cpa audit review ch 13 review 1

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Joens1313
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cpa audit review ch 13 review 1
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2014-09-30 00:21:42
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cpa audit review ch 13 review 1
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  1. In connection with an audit of the prepaid insurance account, which of the following procedures is usually not performed by the auditor?

    A.Examine support for premium payments.

    B.Recompute the portion of the premium that expired during the year.

    C.Prepare excerpts of insurance policies for audit documentation.

    D.Confirm premium rates with an independent insurance broker.
    D.Confirm premium rates with an independent insurance broker.

    An audit of prepayments includes determining that amounts shown reflect all prepayments and that they (1) are properly valued according to the applicable reporting framework, (2) apply to future periods, (3) are expected to be realized (to provide future benefits), and (4) are accurately classified. Determining that a prepayment is properly valued involves verifying the amount of the expenditure by examining invoices from insurers, canceled checks, and the insurance policy. But the auditor does not confirm premium rates with an independent insurance broker. Paid checks and other documents are sufficient appropriate evidence of the amounts paid by the client.
  2. An auditor analyzes repairs and maintenance accounts primarily to obtain evidence in support of the relevant assertion that all

    A.Expenditures for property and equipment have not been charged to expense.

    B.Noncapitalizable expenditures for repairs and maintenance have been recorded in the proper period.

    C.Expenditures for property and equipment have been recorded in the proper period.

    D.Noncapitalizable expenditures for repairs and maintenance have been properly charged to expense.
    A.Expenditures for property and equipment have not been charged to expense.

    The auditor should vouch significant debits from the repairs and maintenance expense account to determine whether any should have been capitalized.
  3. In auditing for unrecorded noncurrent bonds payable, an auditor most likely will

    A.Examine documentation of assets purchased with bond proceeds for liens.

    B.Confirm the existence of individual bondholders at year end.

    C.Perform analytical procedures on the bond premium and discount accounts.

    D.Compare interest expense with the bond payable amount for reasonableness.
    D.Compare interest expense with the bond payable amount for reasonableness.

    The recorded interest expense should reconcile with the outstanding bonds payable. If interest expense appears excessive relative to the recorded bonds payable, unrecorded noncurrent liabilities may exist.
  4. An auditor’s analytical procedures indicate a lower than expected return on an equity method investment. This situation most likely could have been caused by

    A.An error in recording amortization of the excess of the investor’s cost over the investment’s underlying carrying amount.

    B.An error in recording the unrealized gain from an increase in the fair value of available-for-sale securities in the income account for trading securities.

    C.A substantial fluctuation in the price of the investee’s common stock on a national stock exchange.

    D.The investee’s decision to reduce cash dividends declared per share of its common stock.
    A.An error in recording amortization of the excess of the investor’s cost over the investment’s underlying carrying amount. 

    The transaction to record the amortization is a recurring entry that, if miscalculated, could result in a lower return than expected.
  5. An auditor usually tests the reasonableness of dividend income from investments in publicly held companies by computing the amounts that should have been received by referring to
    Dividend record books produced by investment advisory services.

    Investment advisory services, such as Dun & Bradstreet, publish dividend amounts and payment dates for publicly traded entities. The auditor can obtain this information to test whether the client has properly recorded investment income.
  6. In connection with the audit of a current issue of bonds payable, the auditor should
    Ascertain that the client has obtained the opinion of counsel on the legality of the issue.

    An audit of noncurrent debt (1) determines that all noncurrent debt has been recorded and constitutes bona fide liabilities; (2) verifies that federal and state laws relevant to financial reporting have been complied with; (3) determines that premium, discount, interest payable, and interest expense are accurately recorded; (4) monitors compliance with debt contracts; and (5) reviews proper presentation and disclosure in the financial statements. The auditor therefore should determine that the client has obtained the opinion of a lawyer on the legality of the bond issue.

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