Deck 10: Finance and Investment Cycle 443

Question 1

Which of the following is not a substantive audit procedure for estimates of management?

A)Recalculating the mathematical estimate
B)Observing whether estimates are prepared by qualified personnel
C)Developing an independent estimate based on alternative assumptions
D)Comparing the estimates of management to subsequently discovered facts before the end of fieldwork

Answer 1

B

Question 2

A transfer agent:

A)keeps the stockholder list and, from time to time, determines the shareholders eligible to receive dividends.
B)handles the exchange of shares, canceling the shares surrendered by sellers and issuing new certificates.
C)records notes and bonds payable.
D)makes investment decisions for an entity.

Answer 2

B

Question 3

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

A)All material long-term liabilities are recorded.
B)New long-term liabilities and debt extinguishments are properly authorized.
C)Terms, conditions, and restrictions relating to noncurrent debt are adequately disclosed.
D)Disclosures of maturities for the next five years are accurate and adequate.

Answer 3

A

Question 4

If it would be appropriate to confirm capital stock, the auditor would obtain the confirmation from:

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

Question 5

Which of the following controls would be most effective in ensuring that the proper custody of assets in the investing cycle is 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)Independent personnel periodically compare the recorded balances in the investment subsidiary ledger with the contents of the safety deposit box.

Question 6

ABC Company has issued a bond that pays 5% interest semiannually to bond holders on record June 30 and December 30. Payments are made on July 15 and January 15. ABC Company has a December 31 fiscal year-end. The auditor vouches the January 15, 2021 payment to the liabilities recorded on the December 31, 2020 balance sheet. Which of the following ASB balance assertions is the auditor testing?

A)Existence
B)Rights and obligations
C)Completeness
D)Valuation

Question 7

Selecting a sample of paid notes and tracing interest to the general ledger account is a test of the PCAOB assertion for:

A)accounting.
B)valuation or allocation.
C)completeness.
D)existence or occurrence.

Question 8

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

A)Rights and obligations
B)Custody
C)Record keeping
D)Periodic reconciliation

Question 9

Which of the following would not be a place in which owners' equity transactions would be documented?

A)Capital budget
B)Minutes of the meetings of the board of directors
C)Proxy statements
D)Securities offering registration statements

Question 10

Auditors count investment securities held by the client primarily to test the ASB balance assertion of:

A)existence.
B)rights and obligations.
C)completeness.
D)valuation.

Question 11

In the audit of notes payable, an auditor testing the ASB balance assertion of accuracy and valuation most likely would:

A)read directors' and finance committee's minutes for authorization of financing transactions.
B)select a sample of paid notes and trace interest expense to the general ledger account.
C)select a sample of paid notes and recalculate interest expense for the period under audit.
D)select a sample of notes payable and vouch cash receipt to the bank statement.

Question 12

The typical assertions related to investments and related accounts would not include the PCAOB assertion that:

A)capitalized intangible costs relate to intangibles acquired in exchange transactions.
B)amortization is properly calculated.
C)research and development costs are properly classified.
D)goodwill is valued at market value.

Question 13

The preferred method of determining fair value of transactions is:

A)market-based values.
B)basing them on reasonable management assumptions.
C)external auditor estimates.
D)detailed computations by outside experts.

Question 14

To determine whether facts support management's intent to hold securities to maturity, an auditor might:

A)study the entity's cash flow forecasts.
B)obtain published market quotations.
C)compare fair value of the securities to cost.
D)confirm that the securities are held by a broker.

Question 15

Which ASB balance assertion is of the most importance to auditors for long-term liabilities?

A)Existence
B)Completeness
C)Rights and obligations
D)Valuation

Question 16

The typical business activity of the finance and investment cycle would not include

A)proposals for cash forecasts, capital budgets, and business expansion.
B)analysis of excess cash funds.
C)reconciliation of cash.
D)sale of stocks, bonds, or notes.

Question 17

Derivative instruments include:

A)stocks.
B)preferred stocks.
C)stock options.
D)all the above.

Question 18

"Are interest payments and accruals monitored for due dates and financial statement dates?" is an internal control questionnaire item that is related to the ASB transaction assertion of:

A)occurrence.
B)completeness.
C)cutoff.
D)accuracy.

Question 19

In Case 10.4 (No Treasure in This Treasure Planet), Disney overvalued net assets by capitalizing unrecoverable production costs. The lesson for the auditors in this case was to:

A)always recalculate the client's figures regardless of how simple they appear.
B)maintain professional skepticism when evaluating clients' estimates.
C)always look into the background of the client before accepting an engagement.
D)none of the above.

Question 20

Which of the following would not be a typical feature of management's control over the production of 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 particular accounting estimates are consistent with the company's operational plans

Question 21

During an audit of an entity's stockholders' equity accounts, the auditor determines whether there are restrictions on retained earnings resulting from loans, agreements, or state law. This audit procedure most likely is intended to verify the ASB presentation and disclosure assertion of:

A)occurrence.
B)completeness.
C)rights and obligations.
D)understandability.

Question 22

In auditing long-term bonds payable, an auditor most likely would:

A)perform analytical procedures on the bond premium and discount accounts.
B)examine documentation of assets purchased with bond proceeds for liens.
C)compare interest expense with the bond payable amount for reasonableness.
D)confirm the existence of individual bondholders at year-end.

Question 23

Which of the following is not an estimate required in the finance and investment cycle?

A)Actuarial assumptions for pension accruals
B)Residual values for leases
C)Stated market value of publicly traded stocks
D)All the above are estimates.

Question 24

Which of the following is not an off-balance-sheet item?

A)Purchase commitment
B)Capitalized lease
C)Loan commitment
D)Synthetic lease

Question 25

Compensating controls in the finance and investment cycle:

A)feature separation of duties by upper management.
B)feature involvement of two or more persons handling all important responsibilities.
C)include involvement by the external auditor.
D)include all the above.

Question 26

Taking a "big bath" in the financial statements refers to:

A)overstating income.
B)overstating revenues.
C)understating income.
D)an economic downturn.

Question 27

In confirming with an outside agent, such as a financial institution, that the agent is holding investment securities in the client's name, an auditor most likely gathers evidence in support of ASB balance assertion of existence and:

A)valuation.
B)rights and obligations.
C)completeness.
D)accuracy.

Question 28

Loan covenants:

A)describe the collateral of the loan.
B)require the borrower to maintain certain financial characteristics.
C)describe the lender's responsibilities.
D)include all the above.

Question 29

Keeping track of securities owners for payment of interest or dividends is usually done by the company's:

A)treasurer.
B)broker.
C)transfer agent.
D)registrar.

Question 30

Documentation of a count of equity securities should include all of the following except:

A)interest rate.
B)serial numbers.
C)number of shares.
D)market value.

Question 31

Which of the following approaches is most suitable for auditing the finance and investment cycle?

A)Perform extensive tests of controls and limit substantive procedures to analytical procedures.
B)Ignore internal controls and perform extensive substantive procedures.
C)Gain an understanding of internal controls and perform extensive substantive procedures.
D)Ignore internal controls and limit substantive procedures to analytical procedures.

Question 32

Which of the following is not a relevant aspect of internal controls over estimates?

A)External auditor involvement in developing assumptions
B)Adequate review by appropriate levels of authority
C)Comparison of prior estimates with subsequent results
D)All the above are relevant aspects of internal controls over estimates.

Question 33

In auditing intangible assets, an auditor most likely would review or recompute amortization and determine whether the amortization period is reasonable in support of the ASB balance assertion of:

A)valuation.
B)existence.
C)completeness.
D)rights and obligations.

Question 34

Related party transactions:

A)must be valued as if they were arm's length.
B)must be assumed to be valued differently than if they were arm's length.
C)must be disclosed in the financial statements.
D)must be disclosed in the financial statements and the auditor's report.

Question 35

Loan covenants are used for which of the following reasons?

A)To protect the lender from the borrower substantially weakening the borrower's financial position.
B)To protect the borrower from the lender calling the loan early.
C)To protect the auditors from false information by the borrower.
D)To protect shareholders from management taking on too much debt.

Question 36

The focus of controls in the finance and investment cycle is on:

A)proper authorizations and competent personnel.
B)computer controls over transactions.
C)physical security of assets.
D)prenumbered documents.

Question 37

Records of stock and bond certificates are usually maintained by the company's:

A)treasurer.
B)chief financial officer.
C)transfer agent.
D)registrar.

Question 38

Appropriate audit inquiries regarding estimates include all of the following except:

A)Who prepares the estimates?
B)Why are they prepared?
C)What data are used?
D)When are they prepared?

Question 39

Tests of controls in the finance and investment cycle:

A)normally focus on tests of transactions.
B)primarily involve observing physical security of assets.
C)typically amount to inquiries and observations related to management involvement.
D)can significantly reduce the extent of substantive tests.

Question 40

One primary focus of substantive tests in the finance and investment cycle is on:

A)reconciliation of detailed listings with general ledger amounts.
B)proper cut-off.
C)search for unrecorded items.
D)gaining an understanding and verifying amounts and calculations.

Question 41

Jones was engaged to examine the financial statements of Gamma Corporation for the year ended June 30. Having completed an examination of the investment securities, which of the following is the best method of verifying the accuracy of recorded dividend income?

A)Tracing recorded dividend income to cash receipts records and validated deposit slips
B)Performing analytical procedures and statistical sampling
C)Comparing recorded dividends with amounts appearing on federal information Form 1099
D)Comparing recorded dividends with a standard financial reporting service's record of dividends

Question 42

When the client holds a large amount of negotiable securities, auditors need to plan to guard against:

A)unauthorized negotiation of the securities before they are counted.
B)unrecorded sales of securities after they are counted.
C)substitution of securities already counted for other securities that should be on hand but are not.
D)substitution of authentic securities with counterfeit securities.

Question 43

If the auditors discover that the carrying amount of a client's investments is overstated because of a loss in value that is other than a temporary decline in market value, they should insist that:

A)the approximate market value of the investments be shown in parentheses on the face of the balance sheet.
B)the investments be classified as long term for balance-sheet purposes with full disclosure in the footnotes.
C)the loss in value be recognized in the financial statements.
D)the equity section of the balance sheet separately show a charge equal to the amount of the loss.

Question 44

An audit team's purpose in reviewing the documentation concerning the renewal of a note payable shortly after the balance-sheet date most likely is to obtain evidence concerning management's assertions about:

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

Question 45

An audit plan for the examination of the retained earnings account should include a step that requires verification of the:

A)market value used to charge retained earnings to account for a 2-for-1 stock split.
B)approval of the adjustment to the beginning balance as a result of a write-down of account receivables.
C)authorization for both cash and stock dividends.
D)dividends received from investments.

Question 46

A related party is a person or entity that:

A)has a family tie to a management member.
B)does business with the company.
C)can exert significant influence over or be influenced by the company.
D)is a member of the company's management.

Question 47

An audit team would most likely verify the interest earned on bond investments by:

A)vouching the receipt and deposit of interest checks.
B)confirming the bond interest rate with the issuer of the bonds.
C)recomputing the interest earned on the basis of face amount, interest rate, and period held.
D)testing internal controls relevant to cash receipts.

Question 48

In connection with the audit of an issue of long-term bonds payable, the audit team should:

A)determine whether bondholders are persons other than owners, directors, or officers of the company issuing the bond.
B)calculate the effective interest rate to see if it is substantially the same as the rates for similar issues.
C)decide whether the bond issue was made without violating state or local law.
D)ascertain that the client has obtained the opinion of counsel on the legality of the issue.

Question 49

In auditing for unrecorded long-term bonds payable, an audit team most likely will:

A)perform analytical procedures on the bond premium and discount accounts.
B)examine documentation of assets purchased with bond proceeds for liens.
C)compare interest expense with the bond payable amount for reasonableness.
D)confirm the existence of individual bondholders at year-end.

Question 50

When a client company does not maintain its own capital stock records, the auditors should obtain written confirmation from the transfer agent and registrar concerning:

A)restrictions on the payment of dividends.
B)the number of shares issued and outstanding.
C)guarantees of preferred stock liquidation value.
D)the number of shares subject to agreements to repurchase.

Question 51

All corporate capital stock transactions should ultimately be traced to the:

A)minutes of the meetings of the board of directors.
B)cash receipts journal.
C)cash disbursements journal.
D)numbered stock certificates.

Question 52

The primary reason for preparing a reconciliation between interest-bearing obligations outstanding during the year and interest expense in the financial statements is to:

A)evaluate internal control over securities.
B)determine the validity of prepaid interest expense.
C)ascertain the reasonableness of imputed interest.
D)detect unrecorded liabilities.

Question 53

Which of the following is the most important audit consideration when examining the stockholders' equity section of a client's balance sheet?

A)Changes in the capital stock account are verified by an independent stock transfer agent.
B)Stock dividends and stock splits during the year under audit were approved by the stockholders.
C)Stock dividends are capitalized at par or stated value on the dividend declaration date.
D)Entries in the capital stock account can be traced to resolutions in the minutes of meetings of the board of directors.

Question 54

A client has a large and active investment portfolio that is kept in a bank safe deposit box. If the auditors are unable to count securities at the balance-sheet date, they most likely will:

A)request the bank to confirm to the auditors the contents of the safe deposit box at the balance-sheet date.
B)examine supporting evidence for transactions occurring during the year.
C)count the securities at a subsequent date and confirm with the bank whether securities were added or removed since the balance-sheet date.
D)request the client to have the bank seal the safe deposit box until the auditors can count the securities at a subsequent date.

Question 55

The auditors should insist that a representative of the client be present during the inspection and count of securities to:

A)lend authority to the auditors' directives.
B)detect forged securities.
C)coordinate the return of all securities to proper locations.
D)acknowledge the receipt of securities returned.

Question 56

When independent stock transfer agents are not employed and the corporation issues its own stock and maintains stock records, canceled stock certificates should:

A)be defaced to prevent reissuance and attached to their corresponding stubs.
B)not be defaced but be segregated from other stock certificates and retained in a canceled certificates file.
C)be destroyed to prevent fraudulent reissuance.
D)be defaced and sent to the secretary of state.

Question 57

When an entity uses a trust company as custodian of its marketable securities, the possibility of concealing fraud most likely would be reduced if the:

A)trust company has no direct contact with the entity employees responsible for maintaining investment accounting records.
B)securities are registered in the name of the trust company rather than the entity itself.
C)interest and dividend checks are mailed directly to an entity employee who is authorized to sell securities.
D)the trust company places the securities in a bank safe deposit vault under the custodian's exclusive control.

Question 58

An audit team testing long-term investments would ordinarily use analytical procedures to ascertain the reasonableness of the:

A)existence of unrealized gains or losses.
B)completeness of recorded investment income.
C)classification as available-for-sale or trading securities.
D)valuation of trading securities.

Question 59

Which of the following questions would auditors most likely include on an internal control questionnaire for notes payable?

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

Question 60

An audit plan to examine long-term debt most likely would include steps that require:

A)comparing the carrying amount of held-to-maturity securities with their year-end market values.
B)correlating interest expense recorded for the period with outstanding debt.
C)verifying the existence of the holders of the debt by direct confirmation.
D)inspecting the accounts payable subsidiary ledger for unrecorded long-term debt.

Question 61

Selecting a sample of notes payable transactions and vouching payments to canceled checks is a test of the ASB balance assertion of:

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

Question 62

Which of the following audit procedures would not likely be performed for audits of investments?

A)Read board of directors' minutes for authorization of investment strategies.
B)Confirm investments with registrar.
C)Confirm investments with broker or trustee.
D)Compare valuation to published market prices.

Question 63

When auditing the valuation assertion of an equity method investment, which of the following is the auditor most likely to do?

A)Inspect stock certificates.
B)Obtain audited financial statements of the investee company.
C)Obtain the market price of the stock as of year-end.
D)Review management's calculations.

Question 64

Which of the following audit procedures would not likely be performed for audits of shareholders' equity?

A)Read board of directors' minutes for authorization of equity transactions.
B)Confirm outstanding common and preferred stock with stock registrar.
C)Compare valuation of stock to published market prices.
D)Obtain management representation about number of shares issued and outstanding.

Question 65

A _______ is a financial institution appointed to record the issuance and ownership of company securities.

Question 66

ABC Company has 100 shares of IBM stock that is held as an investment. The stock was purchased three years ago and has been in the client's safe deposit box along with other investment securities. During an inspection of securities held by the client, the auditor noted the 100 shares of IBM stock had a different CUSIP number than the number listed when purchased and the number verified during the previous audit. Which of the following would be the auditor's main concern about this discovery?

A)The certificates in the safe deposit box were forgeries.
B)There was unauthorized buying and selling of investment securities.
C)The securities may be misclassified on the balance sheet.
D)The securities were no longer owned by ABC Company.

Question 67

The typical assertion relating to investments and related accounts in a manufacturing company would not include the assertion that:

A)all investments are valued at cost.
B)investment securities are on hand or held in safekeeping by a trustee.
C)investment income has been properly recorded.
D)investments are adequately classified and described in the balance sheet, including disclosures.

Question 68

If a company keeps investments in a bank safe deposit box, which of the following two people ideally should have access to the safe deposit box?

A)A director and the president
B)The president and vice president for finance
C)A director and vice president for finance
D)A director and general ledger accountant

Question 69

A _______ handles the exchange of shares, canceling the shares surrendered by sellers and issuing new certificates to buyers.

Question 70

Which of the following would provide the auditor the best evidence of the Rights assertion for bitcoin recorded as an asset by a client?

A)Inspection of purchase records maintained by the client.
B)Confirmation of the bitcoin from a third party.
C)Execution of a small bitcoin transaction from a digital wallet to demonstrate control of the private key.
D)Verification of the price of the bitcoin in the Wall Street Journal as of the balance sheet date.

Question 71

Capital stock may be subject to _______ when independent registrars and transfer agents are employed.

Question 72

Which of the following is not a typical assertion relating to owners' equity?

A)The number of shares shown as issued is in fact issued.
B)The accounting is proper for options, warrants, and other stock issue plans, and related disclosure is adequate.
C)All owners' equity transactions have been authorized by the board of directors.
D)The valuation of shares issued for noncash consideration is reflected at book value.

Question 73

The typical business activity in the financing and investment cycle that requires an accounting entry is:

A)short- and long-term forecast.
B)meeting with investment bankers.
C)proposal to board of directors for investing excess monies.
D)investment of excess funds in temporary or long-term securities.

Question 74

In an audit test of recorded interest expense and accrued interest, the auditor was able to detect that the recorded interest expense was higher than the calculations showed. This may indicate:

A)a failure to accrue interest occurred.
B)interest payments are in default.
C)interest payments were charged to another account.
D)interest was paid on an unknown debt or unrecorded liability.

Question 75

Records of interest rates and bonds payable are maintained by the _______ and the _______ .

Question 76

Which of the following is not an approach an auditor may choose when performing substantive procedures to test accounting estimates?

A)Test the company's process used to develop the accounting estimate.
B)Confirm the accounting estimate with a reliable third party expert.
C)Develop an independent expectation for comparison to the company's estimate.
D)Evaluate audit evidence from events or transactions occurring after the measurement date.

Question 77

When auditing the market value of an investment, an auditor would be least likely to:

A)examine quoted market prices.
B)evaluate management's procedure for determining market prices.
C)make his or her own determination of market prices.
D)confirm market prices with a broker.

Question 78

An agent of a bond issuer who handles the administrative aspects of a loan and ensures that the borrower complies with the terms of the bond indenture is called a:

A)registrar.
B)transfer agent.
C)trustee.
D)none of the above.

Question 79

When a company keeps its own stock records, which of the following procedures is not required?

A)Confirm outstanding common stock with stock registrar agent.
B)Inspect the stock record stubs for certificate numbers and number of shares.
C)Inspect the unissued certificates.
D)Obtain written representation about the number of shares issued and outstanding.

Question 80

Mike is the controller at Huskie Supply Company. Huskie Supply has an investment account with DT National Brokerage. Mike is authorized to call the broker and initiate trades on behalf of the company. Mike's son goes to MEU (Most Expensive University) and Mike has a CD with the money for this year's tuition. MEU changed the tuition due date such that the tuition came due 30 days before Mike's CD matured. Mike would lose a large amount of interest if he cashed in the CD early, and a loan from the bank was not possible (Mike is already over extended), and interest on a credit card advance would be 28%.Mike authorized DT National Brokerage to sell one of the company's investments and send the check to his attention at the company. Mike paid the tuition and 30 days later, when the CD came due Mike repurchased the investment with the broker. In fact, the stock had dropped $3 and mike made a profit of $900.A) Define the internal control weakness that allowed the situation to exist - if any;B) One (and only one) specific internal controls that should be in place to prevent or detect the problem; and.C) One (and only one) test of control audit procedure.D) One (and only one) substantive audit procedure that may detect the situation described.Consider each item separately - no credit will be given for generic controls (e.g. policies and procedures; separation of duties (without specifics); discuss with management.)