Question 1

For most companies,stockholders' equity includes the following three accounts: preferred stock,paid-in capital,and retained earnings.

Accepted Answer

False

Question 2

Notes receivable is a common type of long-term financing.

Accepted Answer

Notes receivable are typically classified as a current asset on the balance sheet, representing amounts owed to the company that are expected to be received within one year. Long-term financing refers to financial obligations or securities that are due in more than one year, such as long-term loans or bonds payable.

Question 3

Long-term borrowing should be properly authorized.

Accepted Answer

Long-term borrowing involves significant financial commitments and should be authorized through proper channels and in line with the organization's financial policies and procedures. This helps to ensure that the borrowing is within the organization's borrowing capacity and that the funds are used for approved purposes.

Question 4

Several years ago,Conway,Inc.,secured a conventional real estate mortgage loan.Which of the following audit procedures would least likely be performed by an auditor examining the mortgage balance?

Accepted Answer

Inspecting public records of lien balances is less likely to be directly related to examining the mortgage balance itself. The other options (A, B, D) are more directly related to verifying the accuracy of the mortgage balance and interest expense recorded in the financial statements.

Question 5

The auditor typically begins an audit of retained earnings by obtaining a schedule of account activity for the period.

Accepted Answer

The auditor typically starts an audit of retained earnings by getting a schedule of account activity for the period. This schedule should detail the beginning balance, any adjustments or corrections made during the period, dividends or distributions made, and the ending balance.

Question 6

The auditor's program for the examination of long-term debt should include steps that require the

Accepted Answer

The examination of any bond agreement is necessary to determine the terms and conditions of the long-term debt, including the interest rate, due dates, and any covenants or restrictions. Verification of the existence of bondholders, inspection of the accounts payable subsidiary ledger, and investigation of credits to the bond interest income account are not necessarily relevant to the examination of long-term debt.

Question 7

The occurrence assertion is being tested when the auditor vouches stock repurchases to the canceled stock certificates.

Accepted Answer

When an auditor vouches stock repurchases to canceled stock certificates, they are verifying that the company has correctly recorded the reduction of its outstanding shares. This is an example of testing the occurrence assertion, which ensures that transactions have occurred and have been recorded properly.

Question 8

Three types of transactions usually occur in stockholders' equity: issuance of stock,repurchase of stock,and payment of dividends.

Accepted Answer

This statement is true. The three types of transactions that usually occur in stockholders' equity are issuance of stock, repurchase of stock, and payment of dividends.

Question 9

The auditor can best verify an entity's bond sinking fund transactions and year-end balance by

Accepted Answer

Confirmation with the bond trustee is the best way to verify an entity's bond sinking fund transactions and year-end balance. The bond trustee is responsible for managing the sinking fund and has detailed records of all transactions, including the number of bonds retired, the amount of funds deposited into the sinking fund, and any interest earned. This information can be cross-checked with the entity's records to ensure accuracy. Recomputation of interest expense and amortization of bond discount or premium may be useful as well but do not directly verify the sinking fund transactions and year-end balance. Confirmation with individual holders of retired bonds or examination and count of bonds retired during the year is not as reliable as confirmation with the bond trustee since the bond trustee has more complete and detailed records.

Question 10

One major issue associated with long-term debt is the classification of the short-term portion of long-term debt that is due in the next year.

Accepted Answer

Long-term debt may have a portion that is classified as short-term if it is due within the next year. This can impact financial ratios and the overall financial health of a company.

Question 11

Substantive analytical procedures can be used extensively to test revenue and expense accounts.

Accepted Answer

Substantive analytical procedures are commonly used to test revenue and expense accounts because they involve comparing account balances or changes in account balances with expected values based on historical data or other information. This helps to identify unusual or unexpected fluctuations that may indicate errors or fraud. However, other audit procedures may also be necessary to obtain sufficient evidence to support the auditors' opinion on the financial statements.

Question 12

A control which ensures that long-term borrowing is properly initiated by appropriate individuals addresses the control assertion of

Accepted Answer

The control assertion of authorization relates to ensuring that activities are authorized by appropriate individuals. Therefore, a control that ensures that long-term borrowing is properly initiated by appropriate individuals is addressing the authorization assertion.

Question 13

The registrar is responsible for preparing stock certificates and maintaining adequate stockholders' records.

Accepted Answer

The transfer agent is responsible for preparing and issuing stock certificates and maintaining stockholder records, not the registrar. The registrar's role is to ensure that the number of shares issued does not exceed the amount authorized by the corporation.

Question 14

There are typically only a couple of disclosure items that need to be considered for stockholders' equity.

Accepted Answer

Stockholders' equity typically only has a few disclosure items, such as the number of shares outstanding, the par value of the shares, and the retained earnings.

Question 15

The primary reason for preparing a reconciliation between interest-bearing obligations outstanding during the year and interest expense presented in the financial statements is to

Accepted Answer

The primary reason for preparing a reconciliation between interest-bearing obligations outstanding during the year and interest expense presented in the financial statements is to detect unrecorded liabilities. This reconciliation will help ensure that all interest-bearing liabilities are properly recorded in the financial statements and any unrecorded liabilities are identified and recorded.

Question 16

The dividend-disbursing agent prepares and mails dividends checks to the stockholders as of the date of declaration.

Accepted Answer

The dividend-disbursing agent prepares and mails dividend checks to stockholders as of the record date, not the date of declaration.

Question 17

Income statement accounts must be accounted for in accordance with GAAP.

Accepted Answer

Income statement accounts must accurately reflect the financial performance of the company and be reported in accordance with GAAP. This includes proper recognition of revenue, expenses, and gains/losses, among other requirements.

Question 18

The repurchase of stock includes the reacquisition of stock (treasury stock),but not the retirement of stock.

Accepted Answer

The repurchase of stock can include both the reacquisition of stock to hold as treasury stock and the retirement of stock, where the repurchased shares are permanently cancelled and cannot be reissued.

Question 19

Generally,all dividends that are declared and paid will be audited.

Accepted Answer

The answer of Generally,all dividends that are declared and paid...

Question 20

When auditing capital stock accounts,the cutoff assertion is the most important to consider.

Accepted Answer

The existence and rights and obligations assertions are typically more important when auditing capital-stock accounts, as auditors need to verify that the shares exist and the company has the right to issue them. The cutoff assertion is more critical for transactions that occur around the end of the reporting period to ensure they are recorded in the correct period.

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