Question 1

During the year under audit, a company has completed a private placement of a substantial amount of bonds. Which of the following would the auditor use to test the completeness assertion in the auditor's program for the audit of bonds payable?

Accepted Answer

Tracing the cash received from the issue to the accounting records would help the auditor test the completeness assertion. This is because if all the cash received from the private placement has been properly recorded in the accounting records, it ensures that all the bonds issued have been accounted for and there are no unrecorded or missing bonds. Choice A is irrelevant in testing completeness, choice C is related to a provision in the bond agreement and choice D is related to testing the accuracy and valuation assertion.

Question 2

A company issued bonds for cash during the year under audit. To ascertain that this transaction was properly recorded, the auditor's best course of action is to:

Accepted Answer

Tracing the cash received from the issuance to the accounting records is the best course of action because it ensures that the transaction was properly recorded in the company's books. This step also verifies the accuracy of the amount of cash received and helps the auditor detect any potential errors or fraud in the recording of the transaction. Requesting a statement from the bond trustee or confirming the issuance results with underwriters or investment bankers may provide additional information, but they do not directly confirm the recording of the transaction in the company's books. Verifying that the net cash received is credited to an account entitled "Bonds Payable" may also help in confirming the transaction, but it is not as comprehensive as tracing the cash received to the accounting records.

Question 3

All corporate capital stock transactions should ultimately be traced to the:

Accepted Answer

The minutes of the board of directors are the official record of all major decisions and transactions made by the company, including the issuance or repurchase of capital stock. Therefore, tracing all corporate capital stock transactions back to the minutes of the board of directors is the most reliable and accurate method.

Question 4

If recorded interest expense is higher than the auditor's expectation calculated using recorded debt, all of the following are potential explanations except that:

Accepted Answer

The face interest rate is used to calculate interest expense on a bond issued at a premium, which would result in recorded interest expense being lower than the auditor's expectation.

Question 5

The auditor is concerned with establishing that dividends are paid to stockholders of the entity owning stock as of the:

Accepted Answer

The record date is the date on which the ownership of stock is determined for the purpose of receiving dividends. Therefore, the auditor is concerned with establishing that dividends are paid to stockholders of the entity owning stock as of the record date. The issue date represents the date on which the stock is initially sold to the public, the declaration date represents the date on which the board of directors declares the dividend, and the payment date represents the date on which the dividend is actually paid to stockholders. While these other dates may be relevant to the overall financial reporting process, they are not directly related to ensuring that dividends are paid to the appropriate owners of stock.

Question 6

During its fiscal year, a company issued, at a discount, a substantial amount of bonds. When performing audit work in connection with the bond issue, the independent auditor should:

Accepted Answer

The auditor should review the board of directors' minutes for authorization to ensure that the bond issuance was properly approved by the company's governing body.

Question 7

During an examination of a public company, the auditor should obtain written confirmation regarding bond transactions from the:

Accepted Answer

The trustee is responsible for making sure that bond transactions are properly executed in accordance with the terms of the bonds. Therefore, obtaining written confirmation from the trustee is the best choice. The transfer agent handles the transfer of shares of stock, but not bond transactions. The entity's attorney and internal auditors may not have direct knowledge of bond transactions.

Question 8

Examining cancelled stock certificates addresses the assertion of:

Accepted Answer

Examining cancelled stock certificates primarily addresses the assertion of occurrence, ensuring that transactions recorded in the financial statements have actually occurred.

Question 9

In connection with the examination of bonds payable, an auditor would expect to find in a bond agreement:

Accepted Answer

The issue date and maturity date of the bond are important for determining the age of the bonds and when they will need to be repaid. This information can also be used to calculate interest expense and amortization of any bond premiums or discounts. The names of the original subscribers and the company's debt-to-equity ratio are not typically included in a bond agreement. The yield to maturity may be disclosed in the bond agreement, but it is not always required.

Question 10

Reviewing interest expense to examine payments to debt holders not listed on the debt analysis schedule is a procedure that can be used to test the audit assertion of:

Accepted Answer

Reviewing interest expense to examine payments to debt holders not listed on the debt analysis schedule is a way to test the completeness assertion, which ensures that all debts have been included in the analysis schedule. This procedure aims to determine whether any unknown debts exist and verifies whether all interest payments have been included in the financial statements.

Question 11

In the audit of a medium-sized manufacturing concern, which one of the following areas can be expected to require the least amount of audit time?

Accepted Answer

Retained earnings represent the accumulated profits of a company that have not been distributed to shareholders as dividends. This account does not involve significant transactional activity and is less likely to have material misstatements, making it the area that is expected to require the least amount of audit time. Revenue, assets, and liabilities involve more complex and significant audit procedures due to the nature of the transactions and balances involved.

Question 12

In auditing long-term bonds payable, an auditor most likely would:

Accepted Answer

Comparing interest expense with the bonds payable amount for reasonableness helps the auditor assess whether the interest expense recorded is consistent with the amount of bonds outstanding, which is a key aspect of auditing long-term bonds payable.

Question 13

Which audit procedure is most closely related to management's assertion regarding presentation of liabilities?

Accepted Answer

By reviewing loan contracts for restrictive covenants, the auditor can gather evidence around management's assertion regarding the presentation of liabilities. Restrictive covenants can impact the classification of current and long-term liabilities and therefore, reviewing loan contracts is a relevant audit procedure. Tracing cash received from a bond issue and testing a sample of receipts and payments are more related to the accuracy assertion, while confirmation of amounts owed is more related to the existence assertion.

Question 14

An auditor usually obtains evidence of stockholders' equity transactions by reviewing the entity's:

Accepted Answer

Minutes of the board of directors' meetings would provide evidence of stockholders' equity transactions, such as the declaration and payment of dividends, issuance of new shares, or repurchase of existing shares. Transfer agent's records may also be reviewed, but they mainly provide information on the ownership and transfer of shares, rather than the equity transactions themselves. Canceled stock certificates and treasury stock certificate book may provide some supporting evidence, but they are not as reliable or relevant as the minutes of the board of directors' meetings.

Question 15

The auditor gathers evidence about dividends that are declared and paid primarily because of:

Accepted Answer

Dividends that are declared and paid primarily because of concerns with violations of corporate bylaws or debt covenants are of particular interest to the auditor as they could indicate a financial distress situation or a violation of regulations. This could eventually result in an issue with the going concern of the company. Therefore, the auditor is likely to gather evidence and information regarding such dividends to ensure the financial statement users' confidence in the reliability of the financial statements.

Question 16

During the course of an audit, a CPA observes that the recorded interest expense seems to be excessive in relation to the balance in the long-term debt account. This observation could lead the auditor to suspect that:

Accepted Answer

If the interest expense is excessive relative to the balance in the long-term debt account, it could indicate that not all debt is being reported on the balance sheet, suggesting that long-term debt might be understated.

Question 17

Two months before year-end, the bookkeeper erroneously recorded the receipt of a long-term bank loan by a debit to cash and a credit to sales. Which of the following is the most effective procedure for detecting this type of error?

Accepted Answer

Bank confirmation information would reveal the existence of the loan, which would not match the sales account, thus detecting the error.

Question 18

A substantive strategy is typically used to audit stockholders' equity because:

Accepted Answer

A substantive strategy is often used to audit stockholders' equity because the number of transactions affecting stockholders' equity is usually small, making it more efficient to directly verify the amounts rather than assess and test control processes.

Question 19

An audit of stockholders' equity ordinarily should include:

Accepted Answer

An audit of stockholders' equity should ensure that dividend declarations comply with debt agreements, as this affects the company's financial obligations and compliance with covenants.

Question 20

During the course of an audit, a CPA's substantive analytical procedure provides an expected interest expense that is significantly higher than the amount recorded in the entity's accounting records. This observation would most likely lead the auditor to suspect that:

Accepted Answer

The significant difference between the expected interest expense and the recorded amount suggests that the entity may have failed to record all interest expense. Therefore, choice D is the most appropriate. The other choices do not align with the observation made by the CPA.

Quiz 15: Auditing the Financinginvesting Process: Long-Term Liabilities, Stockholders' Equity, and Income Statement Accounts