16. 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.
18. A control which ensures that long-term borrowing is properly initiated by appropriate individuals addresses the control assertion of
19. 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.
20. 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.
21. 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.
22. 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
C. Rights and obligations.
D. Valuation and allocation.
23. 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.
25. 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.
26. The auditor is concerned with establishing that dividends are paid to stockholders of the client corporation owning stock as of the
A. Issue date.
B. Declaration date.
C. Record date.
D. Payment date.
27. 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.
28. 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.
29. 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 client'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 client changed its capitalization policy for small tools in the current year.
31. 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.
32. 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."
33. 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.
34. 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 client's accounting records. This observation would most likely lead the auditor to suspect that
A. The client failed to record all debt.
B. Discount on Bonds is misstated.
C. Interest income is overstated.
D. The client failed to record all interest expense.
36. 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.
37. During an audit, Wicks learns that the audit client 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.
38. 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.
39. 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 client failed to record debt.
B. Debt was recorded as equity.
C. The client used the face interest rate to calculate interest expense on a bond issued at a discount.
D. The client used the face interest rate to calculate interest expense on a bond issued at a premium.
40. 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
41. During the course of an audit, a CPA observes that the recorded interest expense seems to be excessive in relation to the balance in the long-term debt account. 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.
43. Where 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.
44. In performing tests concerning the granting of stock options, an auditor should
A. Confirm the transaction with the Secretary of State in the state of incorporation.
B. Verify the existence of option holders in the entity's payroll records or stock ledgers.
C. Determine that sufficient treasury stock is available to cover any new stock issued.
D. Trace the authorization for the transaction to a vote of the board of directors.
45. Examining cancelled stock certificates addresses the assertion of
46. An audit of stockholders' equity ordinarily should include
A. Tracing individual dividend payments to the capital stock records.
B. Reviewing minutes of board meetings to determine the number of shares outstanding.
C. Confirming shares outstanding with state officials.
D. Determining that dividend declarations comply with debt agreements.
47. Which audit procedure is most closely related to management's assertions about the presentation and disclosure of stockholders' equity?
A. Determining whether restrictions have been imposed on retained earnings.
B. Counting treasury stock certificates.
C. Inspecting minutes of the board of directors to verify that cash dividends were declared.
D. Establishing that treasury stock is valued at cost.
48. An audit program for the examination of the retained earnings account should include a step that requires verification of the
A. Gain or loss resulting from disposition of treasury shares.
B. Market value used to charge retained earnings to account for a two-for-one stock split.
C. Authorization for both cash and stock dividends.
D. Approval of the adjustment to the beginning balance as a result of a write-down of an account receivable.
49. Which of the following transactions is an auditor most likely to examine when auditing the retained earnings account?
A. Changing from one method of depreciation to another.
B. Adjusting the percentage used to estimate the allowance for doubtful accounts.
C. Changing from the FIFO to LIFO method of inventory valuation.
D. Correcting an error in depreciation in a prior year.
A. Applying a rigid measurement standard designed to test for understatement of net income.
B. Analyzing the beginning and ending balance sheet inventory amounts.
C. Making net income comparisons to published industry trends and ratios.
D. Examining income statement accounts concurrently with the related balance sheet accounts.
51. Many of Granada Corporation's convertible bond holders have converted their bonds into stock during the year under examination. The independent auditor should review Granada Corporation's statement of cash flows to ascertain that it shows
A. Only cash used to reduce convertible debt.
B. Only cash provided by issuance of stock.
C. Cash provided by the issuance of stock and used to reduce convertible debt.
D. Nothing relating to the conversion because it does not affect cash.
52. Which of the following is the most important consideration of an auditor when examining the stockholders' equity section of a client's balance sheet?
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 under audit were approved by the stockholders.
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.
54. Of the following, which is the most important procedure that an auditor should use when making an overall review of the income statement?
A. Select sales and expense items and trace amounts to related supporting documents.
B. Compare actual revenues and expenses with the corresponding figures of the previous year and investigate significant differences.
C. Obtain, from the proper client representative, inventory certificates for the beginning and ending inventory amounts that were used to determine cost of sales.
D. Ascertain that the net income amount in the statement of cash flows agrees with the net income amount in the income statement.