Deck 14: Finance and Investment Process

Question 1

Off balance sheet means that:

A)Obligations and commitments are recorded only in the income statement accounts.
B)Obligations and commitments are recorded only in the statement of cash flows.
C)Capital budgets are properly authorized and approved.
D)Obligations and commitments are not recorded in the accounts of the company.

Answer 1

D

Question 2

It is easier to segregate functional responsibilities in middle management than in upper- level management.

Answer 2

True

Question 3

Letters of credit are an example of "off-balance-sheet" financing.

Answer 3

True

Question 4

Which of the following questions is an auditor most likely to include on an internal control questionnaire?

A)Are the assets that secure notes payable critically needed for the entity's continued existence?
B)Are two or more authorized signatures required on cheques that repay notes payable?
C)Are the proceeds from notes payable used for the purchase of non-current assets?
D)Are direct borrowings on notes payable authorized by the board of directors?

Question 5

The inherent risk associated with the finance and investment cycle is less than that associated with other cycles, especially given the low number of transactions typically involved.

Question 6

The purchase of fixed assets is part of the finance and investment cycle.

Question 7

Management's statement that a marketable security is a long-term investment may be the only evidence available to support classifying the investment as a non-current asset.

Question 8

It is very common for auditors to perform substantive procedures on 100 percent of the transactions and general ledger balances for investment accounts and loan accounts.

Question 9

The decision of a company to have a transfer agent handle the exchange of shares is related primarily to which functional responsibility?

A)Authorization.
B)Custody.
C)Recordkeeping.
D)Periodic reconciliation.

Question 10

The most appropriate control to prevent improper use of share or bond instruments is

A)Authorization to purchase shares by a senior financial officer.
B)Use of a registered broker to purchase and sell all shares.
C)Proper custodial control of securities.
D)Registration of bond instruments with the exchange authorities.

Question 11

The auditor's tests of controls over the appropriateness of accounting estimates consist primarily of enquiry and observation.

Question 12

If the auditor suspects that the financial statements are intentionally misstated, he or she should perform procedures to confirm or dispel that suspicion.

Question 13

Auditors should expect to find the authorizing signatures of the CEO, CFO, chair of the board of directors, and perhaps other high-ranking officers on financing documents.

Question 14

The sale of share capital and the decision to finance the company with debt are transactions usually authorized by shareholders.

Question 15

The auditor's primary concern in the verification of long-term liabilities is that all liabilities are recorded and that the interest expense is properly paid or accrued.

Question 16

Confirmation requests should be sent to lenders only if there is a balance owing to the lender at the confirmation date.

Question 17

Transactions in debt and shareholder equity are typically handled by:

A)Payroll
B)Accounting Staff
C)Accounting Supervisors
D)Upper Management

Question 18

A typical activity performed in the finance and investment cycle would be:

A)Analysis of excess cash funds.
B)Reconciliation of cash balances.
C)Authorization of cash disbursements.
D)Preparation of the cash flow statement.

Question 19

In the area of finance and investment, the involvement of two or more persons in each important functional responsibility could be considered a compensating control.

Question 20

The auditor selected a sample of journal entries related to notes payable and traced interest expense to the general ledger.The auditor is testing controls over accuracy.

Question 21

In the finance and investment cycle, which of the following controls would be most effective in ensuring that proper custody of assets has been maintained?

A)Direct access to securities in the safety deposit box is limited to only one corporate officer.
B)Personnel who post investment transactions to the general ledger are not permitted to update the investment subsidiary ledger.
C)The purchase and sale of investments are executed on the specific authorization of the board of directors.
D)The recorded balances in the investment subsidiary ledger are periodically compared with the contents of the safety deposit box by independent personnel.

Question 22

Who is responsible for making accounting estimates?

A)Auditors
B)Management
C)Boards of Directors
D)Shareholders

Question 23

Which of the following is not an example of management's policies and procedures over the preparation of accounting estimates?

A)Accumulation of relevant, sufficient, and reliable data.
B)Preparation of estimates by qualified personnel.
C)Review by the independent auditor.
D)Consideration by management of whether the accounting estimates are consistent with the company's operational plans.

Question 24

Debt covenant violations have a significant impact on a company since they can affect

A)The ability of the entity to function as a going concern.
B)Overall liability relationships in the financial statements.
C)The nature of disclosures required in the audit report.
D)How loan agreements should be structured.

Question 25

What is a compensating control? Describe a compensating control in the finance and investment cycle.

Question 26

What is a compensating control as it relates to the finance and investment function?

Question 27

Selecting a sample of paid notes and tracing interest costs to the general ledger expense account is a test of the control objective of

A)Accounting.
B)Accuracy.
C)Completeness.
D)Validity.

Question 28

Which of the following management assertions for long-term liabilities is related to completeness?

A)All material long-term liabilities are recorded.
B)Assumption of new long-term liabilities and repayment of debt are properly authorized.
C)Terms, conditions, and restrictions relating to long-term debt are adequately disclosed.
D)Disclosure of five-year repayment schedule and debt maturity dates is accurate and adequate.

Question 29

Discuss the custody of investments and intangible assets.

Question 30

Which management assertion is of most importance to auditors in examining long-term debt?

A)Existence.
B)Completeness.
C)Rights and obligations.
D)Presentation and disclosure.

Question 31

If an auditor decided to confirm share capital, the auditor would obtain the confirmation from

A)Management.
B)The board of directors.
C)Stockholders.
D)An independent registrar.

Question 32

Which of the following is a substantive procedure in the audit of estimates made by management?

A)Observing whether estimates are prepared by qualified personnel.
B)Recalculating the mathematical estimate.
C)Scanning for evidence of review by senior management.
D)Ensuring estimates are recorded in the right accounts.

Question 33

This internal control questionnaire item "Are interest payments and accruals monitored for due dates?" relates to the control objective of:

A)Validity.
B)Completeness.
C)Accounting.
D)Proper period recording.

Question 34

Accounting estimates include which of the following:

A)Trade payable balances
B)Cash balances
C)Capital Assets at cost
D)Amortization expense

Question 35

In Cassette 14.3, Verity Distillery used the product repurchase ploy to

A)Overstate assets and understate liabilities by borrowing money and not recording the liability.
B)Increase owners' equity by recording the sale of inventory without recording any cost of goods sold.
C)Understate assets and understate liabilities by borrowing money through an undisclosed related party transaction and disguising it as a sale.
D)Understate assets and understate liabilities by loaning money to its officers.