Question 1

Using substantive procedures to test debt obligations is most appropriate because there are a relatively large number of transactions involving immaterial dollar amounts.

Accepted Answer

Substantive procedures are typically used for material transactions or account balances, and debt obligations are often material in nature. Additionally, even though there may be a large number of transactions involving immaterial amounts, these transactions can still be tested through analytical procedures or other forms of substantive testing.

Question 2

Typically, when determining the appropriate audit procedures to perform for debt accounts, the auditor will usually decide to test debt obligations, including interest, using only substantive procedures.

Accepted Answer

Debt accounts are considered material and significant accounts in the financial statements. Therefore, auditors usually perform substantive procedures such as confirmation with third parties, obtaining copies of loan agreements, and reviewing relevant documents and records to verify the existence, accuracy, and completeness of debt obligations. Audit procedures related to debts are not usually restricted to substantive procedures only. However, the auditors may also perform some tests of controls to evaluate the effectiveness of the internal controls related to debt transactions.

Question 3

If preliminary analytical procedures do not identify any unexpected relationships related to debt obligations, the auditor would conclude that there is not a heightened risk of material misstatements in these accounts.

Accepted Answer

If no unexpected relationships related to debt obligations are identified during preliminary analytical procedures, it indicates that the risk of material misstatements in these accounts is not high. Therefore, the auditor would conclude that there is not a heightened risk of material misstatements in these accounts.

Question 4

Trend analyses are typically used as preliminary analytical procedures related to debt obligations.

Accepted Answer

Trend analyses are commonly used before conducting more detailed analyses related to debt obligations, such as ratio analysis or cash flow analysis.

Question 5

When planning the audit related to stockholders' equity transactions, the auditor is not required to perform preliminary analytical procedures.

Accepted Answer

Preliminary analytical procedures are required in the planning phase of an audit, including those related to stockholders' equity transactions. These can help the auditor identify any potential material misstatements or risks, determine the nature, timing, and extent of audit procedures, and assess the overall reasonableness of financial statements.

Question 6

The transactions in the stockholders' equity accounts are typically tested using a statistical sampling approach.

Accepted Answer

Transactions in the stockholders' equity accounts are usually tested through detailed examination rather than statistical sampling, due to the typically lower volume but higher value and importance of these transactions.

Question 7

When identifying and assessing control risks of material misstatement associated with debt obligations and stockholders' equity transactions, documentation is only required for integrated audits, not financial statement only audits.

Accepted Answer

According to auditing standards, documentation is required for both integrated audits and financial statement only audits when identifying and assessing control risks of material misstatement associated with debt obligations and stockholders' equity transactions.

Question 8

Confirmations are not substantive procedure designed to obtain evidence on the completeness of debt obligations.

Accepted Answer

Confirmations are a substantive procedure designed to obtain evidence on the completeness and accuracy of debt obligations.

Question 9

For financial statement audit purposes, when auditing debt obligations and stockholders' equity transactions, the auditor will most likely perform a substantive audit, and therefore will not perform tests of controls for the debt and equity accounts.

Accepted Answer

Substantive audit procedures are used to gather direct evidence about the completeness, accuracy, and validity of an account balance or transaction. Tests of controls, on the other hand, are used to assess the effectiveness of internal controls and are typically not performed on debt and equity accounts because they do not involve routine transactions that require control procedures. Therefore, the statement is true that the auditor will most likely perform substantive audit procedures for debt obligations and stockholders' equity transactions.

Question 10

For integrated audits, a typical test of controls may include an inquiry of personnel performing the control.

Accepted Answer

In an integrated audit, a test of controls may include an inquiry of personnel performing the control to determine if the control is functioning effectively.

Question 11

When obtaining evidence about internal control operating effectiveness, the auditor will select only entity-wide controls for testing.

Accepted Answer

The auditor will select both entity-wide controls and transaction-level controls for testing when obtaining evidence about internal control operating effectiveness.

Question 12

If the auditor identifies control deficiencies, the auditor will not need to judge the severity of the deficiencies but instead would consult management about the need for a fraud audit.

Accepted Answer

If the auditor identifies control deficiencies, the auditor must assess the severity of the deficiencies to determine their impact on the audit and financial statements. The auditor may recommend management to perform a fraud audit if the deficiencies indicate a risk of fraud, but this is not the only course of action the auditor will take. The auditor will consider alternative procedures to obtain sufficient evidence on the financial statements.

Question 13

When planning the audit related to debt obligations, the auditor should not have expectations as to the nature and magnitude of any account balance changes because they might bias the outcome of the audit.

Accepted Answer

Auditors should have expectations about account balance changes to identify unusual transactions or discrepancies, which helps in assessing the risk of material misstatement.

Question 14

If there were unusual or unexpected relationships, the planned audit procedures (tests of controls, substantive procedures) would be adjusted to address the potential material misstatements.

Accepted Answer

This statement is true, as the auditor would need to modify their planned procedures to address these unexpected relationships and the potential impact they could have on the financial statements.

Question 15

For both debt accounts and stockholders' equity accounts, the boxes of evidence would typically be filled only with evidence obtained through substantive procedures.

Accepted Answer

Substantive procedures are used to obtain evidence about the accuracy and completeness of account balances, transactions, and disclosures. Therefore, the boxes of evidence for debt accounts and stockholders' equity accounts would typically be filled only with evidence obtained through substantive procedures.

Question 16

A substantive approach using only tests of controls is most commonly used to audit equity accounts.

Accepted Answer

A substantive approach using only tests of controls is not appropriate for auditing equity accounts, which require a substantive approach using both tests of controls and substantive procedures such as analytical procedures and substantive testing of transactions and balances.

Question 17

When documenting controls, the auditor can provide this documentation in various formats including a control matrix, a control risk assessment questionnaire, and/or a memo.

Accepted Answer

The auditor can provide documentation of controls in various formats including a control matrix, a control risk assessment questionnaire, and/or a memo.

Question 18

A typical control for stockholders' equity transactions is for the board of directors to approve all stock transactions (including options and warrants).

Accepted Answer

The board of directors typically has the authority to approve all stock transactions to maintain control over the company's stock issuance and ownership. This includes approving the issuance of shares, options, and warrants.

Question 19

Stockholders' equity accounts will be tested with only substantive analytical procedures.

Accepted Answer

Stockholders' equity accounts are significant balances on the financial statements and therefore, require more than just substantive analytical procedures. They need to be tested with substantive tests of details that may include confirming account balances, reviewing underlying documents, and examining supporting evidence, among others.

Question 20

Normally, an auditor can gain an understanding of internal controls by means of a walkthrough of the process, inquiry, observation, and review of the client's documentation.

Accepted Answer

This statement is true. Walkthroughs, inquiry, observation, and review of documentation are among the common procedures used by auditors to gain an understanding of a client's internal controls.

Quiz 13: Auditing Debt Obligations and Stockholders Equity Transactions