Question 1

All corporations must have

Accepted Answer

All corporations must have capital stock, which represents ownership in the company and is typically issued as either common stock or preferred stock. However, paid-in capital in excess of par and dividends payable are not requirements for all corporations.

Question 2

Which of the following statements regarding the capital acquisition and repayment cycle is most correct?

Accepted Answer

The capital acquisition and repayment cycle typically involves relatively few transactions, but these transactions are usually of high value and material to the financial statements.

Question 3

When auditing the capital acquisition and repayment cycle,it is common to verify each transaction taking place in the cycle for the entire year as a part of verifying the balance sheet accounts.

Accepted Answer

When auditing the capital acquisition and repayment cycle, auditors commonly verify each transaction in the cycle for the entire year as part of verifying the balance sheet accounts.

Question 4

The capital acquisition and repayment cycle does not include

Accepted Answer

The capital acquisition and repayment cycle involves acquiring capital through interest-bearing debt (option D), using the capital for investment purposes, generating profits, using the profits to repay the debt, and paying interest on the outstanding amount (option A). However, payment of dividends (option B) and payment of vendor invoices (option C) are not part of this cycle, as they relate to distribution of profits and payment of operating expenses respectively.

Question 5

Which of the following is not an objective of the auditor's examination of notes payable?

Accepted Answer

The auditor's examination of notes payable is primarily aimed at verifying the completeness, accuracy, and valuation of the related liability and related expenses. The auditor also verifies the legality, authorization, classification, and disclosure of the notes payable transactions. However, the auditor is not concerned with the effectiveness and efficiency of the client's financing arrangements, as this falls outside the scope of the audit engagement.

Question 6

The primary audit objectives to focus on when auditing accounts in the capital acquisition and repayment cycle are

Accepted Answer

The answer of The primary audit objectives to focus on...

Question 7

Which of the following statements is correct regarding the capital acquisition and payment cycle?

Accepted Answer

The answer of Which of the following statements is correct...

Question 8

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

Accepted Answer

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

Question 9

Performance materiality is often set at a(n)________ level for notes payable.

Accepted Answer

Performance materiality for notes payable is often set at a low level because the overall balance of notes payable is typically low compared to other accounts on the financial statements. Setting materiality too high could result in a misstatement being considered immaterial and overlooked during the audit process.

Question 10

Auditors seldom learn about the capital acquisition and repayment cycle when gaining an understanding of the client's business and industry.

Accepted Answer

Auditors do learn about the capital acquisition and repayment cycle when gaining an understanding of the client's business and industry. This cycle is a critical component of a company's financial statements and should be thoroughly understood by auditors during the planning stages of an audit.

Question 11

An auditor is determining whether an issuance of notes payable for cash was correctly recorded.Her best course of action would be to

Accepted Answer

Tracing the cash received from the proceeds to the accounting records would provide the most direct evidence that the notes payable were correctly recorded. Confirming with the bond trustee or underwriter would not necessarily indicate whether the issuance was correctly recorded, and checking a footnote disclosure is not sufficient evidence on its own.

Question 12

In the audit of the transactions and amounts in the capital acquisition and repayment cycle,the auditor must take great care in making sure that the significant legal requirements affecting the financial statements have been properly fulfilled and

Accepted Answer

The auditor must ensure that any significant legal requirements affecting the financial statements have been properly fulfilled and that any violations are adequately disclosed in the financial statements. If legal requirements have not been fulfilled, the auditor may need to issue a qualified or adverse opinion, but there is no requirement to issue a disclaimer. Departures from agreements must also be disclosed in the financial statements.

Question 13

The auditor's independent estimate of interest expense from notes payable uses average interest rates and

Accepted Answer

The auditor's independent estimate of interest expense from notes payable uses average interest rates and average notes payable outstanding. This is because interest expense is typically calculated based on the average outstanding principal balance of the debt during the year, and the average interest rate during that same period. Year-end notes payable outstanding or only notes payable above the level of materiality or only notes payable to major lenders would not accurately reflect the interest expense for the entire year.

Question 14

One unique characteristic of the capital acquisition and repayment cycle is that relatively few transactions affect the account balances,but each transaction is often highly material in amount.

Accepted Answer

This statement is true. Capital transactions often involve large amounts of money that can significantly impact the overall financial position of the company. However, these transactions happen infrequently, which means that the balances in the capital accounts tend to remain relatively stable over time.

Question 15

Assessed control risk and results of substantive tests of transactions are normally unimportant for designing tests of details of balances for which of the following accounts?

Accepted Answer

The assessed control risk and results of substantive tests of transactions are normally unimportant for designing tests of details of balances for notes payable because notes payable are normally supported by legal agreements and documentation that can be verified by external parties. Therefore, the risk of material misstatement is generally lower for notes payable compared to other accounts such as accounts receivable, inventory or accounts payable.

Question 16

List six accounts in the capital acquisition and repayment cycle commonly found on balance sheets of corporations.What characteristics do these accounts have in common that distinguish them from other accounts?

Accepted Answer

The answer of List six accounts in the capital acquisition...

Question 17

When auditing interest-bearing debt,the auditor should ________ verify the related interest expense and interest payable.

Accepted Answer

When auditing interest-bearing debt, it is efficient and effective for the auditor to simultaneously verify the related interest expense and interest payable, as these elements are directly related and impact each other.

Question 18

Responsibility for the issuance of new notes payable would normally be vested in the

Accepted Answer

The board of directors is responsible for making financial decisions and setting policies for the company. Issuing new notes payable falls under their jurisdiction. The purchasing department deals with procurement of goods and services, while the accounting department handles the recording and reporting of financial transactions. The accounts payable department is responsible for managing and paying the company's outstanding debts.

Question 19

There is an indirect relationship between the interest and dividends accounts and debt and equity.

Accepted Answer

The answer of There is an indirect relationship between the...

Question 20

The tests of details of balances procedure which requires the auditor to trace the totals of the notes payable list to the general ledger satisfies the audit objective of

Accepted Answer

The tests of details of balances procedure of tracing the totals of the notes payable list to the general ledger satisfies the audit objective of detail tie-in. This is because it ensures that the details of the notes payable list are accurately reflected in the general ledger. A detail tie-in ensures that there is a proper link and agreement between the details in the underlying accounting records and the amounts reported in the financial statements. This helps to ensure the accuracy and completeness of the financial statements. Therefore, option C is the correct answer.

Quiz 22: Audit of the Capital Acquisition and Repayment Cycle