Exam 13: Auditing Long-Term Liabilities and Stockholders Equity Transactions

If interest expense recorded by the client is significantly lower than the auditor's expectation,it may mean that interest payments have not been properly recorded,possibly having been charged to principal.

Confirmations are not a substantive procedure designed to obtain evidence on the completeness of debt.

For integrated audits,when does the auditor test the operating effectiveness of important controls?

James Carson and Martin Tighe,CPAs have audited all the accounts on the balance sheet.James Carson argues with Martin Tighe that since retained earnings is a balancing amount,it requires no further examination.Martin Tighe,however,disagrees and argues that they should still choose to audit retained earnings.Who do you agree with and why?

Which of the following is a typical substantive procedure related to the relevant assertion of presentation and disclosure for debt?

The auditor is primarily concerned with overstatement when auditing bonds.

Which assertion is generally the most relevant when auditing the restrictions contained in debt?

An organization typically has many debt transactions during the year,with each individual transaction being material.

Stark Company's 15% stock dividend should be accounted for as a debit to retained earnings for the fair market value of the dividend and credited to capital stock and capital in excess of par.The auditor should be sure the board of directors authorized the dividend through review of the board minutes and should examine The Wall Street Journal or another financial reporting service to determine the fair market value of the dividend at the time of declaration.The auditor could then trace the amounts to their recording in the general ledger to determine if they were properly accounted for.

If the auditor identifies a risk of material misstatement due to fraud related to debt or stockholders' equity accounts,the auditor needs to determine the appropriate responses,potentially including changing the nature,timing,and extent of audit procedures.

Listed below are several inherent risks associated with stockholders’ equity. REQUIRED: List the assertion associated with each of these. Inherent Risk Related Assertion 1. Proceeds are not received. 2. All stock repurchased is not recorded as treasury stock. 3. The cost of treasury stock that is subsequently retired is not properly allocated among the appropriate accounts. 4. Dividends are recorded in the wrong period. 5. Stock options exercised or expired remain on the organization's books. 6. Stock issued in exchange for goods/services is not properly valued. 7. Issuances/sales are not authorized in accordance with organization's bylaws. 8. Dividends may be recorded and paid before being declared.

How are most bonds marketed?

For financial statement audit purposes,when auditing debt and stockholders' equity transactions,the auditor will most likely perform a substantive audit,and therefore will not perform tests of controls for the debt and equity accounts.

How will your answer differ if instead Barley Company was unprofitable,needed additional financing,and had ineffective internal controls?

Typically,when determining the appropriate audit procedures to perform for debt accounts,the auditor will usually decide to test debt,including interest,using only substantive procedures.

A starting point for substantive tests of details on debt is to have the client provide a cash flow statement.

To determine whether notes have been paid in full,the auditor would obtain the most appropriate evidence by examining the board of directors meeting minutes.

Auditors can choose to test the client's warranty reserves using primarily tests of controls and substantive analytical procedures.

If planning analytical procedures do not identify any unexpected relationships related to debt,the auditor would conclude that there is not a heightened risk of material misstatements in these accounts.

Which of the following is not an example of typical analytical procedures related to debt?