Question 1

For internal control purposes,the audit team may consider whether dividends declared and paid have been approved by which of the following?

Accepted Answer

Dividends declared and paid are usually approved by the board of directors, who have the authority to make decisions related to corporate finance and operations. Executive management and the transfer agent may have some involvement in the process, but they are not typically responsible for approving dividends. Shareholders do not have the authority to approve dividends but may have the right to vote on the election of board members who could ultimately make these decisions.

Question 2

The auditor will examine proceeds and trace them to recorded amounts of the par value of common stock to determine that

Accepted Answer

The auditor's examination of proceeds is to ensure that they have been properly distributed between common stock and additional paid-in capital. This ensures that the recorded amounts of common stock accurately reflect the amount of funds received from shareholders for the issuance of stock. The other options are not relevant to this specific audit procedure.

Question 3

A term used to describe a joint business venture with other entities to develop products and services utilizing the technologies of the entities involved is called what?

Accepted Answer

A variable interest entity (VIE) is a legal business structure in which an investor has a controlling interest despite not having a majority of voting rights. This term is often used in joint ventures where entities collaborate to develop products and services using their technologies.

Question 4

An experienced auditor will review the bond indenture while testing long-term obligations for which purpose?

Accepted Answer

When testing long-term obligations, an experienced auditor will review the bond indenture in order to ensure that no provision has been violated that will cause the debt to become current. This is a crucial step to evaluate the client's solvency and the accuracy of the financial statements.

Answer A is incorrect because determining the fair market value of the bond is not the main purpose of reviewing the bond indenture. Answer C is also incorrect because writing disclosures is not the main objective of the audit process. Answer D is incorrect because creating a confirmation is not related to reviewing the bond indenture.

Question 5

Bond issuers typically engage the services of a bond trustee for what purpose?

Accepted Answer

Bond issuers engage the services of a bond trustee to manage the bond issuance process, including bondholder registration and the disbursement of interest payments to bondholders.

Question 6

Auditing the warranty liability most likely includes the evaluation of which of the following?

Accepted Answer

Auditing the warranty liability would involve evaluating changes in the cost of repairing certain products to accurately estimate the amount of warranty claims that may be made in the future. This is because the warranty liability is a calculated estimate of the future cost of servicing products sold with a warranty.

Options B, C, and D are not directly related to the warranty liability and are unlikely to be evaluated as part of this audit.

Question 7

Auditors will obtain evidence regarding board of director approval of which of the following transactions?

Accepted Answer

The creation of and dealings with special purpose entities often involves complex financial arrangements and potential risks, thus requiring approval from the board of directors. Auditors need to ensure that such transactions are properly authorized and disclosed. The other options listed do not necessarily require board approval in all cases.

Question 8

Related entity transactions can most often be discovered by auditors while performing which of the following procedures?

Accepted Answer

Examining unusual transactions and inquiry can reveal related entity transactions as these often involve atypical terms or conditions that stand out during an audit.

Question 9

All of the following represent equity issuance requiring prominent accounting,presentation and disclosure treatment,except

Accepted Answer

Dividends not paid on common stock since inception do not represent an equity issuance requiring prominent accounting, presentation, and disclosure treatment. They are related to dividend policy and retained earnings rather than the issuance of equity instruments.

Question 10

An audit firm will test the pension obligation of a client by performing which of the following procedures?

Accepted Answer

Evaluating the actuary's independence and the competence and sufficiency of the evidence is a standard audit procedure to ensure the reliability of the actuarial calculations related to pension obligations.

Question 11

Once a related entity transaction is identified,the audit team will do which of the following?

Accepted Answer

The audit team should ensure that the related entity transaction is properly disclosed in the financial statements. This will help provide transparency to users of the financial statements and allow them to make informed decisions based on the information provided. Asking the client to record the transaction differently, calling a board meeting, or requiring that the transaction be excluded from the financial statements are not appropriate actions unless there are significant issues with the transaction that go beyond mere related entity disclosure.

Question 12

Which of the following represents the ultimate action required for treatment of a variable interest entity?

Accepted Answer

The ultimate action required for treatment of a variable interest entity is consolidation. This involves including the VIE's financial statements with those of the primary beneficiary, as the primary beneficiary is considered to have control over the VIE. The equity method, pooling method, and elimination are alternative methods of accounting for investments but are not appropriate for the treatment of a VIE.

Question 13

Bryce Canyon,CPA is auditing the financing cycle of Top Hat,Inc.He reviews the articles of incorporation and bylaws of Top Hat in relation to the company's common stock to determine proper disclosure of which of the following?

Accepted Answer

The articles of incorporation and bylaws typically provide information on the company's authorized shares and par value, which are important elements of the company's capital structure. This information is necessary for proper disclosure in the financial statements and for compliance with legal requirements. The other options (B, C, and D) do not relate specifically to the disclosure of common stock and are not as important for the financing cycle audit.

Question 14

Which one of the following disclosures is not required for stockholder's equity in the financial statements?

Accepted Answer

The disclosure of price-to-earnings ratio is not required for stockholder's equity in the financial statements. The other options, such as disclosure of classes of stock outstanding, number of shares authorized, issued and outstanding, and existence of stock warrants are required to be disclosed in the financial statements.

Question 15

Zion Wilderness,Inc.is a public company that does not maintain its own stock books.How will the auditor most likely establish the number of shares outstanding for testing purposes?

Accepted Answer

The most likely way for the auditor to establish the number of shares outstanding for testing purposes is to confirm with the transfer agent, who is responsible for maintaining records of stock and stock transactions. The auditor may also inquire of management or examine proceeds from current stock issuance, but these are not as reliable as confirmation with the transfer agent. Discussions with the stock trustee may also be helpful, but not necessary in this case, as the transfer agent should have the most up-to-date and accurate information regarding shares outstanding.

Question 16

Which of the following causes valuation issues relative to the issuance of capital stock?

Accepted Answer

Issuing preferred stock for assets or services can lead to valuation issues because it may be difficult to determine the fair value of the assets or services exchanged.

Question 17

Owners of smaller companies often set up related entities to transact with in order to do which of the following?

Accepted Answer

Owners of smaller companies often set up related entities to derive tax benefits, such as splitting income between entities to take advantage of lower tax rates or claiming deductions from one entity against the other. Options A, B, and D are all illegal and unethical practices that should be avoided.

Question 18

What is the primary purpose for the SEC's requirement to disclose all transactions of senior management?

Accepted Answer

The primary purpose of the SEC's requirement to disclose all transactions of senior management is to hold management accountable for any unacceptable personal use of corporate assets. This ensures transparency in management's financial dealings and prevents any misuse of company resources.

Question 19

Typically all of the following liabilities represent difficult and subjective estimates except?

Accepted Answer

Accrued wages are typically straightforward and based on actual hours worked and agreed-upon wage rates, making them less subjective compared to other liabilities like deferred compensation, pension obligations, and warranties, which involve more estimation and judgment.

Question 20

Which of the following liabilities does not involve significant subjective judgments?

Accepted Answer

Interest payable is a straightforward liability that does not involve significant subjective judgments. The amount owed is based on an agreed-upon interest rate and the outstanding balance of the loan or debt. Warranty reserves, pension benefits, and restructuring reserves all require subjective judgments to determine the appropriate amount to record as a liability.

Quiz 14: Audit of Longer-Term Liabilities, equity, acquisitions, and Related-Entity Transactions, long-Term Liabilities, and Equity