Chapter 15 Exam 2

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1. Actual signed copies of the notes are often Permanent 15. Auditors need to determine that notes are 1. types of
put in the auditors' ________ file. classified by: payees
2. maturity
2. All corporate capital stock transactions minutes of
should ultimately be traced to the: the board of 16. The auditors' plan for the examination of examination
directors long-term debt should include steps that of copies of
require the: debt
3. The analysis of stockholder's equity at the YE date
agreements
typically includes few transactions but
material amounts so auditors typically 17. Auditors review renewals of notes Classification
perform the analysis: maturing after the BS date to determine
proper ___________ of these liabilities.
4. Analytical procedures for interest-bearing amount in
debt include comparing interest expense prior year's 18. Auditors review stock option plans and presentation
with: BS shares issued when options are granted to
obtain evidence regarding which audit
5. *An auditor most likely would inspect loan presentation
objective?
agreements under which an entity's and
inventories are pledged to support disclosure 19. Auditors review the partnership contract 1. determine
management's financial statement assertion to: the
of: distribution of
net income is
6. Appropriations of retained earnings require Board Of
appropriate
specific authorization by the: Directors
2. verify
7. An auditor is most likely to trace treasury numbered partners'
stock purchase transactions to the: stock capital
certificates accounts are
on hand maintained at
8. The auditors can best verify a client's bond confirmation prescribed
sinking fund transactions and year-end with the bond levels
balance by: trustee 20. Auditors should determine whether the Presentation
9. The auditors can best verify a client's bond confirmation company has met all requirements and and
sinking fund transactions and year-end with the bond restrictions imposed upon it by debt disclosure
balance by: trustee. agreements to obtain evidence regarding
the ____________ audit objective.
10. Auditors can document their understanding audit
of internal control over capital stock program 21. Auditors should examine payments on the note
transactions in all of the following except notes payable and verify the payment repayment
the: amounts to: schedule

11. Auditors confirm the number of shares 1. 22. Auditors should inspect any shares of Treasury
issued and outstanding with: independent ___________ stock owned by the company
registrar that are on hand or confirm the
2. stock transactions with the transfer agent.
transfer agent 23. Auditors should trace information in corporate
12. Auditors design substantive procedures that Occurrence confirmation replies for shares outstanding records
substantiate the existence of owner's equity to:
and the ___________ of the related 24. Auditors should trace proceeds from the 1. cash
transactions. issuance of capital stock to: records
13. Auditors examine copies of notes payable the debt 2. bank
and trace details to: analysis statements
working 25. Auditors test debt recorded at FV using: 1.
paper unobservable
14. Auditors examine the relationship between completeness inputs
recorded interest expense and the average 2. observable
principal amount of debt outstanding during inputs
the year as a test of which audit objective?
26. Auditors vouch the cash received from validated bank 40. During the course of an audit, a CPA long-term debt
the issuance of notes, bonds, or deposit slips observes that the recorded interest is understated.
mortgages to: expense seems to be excessive in
relation to the balance in the long-term
27. The auditors would be most likely to find Interest
debt account. This observation could
unrecorded long-term liabilities by payments
lead the auditors to suspect that:
analyzing:
41. During the year being audited a Review minutes
28. An auditor usually obtains evidence of minutes of
company guaranteed the debt of an and resolutions
stockholders' equity transactions by board of
affiliate. Which of the following best of the board of
reviewing the entity's: directors
describes the audit procedure that directors.
meetings
would make the auditor aware of the
29. An audit plan for the examination of the authorization guarantee?
retained earnings account should include for both cash
42. The financing cycle includes procedures 1. mortgages
a step that requires verification of the: and stock
for authorizing, executing, and recording 2. bank loans
dividends.
transactions that involve: 3. capital stock
30. The audit procedure of confirmation is holders of
43. Florida Corporation declared a 100% the additional
least appropriate with respect to: common stock
stock dividend during 200X. In shares issued do
31. The board must approve all dividend Record connection with the examination of not exceed the
declarations including the amount per Florida's financial statements, Florida's number of
share, the date of declaration, date of auditors should determine that: authorized but
__________, and date of payment. previously
32. The board should authorize the following: 1. number of unissued shares
shares to be 44. For cash dividends, auditors: 1. determine the
issued and dates and
price per share amounts of
2. valuation of dividends
non cash authorized
assets received 2. verify the
in payment for amounts paid
shares
45. For corporate clients, owner's equity 1. capital stock
33. Bond transactions are typically confirmed Trustee consists of: accounts
directly with the _______. 2. retained
34. Bond transactions are usually confirmed trustees earnings
directly with: 46. For each issue of capital stock, auditors Authorized
35. Cash or other assets set aside for the sinking fund need information on the number of
retirement of a debt. shares __________ and issued; par or stated
value and dividend rates.
36. The compensation cost of employee Fair value
stock options should be measured at 47. The formal agreement between trust indenture
___________ creating challenges for auditors bondholders and the issuer as to the
to determine appropriate valuation. terms of the debt.

37. Copies of bond indentures should be permanent file 48. For stock option plans auditors need to 1. issued
maintained in the: obtain detailed analyses for stock 2. outstanding
options: 3. authorized
38. Copies of loan agreements relating to a permanent file
bond issue should be put in the auditor's: 49. For stock options, auditors must Unissued
determine that the number of shares
39. Debits to a mortgage payable account Payments
held in reserve at the BS date do not
typically are _______ on the account.
exceed the corporation's authorized but
___________ stock.
50. If a company employs a capital stock issued and 61. Match the financing cycle A-1
registrar and/or transfer agent, the registrar outstanding misstatement with its B-2
or agent, or both, should be requested to at the example.
confirm directly to the auditors the number balance
of shares of each class of stock: sheet date. a. Improper reporting of debt
b. Incomplete recording of
51. In addition to bank statements, auditors can registration
debt
also trace proceeds from capital stock issues statements
to: of the SEC
1. Loan recorded as debit to
52. In an audit of a sole proprietorship, a common segregation cash and credit to revenue
difficulty is lack of: of personal account
net worth 2. Loan not recorded and
and proceeds maintained "off the
business books"
capital
62. Match the party with their A-3
53. In a small corporation that does not use a secretary typical role in debt. B-1
dividend-paying agent, which person is C-2
responsible for preparing a list of a. BOD
stockholders as of the date of record, the b. Treasurer
number of shares held by each, and the c. Independent trustee
amount of dividends each is to receive?
54. In connection with the examination of bonds the issue 1. Prepare report on financing
payable, the auditors would expect to find in date and explaining need for funds
a trust indenture: maturity 2. Protect creditors' interests
date of the and maintains detailed
bond. records of the registered
owners of the bonds
55. An institution charged with responsibility for stock
3. Approve borrowing
avoiding over issuance of a corporation's registrar
including bank and reviews
stock.
reports of the amount
56. An institution responsbile for maintaining stock received
detailed records of shareholders and transfer
63. Noncompliance with debt Classification
handling changes of ownership of stock agent
may affect the ____________ of
ownership.
debt, as long-term debt can
57. In the audit of a medium-sized manufacturing Owners' become current.
concern, which one of the following areas equity.
64. A notes payable analysis Note
would be expected to require the least
shows the beginning balance,
amount of audit time?
additional notes, and the
58. In the continuing audit of a manufacturing owners' ending balance of each
company of medium size, which of the equity individual ______.
following areas would you expect to require
65. Notes payable to financial Cash
the least amount of audit time?
institutions are often
59. In the verification of _____________ dividends, Stock confirmed together with the
auditors determine that the proper amounts _______ accounts.
have been transferred from retained earnings
66. The presentation of changes in retained earnings
to capital stock and paid-in capital.
stockholder's equity should during the year
60. A likely reason that consideration of client current include all of the following
compliance with debt provisions is important liabilities except:
to an audit is that violation of such debt
67. The primary responsibility of verify that stock is issued in
provisions may affect the total recorded:
a bank acting as registrar of accordance with the
capital stock is to: authorization of the board
of directors and the articles
of incorporation
68. The primary responsibility of this party is to stock 81. T or F: Multiplying the stock market price times the False
control the issuance of stock and prevent registrar number of shares listed as outstanding by the
any over issuance of stock. registrar is a frequently used analytical procedure
to test the completeness assertion for common
69. The record of serially numbered certificates stock
stock.
with attached stubs used to track the certificate
number of shares, names of shareholders book 82. T or F: Notes payable to financial institutions are True
and serial number of certificates is called: confirmed as a part of the confirmation of cash
deposit balances.
70. Secured liabilities should be disclosed in the pledged
notes to the financial statements and cross- assets 83. T or F: Since owner's equity accounts are typically False
referenced to: large in amount, the audit time devoted to them is
typically extensive in amount.
71. Shares of its own stock acquired by a treasury
corporation for the purpose of being stock 84. T or F: The audit of interest expense may reveal the True
reissued at a later date. existence of unrecorded debt.
72. Testing for unrecorded liabilities, evaluating after the 85. T or F: The auditors have no responsibility to False
compliance with debt provisions, and tests close of the determine compliance with restrictions imposed by
of interest expense are performed: period being borrowing agreements since these restrictions do
audited not affect accounting principles.
73. To determine bonds outstanding were minutes of 86. T or F: The auditors should personally evaluate the False
authorized, auditors review: BOD legality of all new issues of debt by the client.
meetings
87. T or F: The audit procedure of confirmation by True
74. To determine the total number of shares Stockholders direct communication with a creditor is more likely
owned by any one person the auditor can to be applied to a note holder than to a
review the __________ ledger. bondholder.
75. To establish the amount of outstanding stock 88. T or F: The authority to issue interest-bearing debt False
stock, auditors should reconcile general certificate generally lies with the stockholders of the
ledger accounts for capital stock with book corporation.
stockholders ledger and the:
89. T or F: The company transfer agent is responsible True
76. T or F: A complete set of financial False for transferring stock from one investor to another.
statements includes both a statement of
90. T or F: The discovery of related-party transactions True
retained earnings and a statement of
is generally easier in the area of notes payable
stockholders' equity.
than in accounts payable.
77. T or F: Debentures are liabilities that are True
91. T or F: The stock certificate book of a corporation False
backed only by the general credit of the
provides a separate record of the total number of
issuing company.
shares owned by each stockholder.
78. T or F: If the general partner of a True
92. T or F: The use of a stockholders ledger eliminates False
partnership is unwilling to allow the auditors
the need for a stock certificate book.
to examine the partnership contract, the
auditors ordinarily will not be able to issue 93. T or F: Treasury stock should be confirmed directly False
an unmodified opinion on the partnership's with shareholders.
financial statements. 94. T or F: When a "sinking fund" exists, the auditors True
79. T or F: In the audit of a corporation that False should be able to identify cash or other assets set
does not utilize the services of an aside for the retirement of a debt.
independent stock registrar and transfer 95. T or F: When outstanding shares are transferred False
agent, the auditors should always confirm all from one investor to another, owners' equity
outstanding shares by direct communication increases when the transfer is at a higher price than
with stockholders. paid by the original investor.
80. T or F: In the verification of debit entries to False
retained earnings for small stock dividends,
the auditors' only concern about dollar
amounts is that the amount per share
corresponds to the declaration by the board
of directors.
96. To verify details of complex financing send a 107. Which of the following is least Determine that the
arrangements, auditors: separate likely to be an audit objective for client has rights to
confirmation debt? receive proceeds
letter to the relating to the
financial redemption of debt
institution
108. Which of the following is most determine that the
97. A transfer agent and a registrar are most shares issued likely to be an audit objective in presentation and
likely to provide the auditor with evidence and the audit of owners' equity? disclosure of owners'
on: outstanding equity is appropriate
98. Types of long-term debt include: 1. secured 109. Which of the following questions Are direct borrowings
bonds would most likely be found on an on notes payable
2. debentures auditor's internal control authorized by the
questionnaire related to notes board of directors?
99. The typical approach to auditing debt is: test of details
payable?
of transactions
100. Typical internal control for debt include: 1. monitoring
compliance
with debt
provisions
2. new debt
authorized by
appropriate
management
101. The use of an independent trustee is 1. accounting
supported by the fact that the trustee records
does not have access to the company's: 2. assets
102. The use of dividend paying agent in reduces the
dividend distributions: possibility of
errors or fraud
103. When auditing stockholders' equity presentation
accounts, the auditors determine whether and
there are restrictions on retained earnings disclosure.
resulting from loans or other causes. The
primary audit objective of this procedure
is normally to verify management's
assertion of:
104. Where an independent stock transfer be defaced to
agent is not employed and the prevent
corporation issues its own stocks and reissuance
maintains stock records, canceled stock and attached
certificates should: to their
corresponding
stubs
105. Where no independent stock transfer be defaced to
agent is employed and the corporation prevent
issues its own stock and maintains stock reissuance,
records, canceled stock certificates and attached
should: to their
corresponding
stubs.
106. Which internal control feature allows serial
auditors to account for all stock numbers
certificates?