps other high-ranking officers on financing documents.

Accepted Answer

A) True 
 B)False  True

Question 4

Management's statement that a marketable security is a long-term investment may be the only evidence available to support classifying the investment as a non-current asset.

Accepted Answer

A) True 
 B)False

Question 5

Red Corporation had a temporary cash squeeze near its balance sheet date.It needed cash badly to cover a seasonal dip in sales.However,if any additional money were borrowed,the company would violate a loan covenant requiring that a defined debt/equity ratio be maintained.To get around this requirement,the top two officers Red Corporation set up another corporation called 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 inventory transaction.At the end of the three-month period,Red intended to repurchase the inventory from Pink at a price that would allow Pink repay the loan plus interest.
Required:
A)How would this transaction enable Red Corporation to maintain its required debt/equity ratio and obtain the cash it needs?
B)What tests of controls and/or substantive procedures would lead an auditor to detect this scheme?

Accepted Answer

A)By devising this transaction as a sale

Question 6

Confirmation requests should be sent to lenders only if there is a balance owing to the lender at the confirmation date.

Accepted Answer

A) True 
 B)False

Question 7

The purchase of fixed assets is part of the finance and investment cycle.

Accepted Answer

A) True 
 B)False

Question 8

The auditor selected a sample of journal entries related to notes payable and traced interest expense to the general ledger.The auditor is testing controls over accuracy.

Accepted Answer

A) True 
 B)False

Question 9

What is the most appropriate control to prevent improper use of share or bond instruments?

Accepted Answer

A) Authorization to purchase shares by a senior financial officer. 
B) Use of a registered broker to purchase and sell all shares. 
C) Proper custodial control of securities. 
D) Registration of bond instruments with the exchange authorities. 
A) Authorization to purchase shares by a senior financial officer. 
B) Use of a registered broker to purchase and sell all shares. 
C) Proper custodial control of securities. 
D) Registration of bond instruments with the exchange authorities.

Question 10

Which of the following is not an example of management's policies and procedures over the preparation of accounting estimates?

Accepted Answer

A) Accumulation of relevant,sufficient,and reliable data. 
B) Preparation of estimates by qualified personnel. 
C) Review by the independent auditor. 
D) Consideration by management of whether the accounting estimates are consistent with the company's operational plans. 
A) Accumulation of relevant,sufficient,and reliable data. 
B) Preparation of estimates by qualified personnel. 
C) Review by the independent auditor. 
D) Consideration by management of whether the accounting estimates are consistent with the company's operational plans.

Question 11

The auditor's tests of controls over the appropriateness of accounting estimates consist primarily of enquiry and observation.

Accepted Answer

A) True 
 B)False

Question 12

In "Off-Balance-Sheet Inventory Financing," Verity Distillery used the product repurchase ploy to ________.

Accepted Answer

A) overstate assets and understate liabilities by borrowing money and not recording the liability 
B) increase owners' equity by recording the sale of inventory without recording any cost of goods sold 
C) understate assets and understate liabilities by borrowing money through an undisclosed related party transaction and disguising it as a sale 
D) understate assets and understate liabilities by loaning money to its officers 
A) overstate assets and understate liabilities by borrowing money and not recording the liability 
B) increase owners' equity by recording the sale of inventory without recording any cost of goods sold 
C) understate assets and understate liabilities by borrowing money through an undisclosed related party transaction and disguising it as a sale 
D) understate assets and understate liabilities by loaning money to its officers

Question 13

Discuss the custody of investments and intangible assets.

Accepted Answer

Custody of investments and intangible as

Question 14

Who is responsible for making accounting estimates?

Accepted Answer

A) Auditors. 
B) Management. 
C) Boards of directors. 
D) Shareholders. 
A) Auditors. 
B) Management. 
C) Boards of directors. 
D) Shareholders.

Question 15

Which management assertion is of most importance to auditors in examining long-term debt?

Accepted Answer

A) Existence. 
B) Completeness. 
C) Rights and obligations. 
D) Presentation and disclosure. 
A) Existence. 
B) Completeness. 
C) Rights and obligations. 
D) Presentation and disclosure.

Question 16

Transactions in debt and shareholder equity are typically handled by ________.

Accepted Answer

A) payroll 
B) accounting staff 
C) accounting supervisors 
D) upper management 
A) payroll 
B) accounting staff 
C) accounting supervisors 
D) upper management

Question 17

Debt covenant violations have a significant impact on a company since they can affect ________.

Accepted Answer

A) the ability of the entity to function as a going concern 
B) overall liability relationships in the financial statements 
C) the nature of disclosures required in the audit report 
D) how loan agreements should be structured 
A) the ability of the entity to function as a going concern 
B) overall liability relationships in the financial statements 
C) the nature of disclosures required in the audit report 
D) how loan agreements should be structured

Question 18

This internal control questionnaire item-"Are interest payments and accruals monitored for due dates?"-relates to the control objective of ________.

Accepted Answer

A) validity 
B) completeness 
C) accounting 
D) proper period recording 
A) validity 
B) completeness 
C) accounting 
D) proper period recording

Question 19

In the finance and investment cycle,which of the following controls would be most effective in ensuring that proper custody of assets has been maintained?

Accepted Answer

A) Direct access to securities in the safety deposit box is limited to only one corporate officer. 
B) Personnel who post investment transactions to the general ledger are not permitted to update the investment subsidiary ledger. 
C) The purchase and sale of investments are executed on the specific authorization of the board of directors. 
D) The recorded balances in the investment subsidiary ledger are periodically compared with the contents of the safety deposit box by independent personnel. 
A) Direct access to securities in the safety deposit box is limited to only one corporate officer. 
B) Personnel who post investment transactions to the general ledger are not permitted to update the investment subsidiary ledger. 
C) The purchase and sale of investments are executed on the specific authorization of the board of directors. 
D) The recorded balances in the investment subsidiary ledger are periodically compared with the contents of the safety deposit box by independent personnel.

Question 20

Which of the following is a substantive procedure in the audit of estimates made by auditor?

Accepted Answer

A) Observing whether estimates are prepared by qualified personnel. 
B) Recalculating the mathematical estimate. 
C) Scanning for evidence of review by senior management. 
D) Ensuring estimates are recorded in the right accounts. 
A) Observing whether estimates are prepared by qualified personnel. 
B) Recalculating the mathematical estimate. 
C) Scanning for evidence of review by senior management. 
D) Ensuring estimates are recorded in the right accounts.

The auditor can use analytical procedures in the audit of interest expense related to long-term debt.Describe how this is done.

Off the balance sheet means that ________.

Auditors should expect to find the authorizing signatures of the CEO,CFO,chair of the board of directors,and perhaps other high-ranking officers on financing documents.

Management's statement that a marketable security is a long-term investment may be the only evidence available to support classifying the investment as a non-current asset.

Confirmation requests should be sent to lenders only if there is a balance owing to the lender at the confirmation date.

The purchase of fixed assets is part of the finance and investment cycle.

The auditor selected a sample of journal entries related to notes payable and traced interest expense to the general ledger.The auditor is testing controls over accuracy.

What is the most appropriate control to prevent improper use of share or bond instruments?

Which of the following is not an example of management's policies and procedures over the preparation of accounting estimates?

The auditor's tests of controls over the appropriateness of accounting estimates consist primarily of enquiry and observation.

In "Off-Balance-Sheet Inventory Financing," Verity Distillery used the product repurchase ploy to ________.

Discuss the custody of investments and intangible assets.

Who is responsible for making accounting estimates?

Which management assertion is of most importance to auditors in examining long-term debt?

Transactions in debt and shareholder equity are typically handled by ________.

Debt covenant violations have a significant impact on a company since they can affect ________.

This internal control questionnaire item-"Are interest payments and accruals monitored for due dates?"-relates to the control objective of ________.

In the finance and investment cycle,which of the following controls would be most effective in ensuring that proper custody of assets has been maintained?

Which of the following is a substantive procedure in the audit of estimates made by auditor?

Introduction to Auditing

Auditors Professional Roles and Responsibilities

Auditors Ethical and Legal Responsibilities

Reports on Audited Financial Statements

Preliminary Audit Planning: Understanding the Auditees Business

Assessing Risks in an Audit Engagement

Internal Control Over Financial Reporting

Audit Evidence and Assurance

Control Assessment and Testing

Audit Sampling

The Revenues, Receivables, and Receipts Process and Cash Account Balance

The Purchases, Payables, and Payments Process

Payroll and Production Processes

hapter 15 Completing the Audit Work

Applying Professional Judgment to Form the Audit Opinion and Issue the Audit Report

Other Public Accounting Services and Reportsreviews and Compilations

Professional Rules of Conduct Details and Auditor Responsibilities

The Audit of Accounting Estimates: Basic Material Relating to Accounting Estimates

Legal Liability Cases

Other Professional Accounting Services and Reports, Including Fraud Auditing

Filters

Exam 14: The Finance and Investment Process

The auditor can use analytical procedures in the audit of interest expense related to long-term debt.Describe how this is done.

Off the balance sheet means that ________.

Auditors should expect to find the authorizing signatures of the CEO,CFO,chair of the board of directors,and perhaps other high-ranking officers on financing documents.

Management's statement that a marketable security is a long-term investment may be the only evidence available to support classifying the investment as a non-current asset.

Confirmation requests should be sent to lenders only if there is a balance owing to the lender at the confirmation date.

The purchase of fixed assets is part of the finance and investment cycle.

The auditor selected a sample of journal entries related to notes payable and traced interest expense to the general ledger.The auditor is testing controls over accuracy.

What is the most appropriate control to prevent improper use of share or bond instruments?

Which of the following is not an example of management's policies and procedures over the preparation of accounting estimates?

The auditor's tests of controls over the appropriateness of accounting estimates consist primarily of enquiry and observation.

In "Off-Balance-Sheet Inventory Financing," Verity Distillery used the product repurchase ploy to ________.

Discuss the custody of investments and intangible assets.

Who is responsible for making accounting estimates?

Which management assertion is of most importance to auditors in examining long-term debt?

Transactions in debt and shareholder equity are typically handled by ________.

Debt covenant violations have a significant impact on a company since they can affect ________.

This internal control questionnaire item-"Are interest payments and accruals monitored for due dates?"-relates to the control objective of ________.

In the finance and investment cycle,which of the following controls would be most effective in ensuring that proper custody of assets has been maintained?

Which of the following is a substantive procedure in the audit of estimates made by auditor?

Introduction to Auditing

Auditors Professional Roles and Responsibilities

Auditors Ethical and Legal Responsibilities

Reports on Audited Financial Statements

Preliminary Audit Planning: Understanding the Auditees Business

Assessing Risks in an Audit Engagement

Internal Control Over Financial Reporting

Audit Evidence and Assurance

Control Assessment and Testing

Audit Sampling

The Revenues, Receivables, and Receipts Process and Cash Account Balance

The Purchases, Payables, and Payments Process

Payroll and Production Processes

hapter 15 Completing the Audit Work

Applying Professional Judgment to Form the Audit Opinion and Issue the Audit Report

Other Public Accounting Services and Reportsreviews and Compilations

Professional Rules of Conduct Details and Auditor Responsibilities

The Audit of Accounting Estimates: Basic Material Relating to Accounting Estimates

Legal Liability Cases

Other Professional Accounting Services and Reports, Including Fraud Auditing

Filters