Auditing Chapter 13 Homework

Question 1 of 30

1

Which of the following is the auditor’s primary objective when auditing debt?

Select one of the following:

a. Proper presentation and disclosure, including important restrictions contained in the debt.
b. Understatement of the debt obligation focusing on the completeness assertion.
c. Valuation of gains or losses on refinancing debt.
d. Proper valuation of bond premium or bond discount, including amortization valuation.

Explanation

Question 2 of 30

1

Which of the following is not a common debt covenant restriction?

Select one of the following:

a. Specification of a maximum debt-equity ratio.
b. Maintenance of a minimum working-capital ratio.
c. Maintenance of a minimum level of retained earnings before dividends can be paid.
d. Specification of a minimum earnings per share.

Explanation

Question 3 of 30

1

Which of the following results in a situation where an auditor has the least amount of difficulty in determining stock valuation?

Select one of the following:

a. When stock is exchanged for another business.
b. When stock is issued for land.
c. When stock options are issued and exercises occur.
d. When stock is issued for cash.

Explanation

Question 4 of 30

1

How would an auditor generally measure the value of a stock option expense?

Select one of the following:

a. Appraised value.
b. All of these methods can be used.
c. By computing a weighted average value of all classes of stock authorized.
d. Fair value.

Explanation

Question 5 of 30

1

When auditing the gains or losses on refinancing debt, the auditor primarily focuses on which assertion?

Select one of the following:

a. Presentation and disclosure.
b. Existence.
c. Valuation.
d. Completeness.

Explanation

Question 6 of 30

1

When auditing the premium or discount on bonds (including amortization), the auditor primarily focuses on which assertion?

Select one of the following:

a. Completeness.
b. Existence.
c. Presentation and disclosure.
d. Valuation.

Explanation

Question 7 of 30

1

Which of the following is not an inherent risk typically associated with recording debt transactions?

Select one of the following:

a. Interest expense not being properly recorded.
b. Debt not being properly classified.
c. Debt not being properly authorized.
d. Failure to accrue interest expense.

Explanation

Question 8 of 30

1

The inherent risk of proceeds from stock sales not being received is most likely related to which of the following management assertions?

Select one of the following:

a. Existence.
b. Presentation and disclosure.
c. Valuation.
d. Completeness.

Explanation

Question 9 of 30

1

An auditor determines that there is an inherent risk that all stock repurchased is not recorded as treasury stock. This determination is most likely tied to which of the following management assertions?

Select one of the following:

a. Completeness.
b. Presentation and disclosure.
c. Valuation.
d. Existence.

Explanation

Question 10 of 30

1

An auditor determines that there is an inherent risk that dividends may be recorded and paid before being declared. This determination is most likely tied to which of the following management assertions?

Select one of the following:

a. Presentation and disclosure.
b. Valuation.
c. Completeness.
d. Existence.

Explanation

Question 11 of 30

1

An auditor determines that there is an inherent risk that a company has not included both the basic earnings per share and diluted earnings per share amounts in financial statements even though significant dilutive securities are part of the company’s complex capital structure. This determination is most likely tied to which of the following management assertions?

Select one of the following:

a. Existence.
b. Valuation.
c. Rights and obligations.
d. Presentation and disclosure.

Explanation

Question 12 of 30

1

Which of the following is not a potential fraud related to debt?

Select one of the following:

a. Dividends are paid in violation of restrictive covenants.
b. Debt is not properly authorized.
c. Entire loan payments are charged to either principal or interest.
d. Long-term or short-term debt is misclassified.

Explanation

Question 13 of 30

1

What type of risk is intentional failure by management to accurately disclose violations of debt covenants?

Select one of the following:

a. Fraud risk.
b. Inherent risk.
c. Detection risk.
d. Control risk.

Explanation

Question 14 of 30

1

Which of the following would an auditor not typically perform as part of gaining an understanding of the client’s controls related to debt?

Select one of the following:

a. Recalculate interest expense.
b. Inquire of management about the process for reviewing compliance with debt covenants.
c. Review policies related to approval required for new debt.
d. Review the client’s documentation of controls.

Explanation

Question 15 of 30

1

Which of the following does an auditor consider when gaining an overall understanding of the client’s internal controls?

Select one of the following:

a. Transaction controls at the account level only.
b. Entity-wide controls at the assertion level only.
c. Both entity-wide controls and transaction controls at the account and assertion levels.
d. Entity-wide controls at the account level only.

Explanation

Question 16 of 30

1

Which of the following are entity-wide components of internal control that can mitigate the risk of material misstatement related to debt?

Select one of the following:

a. Monitoring controls.
b. All of these are entity-wide components of internal control.
c. Information and communication.
d. Risk assessment.

Explanation

Question 17 of 30

1

Which of the following is a typical control for debt?

Select one of the following:

a. Upper managers approve all new debt.
b. The stockholders approve all new debt.
c. The CFO approves all new debt.
d. The board of directors approves all new debt.

Explanation

Question 18 of 30

1

Which of the following statements is typically not true regarding controls related to proper accounting for stock option grants?

Select one of the following:

a. The proper accounting for stock option grants is researched by the organization’s accountant.
b. The analysis of the accountant regarding stock option grants is reviewed by the organization’s legal counsel.
c. The analysis of the accountant regarding stock option grants is reviewed by the board of directors.
d. The analysis of the accountant regarding stock option grants is reviewed by the CFO.

Explanation

Question 19 of 30

1

Which of the following statements is true regarding planning analytical procedures for debt and stockholders’ equity transactions?

Select one of the following:

a. The long-term debt to equity ratio could be considered by the auditor as part of the planning analytical procedures.
b. Because there are typically only a few stockholders’ equity transactions, the auditor is not required to perform planning analytical procedures for stockholders’ equity accounts.
c. If unusual or unexpected relationships are identified by planning analytical procedures, the auditor should stick with the original expectations of misstatements, because this could be an anomaly and bias the audit overall.
d. Trend analysis would not typically be performed for debt.

Explanation

Question 20 of 30

1

Which of the following statements is true regarding the appropriate audit procedures to perform for debt and stockholder’s equity accounts?

Select one of the following:

a. The auditor will usually decide to test debt, including interest, using only substantive procedures.
b. None of these statements is true.
c. Testing debt, including interest, is typically accomplished using only control procedures.
d. When auditing stockholders’ equity transactions, the auditor commonly uses a control procedure approach, but uses only substantive procedures to test debt obligation transactions.

Explanation

Question 21 of 30

1

For integrated audits, when does the auditor test the operating effectiveness of important controls?

Select one of the following:

a. As of the end of the second quarter of the client’s fiscal year.
b. None of these answers is correct.
c. As of the beginning of the client’s fiscal year.
d. As of the client’s year end.

Explanation

Question 22 of 30

1

Which of the following is not a typical test of controls when auditing debt and equity transactions?

Select one of the following:

a. Comparing current year account balances with prior year account balances.
b. Inquiry of personnel performing the control.
c. Observation of the control being performed.
d. Reperformance of the control by the auditor testing the control.

Explanation

Question 23 of 30

1

Which of the following procedures would be included in the auditor’s audit program for long-term debt?

Select one of the following:

a. Investigation of credits to the bond interest income account.
b. Review debt loan agreements.
c. Verification of the existence of the bondholders.
d. Inspection of the accounts payable master file.

Explanation

Question 24 of 30

1

Which of the following is the least important in helping the auditor develop an independent expectation of interest expense as a substantive analytical procedure?

Select one of the following:

a. Examine disaggregated data by type of debt.
b. Examine an interest revenue schedule.
c. Determine average interest rates.
d. Determine average debt outstanding.

Explanation

Question 25 of 30

1

Which of the following will an auditor not perform when looking for additions to debt?

Select one of the following:

a. Trace the proceeds into the bank statement.
b. Examine canceled notes.
c. Trace the proceeds into the cash receipts records.
d. Obtain assurance regarding board approval of the debt through review of board meeting minutes.

Explanation

Question 26 of 30

1

Which of the following will an auditor not perform when looking for debt reductions?

Select one of the following:

a. Examine canceled checks.
b. Examine proceeds into the cash receipts records.
c. Examine canceled notes.
d. Examine payments through the cash disbursements records.

Explanation

Question 27 of 30

1

Which of the following is not a substantive test of details for dividends?

Select one of the following:

a. Agreement of the dividend amount with the payment in the cash disbursements journal.
b. Examination of the minutes of the board of directors’ meetings for the dividend record date.
c. Calculation of the dividend payout ratio.
d. Examination of the minutes of the board of directors’ meetings for authorization of the dividend per share amount.

Explanation

Question 28 of 30

1

In those audits where there is a heightened risk of fraud related to debt, which of the following will the auditor not typically perform?

Select one of the following:

a. Vouch and trace loan proceeds and debt payments.
b. Search public records to identify debt.
c. Send confirmations to lenders and creditors, including confirmation of compliance with any debt covenants.
d. Obtain photocopies of supporting documents.

Explanation

Question 29 of 30

1

Which of the following is not an element of pensions and other postemployment benefits that is difficult to estimate?

Select one of the following:

a. Long-term interest rates to discount future costs back to present value.
b. The future earnings of employees prior to retiring for defined benefit plans.
c. Projected lifetime of former employees that will receive a pension.
d. Current amounts earned on pension plan assets.

Explanation

Question 30 of 30

1

An audit of the other postemployment benefits does not require estimates with respect to which of the following?

Select one of the following:

a. Changes in average life expectancies.
b. Changes in coverage.
c. Changes in human resources personnel in charge of postemployment benefits.
d. Changes in medical expenses.

	Created by Kayla Harbaugh about 4 years ago