AT.17 Drill on Audit of Capital Acquisition and Repayment Cycle

Performance materiality is often set at a(n) ________ level for notes payable.

Choices:

• high

• moderate

• low

• unknown

Correct answer: low

The two most important balance-related audit objectives for notes payable are

Choices:

• completeness and detail tie-in.

• completeness and valuation.

• accuracy and valuation.

• accuracy and completeness.

Correct answer: accuracy and completeness.

In auditing debits and credits to retained earnings, other than net income and dividends, the auditors first concern is

Choices:

• whether the transactions should have been included in retained earnings.

• whether the transactions have been accurately recorded.

• whether the transactions are classified correctly in the footnotes.

• whether the transactions existed as of the balance sheet date

Correct answer: whether the transactions should have been included in retained earnings.

The tests of details of balances procedure which requires the auditor to examine notes paid after year-end to determine whether they were liabilities at the balance - sheet date is an attempt to satisfy the audit objective of

Choices:

• existence.

• completeness.

• accuracy.

• classification.

 

Correct answer: completeness.

Which of the following owners' equity transactions usually require specific authorization from a company's board of directors?

	Repurchase of common stock	Issuance of common stock	Declaration of dividends
1.	Yes	Yes	Yes
2.	Yes	Yes	No
3.	No	Yes	No
4.	No	No	Yes

Choices:

• Choice 1

• Choice 2

• Choice 3

• Choice 4

Correct answer: Choice 1

The capital acquisition and repayment cycle does not include

Choices:

• payment of interest.

• payment of dividends.

• payment of vendor invoices.

• acquisition of capital through interest-bearing debt.

Correct answer: payment of vendor invoices.

When auditing interest-bearing debt, the auditor should ________ verify the related interest expense and interest payable.

Choices:

• not

• attempt to

• simultaneously

• never

Correct answer: simultaneously

Which of the following is not an objective of the auditor's examination of notes payable?

Choices:

• to determine whether system of internal controls are adequate

• to determine whether client's financing arrangements are effective and efficient

• to determine whether transactions regarding the principal and interest of notes are properly authorized

• to determine whether the liability for notes and related interest expense and accrued liabilities are properly stated

Correct answer: to determine whether client's financing arrangements are effective and efficient

What type of audit test will auditors use when testing to see if the amounts of capital stock transactions are accurately recorded?

	Tests of details of balances	Substantive tests of transactions	Tests of controls
A.	No	Yes	Yes
B.	Yes	No	Yes
C.	No	Yes	No
D.	Yes	No	No

Choices:

• Choice A

• Choice B

• Choice C

• Choice D

Correct answer: Choice D

The primary audit objectives to focus on when auditing accounts in the capital acquisition and repayment cycle are

Choices:

• accuracy and completeness.

• accuracy and existence.

• completeness and valuation.

• accuracy and valuation

Correct answer: accuracy and completeness.

The auditor's independent estimate of interest expense from notes payable uses average interest rates and

Choices:

• average notes payable outstanding.

• year-end notes payable outstanding.

• only notes payable above the level of materiality.

• only notes payable to major lenders

Correct answer: average notes payable outstanding.

The audit objective that requires that existing notes payable be included in the notes payable schedule is satisfied by performing which of the following audit procedures?

Choices:

• Confirm notes payable.

• Trace the total of the notes payable schedule to the general ledger.

• Review the notes payable schedule to determine whether any are related parties.

• Review the bank reconciliation for new notes credited directly to the bank account by the bank

Correct answer: Review the bank reconciliation for new notes credited directly to the bank account by the bank.

The record of the issuance and repurchase of capital stock for the life of the corporation is maintained in the

Choices:

• shareholders' capital stock database.

• capital stock certificate record.

• schedule of stock owners.

• corporate directory

Correct answer: capital stock certificate record.

An auditor is determining whether an issuance of notes payable for cash was correctly recorded. Her or his best course of action would be to

Choices:

• confirm with the bond trustee as to the amount of bonds issued.

• confirm with the underwriter as to the appropriate market yield on the bonds.

• trace the cash received from the proceeds to the accounting records.

• verify that the amount was included in a footnote disclosure

Correct answer: trace the cash received from the proceeds to the accounting records.

Which of the following statements is correct regarding the capital acquisition and payment cycle?

Choices:

• Bonds are frequently issued by companies in small amounts.

• There are relatively few transactions and each transaction is typically highly material.

• A primary emphasis in auditing debt is on existence.

• Audit procedures for notes payable and interest income are often performed simultaneously

Correct answer: There are relatively few transactions and each transaction is typically highly material.

Which of the following balance-related audit objectives is not applicable to the audit of notes payable?

Choices:

• realizable value

• detail tie-in

• cutoff

• classification

Correct answer: realizable value

When a dividend is declared by the board of directors, the source for determining who should receive dividend checks is the

Choices:

• shareholders' capital stock database.

• stock certificate books.

• common stock account in the general ledger.

• corporate directory.

Correct answer: shareholders' capital stock database.

When there are not numerous transactions involving notes payable during the year, the normal starting point for the audit of notes payable is

Choices:

• a schedule of notes payable and accrued interest prepared by the audit team.

• a schedule of notes payable and accrued interest obtained from the client.

• a schedule of only those notes with unpaid balances at the end of the year prepared by the client.

• the notes payable account in the general ledger.

Correct answer: a schedule of notes payable and accrued interest obtained from the client.

When a company maintains its own records of stock transactions and outstanding stock, system of internal controls must be adequate to ensure that

Choices:

• actual owners are recorded in the bylaws.

• the correct amount of dividends is paid to stockholders owning the stock on the dividend record date.

• the correct amount of dividends is paid to stockholders owning the stock on the declaration date.

• actual owners are recorded in the minutes

Correct answer: the correct amount of dividends is paid to stockholders owning the stock on the dividend record date.

Which of the following audit objectives is least important in the audit of capital stock and paid-in-capital in excess of par?

Choices:

• completeness

• accuracy

• rights and obligations

• presentation and disclosure

Correct answer: rights and obligations

When conducting the audit of stockholders' equity, it is normal practice to verify all capital stock transactions

Choices:

• only when the client is small.

• that are in excess of a material amount.

• if there aren't very many during the year.

• regardless of the controls in existence, because of their materiality and permanence in the records

Correct answer: regardless of the controls in existence, because of their materiality and permanence in the records.

The authorization of an issuance of capital stock normally includes all but which of the following?

Choices:

• type of stock to be issued

• number of shares to be issued

• date shares are to be issued

• amount of dividend to be paid on shares issued

Correct answer: amount of dividend to be paid on shares issued

In the audit of notes payable, it is common to include tests of principal and interest payments as a part of the audit of the acquisitions and payment cycle because the payments are in the cash disbursements journal that is being sampled. It is also normal to test these transactions as part of the capital acquisitions and repayment cycle because

Choices:

• it is not unusual for the auditor to duplicate a process, thereby gathering a larger quantity of evidence.

• replicating the evidence will provide the auditor with a higher level of assurance.

• the tests done in the acquisitions and payments cycle will look only at the cash credit side so the tests done in the capital acquisitions and repayment cycle will look at the debit side of the transaction.

• due to the infrequency of these transactions, in many cases no transactions involving notes payable are included in the sample tests of acquisitions and payments.

 

Correct answer: due to the infrequency of these transactions, in many cases no transactions involving notes payable are included in the sample tests of acquisitions and payments.

If a company employs a capital stock registrar and/or transfer agent, the registrar or agent, or both, should be requested to confirm directly to the auditor the number of shares of each class of stock

Choices:

• surrendered and canceled during the year.

• authorized at the balance sheet date.

• issued and outstanding at the balance sheet date.

• sold at a price above par during the year

 

Correct answer: issued and outstanding at the balance sheet date.

During the course of an audit, a CPA observes that the recorded interest expense seems to be excessive in relation to the balance in the long-term debt account. This observation could lead the auditor to suspect that

Choices:

• long-term debt is understated.

• discount on bonds payable is overstated.

• long-term debt is overstated.

• premium on bonds payable is understated

Correct answer: long-term debt is understated.