AUD 2 - Chapter 14 Q's

Question 1

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.

Answer 1

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.

Question 2

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.

Answer 2

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

A. All material long-term liabilities are recorded.

Question 3

Which management assertion is of most importance to auditors in examining long-term	debt?	
A. Existence.	
B. Completeness.	
C. Rights and obligations.	
D. Presentationand disclosure.

Answer 3

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

B. Completeness.

Question 4

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.

Answer 4

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

D. An independent registrar.

Question 5

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.

Answer 5

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

C. Completeness.

Question 6

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

Answer 6

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

D. Proper period recording

Question 7

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.

Answer 7

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

C. Review by the independent auditor.

Question 8

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 theright accounts.

Answer 8

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

B. Recalculating the mathematical estimate.

Question 9

Who is responsible for making accounting estimates?	
A. Auditors	
B. Management	
C. Boards of Directors	
D. Shareholders

Answer 9

Who is responsible for making accounting estimates?

B. Management

Question 10

Accounting estimates include which of the following:	
A. Trade payable balances	
B. Cash balances	
C. Capital Assets at cost	
D. Amortization expense

Answer 10

Accounting estimates include which of the following:

D. Amortization expense

Question 11

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

Answer 11

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?

D. The recorded balances in the investment subsidiary ledger are periodically compared with the contents of the safety deposit box by independent personnel

Question 12

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

Answer 12

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

C. Proper custodial control of securities.

Question 13

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.

Answer 13

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

B. Custody.

Question 14

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?

Answer 14

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

D. Are direct borrowings on notes payable authorized by the board of directors?

Question 15

Transactions in debt and shareholder equity are typically handled by:	
A. Payroll	
B. Accounting Staff	
C. Accounting Supervisors	
D. UpperManagement

Answer 15

Transactions in debt and shareholder equity are typically handled by:

D. Upper Management

Question 16

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

Answer 16

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

A. Analysis of excess cash funds.

Question 17

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 17

Off balance sheet means that:

D. Obligations and commitments are not recorded in the accounts of the company

Question 18

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

Answer 18

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

Question 19

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.

Answer 19

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. TRUE

Question 20

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

Answer 20

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

Question 21

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.

Answer 21

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. TRUE

Question 22

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.

Answer 22

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. TRUE

Question 23

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.

Answer 23

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. FALSE

Question 24

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

Answer 24

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

Question 25

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.

Answer 25

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. TRUE

Question 26

It is easier to segregate functional responsibilities in middle management than in upperlevel management.

Answer 26

It is easier to segregate functional responsibilities in middle management than in upperlevel management. TRUE

Question 27

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

Answer 27

Letters of credit are an example of “off-balance-sheet” financing. TRUE

Question 28

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

Answer 28

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

Question 29

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

Answer 29

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.
TRUE

Question 30

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

Answer 30

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

Question 31

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.

Answer 31

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.
FALSE