cpa audit review ch13 review 2

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  1. During an audit of a company’s equity accounts, the auditor determines whether restrictions have been imposed on retained earnings resulting from loans, agreements, or state law. This audit procedure most likely is intended to verify relevant assertion about
    Classification and understandability.

    The presentation and disclosure assertions include assertions about classification and understandability. Financial information should be properly presented and disclosed, and disclosures should be clear (AU-C 315 and AS No. 15). Hence, when restrictions have been placed on retained earnings, the auditor should determine that they are properly disclosed in the notes to the financial statements.
  2. The auditor can best verify a client’s bond sinking-fund transactions and year-end balance by
    Confirmation with the bond trustee.

    The bond trustee is an outside, independent agent responsible for maintaining subsidiary ledgers and paying dividends. (S)he also often keeps the sinking-fund accounts. Consequently, the auditor should verify bond sinking-fund transactions with this trustee.
  3. To test the valuation assertion when auditing an investment accounted for by the equity method, an auditor most likely would
    Examine the audited financial statements of the investee company.

    The equity method recognizes undistributed income arising from an investment in an investee. Under the equity method, investor income is recorded as the investee reports income. Consequently, the audited financial statements of the investee provide the auditor with the undistributed income from the investee.
  4. An audit of owners’ equity normally would not include

    A.Determining that dividend declarations have been in compliance with debt agreements.

    B.Detail checking from the dividend payment list to the capital stock records.

    C.Tracing the authorization of the dividend from the directors’ minutes.

    D.Determining that the declared dividend amount was closed into retained earnings.
    B.Detail checking from the dividend payment list to the capital stock records.

    An auditor normally does not perform detail checking from the dividend payment list to the capital stock records. (S)he may test certain large dividend payments but, because the amount of each dividend is usually small, detail checking is minimal. The need for extensive checking is reduced when the entity uses an independent financial institution as its agent for dividend payments. The stock transfer agent often performs this function because it maintains detailed records of shareholders. The arrangement substantially decreases the risks of material misstatement.
  5. An analysis of which of the following accounts would best aid in verifying that all fixed assets have been capitalized?

    A.Property tax expense.


    C.Repairs and maintenance.

    D.Depreciation expense.
    C.Repairs and maintenance.

    To determine whether all transactions affecting fixed assets for the period are correctly reflected in the balance of the account, the auditor should (1) perform analytical procedures, (2) reconcile subsidiary and general ledgers, and (3) analyze repairs and maintenance. The auditor should vouch significant debits from the repairs and maintenance expense account to determine whether any should have been capitalized.
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cpa audit review ch13 review 2
2014-09-30 04:25:35
cpa audit review ch13

cpa audit review ch13 review 2
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