Exam 14 February 2020 Questions and Answers
Exam 14 February 2020 Questions and Answers
CHAPTER 15
MULTIPLE CHOICE
d 1. A company holds bearer bonds as a short-term investment. Responsibility for custody of these
bonds and submission of coupons for periodic interest collections probably should be delegated to
the
a. Chief accountant.
b.Internal auditor.
c. Cashier.
d.Treasurer. (AICPA ADAPTED)
b 2. Of the following, which is the most efficient audit procedure for testing accrued interest earned
on bond investments?
a. Tracing interest declarations to an independent record book.
b. Recomputing interest earned.
c. Confirming interest rate with the issuer of the bonds.
d. Vouching the receipt and deposit of interest checks. (AICPA ADAPTED)
d 3. During the audit of a publicly held company, the auditor could obtain written confirmation
regarding long-term bond transactions from the
a. Bond holders.
b. Client's attorney.
c. Internal auditors.
d. Trustee. (AICPA ADAPTED)
d 5. Jones was engaged to audit the financial statements of Gamma Corporation, a June 30 year-end
client. Having completed testing of the investment securities, which of the following is the best
method of verifying the accuracy of recorded dividend income?
a. Tracing recorded dividend income to cash receipts records and validated deposit slips.
b. Utilizing analytical review techniques and statistical sampling.
c. Comparing recorded dividends with amounts appearing on Federal Information Form 1099.
d. Comparing recorded dividends with a standard financial reporting service's record of dividends.
(AICPA ADAPTED)
a 6. A company has temporarily excess funds to invest. The board of directors decided to purchase
marketable securities and assigned the future purchase and sale decisions to a responsible
financial executive. The best person(s) to make periodic reviews of the investment activity would
be
a. The investment committee of the board of directors.
b. The treasurer.
c. The corporate controller.
d. The chief operating officer of the company. (AICPA ADAPTED)
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a 7. Which of the following is a responsibility that should not be assigned to only one employee?
a. Access to securities in the company's safe deposit box.
b. Custodianship of the cash working fund.
c. Reconciliation of bank statements.
d. Custodianship of tools and small equipment. (AICPA ADAPTED)
a 8. When no independent stock transfer agents are employed and the corporation issues its own
stocks and maintains stock records, canceled stock certificates should
a. Be defaced to prevent reissuance and attached to their corresponding stubs.
b. Not be defaced but segregated from other stock certificates and retained in a canceled certificates
file.
c. Be destroyed to prevent fraudulent reissuance.
d. Be defaced and sent to the secretary of state. (AICPA ADAPTED)
a 9. Which of the following is not one of the auditor's concerns in an examination of marketable
securities?
a. To determine whether securities are authentic.
b. To determine whether securities are the property of the client.
c. To determine whether securities actually exist.
d. To determine whether securities are properly classified on the balance sheet.
(AICPA ADAPTED)
c 10. When negotiable securities are of considerable volume, planning by the auditor is necessary to
guard against
a. Unauthorized negotiation of the securities before they are counted.
b. Unrecorded sales of securities after they are counted.
c. Substitution of securities already counted for other securities which should be on hand but are not.
d.Substitution of authentic securities with counterfeit securities. (AICPA ADAPTED)
b 11. During its fiscal year, a company issued, at a discount, a substantial amount of first-mortgage
bonds. When performing audit work, the independent auditor
a. Confirms the existence of the bondholders.
b. Reviews the minutes for authorization.
c. Traces the net cash received from the issuance to the bonds payable account.
d.Inspects the records maintained by the bond trustee. (AICPA ADAPTED)
d 12. In the audit of a medium-sized manufacturing concern, which of the following areas would be
expected to require the least amount of audit time?
a. Revenue.
b. Assets.
c. Liabilities.
d.Owner's equity. (AICPA ADAPTED)
a 13. 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. (AICPA ADAPTED)
c 14. If a company employs a capital stock registrar and/or a transfer agent, the registrar or agent
should be requested to confirm directly to the auditor the number of shares of each class of stock
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b 15. The auditor's program for testing long-term debt should include steps that require
a. Verifying the existence of the bondholders.
b. Examining any bond trust indenture.
c. Inspecting the accounts payable subsidiary ledger.
d. Investigating credits to bond interest income. (AICPA ADAPTED)
b 16. During the year under audit, a company has completed a private placement of a substantial
amount of bonds. Which of the following steps is the most important in the auditor's tests of
existence?
a. Confirm the amount issued with the bond trustee.
b. Trace cash received from the issue to the accounting records.
c. Examine bond records maintained by the transfer agent.
d. Recompute annual interest cost and the effective yield. (AICPA ADAPTED)
a 17. During the course of an audit, an auditor observes that the recorded interest expense seems
excessive in relation to the balance in long-term debt. This observation could lead the auditor to
suspect that
a. Long-term debt is understated.
b. Discount on bonds payable is overstated.
c. Long-term debt is overstated.
d. Premium on bonds payable is understated. (AICPA ADAPTED)
d 18. Which of the following information is most important when auditing shareholders’ equity?
a. Changes in the capital stock account are verified by an independent stock transfer agent.
b. Stock dividends and/or stock splits during the year were approved by the shareholders.
c. Stock dividends are capitalized at par or stated value on the dividend declaration date.
d. Entries in the capital stock account can be traced to a resolution in the minutes of the board of
directors' meetings. (AICPA ADAPTED)
SHORT ANSWER
1. Describe the three ways that the existence or occurrence of long-term debt can be tested.
Answer:
Existence and occurrence can be tested by:
Confirming with creditors all recorded loans and other notes payable, including
terms, due dates, and accrued interest.
To support the results of confirmation procedures, the auditor physically examines all
bond indentures and other long-term indebtedness agreements, thereby determining
whether all outstanding debt was confirmed.
The auditor physically inspects unissued instruments, thereby testing whether all
issued securities are recorded as long-term debt.
2. Explain how an auditor would test existence or occurrence for capital stock.
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Answer:
The auditor would foot and crossfoot the client's schedule of changes in shareholders' equity
balances, account for unissued or retired shares, and if detailed records and stock certificates are
maintained externally, confirm shares outstanding with registrars and transfer agents. The auditor
would also examine supporting documentation and authorizations for any stock issuance, stock
dividends and stock splits occurring during the year. If securities transactions are executed by
independent registrars or transfer agents, the auditor would also confirm capital stock transactions
and balances directly with the registrar or agent.
3. Describe how an auditor would test for rights to investment securities and long-term debt
obligations.
Answer:
Rights to investments are tested by confirming securities held by external trustees/brokers and/or
by physically inspecting securities on hand, depending on whether the securities are maintained
internally or externally. Long-term debt obligations are tested by confirming loans and other notes
with creditors, by examining bond indentures and other indebtedness agreements, and by
confirming bond and serial note balances and interest payments with trustees.
4. Explain the process involved to test for the assertion of valuation of marketable securities.
Answer:
An auditor tests valuation by examining documentation supporting transactions recorded and by
recalculating dividend and interest income. Examining supporting documentation substantiates
historical cost only so an auditor needs to also examine market quotations to assure that
marketable equity securities are reported at the lower of aggregated cost or market, and that
marketable debt securities are reported at the lower of cost or cost less permanent declines in
market value.
5. Describe the process the auditor would use to confirm bonds and interest payments.
Answer:
Bonds and interest payments should be confirmed directly with trustees, determining whether the
debt exists, is valued properly, and represents a bona fide obligation.
PROBLEMS
1. Complete the table below as it pertains to the audit procedures of investment balances and
management’s financial statement assertions.
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Valuation
Valuation
Valuation
Presentation and Disclosure
Answer:
2. Complete the table below as it pertains to the audit procedures of capital stock balances and
management’s financial statement assertions.
Answer:
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