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.

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.

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.

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.

a. Presentation and disclosure.

b. Existence.

c. Valuation.

d. Completeness.

a. Completeness.

b. Existence.

c. Presentation and disclosure.

d. Valuation.

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.

a. Existence.

b. Presentation and disclosure.

c. Valuation.

d. Completeness.

a. Completeness.

b. Presentation and disclosure.

c. Valuation.

d. Existence.

a. Presentation and disclosure.

b. Valuation.

c. Completeness.

d. Existence.

a. Existence.

b. Valuation.

c. Rights and obligations.

d. Presentation and disclosure.

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.

a. Fraud risk.

b. Inherent risk.

c. Detection risk.

d. Control risk.

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.

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.

a. Monitoring controls.

b. All of these are entity-wide components of internal control.

c. Information and communication.

d. Risk assessment.

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.

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.

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.

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.

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.

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.

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.

a. Examine disaggregated data by type of debt.

b. Examine an interest revenue schedule.

c. Determine average interest rates.

d. Determine average debt outstanding.

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.

a. Examine canceled checks.

b. Examine proceeds into the cash receipts records.

c. Examine canceled notes.

d. Examine payments through the cash disbursements records.

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.

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.

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.

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.