Chapter 22

Question 1

The transaction cycle that involves the acquisitions of capital resources in the form of interest-bearing debt and owners’ equity, and the repayment of capital

Answer 1

Capital Acquisition and Repayment Cycle

Question 2

A record of the issuance and repurchase of capital stock for the life of the corporation

Answer 2

Capital Stock Certificate Record

Question 3

Corporation with stock that is not publicly traded; typically, only a few shareholders and a few capital stock transactions throughout the year

Answer 3

Closely Held Corporation

Question 4

Outside entity engaged by corporation to make sure that its stock is issued in accordance with capital stock provisions in the corporate charter and authorizations by the board of directors; required by SEC for publicly held corporations

Answer 4

Independent Register

Question 5

A legal obligation to a creditor that may be unsecured or secured by assets

Answer 5

Note Payable

Question 6

Corporation with stock that is publicly traded; typically, many shareholders and frequent changed in the ownership of the stock

Answer 6

Publicly Held Corporation

Question 7

A record of the issuance and repurchase of capital stock for the life of a corporation

Answer 7

Shareholders’ Capital Stock Master File

Question 8

Outside entity engaged by a corporation to maintain the stockholder records and often disburse cash dividends

Answer 8

Stock Transfer Agent

Question 9

Four characteristics of the capital acquisition and repayment cycle:

Answer 9

1) Relatively few transactions affect the account balance but each transaction is often highly material
2) Exclusion of a single transaction can be material
3) A legal relationship exists between the client entity and the holder of the stock, bond, etc.
4) A direct relationship exists between the interest and dividends accounts and debt and equity

Question 10

The objectives of the audit of notes payable are to determine:

Answer 10

1) Internal controls over notes payable are adequate
2) Transactions for principal and interest involving notes payable are properly authorized and recorded
3) The liability for notes payable and the related interest expense and accrued liability are properly stated
4) Proper disclosures related to notes payable and the related interest expense

Question 11

Four important controls over notes payable:

Answer 11

1) Proper authorization for the issue of new notes
2) Adequate controls over the repayment of principal and interest
3) Proper documents and records
4) Periodic independent verification

Question 12

Two most important balance related audit objectives for accounts payable

Answer 12

Completeness and accuracy

Question 13

Types of owners’ equity transactions that require specific authorization:

Answer 13

Issuance of Capital Stock, Repurchase of capital stock, and declaration of dividends

Question 14

Internal controls that must be adequate if a company maintains its own records of stock:

Answer 14

1. Actual owners of the stock are recognized in the records
2. The correct amount of dividends is paid to the stockholders
3. The potential for misappropriation is minimized

Question 15

Internal controls affecting dividend payments:

Answer 15

1) Dividend checks are prepared from the capital stock certificate record by someone that is not responsible for maintaining the capital stock records
2) Independent verification after checks are prepared
3) A separated imprest dividend account is used

Question 16

4 main concerns of auditors when auditing capital stock and paid-in capital in excess of par:

Answer 16

1) Existing capital stock transactions are recorded
2) Recorded capital stock transactions occurred and are accurately recorded
3) Capital stock is accurately recorded
4) Capital stock is properly presented and disclosed

Question 17

Most important objectives for auditing dividends:

Answer 17

1) Recorded dividends occurred
2) Existing dividends are recorded
3) Dividends are accurately recorded
4) Dividends are paid to stockholders that exist
5) Dividends payable are recorded
6) Dividends payable are accurately recorded

Question 18

Common Tests of balances for notes payable and interest (Detail tie-in)

Answer 18

Trace totals to general ledger

Question 19

Common Tests of balances for notes payable and interest (existence)

Answer 19

Confirm notes payable

Question 20

Common Tests of balances for notes payable and interest (completeness)

Answer 20

Examine notes paid after year-end

Question 21

Common Tests of balances for notes payable and interest (accuracy)

Answer 21

Recalculate accrued interest

Question 22

Common Tests of balances for notes payable and interest (classification)

Answer 22

Review notes to determine if they are related party notes

Question 23

Common Tests of balances for notes payable and interest (cutoff)

Answer 23

Examine duplicate copies to check for dates before balance sheet date

Question 24

Common Tests of balances for notes payable and interest (obligations)

Answer 24

Examine notes to determine if the company has obligations for payment