Question 1

Existence is the most relevant assertion associated with an inherent risk for treasury stock transactions recorded in the wrong period.

Accepted Answer

Existence is more relevant to verifying that treasury stock transactions actually occurred, while the assertion most relevant to transactions recorded in the wrong period is completeness or accuracy, not existence.

Question 2

Completeness is the most relevant assertion associated with an inherent risk for dividends that are recorded and paid before being declared.

Accepted Answer

Completeness is more relevant to ensuring all transactions and events have been recorded, while the assertion more directly related to dividends being recorded and paid before being declared would be occurrence, as it deals with whether the dividends recorded actually occurred (i.e., were properly declared).

Question 3

Relevant accounts when auditing stockholders' equity include leasehold improvements.

Accepted Answer

Leasehold improvements are related to fixed assets, not stockholders' equity. Stockholders' equity accounts include common stock, preferred stock, retained earnings, etc.

Question 4

Valuation is the most relevant assertion associated with an inherent risk for the cost of treasury stock that is subsequently retired and not properly allocated among the appropriate accounts.

Accepted Answer

Valuation is a relevant assertion for the cost of treasury stock that is subsequently retired and not properly allocated among the appropriate accounts. This is because the proper allocation of the cost of retired treasury stock affects the accuracy of the financial statements, specifically the balance sheet and statement of stockholders' equity. If the cost is not properly allocated, it could result in an overstatement or understatement of stockholders' equity, which would affect the company's valuation.

Question 5

An organization typically has many debt transactions during the year, with each individual transaction being material.

Accepted Answer

The statement is true. Many organizations have multiple debt transactions during the year, and each individual transaction can have a significant impact on the organization's financial position.

Question 6

A potential fraud risk associated with debt obligations is the intentional misclassification of short-term debt as long-term debt.

Accepted Answer

Intentional misclassification of short-term debt as long-term debt can be a potential fraud risk because it can distort the company's financial health and make it appear more financially stable than it actually is. It can also mislead investors and creditors about the company's ability to meet its debt obligations in the short term.

Question 7

A bond premium/discount amortization spreadsheet can be used to help assure that the bond is appropriately valued and disclosed in the financial statements.

Accepted Answer

A bond premium/discount amortization spreadsheet tracks the changes in the bond's value over time and assists in properly valuing and disclosing it in the financial statements.

Question 8

If an auditor discovers that a company intentionally applied loan payments to interest rather than principal, this would result in fraudulent overstatement of income.

Accepted Answer

Applying loan payments more to interest than principal does not affect income directly; it affects the loan balance and interest expense, not the income statement.

Question 9

Typically, the most relevant assertion related to debt obligations is existence.

Accepted Answer

The most relevant assertion related to debt obligations is completeness, as it ensures that all liabilities are recorded and none are omitted.

Question 10

The potential dilutive effect of convertible debt or preferred stock, stock options, and warrants should be disclosed in accordance with relevant accounting guidance in computing primary and fully diluted earnings per share.

Accepted Answer

Dilutive potential of convertible debt or preferred stock, stock options, and warrants should be considered and disclosed in the computation of earnings per share, in compliance with accounting regulations.

Question 11

The auditor is primarily concerned with overstatement when auditing bonds.

Accepted Answer

The answer of The auditor is primarily concerned with overstatement...

Question 12

Presentation and disclosure is the most relevant audit assertion associated with the inherent risk of using inaccurate periods of service for stock options.

Accepted Answer

The most relevant audit assertion associated with the inherent risk of using inaccurate periods of service for stock options is accuracy, as it directly relates to the correct calculation and recording of stock option expenses and related periods of service, rather than how these are presented or disclosed in the financial statements.

Question 13

Inherent risks related to debt obligations primarily concern the authorization of debt, receipt of funds, recording debt transactions, and compliance with any debt covenants.

Accepted Answer

Inherent risks related to debt obligations involve all of these factors, including the authorization of debt, receipt of funds, recording debt transactions, and compliance with any debt covenants. These risks can impact an organization's financial stability and ability to meet its debt obligations.

Question 14

Bonds are issued to finance major expansions or to refinance existing debt.

Accepted Answer

Bonds are often used by corporations and governments to raise large sums of money for major capital expenditures such as infrastructure projects or acquisitions. They may also be used to refinance existing debt at more favorable interest rates.

Question 15

Once the auditor has obtained an understanding of the inherent and fraud risks of material misstatement associated with debt obligations and stockholders' equity transactions, the auditor needs to understand the controls that the client has designed and implemented to address those risks.

Accepted Answer

This statement is true. After understanding the risks associated with debt obligations and stockholders' equity transactions, the auditor needs to assess the effectiveness of internal controls in mitigating those risks.

Question 16

Rights/obligations is the most relevant audit assertion associated with an inherent risk for finding stock options or warrants being granted without being properly approved.

Accepted Answer

The answer of Rights/obligations is the most relevant audit assertion...

Question 17

As part of brainstorming activities, the auditor might identify possible fraudulent transactions related to stockholders' equity accounts that are the result of charging expenses directly to retained earnings rather than to the appropriate expense accounts.

Accepted Answer

This is a potential red flag for fraudulent transactions, as charging expenses directly to retained earnings can artificially inflate the company's net income and stockholders' equity. The auditor should investigate to ensure that all expenses are properly classified and recorded in the appropriate accounts.

Question 18

Valuation is a relevant assertion when auditing premiums or discounts on bonds.

Accepted Answer

Valuation of bonds is necessary for determining the accurate amount of premiums or discounts that should be recognized in the financial statements. Auditors need to ensure that the valuation of these items is done correctly to avoid misstatement in the financial statements.

Question 19

When an auditor is investigating the inherent risk associated with stock issuances/sales that are recorded in the wrong period, the auditor is most likely assessing the risks of material misstatements associated with the existence assertion.

Accepted Answer

The existence assertion is concerned with whether the assets and liabilities actually exist and are valid. The risk of material misstatement associated with stock issuances/sales recorded in the wrong period relates to whether these transactions actually occurred during the period being audited, which falls under the existence assertion.

Question 20

Auditing standards require the auditor to identify and assess the risks of material misstatement due to fraud at the financial statement level only.

Accepted Answer

Auditing standards require the auditor to identify and assess the risks of material misstatement due to fraud at both the financial statement level and the assertion level.

Quiz 13: Auditing Debt Obligations and Stockholders Equity Transactions