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Auditing Chapter 10 Questions

Terms in this set (40)

Which of the following approaches is most c. Gain an understanding of internal controls and perform extensive
suitable for auditing the finance and substantive procedures
investment cycle?

a. Perform extensive tests of controls and

limit substantive procedures to analytical
procedures

b. Ignore internal controls and perform

extensive substantive procedures

c. Gain an understanding of internal controls

and perform extensive substantive
procedures

d. Ignore internal controls and limit

substantive procedures to analytical
procedures

To protect the lender from the borrower's substantially weakening of

Loan covenants are used for what reason?
the latter's financial position.

A related party is a person or entity that... Can exert significant influence over or be influenced by the company.

Jones was engaged to examine the financial Comparing recorded dividends with a standard financial reporting
statements of Gamma Corporation for the service's record of dividends.
year ended June 30. Having completed an
examination of the investment securities,
what is the best method of verifying the
accuracy of recorded dividend income?

When the client holds a large amount of Substitution of securities already counted for other securities that
negotiable securities, auditors need to plan should be on hand but are not.
to guard against...

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Auditing Chapter
In connection with the 10 Questions
audit of an issue of Ascertain that the client has obtained the opinion of counsel on theStudy
long-term bonds payable, the audit team legality of the issue.
should...

Which of the following is the most important d. Entries in the capital stock account can be traced to resolutions in
audit consideration when examining the the minutes of meetings of the board of directors.
stockholders' equity section of a client's
balance sheet?

a. Changes in the capital stock account are

verified by an independent stock transfer
agent

b. Stock dividends and stock splits during

the year under audit were approved by the
stockholders

c. Stock dividends are capitalized at par or

stated value on the dividend declaration
date.

d. Entries in the capital stock account can

be traced to resolutions in the minutes of
meetings of the board of directors.

If the auditors discover that the carrying The loss in value be recognized in the financial statements.
amount of a client's investments is
overstated because of a loss in value that is
other than a temporary decline in market
value, they should insist that...

The primary reason for preparing a Detect unrecorded liabilities.

reconciliation between interest-bearing
obligations outstanding during the year and
interest expense in the financial statements
is to...

The auditors should insist that a Acknowledge the receipt of securities returned.
representative of the client be present
during the inspection and count of
securities to...

When independent stock transfer agents are be defaced to prevent reissuance and attached to their corresponding
not employed and the corporation issues its stubs.
own stock and maintains stock records,
canceled stock certificates should

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12/15/21, 5:15 PM Auditing Chapter 10 Questions Flashcards | Quizlet

Auditing Chapter
When a client company10 Questions
does not maintain The number of shares issued and outstanding. Study

its own capital stock records, the auditors

should obtain written confirmation from the
transfer agent and registrar concerning...

All corporate capital stock transactions Minutes of the meetings of the board of directors.
should ultimately be traced to the...

Authorization for both cash and stock dividends declared and paid.

An audit plan for the examination of the

retained earnings account should include a and

step that requires verification of the...

Gain or loss resulting from disposition of treasury shares

When an entity uses a trust company as Trust company has no direct contact with the entity employees
custodian of its marketable securities, the responsible for maintaining investment accounting records.
possibility of concealing fraud most likely
would be reduced if the...

An audit team would most likely verify the Recomputing the interest earned on the basis of face amount, interest
interest earned on bond investments by... rate, and period held.

A client has a large and active investment Request the client to have the bank seal the safe deposit box until the
portfolio that is kept in a bank safe deposit auditors can count the securities at a subsequent date.
box. If the auditors are unable to count
securities at the balance sheet date, they
most likely will...

An audit team testing long-term investments Completeness of recorded investment income.

would ordinarily use analytical procedures
to ascertain the reasonableness of the...

Compare interest expense with the bond payable amount for

reasonableness.

In auditing for unrecorded long-term bonds

payable, an audit team most likely will... (The recorded interest expense should reconcile with the outstanding
bonds payable. If interest expense appears excessive relative to the
recorded bonds payable, unrecorded long-term liabilities may exist.)

An audit plan to examine long-term debt Correlating interest expense recorded for the period with outstanding
most likely would include steps that require debt.

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12/15/21, 5:15 PM Auditing Chapter 10 Questions Flashcards | Quizlet

Auditing Chapter
Which of the following 10 Questions
questions would d. Are direct borrowings on notes payable authorized by the boardStudy
of
auditors most likely include on an internal directors?
control questionnaire for notes payable?

a. Are assets that collateralize notes payable

critically needed for the entity's continuing
existence?

b. Are two or more authorized signatures

required on checks that repay notes
payable?

c. Are the proceeds from notes payable

used to purchase noncurrent assets?

d. Are direct borrowings on notes payable

authorized by the board of directors?

An audit team's purpose in reviewing the classification

documentation concerning the renewal of a
note payable shortly after the balance sheet
date most likely is to obtain evidence
concerning management's assertion about...

Which audit procedure would not likely be Confirm investments with registrar.
performed for audits of investments?

Which of the following audit procedures c. Compare valuation of stock to published market prices
would not likely be performed for audits of
shareholder's equity?

a. Read board of directors' minutes for

authorization of equity transactions

b. Confirm outstanding common and

preferred stock with stock registrar

c. Compare valuation of stock to published

market prices

d. Obtain management representation

about number of shares issued and
outstanding

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12/15/21, 5:15 PM Auditing Chapter 10 Questions Flashcards | Quizlet

Auditing Chapter
ABC stock has 10 of
100 shares Questions
IBM stock that There had been unauthorized buying and selling of investment Study

it holds as an investment. The stock was securities.

purchased three years ago and has been in
the client's safe deposit box along with
other investment securities. During an
inspection of securities held by the client,
the auditor noted the 100 shares of IBM
stock had a different CUSIP number than the
number listed when purchased and the
number verified during the previous audit.
What would be the auditor's main concern
about this discover?

Which of the following sets of information b. Cash in bank and collateral for loans.
does an auditor usually confirm on one
form?

a. Accounts receivable and accrued interest

receivable.

b. Cash in bank and collateral for loans.

c. Inventory on consignment and contingent

liabilities.

d. Accounts payable and purchase

commitments.

In performing a count of negotiable An acknowledgment by a client representative that the securities were
securities, an auditor records the details of returned intact.
the count on a security count worksheet.
What other information is usually included
on this worksheet?

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12/15/21, 5:15 PM Auditing Chapter 10 Questions Flashcards | Quizlet

Auditing Chapter
Which of the following 10 Questions
controls would a c. Two company officials have joint control of marketable securities,
Study

company most likely use to safeguard which are kept in a bank safe-deposit box
marketable securities when an independent
trust agent is not employed?

a. The internal auditor and the controller

independently trace all purchases and sales
of marketable securities from the subsidiary
ledgers to the general ledger.

b. The chairman of the board verifies the

marketable securities, which are kept in a
bank safe-deposit box, each year on the
balance sheet date.

c. Two company officials have joint control

of marketable securities, which are kept in a
bank safe-deposit box.

d. The investment committee of the board of

directors periodically reviews the
investment decisions delegated to the
treasurer.

In establishing the existence and ownership Confirm the number of shares owned that are held by an independent
of a long-term investment in the form of custodian.
publicly-traded stock, an auditor should
inspect the securities or:

In auditing long-term bonds payable, an Compare interest expense with the bond payable amount for
auditor most likely would: reasonableness.

In performing tests concerning the granting Trace the authorization for the transaction to a vote of the board of
of stock options, an auditor should: directors.

When an entity uses a trust company as Trust company has no direct contact with the entity employees
custodian of its marketable securities, the responsible for maintaining investment accounting records.
possibility of concealing fraud most likely
would be reduced if the:

An auditor scans a client's investment Understandability and classification, and valuation and accuracy.
records for the period just before and just
after the year-end to determine that any
transfers between categories of investments
have been properly recorded. The primary
purpose of this procedure is to obtain
evidence about management's financial
statement assertions of:

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12/15/21, 5:15 PM Auditing Chapter 10 Questions Flashcards | Quizlet

Auditing Chapter
When a company's 10record
stock Questions
books are Number of shares issued and outstanding. Study

maintained by an outside registrar or

transfer agent, the auditor should obtain
confirmation from the registrar or transfer
agent concerning the:

When a client engages in transactions Develop an understanding of the economic substance of each
involving derivatives, the auditor should: derivative.

An auditor usually determines whether Records produced by investment services.

dividend income from publicly-held
investments is reasonable by computing the
amounts that should have been received by
referring to

An auditor's inquiries of management Examine the contracts for possible risk exposure and the need to
disclosed that the entity recently invested in recognize losses.
a series of energy derivatives to hedge
against the risks associated with fluctuating
oil prices. Under these circumstances, the
auditor should

An auditor is testing the reasonableness of Electronically accessing the details of dividend records on the Internet.
dividend income from investments in
publicly-held companies. The auditor most
likely would compute the amount that
should have been received and recorded
by the client by:

An auditor's analytical procedures indicate a An error in recording amortization of the excess of the investor's cost
lower than expected return on an equity over the investment's underlying book value.
method investment. This situation most likely
could have been caused by

During an audit of an entity's stockholders' Classification and understandability

equity accounts, the auditor determines
whether there are restrictions on retained
earnings resulting from loans, agreements,
or state law. This audit procedure most likely
is intended to verify management's
assertions related to

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