Deck 22: Audit of the Capital Acquisition and Repayment Cycle

Question 1

Auditors seldom learn about the capital acquisition and repayment cycle when gaining an understanding of the client's business and industry.

Answer 1

False

Question 2

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

A) Relatively few transactions affect the cycle, and most are smaller amounts.
B) Large numbers of transactions affect the cycle, and most are smaller amounts.
C) Relatively few transactions affect the cycle, and most are highly material.
D) Large number of transaction affect the cycle, and most are highly material.

Answer 2

C

Question 3

The tests of details of balances procedure which requires the auditor to trace the totals of the notes payable list to the general ledger satisfies the audit objective of:

A) accuracy.
B) existence.
C) detail tie-in.
D) completeness.

Answer 3

C

Question 4

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

A) not
B) attempt to
C) simultaneously
D) never

Question 5

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

A) Bonds are frequently issued by companies in small amounts.
B) There are relatively few transactions and each transaction is typically highly material.
C) A primary emphasis in auditing debt is on existence.
D) Audit procedures for Notes Payable and Interest Income are often performed simultaneously.

Question 6

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

A) To determine whether internal controls are adequate.
B) To determine whether client's financing arrangements are effective and efficient.
C) To determine whether transactions regarding the principal and interest of notes are properly authorized.
D) To determine whether the liability for notes and related interest expense and accrued liabilities are properly stated.

Question 7

Responsibility for the issuance of new notes payable would normally be vested in the:

A) board of directors.
B) purchasing department.
C) accounting department.
D) accounts payable department.

Question 8

Assessed control risk and results of substantive tests of transactions are normally unimportant for designing tests of details of balances for which of the following accounts?

A) Accounts receivable
B) Inventory
C) Accounts payable
D) Notes payable

Question 9

The capital acquisition and repayment cycle does not include:

A) payment of interest.
B) payment of dividends.
C) payment of vendor invoices.
D) acquisition of capital through interest-bearing debt.

Question 10

List six accounts in the capital acquisition and repayment cycle commonly found on balance sheets. What characteristics do these accounts have in common that distinguish them from other accounts?

Question 11

The primary audit objectives to focus on when auditing debt are:

A) accuracy and completeness.
B) accuracy and existence.
C) completeness and valuation.
D) accuracy and valuation.

Question 12

Describe the methodology for designing tests of details of balances for notes payable.

Question 13

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

A) average notes payable outstanding.
B) year-end notes payable outstanding.
C) only notes payable above the level of materiality.
D) only notes payable to major lenders.

Question 14

Discuss the four characteristics of the capital acquisition and repayment cycle that make it unique from other cycles.

Question 15

In the audit of the transactions and amounts in the capital acquisitions and repayments cycle, the auditor must take great care in making sure that the significant legal requirements affecting the financial statements have been properly fulfilled and:

A) any violations are reported to the SEC.
B) are adequately disclosed in the financial statements.
C) must issue a disclaimer if they haven't been fulfilled.
D) any departures from the agreements are made with management's knowledge and consent.

Question 16

The audit objective to determine that notes payable in the schedule actually exist is verified by the test of details of balances procedure to:

A) foot the notes payable list.
B) confirm notes payable.
C) recalculate interest expense.
D) examine the balance sheet for proper disclosure of noncurrent portions.

Question 17

When auditing the capital acquisition and repayment cycle, it is common to verify each transaction taking place in the cycle for the entire year as a part of verifying the balance sheet accounts.

Question 18

Tolerable misstatement is often set at a(n) ________ level for notes payable.

A) high
B) moderate
C) low
D) unknown

Question 19

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

A) confirm with the bond trustee as to the amount of bonds issued.
B) confirm with the underwriter as to the appropriate market yield on the bonds.
C) trace the cash received from the proceeds to the accounting records.
D) verify that the amount was included in a footnote disclosure.

Question 20

One unique characteristic of the capital acquisition and repayment cycle is that relatively few transactions affect the account balances, but each transaction is often highly material in amount.

Question 21

A company issued long-term notes payable for cash during the year under audit. To ascertain that this transaction was properly recorded, the auditor's best course of action is to:

A) trace the cash received from the issuance to the accounting records.
B) confirm the results of the issuance with the underwriter or investment banker.
C) verify that the new cash received is credited to an account entitled "Bonds Payable."
D) request a statement from the bond trustee as to the amount of bonds issued and outstanding.

Question 22

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:

A) it is not unusual for the auditor to duplicate a process, thereby gathering a larger quantity of evidence.
B) replicating the evidence will provide the auditor with a higher level of assurance.
C) 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.
D) 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.

Question 23

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

A) Realizable value
B) Detail tie-in
C) Cutoff
D) Classification

Question 24

An auditor's substantive analytical procedure provides the auditor with an interest expense amount that is significantly higher than the client's recorded interest expense. This finding would most likely lead the auditor to conclude that:

A) client has not recorded all long-term interest bearing debt in the accounting records.
B) client has not recorded all interest expense paid or accrued.
C) client has not properly accounting for the discount of bonds payable account.
D) client has not properly recorded interest income.

Question 25

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

A) a schedule of notes payable and accrued interest prepared by the audit team.
B) a schedule of notes payable and accrued interest obtained from the client.
C) a schedule of only those notes with unpaid balances at the end of the year prepared by the client.
D) the notes payable account in the general ledger.

Question 26

Which of the following audit tests would provide evidence regarding the balance-related audit objective of existence for an audit of notes payable?

A) Examine due dates on duplicate copies of notes.
B) Examine balance sheet for proper presentation and disclosure of notes payable.
C) Examine corporate minutes for loan approval.
D) Foot the notes payable list for notes payable and accrued interest.

Question 27

What are the two most important balance-related audit objectives in notes payable?

Question 28

You are employing tests of details of balances for notes payable and interest expense. Describe below specific audit procedures you would perform for the balance-related audit objectives of detail tie-in and existence. List at least two for each objective.

Question 29

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?

A) confirm notes payable
B) trace the total of the notes payable schedule to the general ledger
C) review the notes payable schedule to determine whether any are related parties
D) obtain confirmations from creditors who have held notes from the client in the past and are not currently included in the notes payable schedule

Question 30

You are auditing the long-term notes payable account for a client. Which of the following audit procedures would you most likely employ?

A) compare interest expense recorded by the client with the notes payable account for reasonableness
B) confirm bonds payable with individual bond holders
C) perform analytical procedures on the bond discount or premium account
D) examine bond documents for the presence of hybrid securities

Question 31

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:

A) long-term debt is understated.
B) discount on bonds payable is overstated.
C) long-term debt is overstated.
D) premium on bonds payable is understated.

Question 32

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

A) completeness and detail tie-in.
B) completeness and valuation.
C) accuracy and valuation.
D) accuracy and completeness.

Question 33

Which of the following is not an important control over notes payable?

A) proper authorization over the issuance of new notes payable
B) notes payable are issued when the business climate is favorable
C) adequate controls exist over repayment of interest and principal
D) there exists proper documents and records

Question 34

Why are analytical procedures essential for notes payable?

Question 35

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:

A) existence.
B) completeness.
C) accuracy.
D) classification.

Question 36

Identify three analytical procedures commonly performed for notes payable.

Question 37

The starting point for the audit of notes payable is a schedule of notes payable and accrued interest. Discuss the information typically included in the schedule.

Question 38

The audit objective that requires the auditor to determine that notes payable on the notes payable schedule are properly classified can be tested by performing the procedure to:

A) confirm notes payable.
B) examine corporate minutes for loan approval.
C) examine notes, minutes, and bank confirmations for restrictions.
D) review the notes to determine whether any are with related parties.

Question 39

The audit procedure "examine duplicate copies of notes payable to determine whether the notes payable were dated on or before the balance sheet date" is done for which of the following balance-related audit objective?

A) completeness
B) cut-off
C) detail tie-in
D) existence

Question 40

The two most important balance related objectives in notes payable are:

A) completeness and accuracy
B) existence and completeness
C) accuracy and classification
D) existence and occurrence

Question 41

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

A) type of stock to be issued
B) number of shares to be issued
C) date shares are to be issued
D) amount of dividend to be paid on shares issued

Question 42

The three most important balance-related audit objectives for notes payable are existence, realizable value, and accuracy.

Question 43

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

A) shareholders' capital stock master file.
B) capital stock certificate record.
C) schedule of stock owners.
D) corporate directory.

Question 44

The audit procedure "Examine notes payable, minutes, and bank confirmations for restrictions" is performed when verifying the classification objective for notes payable.

Question 45

The record of the outstanding shares at any given time is maintained in the:

A) corporate directory.
B) stock certificate books.
C) schedule of stock owners.
D) shareholders' capital stock master file.

Question 46

The amount of time spent verifying owners' equity is frequently minimal for closely held corporations because:

A) these companies are so small that it is not necessary to audit the capital section.
B) the few owners all have access to the books so the auditor spends more time on accounts like liabilities, which affect outsiders.
C) there are few if any transactions during the year for the capital stock accounts, except for earnings and dividends.
D) there is no public interest in these companies.

Question 47

The audit procedure "Foot the notes payable list and trace the totals to the general ledger" is performed when verifying the accuracy objective for notes payable.

Question 48

The audit procedure "Examine paid notes for cancellation to make sure they are not still outstanding" is performed when verifying the completeness objective for notes payable.

Question 49

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

A)
B)
C)
D)

Question 50

Any company with stock listed on a securities exchange is required to engage a(n) ________.

A) equity analyst
B) stock transfer agent
C) independent registrar
D) equity placement specialist

Question 51

Discuss the four key controls over notes payable.

Question 52

Which of the following types of owners' equity transactions would not require authorization by the board of directors?

A) Issuance of capital stock
B) Repurchase of capital stock
C) Declaration of dividends
D) None of the above

Question 53

The balance-related audit objective realizable value is not applicable when auditing notes payable.

Question 54

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

A) actual owners are recorded in the bylaws.
B) the correct amount of dividends is paid to stockholders owning the stock on the dividend record date.
C) the correct amount of dividends is paid to stockholders owning the stock on the declaration date.
D) actual owners are recorded in the minutes.

Question 55

Which of the following would generally not need to be approved by the board of directors?

A) Issuing capital stock
B) Repurchasing capital stock
C) Declaration of a Dividend
D) Payment of a Dividend

Question 56

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:

A) surrendered and canceled during the year.
B) authorized at the balance sheet date.
C) issued and outstanding at the balance sheet date.
D) authorized, issued, and outstanding during the year.

Question 57

Discuss the overall objectives of the audit of notes payable.

Question 58

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

A) shareholders' capital stock master file.
B) stock certificate books.
C) common stock account in the general ledger.
D) corporate directory.

Question 59

When performing analytical procedures for notes payable, if actual interest expense is materially larger than the auditor's expectation, one possible cause would be interest payments on unrecorded notes payable.

Question 60

Notes payable are generally for short periods of time.

Question 61

What is the difference between an independent registrar and a stock transfer agent?

Question 62

Public companies whose stock is listed on a stock exchange must employ an independent registrar.

Question 63

The Securities and Exchange Commission requires companies listed on exchanges to employ stock transfer agents.

Question 64

The primary concern in determining whether retained earnings is correctly disclosed on the balance sheet is:

A) correct calculation of the net income or loss for the year.
B) correct calculation of dividend payments for the year.
C) whether prior-period adjustments have been made correctly.
D) whether there are any restrictions on the payment of dividends.

Question 65

Any company that has more than 10 percent of its stock owned by one person is considered to be closely held.

Question 66

Match six of the terms (a-i) used in the capital acquisitions and repayment cycle with the descriptions provided below (1-6):
a. Capital acquisition and repayment cycle
b. Capital stock certificate book
c. Closely held corporation
d. Independent registrar
e. Note payable
f. Publicly held corporation
g. Stock transfer agent
h. Schedule of notes payable and accrued interest
i. Stock maintenance agent
________ 1. An outside person engaged by a corporation to make sure that its stock is issued in accordance with capital stock provisions in the corporate charter and authorizations by the board of directors.
________ 2. The normal starting point for the audit of notes payable; includes detailed information of all transactions related to notes payable that took place during the year.
________ 3. A record of the issuance and repurchase of capital stock for the life of the corporation.
________ 4. An outside person engaged by a corporation to maintain the stockholder records, and often to disburse cash dividends.
________ 5. An entity that is required to engage an independent registrar.
________ 6. The cycle that concerns the acquisition of capital resources through interest-bearing debt and owners' equity and repayment of the capital.

Question 67

Independent registrars commonly disburse cash dividends to shareholders.

Question 68

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

A)
B)
C)
D)

Question 69

Which of the following statements is true?

A) There is an inverse relationship between the interest and dividends accounts and debt and equity.
B) There is no relationship between the interest and dividends accounts and debt and equity.
C) There is a direct relationship between the interest and dividends accounts and debt and equity.
D) None of the above is true.

Question 70

Few large companies employ stock transfer agents, but small companies commonly do so.

Question 71

The audit of owners' equity of public and private companies is very different. Which of the following is not one of these differences?

A) The number of transactions (private companies have fewer transactions).
B) Payment of dividends (public companies rarely pay dividends).
C) Complexity of transactions (public companies generally have more complex transactions).
D) Type of noncurrent debt (public companies issue more bonds).

Question 72

Discuss the internal controls related to owners' equity that are of concern to the auditor.

Question 73

A shareholders' capital stock master file is a record of the issuance and repurchase of capital stock over the life of the corporation.

Question 74

The shareholders' capital stock master file is used as the basis for the payment of dividends and also acts as a check on the accuracy of the common stock balance in the general ledger.

Question 75

Capital stock represents a legal obligation to a shareholder and ensures a certain return to the shareholder.

Question 76

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

A)
B)
C)
D)

Question 77

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

A) whether the transactions should have been included in retained earnings.
B) whether the transactions have been accurately recorded.
C) whether the transactions are classified correctly in the footnotes.
D) whether the transactions existed as of the balance sheet date.

Question 78

When a company maintains its own records of stock transactions and capital stock outstanding its internal controls must be adequate to accomplish three objectives. List them below.

Question 79

What are two important procedures that companies should implement to prevent misstatements in owners' equity?

Question 80

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

A) Completeness
B) Accuracy
C) Rights and obligations
D) Presentation and disclosure