Question 1

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

Notes payable typically involve fewer transactions and are often confirmed directly with creditors, making control risk and substantive tests of transactions less critical for designing tests of details of balances.

Question 2

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 focused on verifying the accuracy and completeness of the financial statement disclosures related to the notes payable. While assessing the effectiveness and efficiency of the client's financing arrangements may be a useful piece of information, it is not a primary objective of the audit. The other options listed (A, C, and D) are all valid objectives that the auditor should aim to achieve during their examination of notes payable.

Question 3

The primary audit objectives to focus on when auditing debt are:

Accepted Answer

The primary audit objectives for debt include ensuring that all debt is accurately recorded (accuracy) and that all existing debt is included in the financial statements (completeness).

Question 4

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 5

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 that involves tracing the totals of the notes payable list to the general ledger aims to ensure that every individual note payable is accurately included and agrees with the amounts recorded in the general ledger, which fulfills the audit objective of detail tie-in. This test of detail tie-in helps to guarantee the completeness and accuracy of accounts payable's balance. However, it doesn't directly address existence, as the auditor is only checking if the notes payable balance in the ledger is accurate.

Question 6

The audit objective to determine that notes payable in the schedule actually exist is verified by the test of details of balances procedure to:

Accepted Answer

Confirming notes payable with creditors directly provides the most reliable evidence that the noted payable balances in the schedule actually exist. Footing the list simply ensures mathematical accuracy, while recalculating interest expense and examining the balance sheet for proper disclosure do not directly verify the existence of the notes payable.

Question 7

The capital acquisition and repayment cycle does not include:

Accepted Answer

The capital acquisition and repayment cycle involves acquiring capital through various means, such as issuing stock or taking out loans, and then repaying that capital over time. It also includes paying interest on any debt taken out to acquire capital. However, paying vendor invoices and distributing dividends are not directly related to the capital acquisition and repayment cycle.

Question 8

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

Accepted Answer

The board of directors is responsible for making strategic decisions for the company, including decisions regarding financing and debt. Issuing new notes payable falls under this responsibility, as it involves taking on new debt for the company. The purchasing department would not be responsible for this, as notes payable are a form of financing and not a direct purchase of goods or services. The accounting department and accounts payable department may be involved in the process, but the ultimate decision and responsibility lies with the board of directors.

Question 9

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 issuance of notes payable to the accounting records is the most appropriate course of action to ensure that the transaction was accurately recorded. This confirms that the funds were actually received and properly accounted for. The other options are not relevant to this specific audit procedure.

Question 10

All corporations must have a ________ account.

Accepted Answer

All corporations must have a common stock account as it represents the ownership shares issued to shareholders and is a fundamental component of a corporation's equity.

Question 11

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 12

In the audit of the transactions and amounts in the capital acquisitions and repayments 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 adequately disclosed in the financial statements. Reporting violations to the SEC or issuing a disclaimer may be necessary in extreme cases, but the primary responsibility of the auditor is to ensure that the financial statements are fairly presented and comply with legal requirements. If there are any departures from the agreements, they must be disclosed and made with management's knowledge and consent.

Question 13

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

Auditors commonly verify each transaction in the capital acquisition and repayment cycle for the entire year when auditing the balance sheet accounts.

Question 14

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 15

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 as it is an important part of their financial reporting and potential risk considerations.

Question 16

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 17

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 18

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 19

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

Capital acquisition and repayment cycle involves large amounts of money being invested or paid back, and relatively few transactions occur over time. Therefore, each transaction can have a significant impact on the account balances.

Question 20

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 highly material due to their significant impact on the financial statements.

Quiz 22: Audit of the Capital Acquisition and Repayment Cycle