Q&A Hero

Q: Reviewing interest expense to examine payments to debt holders not listed on the debt analysis schedule is a procedure that can be used to test the audit assertion of A. occurrence. B. completeness. C. cutoff. D. accuracy.

Q: If recorded interest expense is higher than the auditor's expectation calculated using recorded debt, all of the following are potential explanations except that A. the entity failed to record debt. B. debt was recorded as equity. C. the entity used the face interest rate to calculate interest expense on a bond issued at a discount. D. the entity used the face interest rate to calculate interest expense on a bond issued at a premium.

Q: Which audit procedure is most closely related to management's assertion regarding presentation and disclosure of liabilities? A. Tracing cash received from a bond issue to the accounting records. B. Confirmation with the bond trustee of amounts owed on a private placement of bonds. C. Reviewing the renewal of a note payable immediately after the balance sheet. D. Inspection of public records of lien balances.

Q: During an audit, Wicks learns that the entity was granted a 3-month waiver of the repayment of principal on the installment loan with Blank Bank without an extension of the maturity date, which is one year in the future. With respect to this loan, the audit program used by Wicks is least likely to include a verification of the A. interest expense for the year. B. balloon payment. C. total liability at year-end. D. installment loan payments.

Q: In auditing long-term bonds payable, an auditor most likely would A. perform analytical procedures on the bond premium and discount accounts. B. examine documentation of assets purchased with bond proceeds for liens. C. compare interest expense with the bonds payable amount for reasonableness. D. confirm the existence of individual bond holders at year-end.

Q: During an examination of a public company, the auditor should obtain written confirmation regarding bond transactions from the A. bond broker. B. entity's attorney. C. internal auditors. D. trustee.

Q: During the course of an audit, a CPA's substantive analytical procedure provides an expected interest expense that is significantly higher than the amount recorded in the entity's accounting records. This observation would most likely lead the auditor to suspect that A. the entity failed to record all debt. B. discount on Bonds is misstated. C. interest income is overstated. D. the entity failed to record all interest expense.

Q: During its fiscal year, a company issued, at a discount, a substantial amount of bonds. When performing audit work in connection with the bond issue, the independent auditor should A. confirm the existence of the bond holders. B. review the board of directors' minutes for authorization. C. trace the net cash received from the issuance to the bond payable account. D. inspect the records maintained by the bond trustee.

Q: A company issued bonds for cash during the year under audit. To ascertain that this transaction was properly recorded, the auditor's best course of action is to A. request a statement from the bond trustee as to the amount of the bonds issued and outstanding. B. confirm the results of the issuance with the underwriter or investment banker. C. trace the cash received from the issuance to the accounting records. D. verify that the net cash received is credited to an account entitled "Bonds Payable."

Q: During the year under audit, a company has completed a private placement of a substantial amount of bonds. Which of the following is the most important step in the auditor's program for the audit of bonds payable? A. Confirming the interest rate with the bond trustee. B. Tracing the cash received from the issue to the accounting records. C. Examining the bond agreement for a sinking fund provision. D. Recomputing the annual interest cost and the effective yield.

Q: In connection with the examination of bonds payable, an auditor would expect to find in a bond agreement A. the issue date and maturity date of the bond. B. the names of the original subscribers to the bond issue. C. the yield to maturity of the bonds issued. D. the company's debt-to-equity ratio at the time of issuance.

Q: An auditor compares revenues and expenses reported for the year being audited (current year) with those of the prior year and investigates all changes exceeding 10%. By this procedure, the auditor would be most likely to learn that A. an increase in property tax rates has not been recognized in the entity's accrual. B. the current year provision for uncollectible accounts is inadequate, because of worsening economic conditions. C. fourth quarter payroll taxes were not paid. D. the entity changed its capitalization policy for small tools in the current year.

Q: In the audit of a medium-sized manufacturing concern, which one of the following areas can be expected to require the least amount of audit time? A. Retained earnings. B. Revenue. C. Assets. D. Liabilities.

Q: The auditor gathers evidence about dividends that are declared and paid primarily because of A. concerns with violations of corporate bylaws or debt covenants. B. the large dollar value of the transactions. C. the ease with which the transactions can be audited. D. fraud concerns.

Q: The auditor is concerned with establishing that dividends are paid to stockholders of the entity owning stock as of the A. issue date. B. declaration date. C. record date. D. payment date.

Q: An auditor usually obtains evidence of stockholders' equity transactions by reviewing the entity's A. minutes of the board of directors' meetings. B. transfer agent's records. C. canceled stock certificates. D. treasury stock certificate book.

Q: A substantive strategy is typically used to audit stockholders' equity because A. the number of transactions is small. B. controls over stockholders' equity transactions typically are weak. C. a reliance strategy is most efficient. D. a substantive strategy likely was used in prior years.

Q: All corporate capital stock transactions should ultimately be traced to the A. minutes of the board of directors. B. cash receipts journal. C. cash disbursements journal. D. numbered stock certificates.

Q: Reviewing notes paid or renewed after the balance sheet date to determine if there are unrecorded liabilities at year-end can be used to test the assertion of A. existence. B. completeness. C. rights and obligations. D. valuation and allocation.

Q: Valuation and allocation is most likely an issue for long-term debt if A. bonds are sold on the open market. B. bonds are issued at a discount or premium. C. the loans are from banks. D. the company has many short-term leases.

Q: The auditor's program for the examination of long-term debt should include steps that require the A. verification of the existence of the bond holders. B. examination of any bond agreement. C. inspection of the accounts payable subsidiary ledger. D. investigation of credits to the bond interest income account.

Q: The primary reason for preparing a reconciliation between interest-bearing obligations outstanding during the year and interest expense presented in the financial statements is to A. evaluate internal control over securities. B. determine the validity of prepaid interest expense. C. ascertain the reasonableness of imputed interest. D. detect unrecorded liabilities.

Q: A control which ensures that long-term borrowing is properly initiated by appropriate individuals addresses the control assertion of A. occurrence. B. authorization. C. completeness. D. valuation.

Q: The auditor can best verify an entity's bond sinking fund transactions and year-end balance by A. recomputation of interest expense, interest payable, and amortization of bond discount or premium. B. confirmation with individual holders of retired bonds. C. confirmation with the bond trustee. D. examination and count of the bonds retired during the year.

Q: Several years ago, Conway, Inc., secured a conventional real estate mortgage loan. Which of the following audit procedures would least likely be performed by an auditor examining the mortgage balance? A. Examine the current year's canceled checks. B. Review the mortgage amortization schedule. C. Inspect public records of lien balances. D. Recompute mortgage interest expense.

Q: The auditor typically begins an audit of retained earnings by obtaining a schedule of account activity for the period.

Q: Generally, all dividends that are declared and paid will be audited.

Q: There are typically only a couple of disclosure items that need to be considered for stockholders' equity.

Q: The occurrence assertion is being tested when the auditor vouches stock repurchases to the canceled stock certificates.

Q: When auditing capital stock accounts, the cutoff assertion is the most important to consider.

Q: Income statement accounts must be accounted for in accordance with GAAP.

Q: Substantive analytical procedures can be used extensively to test revenue and expense accounts.

Q: The dividend-disbursing agent prepares and mails dividends checks to the stockholders as of the date of declaration.

Q: The registrar is responsible for preparing stock certificates and maintaining adequate stockholders' records.

Q: The repurchase of stock includes the reacquisition of stock (treasury stock), but not the retirement of stock.

Q: Three types of transactions usually occur in stockholders' equity: issuance of stock, repurchase of stock, and payment of dividends.

Q: For most companies, stockholders' equity includes the following three accounts: preferred stock, paid-in capital, and retained earnings.

Q: One major issue associated with long-term debt is the classification of the short-term portion of long-term debt that is due in the next year.

Q: Long-term borrowing should be properly authorized.

Q: Notes receivable is a common type of long-term financing.

Q: Match each of the following intangible assets with its proper general category. Trademark Customer Franchise Marketing Copyright Contract Patented IT program Technology Order backlogs Artistic Excess of purchase price over identifiable assets Goodwill

Q: Identify the types of transactions that occur in the property management process.

Q: What tests do auditors typically perform on a lead schedule for property, plant, and equipment and what assertion are they testing?

Q: Auditors can usually gather sufficient, competent evidence on prepaid insurance by performing substantive analytical procedures. Why is this?

Q: Determining that proper amounts of depreciation are expensed provides assurance about management's assertions of presentation and disclosure and A. valuation and allocation. B. completeness. C. rights and obligations. D. existence.

Q: In performing a search for unrecorded retirements of fixed assets, an auditor most likely would A. inspect the property ledger and the insurance and tax records and then tour the entity's facilities. B. tour the entity's facilities and then inspect the property records and the insurance and tax records. C. analyze the repair and maintenance account and then tour the entity's facilities. D. tour the entity's facilities and then analyze the repair and maintenance account.

Q: Which of the following best describes the independent auditor's approach to obtaining satisfaction concerning depreciation expense in the income statement? A. Verifying the mathematical accuracy of the amounts charged to income as a result of depreciation expense. B. Determining the method for computing depreciation expense and ascertaining that it is in accordance with generally accepted accounting principles. C. Reconciling the amount of depreciation expense to those amounts credited to accumulated depreciation accounts. D. Establishing the reasonableness of useful lives and depreciation methods for depreciable assets and recomputing the depreciation expense.

Q: If the ratio of repairs and maintenance expense to property, plant, and equipment is higher than expected, which of the following is a plausible explanation? A. Routine maintenance on an important piece of machinery was charged to repairs and maintenance expense. B. An addition to a building was charged to repairs and maintenance expense. C. The company forgot to depreciate all of its equipment. D. The company purchased an unusual amount of new equipment.

Q: The controller of Excello Manufacturing, Inc., wants to use ratio analysis to identify the possible existence of idle equipment or the possibility that equipment has been disposed of without having been written off. Which of the following ratios would best accomplish this objective? A. Depreciation expense/book value of manufacturing equipment. B. Accumulated depreciation/book value of manufacturing equipment. C. Repairs and maintenance cost/direct labor costs. D. Gross manufacturing equipment cost/units produced.

Q: Due to a weakness observed in internal control over recording retirements of equipment, the auditor may decide to A. inspect certain items of equipment in the plant and trace those items to the accounting records. B. review the subsidiary ledger to ascertain whether depreciation was taken on each item of equipment during the year. C. trace additions to the "other assets" account to search for equipment that is still on hand but no longer is being used. D. select certain items of equipment from the accounting records and locate them in the plant.

Q: In an interview with the plant manager regarding operations, the auditor is most likely to obtain evidence that raises concerns regarding A. the capitalization vs. expensing policy. B. the allocation of fixed and variable costs. C. the need to write-off equipment that has become obsolete. D. the adequacy of depreciation expense.

Q: Which of the following is the most important control activity over acquisitions of property, plant, and equipment? A. Establishing a written company policy distinguishing between capital and revenue expenditures. B. Using a budget to forecast and control acquisitions and retirements. C. Analyzing monthly variances between authorized expenditures and actual costs. D. Requiring acquisitions to be made by user departments.

Q: If the ratio of insurance expense to related property, plant, and equipment is higher than expected, which of the following is a plausible explanation? A. Too much expired insurance is still included in prepaid insurance. B. PP&E insurance expense includes some expenses related to product liability insurance. C. Depreciation expense was based on overly short useful lives. D. Some routine maintenance on equipment was added to the equipment asset account.

Q: Auditors will examine the insurance register primarily to A. ensure that dollar coverage amounts are adequate. B. examine policy expiration dates to verify that prepaid insurance is properly stated. C. ensure that insurance agents are not related parties. D. ensure that all assets are insured.

Q: Testing a sample of repairs and maintenance expense items to ensure that they were properly classified as repairs as opposed to property, plant, and equipment tests which of the following assertions for the repairs and maintenance expense account? A. Occurrence. B. Completeness. C. Cutoff. D. Authorization.

Q: Testing a sample of repairs and maintenance items to ensure that they were properly classified as repairs as opposed to property, plant, and equipment tests which of the following assertions for the property, plant, and equipment account? A. Occurrence. B. Completeness. C. Cutoff. D. Authorization.

Q: By selecting a sample of additions to property, plant, and equipment and then examining the related vendor invoices, the auditor is testing which of the following assertions for property, plant, and equipment? A. Occurrence. B. Completeness. C. Cutoff. D. Classification.

Q: Which of the following explanations most likely would satisfy an auditor who questions management about significant debits to the accumulated depreciation accounts? A. The estimated remaining useful lives of plant assets were revised upward. B. Plant assets were retired during the year. C. The prior year's depreciation expense was erroneously understated. D. Overhead allocations were revised at year-end.

Q: In testing plant and equipment balances, an auditor may inspect new additions listed on the analysis of plant and equipment. This procedure is designed to obtain evidence concerning management's assertion(s) about A. presentation and disclosure. B. existence or occurrence. C. both (1) presentation and disclosure and (2) existence and occurrence. D. neither (1) presentation and disclosure nor (2) existence and occurrence.

Q: Which of the following explanations might satisfy an auditor who discovers significant debits to an accumulated depreciation account? A. Several fully depreciated assets were retired during the year. B. Prior years' depreciation charges were erroneously understated. C. A reserve for possible loss on retirement has been recorded. D. An asset has been recorded at its fair value.

Q: An auditor analyzes repairs and maintenance accounts primarily to obtain evidence in support of the audit assertion that all A. Non-capitalizable expenditures for repairs and maintenance have been recorded in the proper period. B. expenditures for property and equipment have been recorded in the proper period. C. Non-capitalizable expenditures for repairs and maintenance have been properly charged to expense. D. expenditures for property and equipment have not been charged to expenses.

Q: In testing for unrecorded retirements of equipment, an auditor most likely would A. select items of equipment from the accounting records and then locate them during the plant tour. B. compare depreciation journal entries with similar prior-year entries in search of fully depreciated equipment. C. inspect items of equipment observed during the plant tour and then trace them to the equipment subsidiary ledger. D. scan the general journal for unusual equipment additions and excessive debits to repairs and maintenance expense.

Q: Which of the following audit procedures would be least likely to lead the auditor to find unrecorded fixed asset disposals? A. Examination of insurance policies for evidence of a dropped or cancelled policy. B. Review of repairs and maintenance expense. C. Review of property tax files. D. Scanning of invoices for fixed asset additions for evidence of a purchase to replace a previously owned fixed asset.

Q: Which of the following is the best evidence of real estate ownership at the balance sheet date? A. Title insurance policy. B. A duplicate of the original deed held in the entity's safe. C. Paid real estate tax bills. D. Closing statements.

Q: A normal audit procedure is to analyze the current year's repairs and maintenance accounts to provide evidence in support of the audit proposition that A. expenditures for fixed assets have been recorded in the proper period. B. capital expenditures have been properly authorized. C. Non-capitalizable expenditures have been properly expensed. D. expenditures for fixed assets have been capitalized.

Q: Which of the following is likely the most effective audit procedure for the verification of the legal ownership of real property? A. Examination of correspondence with the corporate counsel concerning acquisitions. B. Examination of ownership documents registered and on file at a public hall of records. C. Examination of corporate minutes and resolutions concerning the approval to acquire property, plant, and equipment. D. Examination of deeds and title guaranty policies on hand.

Q: Tennessee Company violated company policy by erroneously capitalizing the cost of painting its warehouse. The CPA examining Tennessee's financial statements would most likely learn of this error by A. discussing Tennessee's capitalization policies with its controller. B. reviewing the titles and descriptions for all construction work orders issued during the year. C. observing during the physical inventory observation that the warehouse has been painted. D. examining in detail a sample of construction work orders.

Q: Which of the following situations has the best chance of being detected when a CPA compares revenues and expenses reported for the year being audited (current year) with the prior year and investigates all changes exceeding a fixed percentage? A. An increase in property tax rates has not been recognized in the company's current year accrual. B. The cashier began lapping accounts receivable in the current year. C. Because of worsening economic conditions, the current year provision for uncollectible accounts was inadequate. D. The company changed its capitalization policy for small tools in the current year.

Q: Equipment acquisitions that are misclassified as maintenance expenses most likely would be detected by a control activity that provides for A. segregation of duties of employees in the accounts payable department. B. independent verification of invoices for disbursements recorded as equipment acquisitions. C. investigation of variances within a formal budgeting system. D. authorization by the board of directors of significant equipment acquisitions.

Q: When there are numerous property and equipment transactions during the year, an auditor planning to set control risk at low usually plans to obtain an understanding of internal control and to perform A. tests of controls and extensive tests of property and equipment balances at the end of the year. B. extensive tests of current year property and equipment transactions. C. tests of controls and limited tests of current year property and equipment transactions. D. analytical procedures for property and equipment balances at the end of the year.

Q: Complex accounting issues for property, plant, and equipment include all of the following except A. lease accounting. B. testing goodwill for impairment. C. capitalized interest. D. self-constructed assets.

Q: To improve accountability for fixed asset retirements, management most likely would implement a system of internal control that includes A. continuous analysis of the repairs and maintenance account. B. periodic inquiry of plant executives by internal auditors as to whether any plant assets have been retired. C. continuous utilization of sequentially numbered retirement work orders. D. periodic inspection of insurance policies by the internal auditors.

Q: Which of the following constitutes a control weakness related to factory equipment? A. A policy requiring all purchases of factory equipment to be made by the department in need of the equipment. B. Checks issued in payment of purchases of equipment are not signed by the controller. C. Factory equipment replacements are generally made when estimated useful lives, as indicated in depreciation schedules, have expired. D. Proceeds from sales of fully depreciated equipment are credited to other income.

Q: To achieve effective control over fixed asset additions, a company should establish activities that require A. capitalization of the cost of fixed asset additions in excess of a specific dollar amount. B. performance of recurring fixed asset maintenance work solely by maintenance department employees. C. any fixed asset additions that are not used in the business to be classified as investments. D. authorization and approval of major fixed asset additions.

Q: In verifying the amount of goodwill recorded by an entity, the most convincing evidence that an auditor can obtain is by comparing the recorded value of assets acquired with the A. assessed value as evidenced by tax bills. B. seller's book value as evidenced by financial statements. C. insured value as evidenced by insurance policies. D. appraised value as evidenced by independent appraisals.

Q: Recomputing the unexpired portion of insurance policies in effect tests which of the following assertions for prepaid insurance? A. Existence. B. Classification. C. Rights and obligations. D. Valuation.

Q: The cutoff assertion for prepaid insurance A. is never tested because amounts always are immaterial. B. is best tested as part of the testing of property and equipment purchasing. C. is best tested exclusively by sending confirmations to vendors. D. is best tested by recomputing the unexpired portion of insurance policies in effect.

Q: In testing plant and equipment balances, an auditor examines new additions listed on an analysis of plant and equipment. This procedure most likely obtains evidence concerning management's assertion of A. completeness. B. occurrence. C. classification. D. accuracy.

Q: Testing depreciation calculations for a sample of property, plant, and equipment tests the assertion of A. existence. B. completeness. C. valuation and allocation. D. rights and obligations.

Q: In auditing intangible assets, an auditor most likely would review or recompute amortization and determine whether the amortization period is reasonable in support of management's financial statement assertion of A. valuation and allocation. B. existence. C. completeness. D. rights and obligations.