Question 1

When a company maintains its own records of stock transactions and capital stock outstanding, its internal controls must be adequate to accomplish three objectives. List them below.

Accepted Answer

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Question 2

One of the balance-related audit objectives of notes payable balances includes Are notes payable correctly classified on the balance sheet?
 (presentation). List two common tests of details for notes payable which should be considered in meeting this audit objective.

Accepted Answer

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Question 3

When conducting the audit of stockholders' equity, it is normal practice to verify all capital stock transactions

Accepted Answer

The audit of stockholders' equity requires verification of all capital stock transactions regardless of the controls in existence because they are material and permanent in the records. Even small discrepancies in capital stock transactions can significantly impact a company's financial statements. Therefore, auditors should thoroughly examine and verify all capital stock transactions.

Question 4

Which of the following audit objectives is least important in the audit of capital stock and paid-in-capital in excess of par?

Accepted Answer

The audit objective of "Rights and Obligations" is typically considered least important in the audit of capital stock and paid-in-capital in excess of par. This is because rights and obligations are usually well-defined and documented in legal agreements, and verifying them is not a complex process compared to other audit objectives such as completeness, accuracy, and presentation/disclosure.

Question 5

In auditing debits and credits to retained earnings, other than net income and dividends, the auditors first concern is

Accepted Answer

Transactions other than net income and dividends that affect retained earnings should be scrutinized to ensure they are appropriate for inclusion in retained earnings, as this impacts the accuracy of the financial statements.

Question 6

What are two important internal control procedures that companies should implement to prevent misstatements in owners' equity when a company maintains its own records of stock transactions and outstanding stock?

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Question 7

Discuss the internal controls related to owners' equity that are of concern to the auditor.

Accepted Answer

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Question 8

Auditing capital stock transactions as part of a merger is challenging because judgment is often involved.

Accepted Answer

Auditing capital stock transactions as part of a merger can be complex because the valuation and accuracy of the stocks require professional judgment. Evaluating the validity of the transaction may require subjective analysis at times. Therefore, the statement is true.

Question 9

When verifying if capital stock is accurately recorded,

Accepted Answer

A confirmation from the transfer agent is the simplest and most reliable way to verify the number of shares outstanding at the balance sheet date. This confirms the number of shares issued and outstanding, which is important in determining the accuracy of the capital stock balance. The other options, such as examining the corporate minutes or multiplying the number of shares by the market price, may provide additional information but are not as reliable as a confirmation from the transfer agent. Additionally, the ending balance in the account should be verified to ensure accuracy.

Question 10

Which of the following statements is correct regarding the audit of dividends?

Accepted Answer

When a client uses a transfer agent to disburse dividends, auditors can trace the total to a cash disbursement entry to the agent and confirm it, ensuring accuracy and proper authorization.

Question 11

Which of the following is an important source of information for determining whether the presentation and disclosure-related objectives for capital stock activities are satisfied?

Accepted Answer

All of the options listed are important sources of information for determining whether the presentation and disclosure-related objectives for capital stock activities are satisfied. The corporate charter establishes the legal framework for the issuance of capital stock, the board of directors' minutes provide insight into the decision-making process surrounding capital stock issuances, and the auditor's analysis of capital stock transactions serves as an independent review. Therefore, all of these sources should be considered when evaluating whether the presentation and disclosure requirements for capital stock activities have been met.

Question 12

Any restrictions on the payment of dividends must be disclosed in the footnotes to the financial statements.

Accepted Answer

Any restrictions on payment of dividends (such as legal or contractual restrictions) must be disclosed in the footnotes to the financial statements, as per the accounting standards.

Question 13

Name some of the auditing procedures the auditor should consider in auditing hybrid financial instruments.

Accepted Answer

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Question 14

What type of audit test will auditors use when testing to see if the amounts of capital stock transactions are accurately recorded?

Accepted Answer

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Question 15

The primary concern in determining whether retained earnings is correctly disclosed on the balance sheet is

Accepted Answer

The primary concern in determining whether retained earnings is correctly disclosed on the balance sheet is whether there are any restrictions on the payment of dividends. Retained earnings represent the portion of a company's profit that is not distributed to shareholders as dividends, but is instead kept by the company for various purposes, such as reinvestment in the business, debt reduction or future dividend payments. If there are any limitations on the payment of dividends, such as legal restrictions or contractual obligations, then the retained earnings balance may need to be adjusted to reflect these restrictions. This is important for investors and creditors to know, as it affects the company's ability to generate returns or fulfill financial obligations.

Question 16

One of the balance-related audit objectives of notes payable balances includes Are notes payable properly aggregated and presented, and are disclosures adequate and understandable?
 (presentation). List two common tests of details for notes payable which should be considered in meeting this audit objective.

Accepted Answer

The answer of One of the balance-related audit objectives of...

Question 17

A prior period adjustment may result in a debit or credit to a company's retained earnings account.

Accepted Answer

A prior period adjustment is a correction made to the financial statements of a prior year. It can result in a debit or credit to a company's retained earnings account, depending on the nature of the adjustment. If the adjustment increases the net income of the prior period, it will result in a credit to retained earnings. If the adjustment decreases the net income of the prior period, it will result in a debit to retained earnings.

Question 18

What is the difference between an independent registrar and a stock transfer agent?

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Question 19

If a company employs a capital stock registrar and/or transfer agent, the registrar or agent, or both, should be requested to confirm directly to the auditor the number of shares of each class of stock

Accepted Answer

The registrar or transfer agent is responsible for maintaining a record of the number of shares issued and outstanding at the balance sheet date. This information is used by the auditor to verify the accuracy of the stockholders' equity section of the balance sheet. The other options may be useful information for the auditor to know, but they do not directly relate to the confirmation of the stockholders' equity section.

Question 20

Unpaid dividends to shareholders should be tested by the auditor to ensure they are recorded as current assets on the balance sheet.

Accepted Answer

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Quiz 22: Audit of the Capital Acquisition and Repayment Cycle