Question 1

The auditor will normally find evidence concerning the proper authorization of transactions in the financing cycle by:
A) direct confirmation by the investors.
B) inquiring of the audit committee.
C) inquiring of management.
D) reading the copies of the contracts.
E) reading the minutes of the board of directors meetings.

Accepted Answer

The board of directors is responsible for authorizing significant transactions, and such authorizations are typically documented in the minutes of their meetings.

Question 2

The substantive test of vouching plant asset disposals to supporting documentation is categorized under: A) initial procedures. B) analytical procedures. C) tests of details of transactions. D) tests of details of balances. E) presentation and disclosure.

Accepted Answer

The substantive test of vouching plant asset disposals to supporting documentation is categorized under tests of details of transactions, as it involves verifying the details of specific transactions related to asset disposals.

Question 3

The following procedures may be useful to the auditor in determining whether all retirements have been recorded except:
A) analyze the miscellaneous expense account for proceeds from sales of plant assets.
B) investigate the disposition of facilities associated with discontinued product lines and operations.
C) trace retirement work orders and authorizations for retirements to the accounting records.
D) review insurance policies for termination or reductions of coverage.
E) make inquiry of management as to retirements.

Accepted Answer

Analyzing the miscellaneous expense account for proceeds from sales of plant assets is not a procedure aimed at determining whether all retirements have been recorded. This action is more related to identifying proceeds from sales rather than confirming the recording of asset retirements.

Question 4

The specific financing cycle audit objective, long-term debt and related income statement balances and stockholders' equity balances are properly valued in accordance with GAAP, relates to the: A) rights and obligations assertion. B) completeness assertion. C) existence or occurrence assertion. D) valuation or allocation assertion. E) presentation or disclosure assertion.

Accepted Answer

The objective relates to ensuring that long-term debt, related income statement balances, and stockholders' equity balances are accurately valued and allocated in the financial statements, which aligns with the valuation or allocation assertion. This assertion concerns whether assets, liabilities, equity, revenue, and expenses are included in the financial statements at appropriate amounts.

Question 5

Analytical procedures used to audit plant assets often include calculation of :
A) return on common equity.
B) return on total assets.
C) interest bearing debt to total assets.
D) inventory turnover.
E) sustainable growth rate.

Accepted Answer

Analytical procedures for auditing plant assets often involve calculating the return on total assets. This metric helps auditors assess how effectively a company is using its assets, including plant assets, to generate earnings.

Question 6

Return on common stockholders' equity is calculated as: A) net income ÷ weighted average common shares outstanding. B) (net income - preferred dividends) ÷ average common stockholders' equity. C) weighted average common shares outstanding ÷ net income. D) average common stockholders' equity ÷ (net income - preferred dividends). E) operating income ÷ average common stockholders' equity.

Accepted Answer

Return on common stockholders' equity is calculated by subtracting preferred dividends from net income and then dividing the result by the average common stockholders' equity. This measures the profitability of a company from the common shareholders' perspective.

Question 7

Dividend payout rate is calculated as: A) total dividends ÷ operating income. B) cash dividends ÷ operating income. C) total dividends ÷ by net income. D) operating income ÷ total dividends. E) cash dividends ÷ net income.

Accepted Answer

Cash dividends are paid out of net income, so the dividend payout rate is calculated as cash dividends divided by net income.

Question 8

The specific financing cycle audit objective, all recorded long-term debt balances are obligations of the reporting entity, relates to the: A) rights and obligations assertion. B) completeness assertion. C) existence or occurrence assertion. D) valuation or allocation assertion. E) presentation or disclosure assertion.

Accepted Answer

This objective relates to the rights and obligations assertion because it concerns whether the entity has the legal claim to or responsibility for the long-term debt balances recorded, indicating that these are indeed obligations of the entity.

Question 9

The specific financing cycle audit objective, stockholders' equity balances represent the owners' interests that exist at the balance sheet date, relates to the: A) rights and obligations assertion. B) completeness assertion. C) existence or occurrence assertion. D) valuation or allocation assertion. E) presentation or disclosure assertion.

Accepted Answer

The answer of The specific financing cycle audit objective, <b>stockholders'...

Question 10

The specific financing cycle audit objective, stockholders' equity balances include the effects of all transactions pertaining to paid-in capital and retained earnings through the balance sheet date, relates to the: A) rights and obligations assertion. B) completeness assertion. C) existence or occurrence assertion. D) valuation or allocation assertion. E) presentation or disclosure assertion.

Accepted Answer

The objective relates to the completeness assertion because it ensures that all transactions affecting stockholders' equity, including paid-in capital and retained earnings up to the balance sheet date, are recorded. This assertion is concerned with whether all transactions that should have been recorded have indeed been included in the financial statements.

Question 11

The substantive test of comparing financial statement presentation with GAAP is categorized under: A) initial procedures. B) analytical procedures. C) tests of details of transactions. D) tests of details of balances. E) presentation and disclosure.

Accepted Answer

The substantive test of comparing financial statement presentation with GAAP falls under the category of presentation and disclosure. This involves ensuring that the financial statements are prepared and presented in accordance with Generally Accepted Accounting Principles (GAAP), focusing on how financial information is disclosed to users of the financial statements.

Question 12

During inspection of the stock certificate book, the auditor determines that all unissued certificates are intact. This relates primarily to the:
A) completeness assertion.
B) valuation or allocation assertion.
C) existence or occurrence assertion.
D) rights and obligations assertion.
E) presentation or disclosure assertion.

Accepted Answer

The answer of During inspection of the stock certificate book,...

Question 13

Earnings per share is calculated as: A) net income ÷ weighted average common shares outstanding. B) (net income - preferred dividends) ÷ average common stockholders' equity. C) weighted average common shares outstanding ÷ net income. D) average common stockholders' equity ÷ (net income - preferred dividends). E) operating income ÷ average common stockholders' equity.

Accepted Answer

Earnings per share (EPS) is calculated by dividing net income by the weighted average number of common shares outstanding during the period. This formula does not subtract preferred dividends, as that adjustment is made when calculating diluted EPS or when specifically accounting for preferred dividends in basic EPS calculations.

Question 14

The following statement about inherent risk for long-lived assets is not true:
A) The rights and obligations assertion is significant because assets are usually pledged as collateral for the underlying debt.
B) Impairment of long-lived assets poses an inherent risk for the valuation assertion.
C) The completeness assertion rarely presents a high inherent risk.
D) Misstatements of disclosures represent only a moderate inherent risk.
E) Inherent risk for the existence assertion is often low.

Accepted Answer

The completeness assertion rarely presents a high inherent risk because long-lived assets are usually individually controlled and accounted for.

Question 15

The ratio times interest earned is calculated as: A) (interest expense + capitalized interest) ÷ income before interest and income taxes. B) net income ÷ (interest expense + capitalized interest). C) income before interest and income taxes ÷ (interest expense + capitalized interest). D) (interest expense + capitalized interest) ÷ net income. E) income before interest and income taxes ÷ (interest income + capitalized interest).

Accepted Answer

The times interest earned ratio is calculated as income before interest and income taxes (EBIT) divided by interest expense, which matches choice C. This ratio measures a company's ability to meet its interest obligations.

Question 16

The classes of transactions associated with the audit of plant assets do not include:
A) disposals of fixed assets.
B) repair and maintenance transactions.
C) depreciation expense.
D) board minutes authorizing asset acquisitions.
E) manufacture of fixed assets.

Accepted Answer

Board minutes authorizing asset acquisitions are not a class of transactions associated with the audit of plant assets. They are related to the governance and approval process, not the transactions themselves.

Question 17

Entries for dividend declarations and retained earnings appropriations are traced to the minutes book. In determining the propriety of the distribution, the auditor should:
A) establish that preferential or other rights of stockholders and any restrictions on dividend distributions have been recognized.
B) establish the number of shares outstanding on the date of record and verify the accuracy of the total dividend declaration by recalculation.
C) ascertain the propriety of the entry to record the declaration.
D) review the minutes to provide evidence of stockholders' equity transactions authorized during the year.
E) trace dividend payments to canceled checks and other documentation.

Accepted Answer

The answer of Entries for dividend declarations and retained earnings...

Question 18

The financing cycle interfaces with the: A) investing cycle. B) expenditure cycle. C) revenue cycle. D) production cycle. E) personnel services cycle.

Accepted Answer

The answer of The financing cycle interfaces with the: A) investing...

Question 19

The specific financing cycle audit objective, long-term debt and related income statement balances and stockholders' equity balances are properly identified and classified in the financial statements, relates to the: A) rights and obligations assertion. B) completeness assertion. C) existence or occurrence assertion. D) valuation or allocation assertion. E) presentation or disclosure assertion.

Accepted Answer

This objective relates to the presentation or disclosure assertion because it concerns ensuring that long-term debt, related income statement balances, and stockholders' equity balances are correctly identified and classified in the financial statements. This assertion deals with whether financial information is appropriately presented and disclosed in accordance with the applicable financial reporting framework.

Question 20

The use of variable interest entities increase inherent risks:
A) with respect to presentation and disclosure of shareholders' equity.
B) when they are included in the client's consolidated financial statements
C) except when authorized by the board of directors.
D) as to the completeness assertions for investing and financing.
E) with respect to the rights and obligations assertions for shareholders' equity.

Accepted Answer

The answer of The use of variable interest entities increase...

Quiz 17: Auditing the Investing and

The auditor will normally find evidence concerning the proper authorization of transactions in the financing cycle by:

The substantive test of vouching plant asset disposals to supporting documentation is categorized under:

The following procedures may be useful to the auditor in determining whether all retirements have been recorded except:

The specific financing cycle audit objective, long-term debt and related income statement balances and stockholders' equity balances are properly valued in accordance with GAAP, relates to the:

Analytical procedures used to audit plant assets often include calculation of :

Return on common stockholders' equity is calculated as:

Dividend payout rate is calculated as:

The specific financing cycle audit objective, all recorded long-term debt balances are obligations of the reporting entity, relates to the:

The specific financing cycle audit objective, stockholders' equity balances represent the owners' interests that exist at the balance sheet date, relates to the:

The specific financing cycle audit objective, stockholders' equity balances include the effects of all transactions pertaining to paid-in capital and retained earnings through the balance sheet date, relates to the:

The substantive test of comparing financial statement presentation with GAAP is categorized under:

During inspection of the stock certificate book, the auditor determines that all unissued certificates are intact. This relates primarily to the:

Earnings per share is calculated as:

The following statement about inherent risk for long-lived assets is not true:

The ratio times interest earned is calculated as:

The classes of transactions associated with the audit of plant assets do not include:

Entries for dividend declarations and retained earnings appropriations are traced to the minutes book. In determining the propriety of the distribution, the auditor should:

The financing cycle interfaces with the:

The specific financing cycle audit objective, long-term debt and related income statement balances and stockholders' equity balances are properly identified and classified in the financial statements, relates to the:

The use of variable interest entities increase inherent risks: