MCQ 2

Question 1

An audit program for the retained earnings account should include a step that requires verification of the
Submit Approval of the adjustment to the beginning balance as a result of a write-down of an account receivable.
Submit Authorization for both cash and stock dividends.
Submit Market value used to charge retained earnings to account for a two-for-one stock split.
Submit Gain or loss resulting from disposition of treasury shares.

Answer 1

Authorization for both cash and stock dividends.

This answer is correct.
The auditor should determine from the minutes of the board of directors’ meetings that proper authorization has been made for both cash and stock dividends. All dividends require transfers from (debits to) retained earnings. Thus, dividends should be audited in conjunction with retained earnings.

Question 2

A company owns a 30% voting interest in another entity. Assuming the investor did not elect the fair value option, which of the following provides the best form of audit evidence pertaining to the annual measurement of the investment?
Submit Audited financial statements of the investee.
Submit Historical cost of the investee’s assets.
Submit Current fair value of the investee’s assets.
Submit Market quotations of the investee’s stock.

Answer 2

Audited financial statements of the investee.

This answer is correct.
A 30% voting interest creates a presumption that the investor is able to exercise significant influence over the investee. Thus, the equity method of accounting for the investment must be used if the FVO has not been elected. This method requires the investor to recognize the appropriate percentage of the investee’s earnings as a debit to the investment and a credit to income. Dividends reduce the investment. Audited financial statements of the investee are usually sufficient appropriate evidence regarding the investor’s equity. However, the auditor should satisfy the requirements either for (1) referring to the component auditor in the auditor’s report or (2) assuming responsibility for the work of the component auditor (AU-C 600).

Question 3

Which of the following explanations might satisfy an auditor who discovers significant debits to an accumulated depreciation account?
Graded Submit An appropriation for possible loss on retirement has been recorded.
Submit An asset has been recorded at its fair value.
Submit Prior years’ depreciation charges were erroneously understated.
Submit Extraordinary repairs have lengthened the life of an asset.

Answer 3

Extraordinary repairs have lengthened the life of an asset.

This answer is correct.
If extraordinary (major) repairs have lengthened the life of an asset without improving its quality or quantity, the entity may reduce the amount of accumulated depreciation to increase the net carrying amount of the asset. This practice is acceptable for representing the increased life of an asset. It also is often used to account for replacements.

Question 4

if the auditor discovers that the net carrying amount of a client’s trading securities is overstated because of a loss in fair value, the auditor should insist that the
Submit Loss in fair value be recognized in the financial statements of the client.
Submit Investments be reported at cost on the face of the balance sheet.
Graded Submit Loss in fair value be reported in other comprehensive income.
Submit Investments be classified as noncurrent for balance sheet purposes with full disclosure in the notes.

Answer 4

Loss in fair value be recognized in the financial statements of the client.

This answer is correct.
Under U.S. GAAP, trading securities are accounted for at fair value. The unrealized holding loss should be recognized in earnings (a debit), and the net carrying amount of the securities should be reduced (a credit).

Question 5

During an audit of an issuer of bonds, the auditor should obtain written confirmation regarding debenture transactions from the
 	 Submit	Internal auditors.
 	 Submit	Client’s attorney.
Graded	 Submit	Debenture holders.
 Submit	Trustee.

Answer 5

Trustee.

This answer is correct.
Debentures are bonds backed by the general credit of the issuer and not secured by specific assets. A bond issuer normally employs the services of an independent financial institution as trustee. The bond trustee is responsible for executing bond transactions, e.g., distributing or paying interest, and protecting the interests of bondholders. Accordingly, the auditor should confirm transactions with the trustee.

Question 6

Which of the following statements regarding the audit of negotiable notes receivable in bearer form is not correct?
Submit Physical inspection of a note by the auditor does not provide conclusive evidence.
Submit Notes receivable discounted with recourse need to be confirmed.
Graded Submit Materiality of the amount involved is a factor considered when selecting the accounts to be confirmed.
Submit Confirmation by the debtor is an acceptable alternative to inspection.

Answer 6

Confirmation by the debtor is an acceptable alternative to inspection.

This answer is correct.
Negotiable notes in bearer form are highly liquid assets because they are negotiable by transfer of possession alone. Thus, they should be inspected to determine whether the entity has custody. External confirmation also does not establish collectibility. For this purpose, the auditor should examine cash receipts records to determine promptness of interest and principal payments.