Deck 15: Debt and Equity Capital

Question 1

Which of the following procedures is least likely in the audit of capital stock?

A)Examine all outstanding stock certificates for completeness.
B)Account for the proceeds from stock issues.
C)Reconcile shares outstanding with the general ledger.
D)Evaluate compliance with stock option plans.

Answer 1

A

Question 2

Internal control over bonds payable is best when:

A)The company utilizes the services of a bond trustee.
B)The company segregates approval from issuance of the bonds.
C)Bonds are countersigned by two officers.
D)Bonds are serially numbered.

Answer 2

A

Question 3

Dividends should be authorized by the stockholders of the corporation.

Answer 3

False

Question 4

The formal documentation creating bond indebtedness is called the certificate.

Question 5

The auditors should determine that the issuance of bonds was approved by the company's stockholders.

Question 6

When the auditors obtain an understanding of internal control for the financing cycle,documentation will frequently include a written description as well as a(n):

A)List of audit objectives.
B)Decision table.
C)Summary of tests of controls.
D)Internal control questionnaire.

Question 7

The auditors generally refer to provisions in the partnership agreement when auditing the allocation of partnership income.

Question 8

When an independent registrar and stock transfer agent is used,it is likely that the auditor will confirm the number of shares outstanding with those parties rather than the shareholders.

Question 9

Company A does not employ an independent stock transfer agent,but rather issues its own stock and maintains its stock records.When outstanding shares are transferred from one holder to another,the certificate of the selling shareholder should be:

A)Canceled (generally by perforation)and attached to the certificate book.
B)Destroyed to prevent fraudulent reissuance.
C)Retained by the selling shareholder.
D)Sent to the state's registrar of investment securities.

Question 10

The auditors are required to confirm bond holdings directly with the bondholders.

Question 11

Smaller corporations maintain a stock certificate book and a stockholders' ledger to determine the shares outstanding.

Question 12

For a continuing client,the auditors will often find that a large amount of audit time is required for capital stock due to the dollar amount recorded in the accounts.

Question 13

An auditor obtains evidence of stockholders' equity transactions for a publicly traded company by reviewing the entity's:

A)Minutes of board of directors meetings.
B)Registrar's record of interbank transfers.
C)Canceled stock certificates.
D)Treasury stock certificate book.

Question 14

Registered bondholders receive periodic interest payments without any action on their part.

Question 15

In auditing long-term debt,an auditor would be most likely to:

A)Perform analytical procedures on the bond prenumbered discount accounts.
B)Examine documentation of assets purchased with bond proceeds for liens.
C)Evaluate whether debt provisions have been met.
D)Confirm the existence of individual long-term debt holders at year-end.

Question 16

Which of the following most likely would approve the issuance of notes payable?

A)Controller.
B)Payroll.
C)Personnel.
D)Treasurer.

Question 17

The auditor's plan to examine interest-bearing debt most likely will include steps that require:

A)Comparing the book value of the debt to its year-end market value.
B)Vouching borrowing and repayment transactions.
C)Verifying the proper presentation of the debt through confirmation.
D)Inspecting the accounts payable subsidiary ledger for unrecorded interest-bearing debt.

Question 18

Bond transactions are normally confirmed with:

A)Individual holders of retired bonds.
B)Recomputation procedures performed using interest expense.
C)The bond trustee.
D)Comparisons of retired bonds with those outstanding.

Question 19

A registrar/transfer agent system relating to capital stock is most likely used by:

A)A small,nonpublic company.
B)A large,publicly traded company.
C)All companies must use this type of system.
D)No companies use this system anymore.

Question 20

Long-term liabilities that are maturing must always be classified as a current liability.

Question 21

Which of the following statements is correct relating to common stock certificates of a publicly traded company that uses the services of a transfer agent?

A)Stock certificates should exist for all outstanding stock and be held by the owner of the stock.
B)Stock certificates should exist for all outstanding stock and be held either by the owner of the stock or a representative of the owner (e.g. ,brokerage firm).
C)A lack of stock certificates is ordinarily considered a material weakness in internal control.
D)Stock certificates often are not issued in today's electronic environment.

Question 22

For a large publicly traded client,the auditors' examination of capital stock accounts will not normally include:

A)Analysis of capital stock accounts.
B)Confirmation of shares issued with the independent registrar.
C)Accounting for the proceeds of major stock issues.
D)Reconciliation of a stock certificate book with the general ledger.

Question 23

For a corporation that does not utilize the services of an independent registrar and stock transfer agent,which of the following represents a weakness in internal control over stock issuance?

A)Stock certificates are prenumbered.
B)Stock certificates are signed immediately upon receipt from the printer.
C)Stock certificates are in the exclusive custody of a responsible officer.
D)Stock certificates require the signature of two officers.

Question 24

The auditor can best verify a client's bond sinking fund transactions and year-end balance by:

A)Confirmation with individual holders of retired bonds.
B)Confirmation with the bond trustee.
C)Recomputation of interest expense,interest payable,and amortization of bond discount or premium.
D)Examination and count of the bonds retired during the year.

Question 25

When no independent stock transfer agent is employed and the corporation issues its own stocks and maintains stock records,canceled stock certificates should:

A)Be defaced to prevent reissuance and attached to their corresponding stubs.
B)Not be defaced but segregated from other stock.
C)Be destroyed to prevent fraudulent reissuance.
D)Be defaced and sent to the Secretary of State.

Question 26

Changes in capital stock accounts should normally be approved by:

A)The board of directors.
B)The audit committee.
C)The stockholders.
D)The president.

Question 27

When auditing treasury stock,one will normally expect to see an entry in which journal?

A)Cash disbursements.
B)Cash receipts.
C)Purchases.
D)Sales.

Question 28

The auditors' program for the examination of long-term debt should include steps that require the:

A)Verification of the existence of the bondholders.
B)Identification of notes payable to related parties.
C)Inspection of the accounts payable subsidiary ledger.
D)Investigation of credits to the bond interest income accounts.

Question 29

Which of the following is not a primary objective in the audit of interest-bearing debt?

A)Establish the completeness of recorded interest-bearing debt.
B)Establish the legality of outstanding debt.
C)Determine that debt is properly valued.
D)Determine that the presentation and disclosure of interest-bearing debt is appropriate.

Question 30

An audit plan for the examination of the retained earnings account should include a step that requires verification of the:

A)Market value used to charge retained earnings to account for a two-for-one stock split.
B)Approval of the adjustment to the beginning balance as a result of a write-down of an account receivable.
C)Authorization for both cash and stock dividends.
D)Gain or loss resulting from disposition of treasury shares.

Question 31

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.

Question 32

During an audit of a publicly-held company,the auditors should obtain written confirmation regarding debenture transactions from the:

A)Debenture holders.
B)Client's attorney.
C)Internal auditors.
D)Trustee.

Question 33

During its fiscal year,a company issued,at a discount,a substantial amount of first-mortgage bonds.When performing audit work in connection with the bond issue,the independent auditor should:

A)Confirm the existence of the bondholders.
B)Review the minutes for authorization.
C)Trace the net cash received from the issuance to the bond revenue account.
D)Inspect the records maintained by the bond trustee.

Question 34

The auditor would be least likely to be concerned about internal control as it relates to:

A)Land and buildings.
B)Common stock.
C)Shareholder meetings.
D)Minutes of board of directors' meetings.

Question 35

Which of the following is an auditor most likely to confirm from the transfer agent and registrar?

A)Total shares of stock issued.
B)Restrictions on the payment of dividends.
C)Total market value of outstanding shares of stock.
D)Gains from sale of treasury stock.

Question 36

A primary responsibility of a registrar of capital stock is to:

A)Determine that dividends paid do not exceed the amount allowable by law.
B)Act as an independent third party between the board of directors and outside investors concerning merger,acquisition,and other major decisions.
C)Avoid any overissuance of stock.
D)Maintain detailed stockholder records and carrying out transfers of stock ownership.

Question 37

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

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

Question 38

For audit purposes,a corporation's articles of incorporation are normally:

A)Copied and placed on the owners' equity lead schedule.
B)Copied and placed in the permanent file.
C)Confirmed with the transfer agent.
D)Ignored since they are not normally considered to be related to the internal control structure.

Question 39

In which of the following accounts would one expect a related party transaction to be easiest to detect?

A)Accounts receivable.
B)Accounts payable.
C)Notes payable.
D)Cash.

Question 40

A large corporation entered into a very significant long-term debt agreement during the current year.Which of the following would the auditors most likely be concerned with:

A)Approval by the corporation's CEO.
B)Approval by the corporation's CFO.
C)Approval by the corporation's Board of Directors.
D)Approval by the corporation's Controller.

Question 41

In the audit of interest-bearing debt auditors identify audit objectives and then determine appropriate audit procedures.
a.List the audit objectives for substantive tests of interest-bearing debt.
b.List seven substantive tests for interest-bearing debt to help the auditors meet the audit objectives.

Question 42

A review of the board of directors' minutes is least likely to result in the discovery of

A)Write-off of an large accounts payable.
B)Issuance of stock.
C)Issuance of bonds.
D)Purchase of significant property.

Question 43

To establish effective internal control over a corporation's stock transactions,the corporation should utilize the services of a independent registrar and transfer agent.
a.Describe the functions performed by the stock registrar.
b.Describe the functions performed by the transfer agent.
c.Describe the information that is typically requested by the auditors in a confirmation sent to the registrar.

Question 44

In the audit of the allocation of income for a partnership,the auditors would be most interested in reviewing:

A)Federal Partnership Law.
B)State Partnership Law.
C)Board of directors minutes.
D)The partnership agreement.