Deck 15: Assets, Liabilities and Equity Related to the Financing Cycle

Question 1

All entities with which a company has long-term relationship are consolidated.

Answer 1

False

Question 2

Pensions can be either defined-benefit or defined-contribution plans.

Answer 2

True

Question 3

Disclosures are meant to facilitate comparisons between entities that select different measurement attributes for similar assets and liabilities.

Answer 3

True

Question 4

Comprehensive income is the sum of all nonowner-related changes in equity.

Question 5

A cash equivalent is always short-term.

Question 6

The SEC requires that stock that has mandatory redemption requirements or has redemption considerations that are out of the issuer's control be shown outside of the stockholders' equity section. .

Question 7

Derivatives can be recorded as either an asset or liability.

Question 8

Long-term debt can be audited without testing controls.

Question 9

Pensions are always defined-benefit plans.

Question 10

Kiting involves inter-bank transfers.

Question 11

Disclosures are meant to facilitate comparisons between entities that select similar measurement attributes for similar assets and liabilities.

Question 12

Disclosures provide users the means to understand how changes in fair values affect cash flows.

Question 13

Purchasing preferred stock is an equity investment.

Question 14

If a client is in violation of a debt covenant, the debt is shown as short-term.

Question 15

Typical debt disclosures include future cash payments for each of the five years following the latest balance sheet date.

Question 16

Proof of cash detects deposits not recorded in the books.

Question 17

Post-employment benefits refer to health benefits for retired employees.

Question 18

Commercial paper is considered a debt investment.

Question 19

FASB codification section 712 addresses pension obligations.

Question 20

Auditing the consolidation process is not required if the equity method is used.

Question 21

Comprehensive income:

A) is the change in equity resulting from nonowner sources except net income.
B) is the changes in equity resulting from nonowner sources.
C) excludes gains and losses on marketable securities.
D) None of the above.

Question 22

Long-term debt is included in short-term liabilities if:

A) debt covenants are violated.
B) debt covenants are waived.
C) no portion of the debt is due the following year.
D) All of the above.

Question 23

Debt securities:

A) are carried at fair value on the balance sheet.
B) are carried at amortized cost on the balance sheet.
C) Either "a" or "b" depending on management's intentions.
D) None of the above.

Question 24

Which of the following is considered a cash equivalent?

A) Commercial paper.
B) Compensating balances.
C) Money market fund.
D) Both a and

Question 25

Testing the valuation of securities would involve:

A) tracing security values to internal sources of information.
B) comparing inputs used in the valuation process to the underlying documents.
C) tracing amounts shown in the investment ledger to amounts shown on investment statements.
D) None of the above.

Question 26

Analytical procedures for testing investments would include:

A) calculate interest income based on principal amounts and rates.
B) compare interest rates with prior periods.
C) review the general ledger for any adjustments posted to cash.
D) All of the above.

Question 27

Auditing of interbank transfers occurs:

A) at year-end.
B) after year-end.
C) prior to year-end.
D) All of the above, depending on the circumstances.

Question 28

Disclosures focus on:

A) comparisons across entities that use similar measurement techniques for different assets and liabilities.
B) comparisons within an entity that uses similar measurement techniques on different assets and liabilities.
C) comparisons across entities that use different measurement techniques for similar assets and liabilities.
D) comparisons within an entity that uses different measurement techniques for different assets and liabilities.

Question 29

Variable interest entities:

A) may be accounted for either using consolidation or fair value.
B) often do not specify who has the controlling interest.
C) can be used to shield liabilities from disclosure.
D) All of the above.

Question 30

Adopting the fair value option:

A) must be disclosed.
B) reasons for using it must be disclosed.
C) effects from using it must be disclosed.
D) All of the above.

Question 31

Deferred tax liabilities are estimated using both current and estimated tax rates.

Question 32

Valuation techniques:

A) should use observable inputs.
B) cannot use unobservable inputs.
C) may use both observable and unobservable inputs.
D) None of the above.

Question 33

Tests of controls over investing activity include:

A) tracing securities from the investment ledger to the supporting documents.
B) reviewing the bank statement for deposits in transit.
C) recalculating interest expense at the balance sheet date.
D) All of the above.

Question 34

Which of the following would be found on an interbank transfer schedule?

A) Transfers per books.
B) Withdrawals per bank.
C) Deposits in transit.
D) All of the above.

Question 35

Kiting:

A) involves unintentional misplacement of cash.
B) involves intentional duplication of cash.
C) is detected through review of the bank reconciliations.
D) None of the above.

Question 36

If debt covenants are violated, then an auditor must:

A) issue a going concern opinion.
B) obtain evidence that the company will continue in operations.
C) be certain that this fact is disclosed in the financial statements.
D) All of the above.

Question 37

Which of the following is a derivative?

A) Interest rate swap.
B) Currency hedge.
C) Oil price hedge.
D) All of the above.

Question 38

To test the valuation assertion for debt, an auditor:

A) recalculates the amortization of premium or discount on debt.
B) recalculates interest payments.
C) recalculates amounts due.
D) Both a and

Question 39

A proof of cash consists of which of the following:

A) transfers per books.
B) bank adjustments.
C) bank debit memos.
D) All of the above.

Question 40

Equity investments:

A) are carried at fair value on the balance sheet.
B) are carried at cost on the balance sheet.
C) are accounted for using the equity method or consolidation.
D) any of the above based on management's intentions.

Question 41

The audit of taxes includes:

A) only liabilities.
B) both liabilities and receivables.
C) both balance sheet and income statement accounts.
D) only a review of current and prior years' tax liability.

Question 42

Detail tests of balances for debt include:

A) sending confirmations to creditors requesting information concerning outstanding debt.
B) a search of activity subsequent to year-end for any payments linked to debt that was not disclosed.
C) a search of the cash receipts journal for amounts received relating to new debt.
D) All of the above.

Question 43

In auditing a defined benefit plan, the auditor must:

A) recalculate the over- or under- funded status of the plan.
B) trace the amount shown as pension expense to the cash journal.
C) determine if any gains or losses need to be disclosed.
D) All of the above.

Question 44

Post-employment benefits are:

A) considered a form of deferred compensation.
B) considered an expense.
C) not included in the calculation of compensation expense.
D) paid to retired persons.

Question 45

Defined benefit plans can be:

A) funded by the employer.
B) unfunded by the employer.
C) funded through a trust.
D) All of the above.

Question 46

Substantive analytical procedures over stock transactions include:

A) calculation of fully diluted EPS.
B) calculation of dividend payout ratio.
C) calculation of debt to equity.
D) All of the above.

Question 47

FASB ASC 718-10:

A) concerns only restricted stock compensation plans.
B) requires use of fair value accounting for stock compensation.
C) requires stock compensation to be fully amortized prior to exercise.
D) All of the above.

Question 48

Tests of controls over the authorization assertion for long-term debt would include:

A) reviewing the minutes of the board of directors meetings.
B) tracing new debt issuances to the appropriate ledger.
C) tracing cash received from debt to the cash receipts journal and general ledger.
D) All of the above.

Question 49

AU 336 applies to:

A) using the work of an actuary.
B) whether a pension obligation is funded or not.
C) the responsibility the auditor assumes when auditing pension plans.
D) All of the above.

Question 50

Substantive analytical procedures for long-term debt include:

A) recalculating interest expense based on overall terms of debt.
B) comparing interest expense with prior year amount.
C) calculate times interest earned ratio.
D) All of the above.

Question 51

A deferred tax liability is recognized for:

A) temporary differences resulting from net operating loss carry forwards.
B) temporary differences related to depreciation.
C) permanent tax difference related to depreciation.
D) All of the above.

Question 52

Disclosures relating to debt include:

A) future cash payments.
B) the amount of current debt maturities.
C) the amount of sinking fund requirements.
D) All of the above.

Question 53

Pensions:

A) can be defined benefit.
B) can be defined contribution.
C) Either a or

Question 54

A registrar:

A) determines that all outstanding stock complies with the corporate charter.
B) determines that all stock issued complies with the corporate charter.
C) determines who is eligible for dividend payments.
D) All of the above.

Question 55

A test of the valuation assertion for new long-term debt would be:

A) trace the amount received from the debt issuance to the general ledger.
B) recalculate the amortization of premium or discount.
C) recalculate the interest expense.
D) All of the above.

Question 56

A debt covenant waiver:

A) implies there is not a going concern risk.
B) relieves the client from making payment for the debt.
C) relieves the client from penalties resulting from covenant violations.
D) All of the above.

Question 57

A current tax liability is recognized for:

A) the current year's net loss.
B) the current year's net income.
C) estimated taxes payables for the current year.
D) estimated taxes payable for the previous year.

Question 58

The auditor is reviewing the current tax liability for a client in an industry where tax rates are anticipated to decrease because of near-certain Congressional action. In this case the auditor should:

A) recalculate the tax liability under the proposed rate.
B) recalculate the tax liability under both the current and proposed rate.
C) review the appropriateness of the tax liability assuming the current rate.
D) disclose the benefit of probable tax legislation on tax liability in the footnotes.

Question 59

Post-retirement benefits are generally:

A) health benefits to retired employees.
B) health benefits to persons who have left the firm.
C) health benefits to non-employees.
D) None of the above.

Question 60

A stock transfer agent:

A) maintains corporate records of stock issued.
B) maintains records of current and previous shareholders.
C) maintains records of current shareholders.
D) All of the above.

Question 61

Explain the audit steps for detecting the following issues.
(a) Unrecorded noted payable
(b) Unrecorded dividends payable
(c) Unrecorded NSF checks
(d) Unrecorded pension liabilities
(e) Unrecorded stock buybacks (treasury stock)
(f) Unrecorded stock compensation expense
(g) Unrecorded covenant violations
(h) Unrecorded debt issuance

Question 62

Discuss an auditor's objectives in the audit of long-term liabilities. Describe
appropriate analytical procedures an auditor may apply to long-term liabilities.

Question 63

FASB ASC 505-10-50 requires:

A) entities disclose a summary of pertinent rights and obligations of outstanding securities.
B) entities disclose a summary of pertinent rights and privileges of outstanding securities.
C) entities disclose all stock owned and in what format.
D) All of the above.

Question 64

In auditing mergers and acquisitions, the auditor:

A) first understands whether a pooling of interest method is allowed.
B) first reads the agreement between the parties to understand the transaction.
C) first determines of the event is material or not.
D) All of the above.

Question 65

Jillian is on the Big City Defense Company's audit with Andrew (described in
15-31) but has been assigned the task of performing tests of details of balances for
the investment account. She has never audited investments before and asks Andrew
for some advice.Andrew tells her that she needs to review which management assertions
are relevant for the investment account. Then she needs to understand appropriate
tests that will provide evidence on these assertions.
Required:
(a)What are management's key assertions for the investment accounts?
(b)How can Jillian utilize inspection in the tests of details of balances for investments?
How can she utilize confirmations? What evidence will these audit procedures
provide for the financial statement audit?

Question 66

Why is it more important for an auditor to perform a search for unrecorded
notes payable than for unrecorded notes receivable? Discuss some audit procedures
the auditor may use to uncover any unrecorded notes payable.

Question 67

Discuss an auditor's objectives in the audit of equity accounts. Describe appropriate
analytical procedures an auditor may apply to equity accounts.

Question 68

Match the audit step below with its appropriate area. You may use an area more than once and more than one area may apply.
(a) Trace amounts per the cash disbursement journal to the appropriate liability account:
(b) Trace the stock issued per the transfer agent report to equity:
(c) Trace EPS to net income and stockholders' equity:
(d) Trace overfunded liability amount to actuary report:
(e) Recalculate interest expense using face amount and current terms:
(f) Recalculate compensation expense using stock compensation plans approved by the board of directors:
(g) Recalculate stock compensation expense using a model such as Black-Scholes for valuation:
(h) Recalculate taxes payable:
(i) Review debt covenants:
(j) Review cash equivalents for maturity: