Question 1

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

Accepted Answer

Auditors should gain an understanding of the capital acquisition and repayment cycle while examining the client's business and industry, as it affects the company's financial statements and disclosures.

Question 2

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

Accepted Answer

C

Question 3

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 audit objective of detail tie-in is to ensure that each transaction included in the account balance is properly included and that the total is accurate. Tracing the notes payable list to the general ledger serves as a test of detail tie-in because it ensures that the total amount of notes payable recorded in the list agrees with the amount recorded in the general ledger. The other objectives (accuracy, existence, completeness) are not directly tested by this procedure.

Question 4

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 5

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

Accepted Answer

The capital acquisition and payment cycle typically involves fewer transactions, but each transaction is usually of high materiality, such as issuing bonds or obtaining loans.

Question 6

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 7

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

Accepted Answer

The issuance of new notes payable, being a financial decision, would normally be authorized by the board of directors. The board of directors has the ultimate responsibility for overseeing the management of the corporation, including major financial decisions like issuing new debt. The purchasing department, accounting department, and accounts payable department may play a role in the process but would not be primarily responsible for making the decision to issue new notes payable.

Question 8

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 are a liability account and are not directly impacted by the results of substantive tests of transactions or assessed control risk. Therefore, the tests of details of balances would not need to be designed based on those factors. However, accounts receivable, inventory, and accounts payable are all affected by transactions and control risk, which would impact the design of tests of details of balances.

Question 9

The capital acquisition and repayment cycle does not include:

Accepted Answer

The capital acquisition and repayment cycle involves acquiring capital through interest-bearing debt, using the capital for investments, generating revenue, and repaying the debt with interest. Payment of interest (A), payment of dividends (B), and acquisition of capital through interest-bearing debt (D) are all part of this cycle. Payment of vendor invoices (C) refers to the accounts payable cycle, which is a separate financial process.

Question 10

List six accounts in the capital acquisition and repayment cycle commonly found on balance sheets. 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 11

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

Accepted Answer

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

Question 12

Describe the methodology for designing tests of details of balances for notes payable.

Accepted Answer

The answer of Describe the methodology for designing tests of...

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 calculated by multiplying the average interest rate by the average amount of notes payable outstanding during the year.

Question 14

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 15

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 any violations or departures from agreements are adequately disclosed in the financial statements. The auditor is not required to report violations to the SEC, issue a disclaimer, or obtain management's consent for departures from agreements.

Question 16

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

The best procedure to verify the existence of notes payable in the schedule is to confirm them with the creditors.

Question 17

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 typically perform substantive tests to verify the completeness and accuracy of the capital acquisition and repayment cycle transactions for the entire year as a part of verifying balance sheet accounts. This ensures that all transactions have been recorded accurately and the balances in the balance sheet accounts are valid.

Question 18

Tolerable misstatement is often set at a(n) ________ level for notes payable.

Accepted Answer

Tolerable misstatement is the maximum error in financial statements that auditors are willing to accept. For notes payable, the tolerable misstatement level is usually set at a low level because these liabilities are considered important and have a significant impact on the financial statements.

Question 19

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

To determine if the issuance of notes payable for cash was correctly recorded, the auditor should trace the cash received from the proceeds to the accounting records. This will ensure that the correct amount was received and recorded accurately in the company's financial statements. Confirmation with the bond trustee or underwriter may be useful in other types of audits, but is not relevant in this scenario. The footnote disclosure may provide additional information, but it is not sufficient to determine if the transaction was recorded correctly.

Question 20

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 is because capital acquisition and repayment involves acquiring or repaying large amounts of capital, which can greatly impact the account balances even with relatively few transactions.

Quiz 22: Audit of the Capital Acquisition and Repayment Cycle