MCQ 1 Flashcards
In a manufacturing company, which one of the following audit procedures provides the least assurance of the existence of the general ledger balance of investment in stocks and bonds at the audit date?
Confirmation from the broker-dealer.
Examination of paid checks issued in payment of securities purchased.
Vouching all changes during the year to the broker-dealers’ advices and statements.
Inspection and count of stocks and bonds.
Examination of paid checks issued in payment of securities purchased.
This answer is correct.
Paid checks issued in payment for securities do not provide assurance that the investments are in existence and still owned by the client at the balance sheet date.
Florida Corporation declared a 100% stock split-up effected in the form of a dividend. In connection with the audit of Florida’s financial statements, Florida’s auditor should determine that
Submit The additional shares issued do not exceed the number of authorized but previously unissued shares.
Submit Shareholders received their additional shares by confirming year-end holdings with them.
Graded Submit Florida’s shareholders have authorized the issuance.
Incorrect Submit The issuance was properly recorded at fair value.
The additional shares issued do not exceed the number of authorized but previously unissued shares.
This answer is correct.
The auditor should gather evidence that the stock split-up effected in the form of a dividend was properly authorized by the board of directors and does not result in the issuance of shares in excess of the number permitted by the articles of incorporation. The auditor also must verify that the amounts transferred from retained earnings were equal to the legal requirements of the state of incorporation. However, for an issuance of no more than 20 to 25% of the outstanding shares (a stock dividend), the amount capitalized should be the fair value. If the split-up is not effected as a dividend, that is, when the intent is solely to reduce the unit price of the shares, no amount is capitalized.
The auditor is most likely to verify accrued commissions payable in conjunction with the
Graded Submit Examination of trade accounts payable.
Submit Verification of contingent liabilities.
Submit Sales cutoff test.
Incorrect Submit Review of post balance sheet date disbursements.
Sales cutoff test.
This answer is correct.
Sales commissions and accrued sales commissions payable are based upon sales of the period. The auditor verifies accrued commissions payable in conjunction with procedures applied to the sales cutoff test. The purpose is to obtain reasonable assurance that revenues and related liabilities are recorded in the same period in accordance with the matching principle.
An auditor usually tests the reasonableness of dividend income from investments in publicly held companies by computing the amounts that should have been received by referring to
Submit Stock indentures published by corporate transfer agents.
Graded Submit Annual audited financial statements issued by the investee companies.
Submit Stock ledgers maintained by independent registrars.
Correct Submit Dividend record books produced by investment advisory services.
Dividend record books produced by investment advisory services.
This answer is correct.
Investment advisory services, such as Dun & Bradstreet, publish dividend amounts and payment dates for publicly traded entities. The auditor can obtain this information to test whether the client has properly recorded investment income.
n connection with an audit of the prepaid insurance account, which of the following procedures is usually not performed by the auditor?
Graded Submit Prepare excerpts of insurance policies for audit documentation.
Submit Recompute the portion of the premium that expired during the year.
Submit Examine support for premium payments.
Correct Submit Confirm premium rates with an independent insurance broker.
Confirm premium rates with an independent insurance broker.
This answer is correct.
An audit of prepayments includes determining that amounts shown reflect all prepayments and that they (1) are properly valued according to the applicable reporting framework, (2) apply to future periods, (3) are expected to be realized (to provide future benefits), and (4) are accurately classified. Determining that a prepayment is properly valued involves verifying the amount of the expenditure by examining invoices from insurers, canceled checks, and the insurance policy. But the auditor does not confirm premium rates with an independent insurance broker. Paid checks and other documents are sufficient appropriate evidence of the amounts paid by the client.
In establishing the existence and ownership of an investment held by a corporation in the form of publicly traded stock, an auditor should inspect the securities or
Submit Obtain written representations from management confirming that the securities are properly classified as trading securities.
Submit Confirm the number of shares owned that are held by an independent custodian.
Graded Submit Inspect the audited financial statements of the investee company.
Incorrect Submit Determine that the investment is carried at the lower of cost or market.
Confirm the number of shares owned that are held by an independent custodian.
This answer is correct.
To test the existence assertion and the rights and obligations (ownership) assertion, the auditor should perform one or more of the following procedures, depending on the nature of the investments and the assessment of audit risk: (1) inspection; (2) external confirmation by the issuer, custodian, or counterparty; (3) external confirmation of unsettled transactions by the broker-dealer; or (4) reading partnership or similar agreements. Thus, brokers, banks, agents, or others holding securities for the client should be requested by the client to respond directly in writing to the auditor’s confirmation requests.
During its fiscal year, a company issued, at a discount, a substantial amount of first-mortgage bonds. When performing audit work in connection with the bond issue, the independent auditor should
Review the minutes for authorised.
Graded Submit Trace the net cash received from the issuance to the bonds payable account.
Submit Inspect the records maintained by the bond trustee.
Incorrect Submit Confirm the existence of the bondholders.
Review the minutes for authorised.
This answer is correct.
Bonds issued during the year under audit should be traced to the minutes of the shareholders’ or board of directors’ meetings to check for proper authorised. The amount sold should be no greater than the amount authorised authorised in the minutes.
In establishing the existence and ownership of long-term investments in the form of publicly traded stock, an auditor most likely would inspect the securities or
Submit Confirm the number of shares owned that are held by an independent custodian.
Submit Apply analytical procedures to the dividend income and investments accounts.
Graded Submit Correspond with the investee company to verify the number of shares owned.
Incorrect Submit Inspect the cash receipts journal for amounts that could represent the sale of securities.
Confirm the number of shares owned that are held by an independent custodian.
This answer is correct.
To test the existence and rights and obligations (ownership) assertions, the auditor may (1) inspect the securities; (2) read partnership or similar agreements; (3) confirm the number of shares with the issuer, custodian, or counterparty; (4) trace dividend or interest revenue; and (5) confirm unsettled transactions by the broker-dealer.
The best audit procedure for determining the existence of open commodity futures contracts at year end is the review of
Graded Submit The replies to the standard confirmation requests sent to financial institutions.
Submit Canceled checks in the subsequent period.
Submit Direct confirmations with the client’s commodity traders.
Incorrect Submit Available broker trade advices.
Direct confirmations with the client’s commodity traders.
This answer is correct.
Direct external confirmation by the client’s commodity traders provides independent verification of open commodity futures contracts and may reveal undisclosed liabilities.
