Chapter 15 Auditing the Financing/Investing Process: Long-Term Liabilities, Stockholders' Equity, and Income Statement Accounts
Chapter 15 - Auditing the Financing/Investing Process: Long-Term Liabilities, Stockholders' Equity, and Income Statement Accounts
Chapter 15
Auditing the Financing/Investing Process: Long-Term Liabilities, Stockholders' Equity, and Income Statement Accounts
True / False Questions
1.Notes receivable is a common type of long-term financing.TrueFalse
2.Long-term borrowing should be properly authorized.TrueFalse
3.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.TrueFalse
4.For most companies, stockholders' equity includes the following three accounts: preferred stock, paid-in capital, and retained earnings.TrueFalse
5.Three types of transactions usually occur in stockholders' equity: issuance of stock, repurchase of stock, and payment of dividends.TrueFalse
6.The repurchase of stock includes the reacquisition of stock (treasury stock), but not the retirement of stock.TrueFalse
7.The registrar is responsible for preparing stock certificates and maintaining adequate stockholders' records.TrueFalse
8.The dividend-disbursing agent prepares and mails dividends checks to the stockholders as of the date of declaration.TrueFalse
9.Substantive analytical procedures can be used extensively to test revenue and expense accounts.TrueFalse
10.Income statement accounts must be accounted for in accordance with GAAP.TrueFalse
11.When auditing capital stock accounts, the cutoff assertion is the most important to consider.TrueFalse
12.The occurrence assertion is being tested when the auditor vouches stock repurchases to the canceled stock certificates.TrueFalse
13.There are typically only a couple of disclosure items that need to be considered for stockholders' equity.TrueFalse
14.Generally, all dividends that are declared and paid will be audited.TrueFalse
15.The auditor typically begins an audit of retained earnings by obtaining a schedule of account activity for the period.TrueFalse
Multiple Choice Questions
16.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?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.
17.The auditor can best verify a client's bond sinking fund transactions and year-end balance byA.Recomputation of interest expense, interest payable, and amortization of bond discount or premium.B.Confirmation with individual holders of retired bonds.C.Confirmation with the bond trustee.D.Examination and count of the bonds retired during the year.
18.A control which ensures that long-term borrowing is properly initiated by appropriate individuals addresses the control assertion ofA.Occurrence.B.Authorization.C.Completeness.D.Valuation.
19.The primary reason for preparing a reconciliation between interest-bearing obligations outstanding during the year and interest expense presented in the financial statements is toA.Evaluate internal control over securities.B.Determine the validity of prepaid interest expense.C.Ascertain the reasonableness of imputed interest.D.Detect unrecorded liabilities.
20.The auditor's program for the examination of long-term debt should include steps that require theA.Verification of the existence of the bond holders.B.Examination of any bond agreement.C.Inspection of the accounts payable subsidiary ledger.D.Investigation of credits to the bond interest income account.
21.Valuation and allocation is most likely an issue for long-term debt ifA.Bonds are sold on the open market.B.Bonds are issued at a discount or premium.C.The loans are from banks.D.The company has many short-term leases.
22.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 ofA.Existence.B.Completeness.C.Rights and obligations.D.Valuation and allocation.
23.All corporate capital stock transactions should ultimately be traced to theA.Minutes of the board of directors.B.Cash receipts journal.C.Cash disbursements journal.D.Numbered stock certificates.
24.A substantive strategy is typically used to audit stockholders' equity becauseA.The number of transactions is small.B.Controls over stockholders' equity transactions typically are weak.C.A reliance strategy is most efficient.D.A substantive strategy likely was used in prior years.
25.An auditor usually obtains evidence of stockholders' equity transactions by reviewing the entity'sA.Minutes of the board of directors' meetings.B.Transfer agent's records.C.Canceled stock certificates.D.Treasury stock certificate book.
26.The auditor is concerned with establishing that dividends are paid to stockholders of the client corporation owning stock as of theA.Issue date.B.Declaration date.C.Record date.D.Payment date.
27.The auditor gathers evidence about dividends that are declared and paid primarily because ofA.Concerns with violations of corporate bylaws or debt covenants.B.The large dollar value of the transactions.C.The ease with which the transactions can be audited.D.Fraud concerns.
28.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?A.Retained earnings.B.Revenue.C.Assets.D.Liabilities.
29.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 thatA.An increase in property tax rates has not been recognized in the client's accrual.B.The current year provision for uncollectible accounts is inadequate, because of worsening economic conditions.C.Fourth quarter payroll taxes were not paid.D.The client changed its capitalization policy for small tools in the current year.
30.In connection with the examination of bonds payable, an auditor would expect to find in a bond agreementA.The issue date and maturity date of the bond.B.The names of the original subscribers to the bond issue.C.The yield to maturity of the bonds issued.D.The company's debt-to-equity ratio at the time of issuance.
31.During the year under audit, a company has completed a private placement of a substantial amount of bonds. Which of the following is the most important step in the auditor's program for the audit of bonds payable?A.Confirming the interest rate with the bond trustee.B.Tracing the cash received from the issue to the accounting records.C.Examining the bond agreement for a sinking fund provision.D.Recomputing the annual interest cost and the effective yield.
32.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 toA.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."
33.During its fiscal year, a company issued, at a discount, a substantial amount of bonds. When performing audit work in connection with the bond issue, the independent auditor shouldA.Confirm the existence of the bond holders.B.Review the board of directors' minutes for authorization.C.Trace the net cash received from the issuance to the bond payable account.D.Inspect the records maintained by the bond trustee.
34.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 client's accounting records. This observation would most likely lead the auditor to suspect thatA.The client failed to record all debt.B.Discount on Bonds is misstated.C.Interest income is overstated.D.The client failed to record all interest expense.
35.During an examination of a public company, the auditor should obtain written confirmation regarding bond transactions from theA.Bond broker.B.Client's attorney.C.Internal auditors.D.Trustee.
36.In auditing long-term bonds payable, an auditor most likely wouldA.Perform analytical procedures on the bond premium and discount accounts.B.Examine documentation of assets purchased with bond proceeds for liens.C.Compare interest expense with the bonds payable amount for reasonableness.D.Confirm the existence of individual bond holders at year-end.
37.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 theA.Interest expense for the year.B.Balloon payment.C.Total liability at year-end.D.Installment loan payments.
38.Which audit procedure is most closely related to management's assertion regarding presentation and disclosure of liabilities?A.Tracing cash received from a bond issue to the accounting records.B.Confirmation with the bond trustee of amounts owed on a private placement of bonds.C.Reviewing the renewal of a note payable immediately after the balance sheet.D.Inspection of public records of lien balances.
39.If recorded interest expense is higher than the auditor's expectation calculated using recorded debt, all of the following are potential explanations except thatA.The client failed to record debt.B.Debt was recorded as equity.C.The client used the face interest rate to calculate interest expense on a bond issued at a discount.D.The client used the face interest rate to calculate interest expense on a bond issued at a premium.
40.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 ofA.Occurrence.B.Completeness.C.Cutoff.D.Accuracy.
41.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 thatA.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.
42.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?A.Analysis of the notes payable journal.B.Analysis of bank confirmation information.C.Preparation of a year-end bank reconciliation.D.Preparation of a year-end bank transfer schedule.
43.Where no independent stock transfer agents are employed and the corporation issues its own stocks and maintains stock records, canceled stock certificates shouldA.Be defaced to prevent reissuance and attached to their corresponding stubs.B.Not be defaced, but segregated from other stock certificates and retained in a canceled certificates file.C.Be destroyed to prevent fraudulent reissuance.D.Be defaced and sent to the Secretary of State.
44.In performing tests concerning the granting of stock options, an auditor shouldA.Confirm the transaction with the Secretary of State in the state of incorporation.B.Verify the existence of option holders in the entity's payroll records or stock ledgers.C.Determine that sufficient treasury stock is available to cover any new stock issued.D.Trace the authorization for the transaction to a vote of the board of directors.
45.Examining cancelled stock certificates addresses the assertion ofA.Occurrence.B.Disclosures.C.Valuation.D.Completeness.
46.An audit of stockholders' equity ordinarily should includeA.Tracing individual dividend payments to the capital stock records.B.Reviewing minutes of board meetings to determine the number of shares outstanding.C.Confirming shares outstanding with state officials.D.Determining that dividend declarations comply with debt agreements.
47.Which audit procedure is most closely related to management's assertions about the presentation and disclosure of stockholders' equity?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.
48.An audit program for the examination of the retained earnings account should include a step that requires verification of theA.Gain or loss resulting from disposition of treasury shares.B.Market value used to charge retained earnings to account for a two-for-one stock split.C.Authorization for both cash and stock dividends.D.Approval of the adjustment to the beginning balance as a result of a write-down of an account receivable.
49.Which of the following transactions is an auditor most likely to examine when auditing the retained earnings account?A.Changing from one method of depreciation to another.B.Adjusting the percentage used to estimate the allowance for doubtful accounts.C.Changing from the FIFO to LIFO method of inventory valuation.D.Correcting an error in depreciation in a prior year.
50.Before expressing an opinion concerning the results of operations, the auditor would most likely proceed with the examination of the income statement byA.Applying a rigid measurement standard designed to test for understatement of net income.B.Analyzing the beginning and ending balance sheet inventory amounts.C.Making net income comparisons to published industry trends and ratios.D.Examining income statement accounts concurrently with the related balance sheet accounts.
51.Many of Granada Corporation's convertible bond holders have converted their bonds into stock during the year under examination. The independent auditor should review Granada Corporation's statement of cash flows to ascertain that it showsA.Only cash used to reduce convertible debt.B.Only cash provided by issuance of stock.C.Cash provided by the issuance of stock and used to reduce convertible debt.D.Nothing relating to the conversion because it does not affect cash.
52.Which of the following is the most important consideration of an auditor when examining the stockholders' equity section of a client's balance sheet?A.Changes in the capital stock account are verified by an independent stock transfer agent.B.Stock dividends and/or stock splits during the year under audit were approved by the stockholders.C.Stock dividends are capitalized at par or stated value on the dividend declaration date.D.Entries in the capital stock account can be traced to a resolution in the minutes of the board of directors' meetings.
53.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 monthlyA.Income statement ratios to balance sheet ratios.B.Revenue and expense account balances to the monthly reported net income.C.Income statement ratios to published industry averages.D.Revenue and expense account totals to the corresponding figures of the preceding years.
54.Of the following, which is the most important procedure that an auditor should use when making an overall review of the income statement?A.Select sales and expense items and trace amounts to related supporting documents.B.Compare actual revenues and expenses with the corresponding figures of the previous year and investigate significant differences.C.Obtain, from the proper client representative, inventory certificates for the beginning and ending inventory amounts that were used to determine cost of sales.D.Ascertain that the net income amount in the statement of cash flows agrees with the net income amount in the income statement.
Short Answer Questions
55.You have been assigned the duty of auditing long-term debt and retained earnings for your client, Keys, Inc. Describe the tests you would use to support management's assertions regarding disclosure for these accounts.
56.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.
57.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.
58.Identify the three major types of transactions that occur in stockholders' equity.
59.Identify the four major assertions made regarding stockholders' equity and describe one control activity for each.
60.Give an example of how the audit of income statement accounts could be affected by results of audit work done in other areas of the audit.
61.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?
Matching Questions
62.Match each of the following controls with the assertion for long-term debt that it supports.
1.Premiums and discounts on bond and notes payables are properly amortized using the effective interest rate methodValuation____
2.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 ledgerOccurrence and Authorization____
3.Any significant debt commitments are approved by the board of directors or delegated executivesDisclosure - Classification____
4.The portion of long-term debt due in the next year is classified as a short-term liabilityCompleteness____
63.Match the balance sheet account with the income statement account that is typically audited at the same time.
1.Bonds PayableInvestment income____
2.Property, Plant, and EquipmentInterest expense____
3.InvestmentsInsurance expense____
4.Prepaid InsuranceBad debt expense____
5.Accounts ReceivableDepreciation expense____
Chapter 15 Auditing the Financing/Investing Process: Long-Term Liabilities, Stockholders' Equity, and Income Statement Accounts Answer Key
True / False Questions
1.Notes receivable is a common type of long-term financing.FALSE
AACSB: CommunicationAICPA BB: IndustryAICPA FN: Decision MakingBlooms: RememberDifficulty: 1 EasyLearning Objective: 15-01 Understand the types and features of long-term debt.Topic: Auditing Long-Term Debt2.Long-term borrowing should be properly authorized.TRUE
AACSB: CommunicationAICPA BB: IndustryAICPA FN: Decision MakingBlooms: RememberDifficulty: 1 EasyLearning Objective: 15-03 Be familiar with key control activities for long-term debt.Topic: Assertions and Related Control Activities - Long-Term Debt3.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.TRUE
AACSB: CommunicationAICPA BB: IndustryAICPA FN: Decision MakingBlooms: RememberDifficulty: 1 EasyLearning Objective: 15-03 Be familiar with key control activities for long-term debt.Topic: Assertions and Related Control Activities - Long-Term Debt4.For most companies, stockholders' equity includes the following three accounts: preferred stock, paid-in capital, and retained earnings.FALSE
AACSB: CommunicationAICPA BB: IndustryAICPA FN: Decision MakingBlooms: RememberDifficulty: 1 EasyLearning Objective: 15-05 Understand the types of stockholders' equity transactions.Topic: Auditing Stockholders' Equity5.Three types of transactions usually occur in stockholders' equity: issuance of stock, repurchase of stock, and payment of dividends.TRUE
AACSB: CommunicationAICPA BB: IndustryAICPA FN: Decision MakingBlooms: RememberDifficulty: 1 EasyLearning Objective: 15-05 Understand the types of stockholders' equity transactions.Topic: Auditing Stockholders' Equity6.The repurchase of stock includes the reacquisition of stock (treasury stock), but not the retirement of stock.FALSE
AACSB: CommunicationAICPA BB: IndustryAICPA FN: Decision MakingBlooms: RememberDifficulty: 1 EasyLearning Objective: 15-05 Understand the types of stockholders' equity transactions.Topic: Auditing Stockholders' Equity7.The registrar is responsible for preparing stock certificates and maintaining adequate stockholders' records.FALSE
AACSB: CommunicationAICPA BB: IndustryAICPA FN: Decision MakingBlooms: RememberDifficulty: 1 EasyLearning Objective: 15-06 Be familiar with assessing control risk for stockholders' equity.Topic: Control Risk Assessment - Stockholders' Equity8.The dividend-disbursing agent prepares and mails dividends checks to the stockholders as of the date of declaration.FALSE
AACSB: CommunicationAICPA BB: IndustryAICPA FN: Decision MakingBlooms: RememberDifficulty: 1 EasyLearning Objective: 15-06 Be familiar with assessing control risk for stockholders' equity.Topic: Control Risk Assessment - Stockholders' Equity9.Substantive analytical procedures can be used extensively to test revenue and expense accounts.TRUE
AACSB: CommunicationAICPA BB: IndustryAICPA FN: Decision MakingBlooms: RememberDifficulty: 1 EasyLearning Objective: 15-11 Know how to conduct substantive audit procedures for retained earnings.Topic: Auditing Retained Earnings10.Income statement accounts must be accounted for in accordance with GAAP.TRUE
AACSB: CommunicationAICPA BB: IndustryAICPA FN: Decision MakingBlooms: RememberDifficulty: 1 EasyLearning Objective: 15-12 Know how to assess control risk and conduct substantive audit procedures for income statement accounts.Topic: Auditing Income Statement Accounts11.When auditing capital stock accounts, the cutoff assertion is the most important to consider.FALSE
AACSB: CommunicationAICPA BB: Critical ThinkingAICPA FN: Decision MakingBlooms: ApplyDifficulty: 2 MediumLearning Objective: 15-09 Know how to conduct substantive audit procedures for capital stock.Topic: Auditing Capital-Stock Accounts12.The occurrence assertion is being tested when the auditor vouches stock repurchases to the canceled stock certificates.TRUE
AACSB: CommunicationAICPA BB: Critical ThinkingAICPA FN: Decision MakingBlooms: ApplyDifficulty: 2 MediumLearning Objective: 15-09 Know how to conduct substantive audit procedures for capital stock.Topic: Auditing Capital-Stock Accounts13.There are typically only a couple of disclosure items that need to be considered for stockholders' equity.TRUE
AACSB: CommunicationAICPA BB: Critical ThinkingAICPA FN: Decision MakingBlooms: ApplyDifficulty: 2 MediumLearning Objective: 15-09 Know how to conduct substantive audit procedures for capital stock.Topic: Auditing Capital-Stock Accounts14.Generally, all dividends that are declared and paid will be audited.TRUE
AACSB: CommunicationAICPA BB: Critical ThinkingAICPA FN: Decision MakingBlooms: ApplyDifficulty: 2 MediumLearning Objective: 15-10 Know how to conduct substantive audit procedures for dividends.Topic: Auditing Dividends15.The auditor typically begins an audit of retained earnings by obtaining a schedule of account activity for the period.TRUE
AACSB: CommunicationAICPA BB: Critical ThinkingAICPA FN: Decision MakingBlooms: ApplyDifficulty: 2 MediumLearning Objective: 15-11 Know how to conduct substantive audit procedures for retained earnings.Topic: Auditing Retained Earnings
Multiple Choice Questions
16.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?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.
AACSB: CommunicationAICPA BB: IndustryAICPA FN: Decision MakingBlooms: ApplyDifficulty: 1 EasyLearning Objective: 15-01 Understand the types and features of long-term debt.Learning Objective: 15-04 Know how to conduct substantive audit procedures for long-term debt.Topic: Auditing Long-Term DebtTopic: Substantive Procedures - Long-Term Debt17.The auditor can best verify a client's bond sinking fund transactions and year-end balance byA.Recomputation of interest expense, interest payable, and amortization of bond discount or premium.B.Confirmation with individual holders of retired bonds.C.Confirmation with the bond trustee.D.Examination and count of the bonds retired during the year.
AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Decision MakingBlooms: ApplyDifficulty: 1 EasyLearning Objective: 15-01 Understand the types and features of long-term debt.Learning Objective: 15-04 Know how to conduct substantive audit procedures for long-term debt.Topic: Auditing Long-Term DebtTopic: Substantive Procedures - Long-Term Debt18.A control which ensures that long-term borrowing is properly initiated by appropriate individuals addresses the control assertion ofA.Occurrence.B.Authorization.C.Completeness.D.Valuation.
AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Risk AnalysisBlooms: UnderstandDifficulty: 1 EasyLearning Objective: 15-03 Be familiar with key control activities for long-term debt.Topic: Assertions and Related Control Activities - Long-Term Debt19.The primary reason for preparing a reconciliation between interest-bearing obligations outstanding during the year and interest expense presented in the financial statements is toA.Evaluate internal control over securities.B.Determine the validity of prepaid interest expense.C.Ascertain the reasonableness of imputed interest.D.Detect unrecorded liabilities.
AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: ApplyDifficulty: 1 EasyLearning Objective: 15-03 Be familiar with key control activities for long-term debt.Learning Objective: 15-04 Know how to conduct substantive audit procedures for long-term debt.Learning Objective: 15-12 Know how to assess control risk and conduct substantive audit procedures for income statement accounts.Topic: Assertions and Related Control Activities - Long-Term DebtTopic: Auditing Income Statement AccountsTopic: Substantive Procedures - Long-Term Debt20.The auditor's program for the examination of long-term debt should include steps that require theA.Verification of the existence of the bond holders.B.Examination of any bond agreement.C.Inspection of the accounts payable subsidiary ledger.D.Investigation of credits to the bond interest income account.
AACSB: CommunicationAICPA BB: IndustryAICPA FN: MeasurementBlooms: ApplyDifficulty: 1 EasyLearning Objective: 15-04 Know how to conduct substantive audit procedures for long-term debt.Topic: Substantive Procedures - Long-Term Debt21.Valuation and allocation is most likely an issue for long-term debt ifA.Bonds are sold on the open market.B.Bonds are issued at a discount or premium.C.The loans are from banks.D.The company has many short-term leases.
AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Decision MakingBlooms: ApplyDifficulty: 1 EasyLearning Objective: 15-04 Know how to conduct substantive audit procedures for long-term debt.Topic: Substantive Procedures - Long-Term Debt22.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 ofA.Existence.B.Completeness.C.Rights and obligations.D.Valuation and allocation.
AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: ApplyDifficulty: 1 EasyLearning Objective: 15-04 Know how to conduct substantive audit procedures for long-term debt.Topic: Substantive Procedures - Long-Term Debt23.All corporate capital stock transactions should ultimately be traced to theA.Minutes of the board of directors.B.Cash receipts journal.C.Cash disbursements journal.D.Numbered stock certificates.
AACSB: CommunicationAICPA BB: IndustryAICPA FN: Decision MakingBlooms: ApplyDifficulty: 1 EasyLearning Objective: 15-09 Know how to conduct substantive audit procedures for capital stock.Topic: Auditing Capital-Stock Accounts24.A substantive strategy is typically used to audit stockholders' equity becauseA.The number of transactions is small.B.Controls over stockholders' equity transactions typically are weak.C.A reliance strategy is most efficient.D.A substantive strategy likely was used in prior years.
AACSB: CommunicationAICPA BB: IndustryAICPA FN: MeasurementBlooms: UnderstandDifficulty: 1 EasyLearning Objective: 15-09 Know how to conduct substantive audit procedures for capital stock.Learning Objective: 15-10 Know how to conduct substantive audit procedures for dividends.Learning Objective: 15-11 Know how to conduct substantive audit procedures for retained earnings.Topic: Auditing Capital-Stock AccountsTopic: Auditing DividendsTopic: Auditing Retained Earnings25.An auditor usually obtains evidence of stockholders' equity transactions by reviewing the entity'sA.Minutes of the board of directors' meetings.B.Transfer agent's records.C.Canceled stock certificates.D.Treasury stock certificate book.
AACSB: CommunicationAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: ApplyDifficulty: 1 EasyLearning Objective: 15-09 Know how to conduct substantive audit procedures for capital stock.Learning Objective: 15-10 Know how to conduct substantive audit procedures for dividends.Learning Objective: 15-11 Know how to conduct substantive audit procedures for retained earnings.Topic: Auditing Capital-Stock AccountsTopic: Auditing DividendsTopic: Auditing Retained Earnings26.The auditor is concerned with establishing that dividends are paid to stockholders of the client corporation owning stock as of theA.Issue date.B.Declaration date.C.Record date.D.Payment date.
AACSB: CommunicationAICPA BB: IndustryAICPA FN: Decision MakingBlooms: ApplyDifficulty: 1 EasyLearning Objective: 15-10 Know how to conduct substantive audit procedures for dividends.Topic: Auditing Dividends27.The auditor gathers evidence about dividends that are declared and paid primarily because ofA.Concerns with violations of corporate bylaws or debt covenants.B.The large dollar value of the transactions.C.The ease with which the transactions can be audited.D.Fraud concerns.
AACSB: CommunicationAICPA BB: IndustryAICPA FN: MeasurementBlooms: RememberDifficulty: 1 EasyLearning Objective: 15-10 Know how to conduct substantive audit procedures for dividends.Topic: Auditing Dividends28.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?A.Retained earnings.B.Revenue.C.Assets.D.Liabilities.
AACSB: AnalyticAICPA BB: IndustryAICPA FN: Decision MakingBlooms: UnderstandDifficulty: 1 EasyLearning Objective: 15-11 Know how to conduct substantive audit procedures for retained earnings.Learning Objective: 15-12 Know how to assess control risk and conduct substantive audit procedures for income statement accounts.Topic: Auditing Income Statement AccountsTopic: Auditing Retained Earnings29.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 thatA.An increase in property tax rates has not been recognized in the client's accrual.B.The current year provision for uncollectible accounts is inadequate, because of worsening economic conditions.C.Fourth quarter payroll taxes were not paid.D.The client changed its capitalization policy for small tools in the current year.
AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Risk AnalysisBlooms: AnalyzeDifficulty: 1 EasyLearning Objective: 15-12 Know how to assess control risk and conduct substantive audit procedures for income statement accounts.Topic: Auditing Income Statement Accounts30.In connection with the examination of bonds payable, an auditor would expect to find in a bond agreementA.The issue date and maturity date of the bond.B.The names of the original subscribers to the bond issue.C.The yield to maturity of the bonds issued.D.The company's debt-to-equity ratio at the time of issuance.
AACSB: CommunicationAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: RememberDifficulty: 2 MediumLearning Objective: 15-01 Understand the types and features of long-term debt.Learning Objective: 15-04 Know how to conduct substantive audit procedures for long-term debt.Topic: Auditing Long-Term DebtTopic: Substantive Procedures - Long-Term Debt31.During the year under audit, a company has completed a private placement of a substantial amount of bonds. Which of the following is the most important step in the auditor's program for the audit of bonds payable?A.Confirming the interest rate with the bond trustee.B.Tracing the cash received from the issue to the accounting records.C.Examining the bond agreement for a sinking fund provision.D.Recomputing the annual interest cost and the effective yield.
AACSB: CommunicationAICPA BB: IndustryAICPA FN: MeasurementBlooms: AnalyzeDifficulty: 2 MediumLearning Objective: 15-01 Understand the types and features of long-term debt.Learning Objective: 15-04 Know how to conduct substantive audit procedures for long-term debt.Topic: Auditing Long-Term DebtTopic: Substantive Procedures - Long-Term Debt32.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 toA.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."
AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Decision MakingBlooms: ApplyDifficulty: 2 MediumLearning Objective: 15-04 Know how to conduct substantive audit procedures for long-term debt.Topic: Substantive Procedures - Long-Term Debt33.During its fiscal year, a company issued, at a discount, a substantial amount of bonds. When performing audit work in connection with the bond issue, the independent auditor shouldA.Confirm the existence of the bond holders.B.Review the board of directors' minutes for authorization.C.Trace the net cash received from the issuance to the bond payable account.D.Inspect the records maintained by the bond trustee.
AACSB: CommunicationAICPA BB: IndustryAICPA FN: Decision MakingBlooms: ApplyDifficulty: 2 MediumLearning Objective: 15-04 Know how to conduct substantive audit procedures for long-term debt.Topic: Substantive Procedures - Long-Term Debt34.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 client's accounting records. This observation would most likely lead the auditor to suspect thatA.The client failed to record all debt.B.Discount on Bonds is misstated.C.Interest income is overstated.D.The client failed to record all interest expense.
AACSB: CommunicationAICPA BB: LegalAICPA FN: Decision MakingBlooms: AnalyzeDifficulty: 1 EasyLearning Objective: 15-04 Know how to conduct substantive audit procedures for long-term debt.Topic: Substantive Procedures - Long-Term Debt35.During an examination of a public company, the auditor should obtain written confirmation regarding bond transactions from theA.Bond broker.B.Client's attorney.C.Internal auditors.D.Trustee.
AACSB: CommunicationAICPA BB: IndustryAICPA FN: MeasurementBlooms: ApplyDifficulty: 2 MediumLearning Objective: 15-04 Know how to conduct substantive audit procedures for long-term debt.Topic: Substantive Procedures - Long-Term Debt36.In auditing long-term bonds payable, an auditor most likely wouldA.Perform analytical procedures on the bond premium and discount accounts.B.Examine documentation of assets purchased with bond proceeds for liens.C.Compare interest expense with the bonds payable amount for reasonableness.D.Confirm the existence of individual bond holders at year-end.
AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Decision MakingBlooms: ApplyDifficulty: 2 MediumLearning Objective: 15-04 Know how to conduct substantive audit procedures for long-term debt.Topic: Substantive Procedures - Long-Term Debt37.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 theA.Interest expense for the year.B.Balloon payment.C.Total liability at year-end.D.Installment loan payments.
AACSB: CommunicationAICPA BB: IndustryAICPA FN: Decision MakingBlooms: ApplyDifficulty: 2 MediumLearning Objective: 15-04 Know how to conduct substantive audit procedures for long-term debt.Topic: Substantive Procedures - Long-Term Debt38.Which audit procedure is most closely related to management's assertion regarding presentation and disclosure of liabilities?A.Tracing cash received from a bond issue to the accounting records.B.Confirmation with the bond trustee of amounts owed on a private placement of bonds.C.Reviewing the renewal of a note payable immediately after the balance sheet.D.Inspection of public records of lien balances.
AACSB: CommunicationAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: AnalyzeDifficulty: 2 MediumLearning Objective: 15-04 Know how to conduct substantive audit procedures for long-term debt.Topic: Substantive Procedures - Long-Term Debt39.If recorded interest expense is higher than the auditor's expectation calculated using recorded debt, all of the following are potential explanations except thatA.The client failed to record debt.B.Debt was recorded as equity.C.The client used the face interest rate to calculate interest expense on a bond issued at a discount.D.The client used the face interest rate to calculate interest expense on a bond issued at a premium.
AACSB: CommunicationAICPA BB: Critical ThinkingAICPA FN: Decision MakingBlooms: AnalyzeDifficulty: 2 MediumLearning Objective: 15-04 Know how to conduct substantive audit procedures for long-term debt.Topic: Substantive Procedures - Long-Term Debt40.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 ofA.Occurrence.B.Completeness.C.Cutoff.D.Accuracy.
AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: UnderstandDifficulty: 2 MediumLearning Objective: 15-04 Know how to conduct substantive audit procedures for long-term debt.Topic: Substantive Procedures - Long-Term Debt41.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 thatA.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.
AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Risk AnalysisBlooms: AnalyzeDifficulty: 2 MediumLearning Objective: 15-04 Know how to conduct substantive audit procedures for long-term debt.Learning Objective: 15-12 Know how to assess control risk and conduct substantive audit procedures for income statement accounts.Topic: Auditing Income Statement AccountsTopic: Substantive Procedures - Long-Term Debt42.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?A.Analysis of the notes payable journal.B.Analysis of bank confirmation information.C.Preparation of a year-end bank reconciliation.D.Preparation of a year-end bank transfer schedule.
AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Decision MakingBlooms: ApplyDifficulty: 2 MediumLearning Objective: 15-04 Know how to conduct substantive audit procedures for long-term debt.Learning Objective: 15-12 Know how to assess control risk and conduct substantive audit procedures for income statement accounts.Topic: Auditing Income Statement AccountsTopic: Substantive Procedures - Long-Term Debt43.Where no independent stock transfer agents are employed and the corporation issues its own stocks and maintains stock records, canceled stock certificates shouldA.Be defaced to prevent reissuance and attached to their corresponding stubs.B.Not be defaced, but segregated from other stock certificates and retained in a canceled certificates file.C.Be destroyed to prevent fraudulent reissuance.D.Be defaced and sent to the Secretary of State.
AACSB: CommunicationAICPA BB: IndustryAICPA FN: Decision MakingBlooms: ApplyDifficulty: 2 MediumLearning Objective: 15-09 Know how to conduct substantive audit procedures for capital stock.Topic: Auditing Capital-Stock Accounts44.In performing tests concerning the granting of stock options, an auditor shouldA.Confirm the transaction with the Secretary of State in the state of incorporation.B.Verify the existence of option holders in the entity's payroll records or stock ledgers.C.Determine that sufficient treasury stock is available to cover any new stock issued.D.Trace the authorization for the transaction to a vote of the board of directors.
AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Decision MakingBlooms: ApplyDifficulty: 2 MediumLearning Objective: 15-09 Know how to conduct substantive audit procedures for capital stock.Topic: Auditing Capital-Stock Accounts45.Examining cancelled stock certificates addresses the assertion ofA.Occurrence.B.Disclosures.C.Valuation.D.Completeness.
AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: ApplyDifficulty: 2 MediumLearning Objective: 15-09 Know how to conduct substantive audit procedures for capital stock.Topic: Auditing Capital-Stock Accounts46.An audit of stockholders' equity ordinarily should includeA.Tracing individual dividend payments to the capital stock records.B.Reviewing minutes of board meetings to determine the number of shares outstanding.C.Confirming shares outstanding with state officials.D.Determining that dividend declarations comply with debt agreements.
AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Decision MakingBlooms: ApplyDifficulty: 2 MediumLearning Objective: 15-09 Know how to conduct substantive audit procedures for capital stock.Learning Objective: 15-10 Know how to conduct substantive audit procedures for dividends.Topic: Auditing Capital-Stock AccountsTopic: Auditing Dividends47.Which audit procedure is most closely related to management's assertions about the presentation and disclosure of stockholders' equity?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.
AACSB: CommunicationAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: ApplyDifficulty: 2 MediumLearning Objective: 15-09 Know how to conduct substantive audit procedures for capital stock.Learning Objective: 15-10 Know how to conduct substantive audit procedures for dividends.Learning Objective: 15-11 Know how to conduct substantive audit procedures for retained earnings.Topic: Auditing Capital-Stock AccountsTopic: Auditing DividendsTopic: Auditing Retained Earnings48.An audit program for the examination of the retained earnings account should include a step that requires verification of theA.Gain or loss resulting from disposition of treasury shares.B.Market value used to charge retained earnings to account for a two-for-one stock split.C.Authorization for both cash and stock dividends.D.Approval of the adjustment to the beginning balance as a result of a write-down of an account receivable.
AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Decision MakingBlooms: ApplyDifficulty: 2 MediumLearning Objective: 15-11 Know how to conduct substantive audit procedures for retained earnings.Topic: Auditing Retained Earnings49.Which of the following transactions is an auditor most likely to examine when auditing the retained earnings account?A.Changing from one method of depreciation to another.B.Adjusting the percentage used to estimate the allowance for doubtful accounts.C.Changing from the FIFO to LIFO method of inventory valuation.D.Correcting an error in depreciation in a prior year.
AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Decision MakingBlooms: ApplyDifficulty: 2 MediumLearning Objective: 15-11 Know how to conduct substantive audit procedures for retained earnings.Topic: Auditing Retained Earnings50.Before expressing an opinion concerning the results of operations, the auditor would most likely proceed with the examination of the income statement byA.Applying a rigid measurement standard designed to test for understatement of net income.B.Analyzing the beginning and ending balance sheet inventory amounts.C.Making net income comparisons to published industry trends and ratios.D.Examining income statement accounts concurrently with the related balance sheet accounts.
AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: ApplyDifficulty: 2 MediumLearning Objective: 15-12 Know how to assess control risk and conduct substantive audit procedures for income statement accounts.Topic: Auditing Income Statement Accounts51.Many of Granada Corporation's convertible bond holders have converted their bonds into stock during the year under examination. The independent auditor should review Granada Corporation's statement of cash flows to ascertain that it showsA.Only cash used to reduce convertible debt.B.Only cash provided by issuance of stock.C.Cash provided by the issuance of stock and used to reduce convertible debt.D.Nothing relating to the conversion because it does not affect cash.
AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Decision MakingBlooms: ApplyDifficulty: 3 HardLearning Objective: 15-01 Understand the types and features of long-term debt.Learning Objective: 15-04 Know how to conduct substantive audit procedures for long-term debt.Topic: Auditing Long-Term DebtTopic: Substantive Procedures - Long-Term Debt52.Which of the following is the most important consideration of an auditor when examining the stockholders' equity section of a client's balance sheet?A.Changes in the capital stock account are verified by an independent stock transfer agent.B.Stock dividends and/or stock splits during the year under audit were approved by the stockholders.C.Stock dividends are capitalized at par or stated value on the dividend declaration date.D.Entries in the capital stock account can be traced to a resolution in the minutes of the board of directors' meetings.
AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Decision MakingBlooms: ApplyDifficulty: 3 HardLearning Objective: 15-07 Be familiar with key control activities for stockholders' equity.Topic: Assertions and Related Control Activities - Stockholders' Equity53.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 monthlyA.Income statement ratios to balance sheet ratios.B.Revenue and expense account balances to the monthly reported net income.C.Income statement ratios to published industry averages.D.Revenue and expense account totals to the corresponding figures of the preceding years.
AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Decision MakingBlooms: AnalyzeDifficulty: 3 HardLearning Objective: 15-12 Know how to assess control risk and conduct substantive audit procedures for income statement accounts.Topic: Auditing Income Statement Accounts54.Of the following, which is the most important procedure that an auditor should use when making an overall review of the income statement?A.Select sales and expense items and trace amounts to related supporting documents.B.Compare actual revenues and expenses with the corresponding figures of the previous year and investigate significant differences.C.Obtain, from the proper client representative, inventory certificates for the beginning and ending inventory amounts that were used to determine cost of sales.D.Ascertain that the net income amount in the statement of cash flows agrees with the net income amount in the income statement.
AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Decision MakingBlooms: AnalyzeDifficulty: 3 HardLearning Objective: 15-12 Know how to assess control risk and conduct substantive audit procedures for income statement accounts.Topic: Auditing Income Statement Accounts
Short Answer Questions
55.You have been assigned the duty of auditing long-term debt and retained earnings for your client, Keys, Inc. Describe the tests you would use to support management's assertions regarding disclosure for these accounts.
Proper classification between long- and current portions of long-term debt is an important part of disclosure. The auditor should verify the payment dates of the debt to ensure proper classification. To test for other long-term debt disclosure items, the auditor could inspect loan agreements for any restrictive covenants that should be disclosed in the financial statement footnotes. The auditor should also look for any applicable restrictions on retained earnings, which could arise from loan agreements or state law.
AACSB: CommunicationAICPA BB: IndustryAICPA FN: ReportingBlooms: ApplyDifficulty: 1 EasyLearning Objective: 15-04 Know how to conduct substantive audit procedures for long-term debt.Learning Objective: 15-11 Know how to conduct substantive audit procedures for retained earnings.Topic: Auditing Retained EarningsTopic: Substantive Procedures - Long-Term Debt56.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.
a. Rekdahl should perform the following audit steps to determine if the company is in compliance with the bond indentures:
Calculate the working capital ratio to ensure that it is 2 to 1 at the end of each month during the fiscal year. If the working capital ratio is less than 2 to 1, verify that the total compensation of the chairperson and president is not more than $650,000. Confirm with the trustee that insurance policies protecting against fire loss to the extent of 100 percent of value have been filed. Test retained earnings to ensure that 40 percent has been restricted from dividend payments. Confirm with the First Morgan Bank of Austin that a sinking fund has been established and that the required semiannual payments have been made. Confirm whether any bonds have been repurchased.
b. The following disclosures should be included in the footnotes of the financial statements:
The amount, interest rate, and due date of each bond issue. The covenant restrictions on the bond indentures. The amount of debt due over each of the next five years.
AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: EvaluateDifficulty: 2 MediumLearning Objective: 15-04 Know how to conduct substantive audit procedures for long-term debt.Topic: Substantive Procedures - Long-Term Debt57.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.
1. Test of details of transactions-Completeness2. Test of details of account balances-Rights and Obligations3. Test of details of account balances-Valuation and Allocation4. Test of details of transactions-Cutoff5. Test of details of transactions-Classification
AACSB: CommunicationAICPA BB: Critical ThinkingAICPA FN: Decision MakingBlooms: UnderstandDifficulty: 3 HardLearning Objective: 15-04 Know how to conduct substantive audit procedures for long-term debt.Topic: Substantive Procedures - Long-Term Debt58.Identify the three major types of transactions that occur in stockholders' equity.
The three major types of transactions that occur in stockholders' equity include (1) issuance of stock, (2) repurchase of stock, and (3) payment of dividends.
AACSB: CommunicationAICPA BB: IndustryAICPA FN: MeasurementBlooms: RememberDifficulty: 1 EasyLearning Objective: 15-05 Understand the types of stockholders' equity transactions.Topic: Auditing Stockholders' Equity59.Identify the four major assertions made regarding stockholders' equity and describe one control activity for each.
1. Occurrence-An officer of the entity ensures that every stock or dividend transaction complies with the corporate charter.2. Accuracy-Stockholders' records are reconciled with the number of shares outstanding. Dividends paid is reconciled with the total shares outstanding on the dividend record date.3. Authorization-Stock and dividend transactions are approved by the board of directors.4. Valuation-Stock issuances and repurchases and dividends are recorded by the treasurer's department at an amount that conforms to GAAP.
AACSB: CommunicationAICPA BB: Critical ThinkingAICPA FN: Risk AnalysisBlooms: UnderstandDifficulty: 2 MediumLearning Objective: 15-07 Be familiar with key control activities for stockholders' equity.Topic: Assertions and Related Control Activities - Stockholders' Equity60.Give an example of how the audit of income statement accounts could be affected by results of audit work done in other areas of the audit.
The results of testing for controls of the various business processes can affect the audit of the income statement accounts, because any weakness in controls discovered will also have an effect on the amount of substantive testing done for the income statement accounts. Also, misstatements found while completing tests of details of balance sheet accounts and their related income statement accounts could imply that there are misstatements elsewhere in the income statement. Due to the relationship between the balance sheet and the income statement, results from the audit work done on balance sheet accounts has meaning for the related income statement accounts as well.
AACSB: CommunicationAICPA BB: Critical ThinkingAICPA FN: Decision MakingBlooms: UnderstandDifficulty: 1 EasyLearning Objective: 15-12 Know how to assess control risk and conduct substantive audit procedures for income statement accounts.Topic: Auditing Income Statement Accounts61.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?
The working paper includes dates, amounts, descriptions, and explanations of the account's transactions. The auditor can vouch this information to supporting documentation and scan the working paper for unusual amounts. These tests provide additional evidence about the reasonableness of income statement accounts that are not verified while auditing other business processes or accounts that contain sensitive information or unusual transactions. Additional analysis is also done on accounts used to complete the tax return.
AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Decision MakingBlooms: ApplyDifficulty: 2 MediumLearning Objective: 15-12 Know how to assess control risk and conduct substantive audit procedures for income statement accounts.Topic: Auditing Income Statement Accounts
Matching Questions
62.Match each of the following controls with the assertion for long-term debt that it supports.
1.Premiums and discounts on bond and notes payables are properly amortized using the effective interest rate methodValuation1
2.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 ledgerOccurrence and Authorization3
3.Any significant debt commitments are approved by the board of directors or delegated executivesDisclosure - Classification4
4.The portion of long-term debt due in the next year is classified as a short-term liabilityCompleteness
AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: UnderstandDifficulty: 2 MediumLearning Objective: 15-03 Be familiar with key control activities for long-term debt.Topic: Assertions and Related Control Activities - Long-Term Debt63.Match the balance sheet account with the income statement account that is typically audited at the same time.
1.Bonds PayableInvestment income3
2.Property, Plant, and EquipmentInterest expense1
3.InvestmentsInsurance expense4
4.Prepaid InsuranceBad debt expense5
5.Accounts ReceivableDepreciation expense2
AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Decision MakingBlooms: ApplyDifficulty: 1 EasyLearning Objective: 15-12 Know how to assess control risk and conduct substantive audit procedures for income statement accounts.Topic: Auditing Income Statement Accounts15-38
