Deck 22: Audit of the Capital Acquisition and Repayment Cycle

Question 1

In the audit of the transactions and amounts in the capital acquisition and repayment 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.

Answer 1

B

Question 2

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

Answer 2

D

Question 3

Mergers and acquisitions can make the audit of the debt and the equity cycle more complex, especially when acquisitions are financed through debt.

Answer 3

True

Question 4

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 5

The capital acquisition and repayment cycle includes the payment of interest on debt and dividends to shareholders.

Question 6

The dollar amounts of bond issues are normally large, making it difficult for auditors to verify each transaction in this account.

Question 7

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

Question 8

The primary audit objectives to focus on when auditing accounts in the capital acquisition and repayment cycle are

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

Question 9

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

A) A relatively few transactions affect the cycle, and most are smaller amounts.
B) A large number of transactions affect the cycle, and most are smaller amounts.
C) A relatively few transactions affect the cycle, and most are highly material.
D) A large number of transactions affect the cycle, and most are highly material.

Question 10

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

Question 11

There is an indirect relationship between the interest and dividends accounts and debt and equity.

Question 12

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

Question 13

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 14

All corporations must have

A) preferred stock.
B) capital stock.
C) paid-in capital in excess of par.
D) dividends payable.

Question 15

If a legal relationship exists between the client and the holder of bonds, the auditor must determine if the client has met the requirements of the bondholder agreement.

Question 16

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 17

Audit schedules for most of the accounts in the capital acquisition and repayment cycle include the beginning balance, a list of transactions that occurred in the account, and the ending balance.

Question 18

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 19

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 20

Performance materiality is often set at a(n) ________ level for notes payable.

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

Question 21

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 22

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 23

Which of the following is an accurate statement regarding the audit of the capital acquisition and repayment schedule?

A) When internal controls over notes payable are deficient, auditors are required to confirm the notes payable.
B) As auditors perform tests of details of balances for balance-related audit objectives, the evidence obtained helps satisfy the notes payable presentation and disclosure requirements.
C) The normal starting point for the audit of notes payable is a list of fixed asset acquisitions.
D) The schedule of notes payable and accrued interest must be prepared regardless of the number of transactions involved.

Question 24

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 25

An auditor is determining whether an issuance of notes payable for cash was correctly recorded. Her or his 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 26

Actual interest expense is significantly higher than the auditor's estimate. This would most likely lead the auditor to conclude that the client has not

A) recorded all long-term interest-bearing debt in the accounting records.
B) recorded all interest expense paid or accrued.
C) properly accounted for the discount of bonds payable account.
D) properly recorded interest income.

Question 27

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 28

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.

Question 29

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 30

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 31

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

A) There is 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 exist proper documents and records.

Question 32

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 33

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 34

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) Review the bank reconciliation for new notes credited directly to the bank account by the bank.

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

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 37

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 38

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 39

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 40

To determine if notes payable is included in the proper period, the auditor should

A) trace the cash received from the issuance to the accounting records.
B) examine duplicate copies of notes to determine whether the notes were dated on or before the balance sheet date.
C) examine duplicate copies of notes for principal and interest rates.
D) trace the individual notes payable to the master file.

Question 41

Typically, auditors set inherent risk at a low level for notes payable, as the correct value is usually easy to determine.

Question 42

Accounts including preferred stock, additional paid-in capital, and treasury stock are not included in the capital acquisition and repayment cycle.

Question 43

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

Question 44

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 45

Why are substantive analytical procedures essential for notes payable?

Question 46

The audit procedure "Review the notes to determine whether any are related party notes or accounts payable" is performed when verifying the classification objective for notes payable.

Question 47

Discuss the four key controls over notes payable.

Question 48

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 49

Because the accounts in the capital acquisition and repayment cycle contain few transactions, control risk and the results of substantive transactions are normally more important for designing tests of details of balances in these accounts.

Question 50

Identify three substantive analytical procedures commonly performed for notes payable.

Question 51

Discuss the overall objectives of the audit of notes payable.

Question 52

Which balance-related audit objective is important for uncovering both errors and fraud?

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

Question 53

If loans require significant restrictions on the activities of the company, they must be disclosed in the footnotes.

Question 54

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

Question 55

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 56

When performing substantive 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 57

Notes payable are generally for a period of sixty days or less.

Question 58

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 59

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

Question 60

Auditors often set performance materiality at a low level for accounts in the capital acquisition and repayment cycle because it is usually possible to completely audit the account balance and each of the transactions in these accounts.

Question 61

Independent registrars commonly disburse cash dividends to shareholders.

Question 62

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 63

Common hybrid securities do not include which of the following?

A) Treasury stock
B) certain types of preferred stock
C) convertible debt
D) redeemable debt

Question 64

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 65

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 66

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

Question 67

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 68

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 69

Most closely held corporations have numerous transactions during the year for capital stock accounts.

Question 70

Financial instruments or securities that combine features of both debt and equity are commonly known as hybrid securities.

Question 71

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

Question 72

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

A)
B)
C)
D)

Question 73

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

Question 74

Which of the following types of owners' equity transactions would require authorization by the board of directors?

A) issuance of capital stock
B) repurchase of capital stock
C) declaration of dividends
D) all of the above

Question 75

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

Question 76

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 77

All of the following are owners' equity accounts except for

A) common stock.
B) paid-in-capital in excess of par.
C) sales.
D) retained earnings.

Question 78

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 79

The board of directors must authorize the amount of the dividend per share and the dates of record and payment of the dividend.

Question 80

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.