Ch 14: auditing investing and financing activities

Question 1

property, plant and equipment is typically ___________ risk

Answer 1

not super high

Question 2

in PPE there is typically a _______ volume of transactions but maybe ___________ dollar value for the transaction

Answer 2

lower; higher

Question 3

what are some activities that occur in PPE

Answer 3

acquisition, depreciation, maintenance and repairs

Question 4

what is the activity that is the “total cost” of asset recorded in asset account

Answer 4

acquisition

Question 5

maintenance and repairs on PPE can be _______________ or ______________

Answer 5

expenses; capitalized

Question 6

a short term lease is for ______ or less

Answer 6

12 months

Question 7

finance leasing option acronym

Answer 7

OWNSA

Question 8

what does the OWNSA acronym for finance lease option stand for

Answer 8

O- ownership transfer
W- written bargain purchase option
N- 90%
S- 75%
A- alternative use

Question 9

what are the five audit procedures for auditing PPE

Answer 9

1. initial procedures
2. substantive analytical procedures
3. test of details- vouching/ tracing
4. test of balances
5. test of details of presentation and disclosure

Question 10

is vouching forwards or backwards

Answer 10

backwards

Question 11

what is the relevant assertion for vouching

Answer 11

existence

Question 12

is tracing backwards or forwards

Answer 12

forwards

Question 13

what is the relevant assertion for tracing

Answer 13

completeness

Question 14

what three things are tested in the tests of balances for PPE

Answer 14

• inspection of assets
• valuation/ allocation
• rights/ obligations

Question 15

in valuation/ allocation of PPE the auditors ____________

Answer 15

recalculate depreciation (the method and the estimate)

Question 16

what do auditors do to gain comfortability surrounding impairment (PPE)

Answer 16

inquire of management, inspect management’s documentation, and recalculate impairment loss

Question 17

when testing the rights/ obligations for the tests of balances for PPE what do auditors do?

Answer 17

• inspect vendor invoices
• inspect lease agreements
• inspect property deeds/ titles

Question 18

in the test of details of presentation and disclosure for PPE what do auditors inspect?

Answer 18

client-prepared note

Question 19

what are the two audit procedures for auditing long-term debt

Answer 19

1. initial procedures
2. substantive analytical procedures

Question 20

what do auditors do under the test of details when auditing long-term debt

Answer 20

• vouch sample of entries
• confirmations as needed
• inspect authorizations and contracts for long term debt

Question 21

does vouching have to be done every year for long-term debt?

Answer 21

no only really needs to be done for new debts

Question 22

confirmations for long-term debt are done with

Answer 22

banks/ financial institutions

Question 23

when inspecting authorizations for long-term debt who are the authorizations usually by?

Answer 23

board of directors

Question 24

in the presentation and disclosure audit procedure for auditing long- term debt what do auditors do

Answer 24

inspect client- prepared note

Question 25

what are the four audit procedures for auditing stockholder's equity?

Answer 25

1. initial procedures 2. substantive analytical procedures 3. test of details 4. presentation and disclosure

Question 26

in the test of details procedure for auditing SE what does the auditor do

Answer 26

inspect, confirmations as needed, recalc as needed

Question 27

what is the auditor inspecting in the test of details procedure when auditing SE

Answer 27

board of directors minutes for authorization and details of transactions

Question 28

who are the auditors confirming with in the test of details procedure for the auditing of SE

Answer 28

transfer agent to verify outstanding shares/ transactions

Question 29

what does the auditor do in the presentation and disclosure procedure when auditing SE

Answer 29

inspect client prepare notes (ex: stock based compensation, EPS and how did they calculate basis/ dilute, dilutive securities, pensions)

Question 30

what are investing activities

Answer 30

the purchase and sale of land, buildings, equipment, and other long-term assets not generally held for resale; in addition, investing activities include the purchase and sale of financial instruments that are not intended for trading purposes

Question 31

assume that while performing analytical procedures that an auditor notices a material increase in repair and maintenance expense as a percent of net sales. what assertions may be misstates?

Answer 31

might indicate that assets that should have been capitalized were expensed. the assertion that may be misstated is classification

Question 32

what are the three main testing streams related to PPE

Answer 32

1. acquisition of PPE 2. depreciation of PPE 3. disposals of PPE

Question 33

When auditing PPE, if the control are ______ and analytical procedures appear __________, the auditor may perform limited testing on the 3 transaction streams

Answer 33

strong; normal

Question 34

if a private company or not-for-profit organization is undergoing significant capital expansion, and internal controls are weak, the auditor will likely _____________ sampling and audit a more ___________ portion of fixed asset additons

Answer 34

increase; significant

Question 35

what should an auditor consider when developing an expectation for changes in long-term financing and changed in equity

Answer 35

-auditor needs to develop a good understanding of the audit client and its business environment to develop expectations regarding the client's financial statements

Question 36

there is often a direct connection between a client's investment in PPE and ___________

Answer 36

the entity's financing activities

Question 37

auditor should understand how a company plans to fund ________ of LT assets

Answer 37

acquisition

Question 38

what does the sustainable growth rate calculation do?

Answer 38

provides an estimate of the rate of sales growth that can be obtained without changing the entity's profitability or financing structure

Question 39

when should the auditor expect changes in the financing structure?

Answer 39

when sales grow significantly faster than the entity's sustainable growth rate

Question 40

an auditor needs to be alert to equity instruments like preferred stock with mandatory redemption dates that behave like _______

Answer 40

debt

Question 41

auditor needs to ensure that equity instruments are properly ______ and ______-

Answer 41

classified; disclosed

Question 42

a key control when entering into a new loan agreement/ issuing new common stock is that transactions are handled by a __________ or ____________

Answer 42

bond trustee; transfer agent

Question 43

the payment of dividends and repurchase of stock should be authorized by _________

Answer 43

BOD

Question 44

accounting should regularly reconcile ________ to general ledger

Answer 44

subsidiary records

Question 45

it is important for __________ to authorize new financing transactions based on the entity's strategic plans and need for funding of investment activities

Answer 45

BOD

Question 46

the three most common equity transactions that may occur on a regular basis are

Answer 46

1. issuing shares when stock options are exercised 2. repurchasing common stock and 3. paying dividends

Question 47

auditor will normally confirm equity transactions with company's _____________-

Answer 47

registar/ transfer agent

Question 48

auditor expected to confirm _________ and _________ of LT debt by direct communication with lenders and bond trustees

Answer 48

existence; terms

Question 49

all confirmation responses should be compared with ________ and any differences should be investigated

Answer 49

records

Question 50

what are the assertions related to additions of PPE

Answer 50

- Occurrence (additions which are recorded during the period are PPE acquired during the period - Completeness (additions that occurred during the period have been included or recorded) - Accuracy (additions are correctly journalized or posted) - Cut-off (additions are recorded in the correct period) - Classification (additions are recorded at the correct PPE account)

Question 51

what are the assertions relating to disposals to PPE

Answer 51

- Occurrence (disposals which are recorded during the period are for PPE disposed during the period - Completeness (disposals during the period have been included or recorded) - Accuracy (disposals are correctly journalized or posted) - Cut-off (disposals are recorded in the correct period) - classification (disposals are recorded in the correct PPE account)

Question 52

when can an asset under construction be depreciated?

Answer 52

can begin being depreciated when it is ready for use

Question 53

if a gain is material it may indicate what?

Answer 53

can indicate the client is potentially being too aggressive with the depreciate rate chosen