Deck 13: Auditing Long-Term Liabilities and Stockholders Equity Transactions

Question 1

Once the auditor has obtained an understanding of the inherent and fraud risks of material misstatement associated with debt and stockholders' equity transactions,the auditor needs to understand the controls that the client has designed and implemented to address those risks.

Answer 1

True

Question 2

An organization typically has many debt transactions during the year,with each individual transaction being material.

Answer 2

False

Question 3

As part of brainstorming activities,the auditor might identify possible fraudulent transactions related to stockholders' equity accounts that are the result of charging expenses directly to retained earnings rather than to the appropriate expense accounts.

Answer 3

True

Question 4

When an auditor is investigating the inherent risk associated with stock issuances/sales that are recorded in the wrong period,the auditor is most likely assessing the risks of material misstatements associated with the existence assertion.

Question 5

Presentation and disclosure is the most relevant audit assertion associated with the inherent risk of using inaccurate periods of service for stock options.

Question 6

Existence is the most relevant assertion associated with an inherent risk for treasury stock transactions recorded in the wrong period.

Question 7

Completeness is the most relevant assertion associated with an inherent risk for dividends that are recorded and paid before being declared.

Question 8

Inherent risks related to debt primarily concern the authorization of debt,receipt of funds,recording debt transactions,and compliance with any debt covenants.

Question 9

The auditor is primarily concerned with overstatement when auditing bonds.

Question 10

Valuation is a relevant assertion when auditing bond premium or discount.

Question 11

A potential fraud risk associated with debt is the intentional misclassification of short-term debt as long-term debt.

Question 12

Bonds are issued to finance major expansions or to refinance existing debt.

Question 13

If an auditor discovers that a company intentionally applied loan payments to interest rather than principal,this would result in fraudulent overstatement of income.

Question 14

Relevant accounts when auditing stockholders' equity include dividends per share.

Question 15

Stock issuances generally do not present valuation problems because most stock is issued in exchange for cash.

Question 16

Rights/obligations is the most relevant audit assertion associated with an inherent risk for finding stock options or warrants being granted without being properly approved.

Question 17

Typically,the most relevant assertion related to debt is existence.

Question 18

Valuation is the most relevant assertion associated with an inherent risk for the cost of treasury stock that is subsequently retired and not properly allocated among the appropriate accounts.

Question 19

Auditing standards require the auditor to identify and assess the risks of material misstatement due to fraud at the financial statement level only.

Question 20

A bond premium/discount amortization spreadsheet can be used to help assure that the bond is appropriately valued and disclosed in the financial statements.

Question 21

When planning the audit related to debt,the auditor should not have expectations as to the nature and magnitude of any account balance changes because they might bias the outcome of the audit.

Question 22

Normally,an auditor can gain an understanding of internal controls by means of a walkthrough of the process,inquiry,observation,and review of the client's documentation.

Question 23

Stockholders' equity accounts typically will be tested with only substantive analytical procedures.

Question 24

A substantive approach using only tests of controls is most commonly used to audit equity accounts.

Question 25

For both debt accounts and stockholders' equity accounts,evidence would typically be obtained only through substantive procedures.

Question 26

A typical control for stockholders' equity transactions is for the board of directors to approve all stock transactions (including options and warrants).

Question 27

If planning analytical procedures do not identify any unexpected relationships related to debt,the auditor would conclude that there is not a heightened risk of material misstatements in these accounts.

Question 28

Using substantive procedures to test debt is most appropriate because there are a relatively large number of transactions involving immaterial dollar amounts.

Question 29

If there were unusual or unexpected relationships,the planned audit procedures (tests of controls,substantive procedures)would be adjusted to address the potential material misstatements.

Question 30

When identifying and assessing control risks of material misstatement associated with debt and stockholders' equity transactions,documentation is only required for integrated audits,not financial statement only audits.

Question 31

Confirmations are not a substantive procedure designed to obtain evidence on the completeness of debt.

Question 32

The transactions in the stockholders' equity accounts are typically tested using a statistical sampling approach.

Question 33

When documenting controls,the auditor can provide this documentation in various formats including a control matrix,a control risk assessment questionnaire,and/or a memo.

Question 34

For integrated audits,a typical test of controls may include an inquiry of personnel performing the control.

Question 35

When obtaining evidence about internal control operating effectiveness,the auditor will select only entity-wide controls for testing.

Question 36

Trend analyses are typically used as planning analytical procedures related to debt.

Question 37

When planning the audit related to stockholders' equity transactions,the auditor is not required to perform planning analytical procedures.

Question 38

Typically,when determining the appropriate audit procedures to perform for debt accounts,the auditor will usually decide to test debt,including interest,using only substantive procedures.

Question 39

For financial statement audit purposes,when auditing debt and stockholders' equity transactions,the auditor will most likely perform a substantive audit,and therefore will not perform tests of controls for the debt and equity accounts.

Question 40

If the auditor identifies control deficiencies,the auditor will not need to judge the severity of the deficiencies but instead would consult management about the need for a fraud audit.

Question 41

Which of the following is not typically included in the audit of debt?

A)Interest expense.
B)Interest income.
C)Notes payable.
D)Bonds payable.

Question 42

To determine whether notes have been paid in full,the auditor would obtain the most appropriate evidence by examining the board of directors meeting minutes.

Question 43

For additions to debt,the auditor traces the proceeds into the cash receipts records and the bank statement.

Question 44

If interest expense recorded by the client is significantly lower than the auditor's expectation,it may mean that interest payments have not been properly recorded,possibly having been charged to principal.

Question 45

When performing a substantive analytical procedure related to interest expense,the auditor will likely not test the client's internal controls.

Question 46

Which of the following is not a common debt covenant restriction?

A)Maintenance of a minimum level of retained earnings before dividends can be paid.
B)Maintenance of a minimum working-capital ratio.
C)Specification of a maximum debt-equity ratio.
D)Specification of a minimum earnings per share.

Question 47

As a starting point for testing capital stock and equity transactions,the auditor should review a copy of the client's articles of incorporation.

Question 48

Which assertion is generally the most relevant when auditing the restrictions contained in debt?

A)Completeness.
B)Valuation.
C)Proper presentation and disclosure.
D)Existence.

Question 49

Which of the following is not a common transaction affecting stockholders' equity?

A)The purchase of treasury stock.
B)The declaration and payment of dividends.
C)The exercises and expirations of stock options and warrants.
D)Bond amortization.

Question 50

Which of the following statements about bonds is false?

A)They may be issued to finance major expansions.
B)They may be issued to refinance existing debt.
C)They account for many of the organization's transactions.
D)They are generally highly material to the financial statements.

Question 51

If the auditor identifies a risk of material misstatement due to fraud related to debt or stockholders' equity accounts,the auditor needs to determine the appropriate responses,potentially including changing the nature,timing,and extent of audit procedures.

Question 52

How would an auditor generally measure the value of a stock option expense?

A)Fair value.
B)Appraised value.
C)By computing a weighted average value of all classes of stock authorized.
D)All of these methods can be used.

Question 53

Which of the following is not a relevant account when auditing stockholders' equity?

A)Treasury stock.
B)Dividends.
C)Sinking fund for plant expansion.
D)Retained earnings.

Question 54

A starting point for substantive tests of details on debt is to have the client provide a cash flow statement.

Question 55

When auditing pension obligations,the auditor may hire an actuarial specialist to assist the audit team.

Question 56

How are most bonds marketed?

A)Through the board of directors.
B)Through an underwriter.
C)Through auditors.
D)Through employees.

Question 57

Which of the following results in a situation where an auditor has the least amount of difficulty in determining stock valuation?

A)When stock is issued for land.
B)When stock is exchanged for another business.
C)When stock options are issued and exercises occur.
D)When stock is issued for cash.

Question 58

Which of the following is the auditor's primary objective when auditing debt?

A)Understatement of the debt obligation focusing on the completeness assertion.
B)Proper valuation of bond premium or bond discount,including amortization valuation.
C)Valuation of gains or losses on refinancing debt.
D)Proper presentation and disclosure,including important restrictions contained in the debt.

Question 59

Auditors can choose to test the client's warranty reserves using primarily tests of controls and substantive analytical procedures.

Question 60

When auditing debt and equity transactions,the auditor should be skeptical,and therefore alert to the possibility that management is managing earnings by not appropriately recording expenses,such as charging expenses directly to retained earnings or under-recording interest expense.

Question 61

Which of the following would an auditor not typically perform as part of gaining an understanding of the client's controls related to debt?

A)Review policies related to approval required for new debt.
B)Inquire of management about the process for reviewing compliance with debt covenants.
C)Review the client's documentation of controls.
D)Recalculate interest expense.

Question 62

An auditor determines that there is an inherent risk that a company has not included both the basic earnings per share and diluted earnings per share amounts in financial statements even though significant dilutive securities are part of the company's complex capital structure.This determination is most likely tied to which of the following management assertions?

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

Question 63

Which of the following is not a potential fraud related to stockholders' equity accounts?

A)Stock sales or issuances are not authorized.
B)Entire loan payments are charged to either principal or interest.
C)Dividends are paid in violation of restrictive covenants.
D)Stock options are back-dated.

Question 64

The inherent risk of proceeds from stock sales not being received is most likely related to which of the following management assertions?

A)Completeness.
B)Presentation and disclosure.
C)Valuation.
D)Existence.

Question 65

In auditing equity accounts,the auditor primarily focuses on which of the following two assertions?

A)Valuation and completeness.
B)Valuation and existence.
C)Presentation and disclosure and valuation.
D)Presentation and disclosure and completeness.

Question 66

Which of the following is not an inherent risk typically associated with recording debt transactions?

A)Interest expense not being properly recorded.
B)Failure to accrue interest expense.
C)Debt not being properly classified.
D)Debt not being properly authorized.

Question 67

When auditing the premium or discount on bonds (including amortization),the auditor primarily focuses on which assertion?

A)Existence.
B)Completeness.
C)Presentation and disclosure.
D)Valuation.

Question 68

Which of the following does an auditor consider when gaining an overall understanding of the client's internal controls?

A)Entity-wide controls at the account level only.
B)Transaction controls at the account level only.
C)Entity-wide controls at the assertion level only.
D)Both entity-wide controls and transaction controls at the account and assertion levels.

Question 69

An auditor determines that there is an inherent risk that stock options exercised or expired remain on the organization's books.This determination is most likely tied to which of the following management assertions?

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

Question 70

Which of the following is not a potential fraud related to debt?

A)Long-term or short-term debt is misclassified.
B)Entire loan payments are charged to either principal or interest.
C)Dividends are paid in violation of restrictive covenants.
D)Debt is not properly authorized.

Question 71

Which of the following statements is true regarding the identification and assessment of the risks of material misstatements by the auditor?

A)Auditing standards require the auditor to identify and assess the risks of material misstatement due to fraud at the financial statement level.
B)Auditing standards require the auditor to identify and assess the risks of material misstatement due to fraud at the assertion level.
C)As part of brainstorming activities,the auditor should identify possible frauds that could occur.
D)All of these statements are true.

Question 72

In general,which of the following would an auditor not typically perform as part of gaining an understanding of the client's controls?

A)A walkthrough of the process.
B)Inquiry.
C)Observation.
D)All of these are used to gain an understanding of the controls.

Question 73

An auditor determines that there is an inherent risk that dividends may be recorded and paid before being declared. This determination is most likely tied to which of the following management assertions?

A)Completeness.
B)Presentation and disclosure.
C)Valuation.
D)Existence.

Question 74

Which of the following would not typically be included as part of the balance sheet disclosures related to stockholders' equity?

A)Accumulated other comprehensive income
B)Details on stock repurchases.
C)Price/earnings ratios for stock.
D)Prior period adjustments to retained earnings.

Question 75

Which of the following is not an inherent risk typically associated with debt covenant compliance issues?

A)Whether debt covenants are calculated accurately.
B)Whether debt payment transactions are properly initiated.
C)Whether compliance with debt covenants is appropriately disclosed.
D)Whether compliance with debt covenants is appropriately reviewed.

Question 76

Which of the following is not an inherent risk typically associated with the existence of dividends?

A)Dividends are recorded in the wrong period.
B)Dividends are recorded before declared.
C)Dividends are not properly amortized.
D)Dividends have not been approved before being declared.

Question 77

Which of the following would a bond indenture not provide information about?

A)The time period before repayment.
B)Whether the bond is convertible.
C)Whether the bond is callable.
D)The date the bond will be called.

Question 78

An auditor determines that there is an inherent risk that all stock repurchased is not recorded as treasury stock.This determination is most likely tied to which of the following management assertions?

A)Completeness.
B)Presentation and disclosure.
C)Valuation.
D)Existence.

Question 79

When auditing the gains or losses on refinancing debt,the auditor primarily focuses on which assertion?

A)Completeness.
B)Existence.
C)Valuation.
D)Presentation and disclosure.

Question 80

What type of risk is intentional failure by management to accurately disclose violations of debt covenants?

A)Inherent risk.
B)Fraud risk.
C)Control risk.
D)Detection risk.