Question 1

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 2

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

To analyze the income statement, it is best to compare revenue and expense account totals to the corresponding figures of the preceding years. This will help identify any changes in revenue or expense patterns that may indicate errors or inconsistencies. Comparing income statement ratios to published industry averages or balance sheet ratios may also be useful in identifying issues, but a comparison to previous years' data is the best starting point. Option B is not ideal as comparing revenue and expense account balances to the monthly reported net income may not reveal any errors or inconsistencies.

Question 3

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 conversion of bonds into stock is a non-cash transaction and does not affect the company's cash flows. Therefore, it should not be reflected in the statement of cash flows.

Question 4

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

Accepted Answer

The most important consideration of an auditor when examining the stockholders' equity section of an entity's balance sheet is to ensure that entries in the capital stock account can be traced to a resolution in the minutes of the board of directors' meetings. This is because stock issuances, stock splits or dividends require board approval and should be recorded properly in the financial statements. Therefore, tracing entries to board resolutions serves as evidence of proper authorization and validation of changes in the capital stock account. Option A is incorrect as while verification of stock transfer agent is a control, it is not the most significant consideration. Option B pertains only to the approval process and does not necessarily ensure accuracy of accounting treatment. Option C is not relevant for examination of stockholders' equity section of an entity's balance sheet.

Question 5

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

Accepted Answer

Verification of the authorization for both cash and stock dividends should be included in an audit program for the examination of the retained earnings account. This is because dividends affect the balance of the retained earnings account, and verifying the authorization ensures that the dividends were properly declared and recorded. The other options (A, B, and D) may also be important steps in an audit program, but they are not directly related to the balance of the retained earnings account.

Question 6

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

If the interest expense is excessive compared to the balance in the long-term debt account, it could indicate that not all debt is being reported on the balance sheet, suggesting that long-term debt might be understated.

Question 7

Examining cancelled stock certificates addresses the assertion of

Accepted Answer

Examining cancelled stock certificates primarily addresses the assertion of occurrence, ensuring that transactions recorded in the financial statements have actually occurred.

Question 8

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

Canceled stock certificates should be defaced to prevent reissuance and attached to their corresponding stubs to maintain a proper audit trail and ensure that they cannot be fraudulently reissued.

Question 9

An audit of stockholders' equity ordinarily should include

Accepted Answer

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

Question 10

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

Accepted Answer

The correction of an error in depreciation in a prior year could have a material impact on the retained earnings account and therefore would be a transaction that an auditor is most likely to examine when auditing the account. Options A, B, and C are all changes in accounting methods which may affect the current period's net income but would not necessarily have a direct impact on the retained earnings account.

Question 11

You have been assigned the duty of auditing long-term debt and retained earnings for 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...

Question 12

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

Accepted Answer

Management's assertions about presentation and disclosure involve ensuring that all necessary information is properly presented and disclosed in the financial statements. Determining whether restrictions have been imposed on retained earnings relates directly to the disclosure of stockholders' equity, as such restrictions must be disclosed in the financial statements.

Question 13

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 14

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

Accepted Answer

In order to ensure the validity of the granting of stock options, the auditor should trace the authorization for the transaction to a vote of the board of directors. This confirms that the granting of stock options was properly approved by those with the authority to do so. The other options may also be relevant factors, but do not directly confirm the authenticity of the stock option grants.

Question 15

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 the most important procedure for an auditor when making an overall review of the income statement. This helps the auditor identify any unusual fluctuations or patterns in the financial data, investigate the causes behind the variances, and assess the overall financial health and performance of the entity. The other options are also important procedures in auditing, but they are more relevant to specific aspects of the income statement rather than the overall review.

Question 16

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 helps the auditor to ensure that the transactions recorded in both financial statements are accurate and complete. This approach also helps to identify any potential misstatements or errors that may have occurred during the accounting period, which could impact the results of operations. While the other options may also be relevant to the examination of the income statement, examining the income statement and balance sheet accounts together is the most direct and effective method for the auditor to form an opinion on the results of operations.

Question 17

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 18

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 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

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...

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