Question 1

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 in the capital acquisition and repayment cycle could result in incomplete financial statements. Therefore, completeness is a major audit concern.

Question 2

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

Accepted Answer

C

Question 3

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

Accepted Answer

The risks of fraud and error for such accounts are as follows:
•errors in calculating interest payments, posting such amounts to the wrong period, or omitting them
•misclassifying debt as equity or vice versa, or misclassifications between current and long-term
•recording debt or equity transactions in the wrong period
•incorrect or inaccurate disclosure of terms or amounts
•deliberate misclassification of debt or equity as revenue or other fraudulent manipulations
•over or underpayment of interest due to the use of different interest rates
•duplication of interest payments in error

Question 4

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 5

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 the interest and dividend accounts and debt and equity means that verifying the related interest expense and interest payable is necessary for the audit of interest-bearing debt. This will help ensure that the company's financial statements accurately reflect its debt obligations and related interest expenses. It is also important to note that while contracts and commitments that are long-term may be relevant to the audit, they are not directly related to the interest and dividend accounts like interest expense and interest payable. Details provided in the board of directors' minutes may be useful for understanding management's decisions and actions, but they are not directly related to the verification of interest-bearing debt.

Question 6

Discuss the overall objectives of the audit of notes payable.

Accepted Answer

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

Question 7

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 8

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

Accepted Answer

The normal audit approach for the audit of bonds issued is to verify each transaction taking place in the cycle for the entire year, rather than simply examining transactions that occurred near the year-end date only or relying on controls. Selecting a statistical sample of transactions throughout the year is also a common approach, but verifying each transaction provides more assurance of accuracy and completeness.

Question 9

A note payable is

Accepted Answer

A note payable is a legal obligation to a creditor that may be unsecured or secured by assets. This means that the borrower has promised to pay back the loan and may have offered collateral as security for the debt, but it is not necessarily required. A note payable can be short-term or long-term depending on the maturity date of the loan.

Question 10

Discuss the four key controls over notes payable.

Accepted Answer

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

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 have clear terms for repayment, making them easy to value and include in financial statements, resulting in a low level of inherent risk.

Question 12

Proper authorization for the issuance of notes payable requires that

Accepted Answer

Renewal or refinancing of notes payable should follow the same authorization procedures as used when they were initially issued to ensure proper accountability and control. This helps to prevent unauthorized borrowings or misuse of company funds. It also ensures that renewals or refinancing are done to meet the company's financial objectives and goals.

Question 13

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 14

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

Accepted Answer

The responsibility for the issuance of new notes should be vested in the board of directors, as this is a critical financial decision that requires careful consideration and oversight at the highest level of the organization. The accounting department may be involved in the process, but ultimately the decision should be made by the board. The accounts payable and purchasing departments are not typically involved in the issuance of new notes.

Question 15

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 16

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 17

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 significant legal requirements affecting the financial statements have been properly fulfilled and are adequately disclosed in the financial statements. This means that any departures from the agreements should be disclosed properly in the financial statements. The auditor does not have to report any violations to the relevant provincial securities commissions or issue a disclaimer if the legal requirements have not been fulfilled. Additionally, any departures from the agreements should not be made with management's knowledge and consent without proper disclosure in the financial statements.

Question 18

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 19

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

Accepted Answer

The answer of Which of the following internal controls over...

Question 20

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.

Quiz 16: Audit of the Capital Acquisition and Repayment Cycle