Question 1

Notes payable that have been repaid in full should be

Accepted Answer

Notes payable that have been repaid in full should be cancelled and retained by an authorized company official. This ensures there is a record of the repayment, which can be important for accounting purposes and to resolve any future disputes about the payment.

Question 2

Which of the following internal controls over notes payable address risks associated with the accuracy, allocation, and completeness audit assertions?

Accepted Answer

B

Question 3

A note payable is

Accepted Answer

A note payable is a legal obligation to a creditor, but it may be either unsecured or secured by assets, making it the best choice. A long-term account payable (A) typically refers to amounts owed to suppliers that will be paid back over a period greater than one year, while a legal obligation secured by assets(B) would be considered a secured note payable. An unsecured legal obligation to a creditor(C) would be considered an unsecured loan or unsecured note payable.

Question 4

Responsibility for the issuance of new notes should be vested in the

Accepted Answer

The board of directors is responsible for overseeing the overall financial health and well-being of the organization, including the issuance of new notes. They are the highest decision-making body within the company and have the ultimate authority to approve or reject the issuance of new notes. The accounting department, accounts payable department, and purchasing department may be involved in the process, but the ultimate responsibility rests with the board of directors.

Question 5

The normal audit approach for the audit of bonds issued is to

Accepted Answer

The answer of The normal audit approach for the audit...

Question 6

Tests of details for notes payable interest expense and accrued interest can frequently be eliminated when

Accepted Answer

Tests of details for notes payable interest expense and accrued interest can often be reduced or eliminated when the results of analytical review procedures are favorable. This means that if the analytical procedures do not indicate any unexpected fluctuations or inconsistencies in interest expense or accrued interest, auditors may decide that further detailed testing is unnecessary. Analytical review helps auditors to assess the reasonableness of financial statement accounts and can be a powerful tool in assessing the risk of material misstatement.

Question 7

In the audit of the transactions and amounts in the capital acquisitions and repayments cycle, the auditor must ensure that significant legal requirements affecting the financial statements have been properly fulfilled and

Accepted Answer

The auditor must ensure that all significant legal requirements affecting the financial statements have been properly fulfilled, and any departures from the agreements are adequately disclosed in the financial statements. Reporting violations to the relevant provincial securities commissions is not the role of the auditor, and issuing a disclaimer is only necessary if there is a scope limitation or a material misstatement in the financial statements that cannot be resolved.

Question 8

Discuss the four characteristics of the capital acquisition and repayment cycle that make it unique from other cycles.

Accepted Answer

The answer of Discuss the four characteristics of the capital...

Question 9

Discuss the overall objectives of the audit of notes payable.

Accepted Answer

The answer of Discuss the overall objectives of the audit...

Question 10

There is a direct relationship between the interest and dividend accounts and debt and equity. This means that in the audit of interest-bearing debt, it is desirable to simultaneously verify

Accepted Answer

The direct relationship between interest and dividend accounts and debt and equity indicates that in the audit of interest-bearing debt, it is desirable to simultaneously verify the related interest expense and interest payable. This is because interest expense is directly related to the interest-bearing debt, and interest payable reflects the amount of interest that has been incurred but not yet paid. The related dividends declared and dividends payable may be important to verify in the audit of equity accounts, but not in the audit of interest-bearing debt. Contracts and commitments that are long-term may be relevant to the audit of both debt and equity accounts, but they do not reflect the direct relationship between interest and dividends with debt and equity. Details provided in the board of directors' minutes may be relevant to the audit of various accounts, but they do not directly relate to the verification of interest and dividend accounts.

Question 11

Notes payable are easy for companies to correctly value and include in the financial statements. This means that with respect to notes payable, inherent risk is

Accepted Answer

Notes payable are typically straightforward and easy to value, making the inherent risk low.

Question 12

If actual interest expense is materially larger than the auditor's independent estimate, one possible cause could be

Accepted Answer

Interest payments on unrecorded notes payable could lead to actual interest expense being materially larger than the auditor's independent estimate, as these liabilities and their associated interest expenses would not have been accounted for in the auditor's calculations.

Question 13

When setting the objectives for auditing notes, the auditor should consider inherent risks associated with

Accepted Answer

The answer of When setting the objectives for auditing notes,...

Question 14

Control risk for notes payable is usually assessed as low. This occurs because internal controls are normally good for notes payable and

Accepted Answer

Control risk for notes payable is usually assessed as low primarily because there are a small number of large transactions, making it easier to monitor and control these transactions compared to numerous small transactions.

Question 15

The amount of time spent verifying owners' equity is frequently minimal for closely-held corporations because

Accepted Answer

The answer of The amount of time spent verifying owners'...

Question 16

Discuss the four key controls over notes payable.

Accepted Answer

The answer of Discuss the four key controls over notes...

Question 17

Describe the risks of error and fraud in the debt or equity accounts.

Accepted Answer

The answer of Describe the risks of error and fraud...

Question 18

Comparison of the total balance in notes payable, interest expense, and accrued interest with these accounts in the prior year could detect what type of possible misstatement?

Accepted Answer

This comparison can reveal discrepancies in the amounts reported for notes payable, interest expense, or accrued interest, indicating potential misstatements in any of these areas.

Question 19

The exclusion of a single transaction of the capital acquisition and repayment cycle could be material in itself. This means that the following audit assertion is a major audit concern:

Accepted Answer

The exclusion of a single transaction from the capital acquisition and repayment cycle could have a significant impact on the completeness assertion. Completeness assertion refers to the completeness of all transactions that should have been recorded in the financial statements. Even a single omission or error can have a material impact on the financial statements. Therefore, the completeness assertion is a major audit concern in this scenario.

Question 20

Proper authorization for the issuance of notes payable requires that

Accepted Answer

Proper authorization for the issuance of notes payable requires that whenever notes are renewed (refinanced), they should be subject to the same authorization procedures as used when they were first issued. This ensures that the same level of scrutiny and approval is given to the refinanced notes as was given to the original notes, and helps to prevent unauthorized borrowing by the company. The responsibility for authorizing notes should generally lie with senior management or the board of directors, rather than with individual managers or functional departments.

Quiz 16: Audit of the Capital Acquisition and Repayment Cycle