Other Assets, Liabilities, and Equities 2 Flashcards
How would I test the existence and rights of an investment in the common stock of a publicly traded company?
By confirming the number of shares owned that are held by an independent custodian
How would I gain assurance that all guarantees of the affiliate’s indebtedness have been detected?
By reviewing the client’s minutes and obtain a representation letter
What is a primary concern when examining the shareholders’ equity section of a client’s balance sheet?
Whether entries in the capital stock account can be traced to a resolution in the minutes of the board of directors’ meetings
E.g. This tells the auditor whether all capital stock transactions are properly authorized
What detail information can I find on a security count worksheet?
An acknowledgment by a client representative that the securities were returned intact
E.g. This ensures a clear chain of custody; and
- securities were returned intact when the count was complete
What procedure(s) would I use to audit a mortgage balance?
- Examine the current year’s canceled checks
- Re-compute mortgage interest expense
- Review the mortgage amortization schedule
What should I do when;
An entity (the client) holds an asset (e.g. securities) of another entity as security (e.g. collateral) for an outstanding debt?
Examine the securities and determine their fair value
E.g. I want to examine the collateral; and
- estimate its fair value to determine the reasonableness of the arrangement
How would I best verify the interest earned on bond investment?
By re-computing the interest earned on the basis of face amount, interest rate, and period held
E.g. I can use the information from bond certificates to;
- Recalculate bond interest earned
What item would I verify in conjunction with accrued commissions payable?
Sales cutoff test
Why?: This helps me obtain reasonable assurance that revenues and related liabilities are recorded in the same period
E.g. The “Matching Principle”
What should I be concerned with when establishing whether dividends are paid to client corporation shareholders who hold stock?
That dividends are paid to client corporation shareholders who hold stock as of the:
“Record Date”
Why?: Because these shareholders are entitled to the dividend
When auditing the private placement of bonds, what step should I use in my auditor’s plan for the audit of bonds payable?
Tracing the cash received from the issue to the accounting records
Why?: Because I am most concerned that the cash received from the issue is accurately recorded
How would I test the valuation assertion when auditing an investment accounted for by the equity method?
By examining the audited financial statements of the investee company
What account would I analyze to verify whether all fixed assets have been capitalized?
Repairs and maintenance
How could I best test for unrecorded retirements of equipment?
Select items of equipment from the accounting records and then locate them during the plant tour
What assertion am I best testing for when I am testing for unrecorded retirements of equipment?
I am testing for the “Existence” assertion
When RMM is low for assertions related to payroll, what analytical procedures would I perform?
Applying analytical procedures and Recalculating payroll accruals
E.g. Analytical procedures and testing for completeness and cutoff of the year-end accruals
