Question 1

When no independent stock transfer agent is employed and the corporation issues its own stocks and maintains stock records,canceled stock certificates should:

Accepted Answer

When no independent stock transfer agent is employed and the corporation issues its own stocks and maintains stock records, canceled stock certificates should be defaced to prevent reissuance and attached to their corresponding stubs. This maintains an accurate record of the stocks issued and canceled, and prevents fraudulent reissuance of the defaced certificates.

Question 2

In which of the following accounts would one expect a related party transaction to be easiest to detect?

Accepted Answer

Notes payable often involve formal agreements or contracts that specify the terms, interest rates, and parties involved, making it easier to identify transactions with related parties compared to accounts like cash, accounts receivable, or accounts payable, which may not always have such detailed documentation.

Question 3

An auditor who is auditing for acquired treasury stock will normally expect to see an entry in which journal?

Accepted Answer

The answer of An auditor who is auditing for acquired...

Question 4

A primary responsibility of a registrar of capital stock is to:

Accepted Answer

The answer of A primary responsibility of a registrar of...

Question 5

An audit program for the examination of the retained earnings account should include a step that requires verification of the:

Accepted Answer

Verification of authorization for both cash and stock dividends is an important step to ensure that the distribution of earnings is properly authorized and recorded accurately. This step ensures compliance with legal and regulatory requirements for dividend payments. Verification of market value used to charge retained earnings for a stock split, approval of adjustments to beginning balance, and gain or loss resulting from disposition of treasury shares are also important audit steps but are not directly related to the examination of the retained earnings account.

Question 6

For audit purposes,a corporation's articles of incorporation are normally:

Accepted Answer

The articles of incorporation are an important legal document that establishes the corporation and its structure. They should be kept in the permanent file for future reference and are relevant for audit purposes in verifying the corporation's legal existence and authority to conduct business. They are not typically placed on the equity lead schedule or confirmed with the transfer agent. They may also be relevant in assessing the internal control structure if they contain information related to the board of directors or management structure.

Question 7

For a large publicly traded client the auditors' examination of capital stock accounts will not normally include:

Accepted Answer

The answer of For a large publicly traded client the...

Question 8

The auditors' program for the examination of long-term debt should include steps that require the:

Accepted Answer

The examination of long-term debt should involve a review of any bond trust indenture, which is a legal agreement between bondholders and the issuer of the bonds. This agreement sets out the terms of the bond issue, such as interest rates, repayment terms, and any collateral or security provided. This step will help the auditors to ensure that the company is meeting its obligations to the bondholders and that all the terms of the bond agreement are being followed. The verification of the existence of bondholders (A) and investigation of credits to bond interest income accounts (D) are also important steps, but they are not as critical as the examination of the bond trust indenture. The inspection of the accounts payable subsidiary ledger (C) is not directly relevant to the examination of long-term debt.

Question 9

During its fiscal year,a company issued,at a discount,a substantial amount of first-mortgage bonds.When performing audit work in connection with the bond issue,the independent auditor should:

Accepted Answer

Reviewing the minutes for authorization is crucial to ensure that the bond issuance was approved by the company's board of directors or relevant authority, which is a standard audit procedure to verify the legality and compliance of the transaction.

Question 10

Auditors often request that the audit client send a letter of inquiry to those attorneys who have been consulted with respect to litigation,claims,or assessments.The primary reason for this request is to provide the auditor with:

Accepted Answer

The primary reason auditors request a letter of inquiry to attorneys is to obtain corroborative audit evidence regarding litigation, claims, or assessments, which helps in assessing the financial statement impact.

Question 11

Which of the following is an auditor most likely to confirm from the transfer agent and registrar?

Accepted Answer

The transfer agent and registrar maintain records regarding the total number of shares of stock issued by the company. This information is important for an auditor in verifying the accuracy of the company's financial statements. Restrictions on the payment of dividends, gains from sale of treasury stock, and total market value of outstanding shares of stock are not typically confirmed through the transfer agent and registrar.

Question 12

The auditor can best verify a client's bond sinking fund transactions and year-end balance by

Accepted Answer

The bond sinking fund transactions and year-end balance are typically handled by an independent trustee, who is responsible for managing the fund's assets and making payments to bondholders as bonds mature or are called. Therefore, the auditor can best verify these transactions and balances by confirming them with the bond trustee, who should be able to provide documentation and other evidence to support the accuracy and completeness of the information provided. Confirmation with individual bondholders (A) may not provide enough coverage, recomputation of related accounts (C) does not specifically verify the existence of the sinking fund or confirm the trustee's activities, and examining bonds retired during the year (D) may only cover a portion of the transactions and may not provide sufficient evidence of the overall accuracy of the sinking fund activities.

Question 13

Which of the following is not a primary objective in the audit of interest-bearing debt?

Accepted Answer

While the legality of outstanding debt is important, it is not a primary objective in the audit of interest-bearing debt. The primary objectives are to establish the completeness of recorded debt, determine that debt is properly valued, and ensure that the presentation and disclosure of debt is appropriate.

Question 14

Which of the following statements is correct relating to common stock certificates of a publicly traded company that uses the services of a transfer agent?

Accepted Answer

Stock certificates often are not issued in today's electronic environment, as ownership records are maintained electronically by the company or its transfer agent, eliminating the need for physical certificates.

Question 15

Changes in capital stock accounts should normally be approved by:

Accepted Answer

The answer of Changes in capital stock accounts should normally...

Question 16

For a corporation that does not utilize the services of an independent registrar and stock transfer agent,which of the following represents a weakness in internal control over stock issuance?

Accepted Answer

If stock certificates are signed immediately upon receipt from the printer, there is a risk that unauthorized stock can be issued without proper documentation or authorization. This represents a weakness in internal control over stock issuance, as it increases the risk of fraud or errors in recording stock transactions. Options A, C, and D are good practices that enhance internal control over stock issuance.

Question 17

The primary reason for preparing a reconciliation between interest-bearing obligations outstanding during the year and interest expense presented in the financial statements is to:

Accepted Answer

The primary purpose of preparing a reconciliation between interest-bearing obligations outstanding during the year and the interest expense presented in the financial statements is to detect any unrecorded liabilities. This ensures that all loans, creditors, and other sources of interest expense are properly reflected in the financial statements. It helps to identify any omission or error in recording the interest expense and ensures that the financial statements provide a true and fair view of the company's financial position.

Question 18

During an audit of a publicly-held company,the auditors should obtain written confirmation regarding debenture transactions from the:

Accepted Answer

The trustee is the party responsible for managing debenture transactions, including issuance, repurchase, and redemption. As such, the auditors should obtain written confirmation from the trustee to ensure the accuracy and completeness of debenture transactions. Debenture holders may not have comprehensive information on all debenture transactions, the client's attorney may not have direct involvement in the debenture transactions, and internal auditors may not have the authority to provide confirmation for external auditors.

Question 19

To establish effective internal control over a corporation's stock transactions,the corporation should utilize the services of an independent registrar and transfer agent.
a.Describe the functions performed by the stock registrar.
b.Describe the functions performed by the transfer agent.
c.Describe the information that is typically requested by the auditors in a confirmation sent to the registrar.

Accepted Answer

The answer of To establish effective internal control over a...

Question 20

In the audit of interest-bearing debt auditors identify audit objectives and then determine appropriate audit procedures.
a.List the audit objectives for substantive tests of interest-bearing debt.
b.List seven substantive tests for interest-bearing debt to help the auditors meet the audit objectives.

Accepted Answer

The answer of In the audit of interest-bearing debt auditors...

Quiz 15: Debt and Equity Capital