Question 1

An audit of stockholders' equity ordinarily should include

Accepted Answer

The answer of An audit of stockholders' equity ordinarily should...

Question 2

Which of the following transactions is an auditor most likely to examine when auditing the retained earnings account?

Accepted Answer

Adjustments to retained earnings can occur as a result of correcting errors in prior year financial statements. Therefore, an auditor is most likely to examine transactions related to correcting prior year errors, such as the correction of an error in depreciation in a prior year, when auditing the retained earnings account. The other transactions listed do not necessarily affect the retained earnings account directly, and are therefore less likely to be examined in relation to retained earnings.

Question 3

An audit program for the examination of the retained earnings account should include a step that requires verification of the

Accepted Answer

The answer of An audit program for the examination of...

Question 4

Identify the three major types of transactions that occur in stockholders' equity.

Accepted Answer

The answer of Identify the three major types of transactions...

Question 5

Identify the four major assertions made regarding stockholders' equity and describe one control activity for each.

Accepted Answer

The answer of Identify the four major assertions made regarding...

Question 6

Where no independent stock transfer agents are employed and the corporation issues its own stocks and maintains stock records,canceled stock certificates should

Accepted Answer

Cancelled stock certificates should be defaced to prevent fraudulent reissuance and attached to their corresponding stubs for record keeping purposes. This method ensures that there is a clear record of canceled stock and prevents any confusion or discrepancies in the future.

Question 7

Two months before year-end,the bookkeeper erroneously recorded the receipt of a long-term bank loan by a debit to cash and a credit to sales.Which of the following is the most effective procedure for detecting this type of error?

Accepted Answer

The answer of Two months before year-end,the bookkeeper erroneously recorded...

Question 8

Many of Granada Corporation's convertible bond holders have converted their bonds into stock during the year under examination.The independent auditor should review Granada Corporation's statement of cash flows to ascertain that it shows

Accepted Answer

The answer of Many of Granada Corporation's convertible bond holders...

Question 9

For each of the following substantive procedures,first note whether it is a test of details of transactions or a test of details of account balances.Then decide for which assertion the test provides the best evidence.
1.Trace large cash receipts and payments to the source documents and the general ledger.
2.Examine copies of note and bond agreements.
3.Recompute accrued interest payable.
4.Review debt activity for a few days before and after year-end to determine whether transactions are included in the proper period.
5.Examine due dates on notes and bonds for proper classification between current and long term debt.

Accepted Answer

The answer of For each of the following substantive procedures,first...

Question 10

Erik Rekdahl,senior-in-charge,is auditing Koonce Katfood,Inc.'s,long-term debt for the year ended December 31.Long-term debt is composed of two bond issues,which are due in 10 and 15 years,respectively.The debt is held by two insurance companies.Rekdahl has examined the bond agreements for each issue.The agreements provide that if Koonce fails to comply with the covenants of the contract,the debt becomes payable immediately.Rekdahl identified the following covenants when reviewing the bond agreements:
"The debtor company shall endeavor to maintain a working capital ratio of 2 to 1 at all times,and in any fiscal year following a failure to maintain said ratio,the company shall restrict compensation of officers to a total of $650,000.Officers include the chairperson of the board and the president."
"The debtor company shall keep all property that is security for these debt agreements insured against loss by fire to the extent of 100 percent of its actual value.Policies of insurance comprising this protection shall be filed with the trustee."
"The company is required to restrict 40 percent of retained earnings from availability for paying dividends."
"A sinking fund shall be established with the First Morgan Bank of Austin,and semiannual payments of $500,000 shall be deposited in the fund.The bank may,at its discretion,purchase bonds from either issue."
a.Provide any audit steps that Rekdahl should conduct to determine if the company is in compliance with the bond indentures.
b.List any reporting requirements that the financial statements or footnotes should include.

Accepted Answer

The answer of Erik Rekdahl,senior-in-charge,is auditing Koonce Katfood,Inc.'s,long-term debt for...

Question 11

In performing tests concerning the granting of stock options,an auditor should

Accepted Answer

In order to ensure the validity and legality of the granting of stock options, an auditor should trace the authorization for the transaction to a vote of the board of directors. This ensures that proper approval was given for the transaction. While the other choices may also be relevant in certain circumstances, they are not as directly related to the granting of stock options as the authorization by the board of directors.

Question 12

During the course of an audit,a CPA observes that the recorded interest expense seems to be excessive in relation to the balance in the long-term debt account.This observation could lead the auditor to suspect that

Accepted Answer

The answer of During the course of an audit,a CPA...

Question 13

Of the following,which is the most important procedure that an auditor should use when making an overall review of the income statement?

Accepted Answer

Comparing actual revenues and expenses with the corresponding figures of the previous year and investigating significant differences is a key procedure to evaluate the reasonableness and reliability of the income statement. It helps the auditor to identify any unusual or unexpected fluctuations and anomalies that require further investigation. While the other options are also important procedures for auditing the income statement, they are not necessarily the most crucial for making an overall review.

Question 14

Before expressing an opinion concerning the results of operations,the auditor would most likely proceed with the examination of the income statement by

Accepted Answer

Examining income statement accounts concurrently with the related balance sheet accounts is the best option as it helps the auditor to understand the relationship between the items reported on the income statement and their underlying transactions reflected on the balance sheet. This approach also helps in identifying any misstatements or errors in both the income statement and balance sheet accounts.

Question 15

Overall analysis of income statement accounts may bring to light errors,omissions,and inconsistencies not disclosed in the overall analysis of balance sheet accounts.The income statement analysis can best be accomplished by comparing monthly

Accepted Answer

The best way to analyze the income statement is by comparing the revenue and expense account totals to the corresponding figures of the preceding years. This allows for identification of any significant changes or anomalies in the income statement that can be further investigated. Comparing income statement ratios to balance sheet ratios or published industry averages may provide some insights, but it may not reveal errors or inconsistencies present in the individual account balances.

Question 16

Examining cancelled stock certificates addresses the assertion of

Accepted Answer

Examining cancelled stock certificates verifies the occurrence of the cancellation and ensures that the corresponding stocks have been properly removed from the company's records.

Question 17

Which of the following is the most important consideration of an auditor when examining the stockholders' equity section of a client's balance sheet?

Accepted Answer

The most important consideration of an auditor when examining the stockholders' equity section of a client's balance sheet is to ensure that the entries in the capital stock account can be traced to a resolution in the minutes of the board of directors' meetings. This helps to verify the validity of the capital stock transactions and ensure that they were properly authorized. While the other options may be important considerations, they are not as critical as ensuring proper authorization and documentation of capital stock transactions. Therefore, the correct answer is choice D.

Question 18

Which audit procedure is most closely related to management's assertions about the presentation and disclosure of stockholders' equity?

Accepted Answer

The answer of Which audit procedure is most closely related...

Question 19

Give an example of how the audit of income statement accounts could be affected by results of audit work done in other areas of the audit.

Accepted Answer

The answer of Give an example of how the audit...

Question 20

You have been assigned the duty of auditing long-term debt and retained earnings for your client,Keys,Inc.Describe the tests you would use to support management's assertions regarding disclosure for these accounts.

Accepted Answer

The answer of You have been assigned the duty of...

Quiz 15: Auditing the Financinginvesting Process: Long-Term Liabilities, Stockholders Equity, and Income Statement Accounts