Deck 17: Auditing the Investing and

Question 1

Events may occur between acquiring and retiring an asset that affect the completeness assertion and require an immediate writedown of the asset.

Answer 1

False

Question 2

The interesting-bearing debt to total assets ratio is calculated as interest-bearing debt divided by total assets.

Answer 2

True

Question 3

When bond interest coupons are involved, the auditor can examine the canceled coupons and reconcile them to the amount received.

Answer 3

False

Question 4

The ownership of vehicles may be established by examining certificates of title, registration certificates, and invoices.

Question 5

Property pledged as security for loans need not be disclosed.

Question 6

When plant assets are acquired under a capital lease, the cost of the property and the related liability should be recorded at the present value of the future minimum lease payments.

Question 7

For bonds, the auditor should obtain evidence on both the face value and net proceeds of the obligations as of the balance sheet date.

Question 8

The dividend payout rate is calculated as: cash dividends divided by stockholders' equity.

Question 9

The ratio total asset turnover is calculated as: net sales divided by average fixed assets.

Question 10

Equity financing might be used either to support investing activities, or to support needed investments in working capital.

Question 11

The inspection of plant assets enables the auditor to obtain direct personal knowledge of their existence.

Question 12

Inherent risk related to the existence assertion is often low because fixed assets are not vulnerable to theft.

Question 13

Inherent risk assessments for assertions pertaining to stockholders' equity balances depend on the nature and frequency of transactions affecting the accounts.

Question 14

Evidence obtained while auditing disposals of plant assets may assist in the audit of repairs and maintenance expense.

Question 15

Substantive tests of long-term debt balances may be performed either before or after the balance sheet date.

Question 16

Confirming long-term debt relates to four assertions: existence or occurrence, completeness, rights and obligations, and valuation or allocation.

Question 17

Documentation of the cost of treasury stock should be available to the auditor in the form of authorizations in the minutes, disbursement vouchers, and canceled checks.

Question 18

The disclosure requirements for long-term debt and stockholders' equity are usually significant.

Question 19

Consistency involves a determination of whether the company's criteria for distinguishing between capital and revenue expenditures are the same as in the prior year.

Question 20

Investing activities include the purchase and sale of financial instruments intended for trading purposes.

Question 21

Entering into a capital lease is both a financing activity and an investing activity.

Question 22

The specific account balance audit objective, plant asset balances include the effects of all applicable transactions for the period, relates to the:

A) rights and obligations assertion.
B) completeness assertion.
C) existence or occurrence assertion.
D) valuation or allocation assertion.
E) presentation or disclosure assertion.

Question 23

Each change in a capital stock account should be vouched to supporting documentation.

Question 24

If capital stock is held in the treasury, the auditor should count the certificates at the same time other securities are counted.

Question 25

Dividends require management authorization and are authorized in the bylaws.

Question 26

The specific account balance audit objective, plant assets are stated at cost less accumulated depreciation, relates to the:

A) rights and obligations assertion.
B) completeness assertion.
C) existence or occurrence assertion.
D) valuation or allocation assertion.
E) presentation or disclosure assertion.

Question 27

The substantive test of determining the significance of plant assets, and changes in plant assets, to the entity is categorized under:

A) initial procedures.
B) analytical procedures.
C) tests of details of transactions.
D) tests of details of balances.
E) presentation and disclosure.

Question 28

Analytical procedures risk for presentation and disclosure should always be assessed at maximum for both investing and financing cycles.

Question 29

The audit significance of the financial ratio, return on common equity is:

A) this financial ratio provides a reasonableness test of the entity's proportion of equity that may be compared with prior years' experience or industry data.
B) an unexpected increase or decrease in the depreciation expense as a percent of depreciable assets may indicate an error in calculating depreciation.
C) an unexpected increase in this financial ratio may indicate the failure to record or capitalize depreciable assets.
D) this financial ratio provides a test of the entity's ability to generate earnings to cover the cost of service debt.
E) this financial ratio provides a reasonableness test of shareholders' equity given the company's earnings and financing structure.

Question 30

The specific account balance audit objective, plant assets and related expenses are properly identified and classified in the financial statements, relates to the:

A) rights and obligations assertion.
B) completeness assertion.
C) existence or occurrence assertion.
D) valuation or allocation assertion.
E) presentation or disclosure assertion.

Question 31

Investing activities include the sale of land, buildings, equipment and other assets not generally held for resale.

Question 32

The audit significance of the financial ratio, fixed asset turnover, is:

A) this financial ratio provides a reasonableness test of the entity's proportion of equity that may be compared with prior years' experience or industry data.
B) an unexpected increase or decrease in the depreciation expense as a percent of depreciable assets may indicate an error in calculating depreciation.
C) an unexpected increase in this financial ratio may indicate the failure to record or capitalize depreciable assets.
D) this financial ratio provides a test of the entity's ability to generate earnings to cover the cost of service debt.
E) this financial ratio provides a reasonableness test of shareholders' equity given the company's earnings and financing structure.

Question 33

When a company enters into a capital lease, the values of the additional asset and debt are independently determined.

Question 34

The specific account balance audit objective, the entity owns or has rights to all recorded plant assets at the balance sheet date, relates to the:

A) rights and obligations assertion.
B) completeness assertion.
C) existence or occurrence assertion.
D) valuation or allocation assertion.
E) presentation or disclosure assertion.

Question 35

Which one of the following is an?

A) acquiring debt
B) capital leases
C) selling land
D) issuing bonds
E) issuing preferred stock

Question 36

The audit significance of the financial ratio, times interest earned, is:

A) this financial ratio provides a reasonableness test of the entity's proportion of equity that may be compared with prior years' experience or industry data.
B) an unexpected increase or decrease in the depreciation expense as a percent of depreciable assets may indicate an error in calculating depreciation.
C) an unexpected increase in this financial ratio may indicate the failure to record or capitalize depreciable assets.
D) this financial ratio provides a test of the entity's ability to generate earnings to cover the cost of service debt.
E) this financial ratio provides a reasonableness test of shareholders' equity given the company's earnings and financing structure.

Question 37

The client is expected to furnish support for any prior-period adjustments to retained earnings.

Question 38

The substantive test of inspecting plant asset additions is categorized under:

A) initial procedures.
B) analytical procedures.
C) tests of details of transactions.
D) tests of details of balances.
E) presentation and disclosure.

Question 39

Each entry to retained earnings should be vouched to supporting documentation.

Question 40

The substantive test of calculating fixed asset turnover is categorized under:

A) initial procedures.
B) analytical procedures.
C) tests of details of transactions.
D) tests of details of balances.
E) presentation and disclosure.

Question 41

The auditor will normally find evidence concerning the proper authorization of transactions in the financing cycle by:

A) direct confirmation by the investors.
B) inquiring of the audit committee.
C) inquiring of management.
D) reading the copies of the contracts.
E) reading the minutes of the board of directors meetings.

Question 42

The substantive test of vouching plant asset disposals to supporting documentation is categorized under:

A) initial procedures.
B) analytical procedures.
C) tests of details of transactions.
D) tests of details of balances.
E) presentation and disclosure.

Question 43

The following procedures may be useful to the auditor in determining whether all retirements have been recorded except:

A) analyze the miscellaneous expense account for proceeds from sales of plant assets.
B) investigate the disposition of facilities associated with discontinued product lines and operations.
C) trace retirement work orders and authorizations for retirements to the accounting records.
D) review insurance policies for termination or reductions of coverage.
E) make inquiry of management as to retirements.

Question 44

The specific financing cycle audit objective, long-term debt and related income statement balances and stockholders' equity balances are properly valued in accordance with GAAP, relates to the:

A) rights and obligations assertion.
B) completeness assertion.
C) existence or occurrence assertion.
D) valuation or allocation assertion.
E) presentation or disclosure assertion.

Question 45

Analytical procedures used to audit plant assets often include calculation of :

A) return on common equity.
B) return on total assets.
C) interest bearing debt to total assets.
D) inventory turnover.
E) sustainable growth rate.

Question 46

Return on common stockholders' equity is calculated as:

A) net income ÷ weighted average common shares outstanding.
B) (net income - preferred dividends) ÷ average common stockholders' equity.
C) weighted average common shares outstanding ÷ net income.
D) average common stockholders' equity ÷ (net income - preferred dividends).
E) operating income ÷ average common stockholders' equity.

Question 47

Dividend payout rate is calculated as:

A) total dividends ÷ operating income.
B) cash dividends ÷ operating income.
C) total dividends ÷ by net income.
D) operating income ÷ total dividends.
E) cash dividends ÷ net income.

Question 48

The specific financing cycle audit objective, all recorded long-term debt balances are obligations of the reporting entity, relates to the:

A) rights and obligations assertion.
B) completeness assertion.
C) existence or occurrence assertion.
D) valuation or allocation assertion.
E) presentation or disclosure assertion.

Question 49

The specific financing cycle audit objective, stockholders' equity balances represent the owners' interests that exist at the balance sheet date, relates to the:

A) rights and obligations assertion.
B) completeness assertion.
C) existence or occurrence assertion.
D) valuation or allocation assertion.
E) presentation or disclosure assertion.

Question 50

The specific financing cycle audit objective, stockholders' equity balances include the effects of all transactions pertaining to paid-in capital and retained earnings through the balance sheet date, relates to the:

A) rights and obligations assertion.
B) completeness assertion.
C) existence or occurrence assertion.
D) valuation or allocation assertion.
E) presentation or disclosure assertion.

Question 51

The substantive test of comparing financial statement presentation with GAAP is categorized under:

A) initial procedures.
B) analytical procedures.
C) tests of details of transactions.
D) tests of details of balances.
E) presentation and disclosure.

Question 52

During inspection of the stock certificate book, the auditor determines that all unissued certificates are intact. This relates primarily to the:

A) completeness assertion.
B) valuation or allocation assertion.
C) existence or occurrence assertion.
D) rights and obligations assertion.
E) presentation or disclosure assertion.

Question 53

Earnings per share is calculated as:

A) net income ÷ weighted average common shares outstanding.
B) (net income - preferred dividends) ÷ average common stockholders' equity.
C) weighted average common shares outstanding ÷ net income.
D) average common stockholders' equity ÷ (net income - preferred dividends).
E) operating income ÷ average common stockholders' equity.

Question 54

The following statement about inherent risk for long-lived assets is not true:

A) The rights and obligations assertion is significant because assets are usually pledged as collateral for the underlying debt.
B) Impairment of long-lived assets poses an inherent risk for the valuation assertion.
C) The completeness assertion rarely presents a high inherent risk.
D) Misstatements of disclosures represent only a moderate inherent risk.
E) Inherent risk for the existence assertion is often low.

Question 55

The ratio times interest earned is calculated as:

A) (interest expense + capitalized interest) ÷ income before interest and income taxes.
B) net income ÷ (interest expense + capitalized interest).
C) income before interest and income taxes ÷ (interest expense + capitalized interest).
D) (interest expense + capitalized interest) ÷ net income.
E) income before interest and income taxes ÷ (interest income + capitalized interest).

Question 56

The classes of transactions associated with the audit of plant assets do not include:

A) disposals of fixed assets.
B) repair and maintenance transactions.
C) depreciation expense.
D) board minutes authorizing asset acquisitions.
E) manufacture of fixed assets.

Question 57

Entries for dividend declarations and retained earnings appropriations are traced to the minutes book. In determining the propriety of the distribution, the auditor should:

A) establish that preferential or other rights of stockholders and any restrictions on dividend distributions have been recognized.
B) establish the number of shares outstanding on the date of record and verify the accuracy of the total dividend declaration by recalculation.
C) ascertain the propriety of the entry to record the declaration.
D) review the minutes to provide evidence of stockholders' equity transactions authorized during the year.
E) trace dividend payments to canceled checks and other documentation.

Question 58

The financing cycle interfaces with the:

A) investing cycle.
B) expenditure cycle.
C) revenue cycle.
D) production cycle.
E) personnel services cycle.

Question 59

The specific financing cycle audit objective, long-term debt and related income statement balances and stockholders' equity balances are properly identified and classified in the financial statements, relates to the:

A) rights and obligations assertion.
B) completeness assertion.
C) existence or occurrence assertion.
D) valuation or allocation assertion.
E) presentation or disclosure assertion.

Question 60

The use of variable interest entities increase inherent risks:

A) with respect to presentation and disclosure of shareholders' equity.
B) when they are included in the client's consolidated financial statements
C) except when authorized by the board of directors.
D) as to the completeness assertions for investing and financing.
E) with respect to the rights and obligations assertions for shareholders' equity.

Question 61

Listed below are five assertion categories coded by the letters A through E.
A.Completeness
D.Valuation or Allocation
B.Existence or Occurrence
E.Presentation and Disclosure
C.Rights and Obligations
REQUIRED: Match the specific account balance audit objectives with the codes for the assertion categories above.
Recorded plant assets represent productive assets that are in use at the balance sheet date.

Question 62

You have been assigned to the examination of the capital stock of B Company. As a result of your review of changes in the account for the year, you have identified the following transactions:
1.Cancellation of treasury stock.
2.Issuance of a 5% stock dividend.
3.Issuance of capital stock in exchange for land wanted as a site for possible future expansion.
4.Issuance of ten shares of $25 par common stock having a market price of $125 per share in exchange for a $1,000 convertible bond.
REQUIRED: State the audit procedures you would use to gather evidence in support of the propriety of the above transactions.

Question 63

Listed below are five assertion categories coded by the letters A through E.
A.Completeness
D.Valuation or Allocation
B.Existence or Occurrence
E.Presentation and Disclosure
C.Rights and Obligations
REQUIRED: Match the specific account balance audit objectives with the codes for the assertion categories above.
Recorded long-term debt balances represent debt that exists at the balance sheet date, and related income statement balances represent the effects of long-term debt transactions and events that occurred during the period.

Question 64

Listed below are five assertion categories coded by the letters A through E.
A.Completeness
D.Valuation or Allocation
B.Existence or Occurrence
E.Presentation and Disclosure
C.Rights and Obligations
REQUIRED: Match the specific account balance audit objectives with the codes for the assertion categories above.
Stockholders' equity balances represent owners' claims on the reporting entity's assets.

Question 65

Listed below are five assertion categories coded by the letters A through E.
A.Completeness
D.Valuation or Allocation
B.Existence or Occurrence
E.Presentation and Disclosure
C.Rights and Obligations
REQUIRED: Match the specific account balance audit objectives with the codes for the assertion categories above.
Long-term debt and related income statement balances and stockholders' equity balances are properly valued in accordance with GAAP.

Question 66

The auditor usually wants to obtain answers to what three questions when auditing investing and financing activities?

Question 67

Listed below are five assertion categories coded by the letters A through E.
A.Completeness
D.Valuation or Allocation
B.Existence or Occurrence
E.Presentation and Disclosure
C.Rights and Obligations
REQUIRED: Match the specific account balance audit objectives with the codes for the assertion categories above.
All terms, covenants, commitments, and retirement provisions pertaining to long-term debt are adequately disclosed.

Question 68

The disclosure committee would not ordinarily:

A) review and confirm financing transactions with the bond trustee or transfer agent.
B) review reporting of transactions involving variable interest entities.
C) review amortization of bond premiums or discounts at the time of issuance.
D) review controls over the completeness of transactions.
E) review the accounting for fixed asset disposals.

Question 69

Different industries have different types of assets and use different types of financing. How are net fixed assets financed for a company in (1) the hotel industry, (2) the retail grocery industry, and (3) the computer manufacturing industry?

Question 70

Listed below are five assertion categories coded by the letters A through E.
A.Completeness
D.Valuation or Allocation
B.Existence or Occurrence
E.Presentation and Disclosure
C.Rights and Obligations
REQUIRED: Match the specific account balance audit objectives with the codes for the assertion categories above.
Plant assets and related expenses are properly identified and classified in the financial statements.

Question 71

Listed below are five assertion categories coded by the letters A through E.
A.Completeness
D.Valuation or Allocation
B.Existence or Occurrence
E.Presentation and Disclosure
C.Rights and Obligations
REQUIRED: Match the specific account balance audit objectives with the codes for the assertion categories above.
Long-term debt balances represent all payables to long-term creditors at the balance sheet date, and related income statement balances represent the effects of all long-term debt transactions and events that occurred during the period.

Question 72

Listed below are five assertion categories coded by the letters A through E.
A.Completeness
D.Valuation or Allocation
B.Existence or Occurrence
E.Presentation and Disclosure
C.Rights and Obligations
REQUIRED: Match the specific account balance audit objectives with the codes for the assertion categories above.
Plant assets are stated at cost less accumulated depreciation.

Question 73

Listed below are five assertion categories coded by the letters A through E.
A.Completeness
D.Valuation or Allocation
B.Existence or Occurrence
E.Presentation and Disclosure
C.Rights and Obligations
REQUIRED: Match the specific account balance audit objectives with the codes for the assertion categories above.
Plant asset balances include the effects of all applicable transactions for the period.

Question 74

You have been assigned to the substantive testing of the plant assets of B Company.
REQUIRED: Describe the basic procedural steps that would be necessary in performing the following types of tests:
1.Obtain an understanding of the business and industry.
2.Inspect plant assets.