Chapter 15 – Auditing the Financing/Investing Process: Long-Term Liabilities, Stockholders’ Equity, and Income
Statement Accounts
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
38. Which audit procedure is most closely related to management’s assertion regarding
presentation and disclosure of liabilities?
Chapter 15 – Auditing the Financing/Investing Process: Long-Term Liabilities, Stockholders’ Equity, and Income
Statement Accounts
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
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
Chapter 15 – Auditing the Financing/Investing Process: Long-Term Liabilities, Stockholders’ Equity, and Income
Statement Accounts
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
42. Two months before year-end, the bookkeeper erroneously recorded the receipt of a
long-term bank loan by a debit to cash and a credit to sales. Which of the following is the most
effective procedure for detecting this type of error?
Chapter 15 – Auditing the Financing/Investing Process: Long-Term Liabilities, Stockholders’ Equity, and Income
Statement Accounts
43. Where no independent stock transfer agents are employed and the corporation issues its
own stocks and maintains stock records, canceled stock certificates should
44. In performing tests concerning the granting of stock options, an auditor should
45. Examining cancelled stock certificates addresses the assertion of
Chapter 15 – Auditing the Financing/Investing Process: Long-Term Liabilities, Stockholders’ Equity, and Income
Statement Accounts
46. An audit of stockholders’ equity ordinarily should include
47. Which audit procedure is most closely related to management’s assertions about the
presentation and disclosure of stockholders’ equity?
Chapter 15 – Auditing the Financing/Investing Process: Long-Term Liabilities, Stockholders’ Equity, and Income
Statement Accounts
48. An audit program for the examination of the retained earnings account should include a step
that requires verification of the
49. Which of the following transactions is an auditor most likely to examine when auditing the
retained earnings account?
Chapter 15 – Auditing the Financing/Investing Process: Long-Term Liabilities, Stockholders’ Equity, and Income
Statement Accounts
50. Before expressing an opinion concerning the results of operations, the auditor would most
likely proceed with the examination of the income statement by
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
Chapter 15 – Auditing the Financing/Investing Process: Long-Term Liabilities, Stockholders’ Equity, and Income
Statement Accounts
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?
53. Overall analysis of income statement accounts may bring to light errors, omissions, and
inconsistencies not disclosed in the overall analysis of balance sheet accounts. The income
statement analysis can best be accomplished by comparing monthly
Chapter 15 – Auditing the Financing/Investing Process: Long-Term Liabilities, Stockholders’ Equity, and Income
Statement Accounts
54. Of the following, which is the most important procedure that an auditor should use when
making an overall review of the income statement?
55. You have been assigned the duty of auditing long-term debt and retained earnings for your
client, Keys, Inc. Describe the tests you would use to support management’s assertions
regarding disclosure for these accounts.
Chapter 15 – Auditing the Financing/Investing Process: Long-Term Liabilities, Stockholders’ Equity, and Income
Statement Accounts
56. Erik Rekdahl, senior-in-charge, is auditing Koonce Katfood, Inc.’s, long-term debt for the
year ended December 31. Long-term debt is composed of two bond issues, which are due in 10
and 15 years, respectively. The debt is held by two insurance companies. Rekdahl has examined
the bond agreements for each issue. The agreements provide that if Koonce fails to comply with
the covenants of the contract, the debt becomes payable immediately. Rekdahl identified the
following covenants when reviewing the bond agreements:
“The debtor company shall endeavor to maintain a working capital ratio of 2 to 1 at all times,
and in any fiscal year following a failure to maintain said ratio, the company shall restrict
compensation of officers to a total of $650,000. Officers include the chairperson of the board
and the president.”
“The debtor company shall keep all property that is security for these debt agreements insured
against loss by fire to the extent of 100 percent of its actual value. Policies of insurance
comprising this protection shall be filed with the trustee.”
“The company is required to restrict 40 percent of retained earnings from availability for paying
dividends.”
“A sinking fund shall be established with the First Morgan Bank of Austin, and semiannual
payments of $500,000 shall be deposited in the fund. The bank may, at its discretion, purchase
bonds from either issue.”
Chapter 15 – Auditing the Financing/Investing Process: Long-Term Liabilities, Stockholders’ Equity, and Income
Statement Accounts
57. For each of the following substantive procedures, first note whether it is a test of details of
transactions or a test of details of account balances. Then decide for which assertion the test
provides the best evidence.
1. Trace large cash receipts and payments to the source documents and the general ledger.
2. Examine copies of note and bond agreements.
3. Recompute accrued interest payable.
4. Review debt activity for a few days before and after year-end to determine whether
transactions are included in the proper period.
5. Examine due dates on notes and bonds for proper classification between current and long
term debt.
Chapter 15 – Auditing the Financing/Investing Process: Long-Term Liabilities, Stockholders’ Equity, and Income
Statement Accounts
58. Identify the three major types of transactions that occur in stockholders’ equity.
59. Identify the four major assertions made regarding stockholders’ equity and describe one
control activity for each.
Chapter 15 – Auditing the Financing/Investing Process: Long-Term Liabilities, Stockholders’ Equity, and Income
Statement Accounts
60. Give an example of how the audit of income statement accounts could be affected by results
of audit work done in other areas of the audit.
61. What kind of information would typically be found on an income statement account
analysis working paper? What kind of tests can an auditor perform using this information? Why
would an auditor conduct additional analysis on an income statement account?
Chapter 15 – Auditing the Financing/Investing Process: Long-Term Liabilities, Stockholders’ Equity, and Income
Statement Accounts
62. Match each of the following controls with the assertion for long-term debt that it supports.
1. Premiums and discounts on bond and notes payables
are properly amortized using the effective interest rate
2. A subsidiary ledger is maintained that contains
information about all the long-term debt and the amount
Occurrence and
3. Any significant debt commitments are approved by the
Disclosure –
4. The portion of long-term debt due in the next year is
63. Match the balance sheet account with the income statement account that is typically audited
at the same time.