Question 1

Which of the following is a key substantive test of transactions for the long-term debt and owner's equity process?

Accepted Answer

Both B and C are key substantive tests of transactions for the long-term debt and owner's equity process. B focuses on analyzing new debt instruments that originated during the year, which is crucial for understanding changes in the company's leverage. C emphasizes the analysis of capital stock accounts, which is essential for verifying transactions related to owner's equity. These analyses help auditors assess the accuracy and completeness of financial statement disclosures related to long-term debt and equity.

Question 2

When using analytical procedures in the long-term debt and owner's equity process,the auditor might consider

Accepted Answer

The auditor would consider the average interest rate on long-term debt in the current year and the prior year to assess the reasonableness of interest expense and to identify any unusual fluctuations or trends.

Question 3

Key control procedures for the long-term debt and owner's equity process are

Accepted Answer

Independent reconciliations and physical controls that limit access to assets are key control procedures for managing long-term debt and owner's equity, ensuring accuracy and safeguarding assets.

Question 4

Retained earnings are

Accepted Answer

Retained earnings are an owner's equity account that reflects all the net income (or net loss) earned by the company in the past that the company has kept. This means that the company has not distributed all of its profits as dividends and has instead reinvested them into the business. Retained earnings are a key component of a company's financial statements, as they demonstrate the company's profitability over time and its ability to generate cash flow.

Question 5

Key control procedures for the long-term debt and owner's equity process are

Accepted Answer

Key control procedures for long-term debt and owner's equity process include authorization procedures to ensure that only approved parties and amounts can access the resources, as well as documented transaction trails to track each transaction's path. Segregated reconciliations allow for independent verification of the accuracy and completeness of the process, while physical controls ensure that only authorized personnel can access the assets. Therefore, options B and C are included in the key control procedures identified.

Question 6

The only controls that an auditor can test are

Accepted Answer

The auditor can only test controls that are documented. Controls that are not documented cannot be tested. Controls that are relevant and significant to the audit objectives should also be tested. Authorization procedures and independent reconciliations may be types of controls, but they need to be documented in order for the auditor to test them.

Question 7

Key control procedures for the long-term debt and owner's equity process are

Accepted Answer

The key control procedures for long-term debt and owner's equity process are segregation of duties and documented transaction trails, as these help to prevent errors and fraudulent activities. Reconciliation procedures and independent recalculations are also important, but they are more relevant for the cash and accounts payable processes. Physical controls that allow access to assets are not directly relevant to the long-term debt and owner's equity process.

Question 8

Because long-term debt is listed as a long-term liability on the balance sheet,it should

Accepted Answer

Long-term debt represents the present value of the future cash flows needed to reduce the debt to zero, as it is typically repaid over a lengthy period of time, and the company must account for the time value of money when calculating the amount of debt owed. The present value of future debt payments is then listed on the balance sheet as a long-term liability.

Question 9

If the controls in the long-term debt and owner's equity process are not designed appropriately or are not operating properly,the auditor will

Accepted Answer

If the controls in the long-term debt and owner's equity process are not designed appropriately or are not operating properly, the auditor will need to design substantive tests to determine whether the internal control failures have led to misstatements in the financial statement accounts. This will allow the auditor to identify and correct any errors or inaccuracies in the financial statements, ensuring that the information provided is accurate and reliable. Control tests may also be performed to evaluate the effectiveness of the internal controls and identify areas for improvement. However, the primary focus will be on designing tests to detect any misstatements caused by internal control failures.

Question 10

In the long-term debt and owner's equity process,the auditor might perform which of the following analytical procedures

Accepted Answer

Both options A and B are valid analytical procedures for assessing long-term debt and owner's equity. A involves comparing the balances of various accounts between the current and prior years, while B involves calculating a ratio to assess the relationship between debt and equity. By performing both procedures, the auditor can gain a deeper understanding of the company's financial position and ensure that these accounts are properly stated.

Question 11

The balance in the retained earnings account is reduced by

Accepted Answer

Dividends declared reduce retained earnings because they represent a distribution of earnings to shareholders.

Question 12

Shares of treasury stock

Accepted Answer

Shares of treasury stock do not directly reduce the capital stock accounts, but rather remain in a treasury stock account (a contra-equity account) until they are retired by the company or reissued. Retiring the treasury stock means that the shares are cancelled and returned to the status of authorized but unissued, while reissuing the treasury stock means that the shares are sold again to investors. Only transactions involving newly issued shares affect the capital stock accounts.

Question 13

Long-term debt accounts reflect

Accepted Answer

Long-term debt accounts reflect obligations to repay money borrowed over a longer period of time than one year. The other choices are incorrect as they do not accurately describe long-term debt accounts.

Question 14

The auditor uses substantive tests of transactions in the long-term debt and owner's equity business process to

Accepted Answer

Substantive tests of transactions are designed to test the accuracy, completeness, and validity of the transactions that have occurred during the year. Therefore, they are used to test the recording of transactions during the year, ensuring that all transactions are recorded correctly in the financial records.

Question 15

If the auditor decides to rely on internal control evidence in the long-term debt and owner's equity process,he will first

Accepted Answer

Before relying on internal control evidence in the long-term debt and owner's equity process, the auditor must first document the internal control system to assess its effectiveness in ensuring accuracy and completeness of financial information. Reviewing computer access controls, determining the amount of long-term debt, and determining the amount of owner's equity would come after assessing the internal control system.

Question 16

IT controls that the auditor might expect to find in the long-term and owner's equity process are

Accepted Answer

Option B is correct as it ensures that increases in common stock and additional paid-in capital are supported by either cash or assets, which provides assurance on the completeness and accuracy of reported equity balances. Option C is also correct as it ensures that accrued interest entries are supported by relevant information, which provides assurance on the accuracy and completeness of interest expense. Options A, D, and E are not relevant or sufficient to provide assurance on the completeness and accuracy of reported equity balances.

Question 17

Key control procedures for the long-term debt and owner's equity process are

Accepted Answer

Key control procedures for the long-term debt and owner's equity process include authorization procedures (B) and independent reconciliations (D). These help ensure that only authorized individuals are able to initiate and approve transactions and that those transactions are accurately recorded and reflected in the company's financial statements. Segregated transaction trails (C) and physical controls (E) may also be important but are not specifically related to the long-term debt and owner's equity process. Documentation of duties (A) is also important but does not specifically address control procedures for this process. Therefore, the best choice is G, which includes the two procedures most directly related to long-term debt and owner's equity.

Question 18

The balance in the capital stock accounts at year-end should include

Accepted Answer

The balance in the capital stock accounts at year-end should include the beginning balance from last year's audited number, increased by new shares of stock sold during the year, and decreased by shares of stock retired during the year. Option C correctly reflects this. Option A is incorrect because it includes new shares authorized but not necessarily sold, and Option B is incorrect because it includes treasury stock acquired, which is not included in the capital stock account balance. Option D is incorrect because it includes issued and outstanding shares, but only issued shares are included in the capital stock account balance.

Question 19

Key control procedures for the long-term debt and owner's equity process are

Accepted Answer

The key control procedures for the long-term debt and owner's equity process are segregation of duties and independent reconciliations. These procedures ensure that no single individual has complete control over the process and that there is a system of checks and balances in place. Segregation of duties means that different individuals are responsible for different aspects of the process, such as authorizing, recording, and reconciling transactions. Independent reconciliations involve a separate individual or department reviewing and verifying the accuracy of the transactions and account balances. This helps to detect errors or fraudulent activity. Therefore, choice G, which includes both segregation of duties and independent reconciliations, is the best answer.

Question 20

The capital stock accounts (capital stock par,stated value or paid in capital)reflect

Accepted Answer

The capital stock accounts reflect the ownership interest of individuals who own stock in the company. This ownership interest is represented by the amount of money that individuals have paid to the company for their shares, which is recorded as capital stock par, stated value or paid-in capital. Option A is incorrect because individuals who loaned money to the company are represented in the notes payable and other liability accounts. Option C is incorrect because loaning money does not represent ownership interest. Option D is incorrect because owning stock does not represent an ownership obligation; it represents an ownership interest.

Quiz 11: Long-Term Debt and Owners Equity Business Process

Which of the following is a key substantive test of transactions for the long-term debt and owner's equity process?

When using analytical procedures in the long-term debt and owner's equity process,the auditor might consider

Key control procedures for the long-term debt and owner's equity process are

Retained earnings are

Key control procedures for the long-term debt and owner's equity process are

The only controls that an auditor can test are

Key control procedures for the long-term debt and owner's equity process are

Because long-term debt is listed as a long-term liability on the balance sheet,it should

If the controls in the long-term debt and owner's equity process are not designed appropriately or are not operating properly,the auditor will

In the long-term debt and owner's equity process,the auditor might perform which of the following analytical procedures

The balance in the retained earnings account is reduced by

Shares of treasury stock

Long-term debt accounts reflect

The auditor uses substantive tests of transactions in the long-term debt and owner's equity business process to

If the auditor decides to rely on internal control evidence in the long-term debt and owner's equity process,he will first

IT controls that the auditor might expect to find in the long-term and owner's equity process are

Key control procedures for the long-term debt and owner's equity process are

The balance in the capital stock accounts at year-end should include

Key control procedures for the long-term debt and owner's equity process are

The capital stock accounts (capital stock par,stated value or paid in capital) reflect