Deck 14: The Finance and Investment Process

Question 1

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

A)management
B)the board of directors
C)shareholders
D)an independent registrar

Answer 1

D

Question 2

Which of the following procedures is a test of control for the validity objective for notes payable?

A)Read minutes of director's meetings for authorization of financing transactions.
B)Select a sample of notes payable and vouch cash receipt to the bank statement.
C)Select a sample of paid notes and recalculate interest expense for the period under audit.
D)Select a sample of paid notes and trace interest costs to the general ledger expense account.

Answer 2

B

Question 3

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

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.

Answer 3

B

Question 4

Who is responsible for making accounting estimates?

A)Auditors.
B)Management.
C)Boards of directors.
D)Shareholders.

Question 5

What is the most appropriate control to prevent improper use of share or bond instruments?

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 6

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)Record-keeping.
D)Periodic reconciliation.

Question 7

The main risks in the finance and investment process include all of the following,EXCEPT:

A)Completeness of debt.
B)Occurrence of interest expense.
C)Valuation of financial instruments.
D)Presentation and disclosure of intercorporate investments.

Question 8

Recordkeeping for the management of some intangible accounts,like goodwill,are subject to high inherent risk of overstatement because:

A)Such investment transactions are often off the balance sheet.
B)Such assets have a high risk of theft.
C)They are dependent on management estimates,which can be biased.
D)There is a high volume of such investments.

Question 9

Which of the following questions is an auditor most likely to include on an internal control questionnaire for notes and loans payable?

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 10

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 11

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 12

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 13

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 14

Key control procedures for derivative financial instruments include all but which of the following?

A)Derivatives activities are monitored by independent control staff.
B)Accurate transmittals of derivatives positions are made to the risk measurement systems.
C)Reconciliations are performed to ensure data integrity across a full range of derivatives.
D)Access to derivatives is limited to the CEO,CFO,or Board chair.

Question 15

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 16

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 17

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 18

"Off-the-balance-sheet" financing transactions 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

Question 19

Accounting estimates include which of the following?

A)Trade payable balances.
B)Cash balances.
C)Capital assets at cost.
D)Imputed interest rates on receivables and payables.

Question 20

Transactions in debt and shareholder equity are typically handled by ________.

A)payroll
B)accounting staff
C)accounting supervisors
D)upper management

Question 21

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 22

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

Question 23

Custody of share capital is a higher control risk issue in small companies.

Question 24

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 25

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

Question 26

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 27

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

Question 28

The substantive audit procedure "confirm outstanding common and preferred shares with share registrar agent" provides evidence for which of the following assertion(s)?

A)Presentation and ownership.
B)Completeness,valuation,and presentation.
C)Existence,completeness,and ownership.
D)Existence only.

Question 29

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

Question 30

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

Question 31

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

Question 32

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 33

High estimation uncertainty for accounting estimates may create new opportunities for management fraud.

Question 34

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 35

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 presentation of equity in the financial statements
D)how loan agreements should be structured

Question 36

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

Question 37

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 38

What are the contributions that a board of directors can make to internal control?

Question 39

Discuss the custody of investments and intangible assets.

Question 40

Guarantees are an example of "off-balance-sheet" financing.

Question 41

Name the typical specific management assertions relating to long-term liabilities.

Question 42

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

Question 43

What is off-balance-sheet financing? Define the term and provide at least two examples.

Question 44

The auditor can use analytical procedures in the audit of interest expense related to long-term debt.Describe how this is done.