Chapter 15 – Auditing the Financing/Investing Process: Long-Term Liabilities, Stockholders’ Equity, and Income
Statement Accounts
1. Notes receivable is a common type of long-term financing.
2. Long-term borrowing should be properly authorized.
3. 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.
Chapter 15 – Auditing the Financing/Investing Process: Long-Term Liabilities, Stockholders’ Equity, and Income
Statement Accounts
4. For most companies, stockholders’ equity includes the following three accounts: preferred
stock, paid-in capital, and retained earnings.
5. Three types of transactions usually occur in stockholders’ equity: issuance of stock,
repurchase of stock, and payment of dividends.
6. The repurchase of stock includes the reacquisition of stock (treasury stock), but not the
retirement of stock.
Chapter 15 – Auditing the Financing/Investing Process: Long-Term Liabilities, Stockholders’ Equity, and Income
Statement Accounts
7. The registrar is responsible for preparing stock certificates and maintaining adequate
stockholders’ records.
8. The dividend-disbursing agent prepares and mails dividends checks to the stockholders as of
the date of declaration.
9. Substantive analytical procedures can be used extensively to test revenue and expense
accounts.
Chapter 15 – Auditing the Financing/Investing Process: Long-Term Liabilities, Stockholders’ Equity, and Income
Statement Accounts
10. Income statement accounts must be accounted for in accordance with GAAP.
11. When auditing capital stock accounts, the cutoff assertion is the most important to
consider.
12. The occurrence assertion is being tested when the auditor vouches stock repurchases to the
canceled stock certificates.
Chapter 15 – Auditing the Financing/Investing Process: Long-Term Liabilities, Stockholders’ Equity, and Income
Statement Accounts
13. There are typically only a couple of disclosure items that need to be considered for
stockholders’ equity.
14. Generally, all dividends that are declared and paid will be audited.
15. The auditor typically begins an audit of retained earnings by obtaining a schedule of
account activity for the period.
Chapter 15 – Auditing the Financing/Investing Process: Long-Term Liabilities, Stockholders’ Equity, and Income
Statement Accounts
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?
17. The auditor can best verify a client’s bond sinking fund transactions and year-end balance
by
Chapter 15 – Auditing the Financing/Investing Process: Long-Term Liabilities, Stockholders’ Equity, and Income
Statement Accounts
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
Chapter 15 – Auditing the Financing/Investing Process: Long-Term Liabilities, Stockholders’ Equity, and Income
Statement Accounts
20. The auditor’s program for the examination of long-term debt should include steps that
require the
21. Valuation and allocation is most likely an issue for long-term debt if
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
Chapter 15 – Auditing the Financing/Investing Process: Long-Term Liabilities, Stockholders’ Equity, and Income
Statement Accounts
23. All corporate capital stock transactions should ultimately be traced to the
24. A substantive strategy is typically used to audit stockholders’ equity because
Chapter 15 – Auditing the Financing/Investing Process: Long-Term Liabilities, Stockholders’ Equity, and Income
Statement Accounts
25. An auditor usually obtains evidence of stockholders’ equity transactions by reviewing the
entity’s
26. The auditor is concerned with establishing that dividends are paid to stockholders of the
client corporation owning stock as of the
Chapter 15 – Auditing the Financing/Investing Process: Long-Term Liabilities, Stockholders’ Equity, and Income
Statement Accounts
27. The auditor gathers evidence about dividends that are declared and paid primarily because
of
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?
Chapter 15 – Auditing the Financing/Investing Process: Long-Term Liabilities, Stockholders’ Equity, and Income
Statement Accounts
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
30. In connection with the examination of bonds payable, an auditor would expect to find in a
bond agreement
Chapter 15 – Auditing the Financing/Investing Process: Long-Term Liabilities, Stockholders’ Equity, and Income
Statement Accounts
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?
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
Chapter 15 – Auditing the Financing/Investing Process: Long-Term Liabilities, Stockholders’ Equity, and Income
Statement Accounts
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
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
Chapter 15 – Auditing the Financing/Investing Process: Long-Term Liabilities, Stockholders’ Equity, and Income
Statement Accounts
35. During an examination of a public company, the auditor should obtain written confirmation
regarding bond transactions from the
36. In auditing long-term bonds payable, an auditor most likely would