Which of the following accounts would not typically be included in the audit of debt?
a. Interest expense.
b. Bonds payable.
c. Notes payable.
d. Interest income.
Which of the following most accurately describes the nature of fraud related to equity described in the case of Delphi Corporation presented in the Focus on Fraud feature?
a. Stock options were backdated.
b. Proceeds from stock sales were misappropriated.
c. Expenses were charged directly to retained earnings, rather than to the appropriate expense accounts.
d. Stock sales were not authorized.
Which of the following would an auditor typically not perform as part of gaining an understanding of the client's controls related to debt?
a. Inquire of management about the process for reviewing compliance with debt covenants.
b. Recalculate interest expense.
c. Review policies related to approval required for new debt.
d. Review the client's documentation of controls.
How does an auditor typically respond to identified risks of material misstatement associated with debt?
a. The auditor will typically plan an approach that uses only substantive procedures.
b. The auditor will typically plan to perform a controls reliance approach to the audit.
c. Because of the low level of risk of material misstatement, the auditor would only rely on planning analytical procedures.
d. The auditor does not need to respond to identified fraud risks since the risk of fraud related to debt is typically minimal.
Which of the following would the auditor not try to determine about a client's warranty estimate?
a. Whether the estimate is reasonable in the circumstance.
b. How management developed the estimate.
c. Whether management based the estimate on verifiable, objective assumptions.
d. Whether the factors and assumptions used by management deviate from historical patterns.
Typically, the most relevant assertion related to debt is completeness.
A potential fraud risk associated with debt is the intentional misclassification of short-term debt as long-term debt.
An auditor would typically not use trend analyses as a planning analytical procedure when auditing debt.
When testing debt, the auditor typically uses a substantive audit approach.
Auditors can test the client's warranty reserves using primarily tests of controls and substantive analytical procedures.
