cpa audit review ch 13 to ch 17 review 3

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cpa audit review ch 13 to ch 17 review 3
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2014-10-26 17:58:38
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cpa audit review ch 13 to ch 17 review 3
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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

    A.Classification and understandability.

    B.Existence or occurrence.

    C.Completeness.

    D.Valuation and allocation.
    A.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. Which of the following actions is an analytical procedure that an auditor most likely would use while auditing a company’s notes payable?

    A.Reviewing the details of the company’s loan and interest expense accounts to determine that all payments were properly recorded.

    B. Multiplying the average outstanding loan balance by the interest rate and comparing the result to interest expense actually recorded.

    C.Sending a confirmation to the lender requesting verification of the loan’s outstanding balance.

    D.Performing calculations to determine if the company is in compliance with debt covenants.
    B. Multiplying the average outstanding loan balance by the interest rate and comparing the result to interest expense actually recorded.

    Prior-period amounts recorded for notes payable should be compared with current amounts. A key procedure to detect unrecorded debt is to recalculate interest expense based on recorded debt and compare it with recorded interest expense. Significant unexpected interest expense recorded in the general ledger suggests the existence of unrecorded debt. The debt-to-equity ratio, which equals total liabilities divided by total equity, also can be calculated and compared with previous periods.
  3. In connection with the audit of bonds payable, an auditor would expect to find in a trust indenture the

    A.Company’s debt-to-equity ratio at the time of issuance.

    B.Yield to maturity of the bonds issued.

    C.Issue date and maturity date of the bond.

    D.Names of the original subscribers to the bond issue.
    C.Issue date and maturity date of the bond.

    A bond trust indenture is the contractual agreement between the bondholders and the bond issuer. It contains the date of issue and the date of maturity of the bond issue. It also contains (1) the amount of the bonds, (2) interest rates, (3) payment dates, (4) descriptions of collateral, (5) provisions for conversion or retirement, (6) trustee duties, (7) sinking-fund requirements, and (8) restrictions on the borrower.
  4. The auditor’s judgment concerning the overall fairness of the presentation of financial position, results of operations, and cash flows is applied within the framework of

    A.Quality control.

    B.Generally accepted accounting principles.

    C.Generally accepted auditing standards, which include the concept of materiality.

    D.The auditor’s assessment of the risk of material misstatement.
    B.Generally accepted accounting principles.

    Reporting standards require the auditor to state whether the audited entity’s financial statements are presented in conformity with GAAP. Without an applicable reporting framework, the auditor would have no uniform standard for judging fairness of presentation.
  5. Which of the following statements is a basic element of the auditor’s report for a nonissuer?

    A.The procedures used depend on the auditor’s judgment.

    B.The financial statements are consistent with those of the prior period.

    C.The auditor evaluated management decisions.

    D.The disclosures provide reasonable assurance that the financial statements are free of material misstatement.
    A.The procedures used depend on the auditor’s judgment.

    The auditor’s responsibility section states, “The procedures selected depend on the auditor’s judgment . . .”
  6. An auditor released an audit report that was dual-dated for a subsequently discovered fact occurring after the date of the auditor’s report but before issuance of the related financial statements. The auditor’s responsibility for events occurring subsequent to the original report date was

    A.Limited to include only events occurring before the date of the last subsequent event referenced.

    B.Limited to the specific event referenced.

    C.Extended to subsequent events occurring through the date of issuance of the related financial statements.

    D.Extended to include all events occurring since the original report date.
    B.Limited to the specific event referenced.

    Subsequent to the original report date, the auditor is responsible only for the specific subsequently discovered fact for which the report was dual-dated. (S)he is responsible for other events only up to the original report date.
  7. The auditor who interviews the plant manager is most likely to rely upon this interview as primary support for an audit conclusion on

    A.Allocation of fixed and variable costs.

    B.The adequacy of the depreciation expense.

    C.Capitalization vs. expensing policy.

    D.The necessity to record a provision for deferred maintenance costs.
    D.The necessity to record a provision for deferred maintenance costs.

    The auditor typically does not use the responses to inquiries as primary support for an audit conclusion. However, the determination by management that a liability exists should convince the auditor that an entry should be made.

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