Source: Auditing: A Risk Analysis Approach 5 Edition by Larry F. Konrath

TEST BANKS – FINANCING AND INVESTING CYCLE
Source: Auditing: A Risk Analysis Approach 5th Edition by Larry F. Konrath
MULTIPLE CHOICE:[42 items]
1. Which of the following expressions is least likely to be

included in a client's representation letter?
a. No events have occurred subsequent to the balance sheet
date that require adjustment to, or disclosure in, the
financial statements.
b. The company has complied with all aspects of
contractual agreements that would have a material
effect on the financial statements in the event of
noncompliance.
c. Management acknowledges responsibility for illegal
actions committed by employees.
d. Management has made available all financial statements
and related data.
ANSWER: C
2. When reviewing working papers, an audit supervisor will be

primarily concerned with determining whether the
a. Audit programs have been carried out without deviation.
b. Working papers adequately support the audit findings,

conclusions, and reports.
c. Working papers reflect adherence to budget constraints.
d. Auditing department's standard formats and tick marks

have been used consistently.
ANSWER: B
3. A written representation from a client's management which,

among other matters, acknowledges responsibility for the
fair presentation of financial statements, should
normally be signed by the
a. Chief executive officer and the chief financial
officer.
b. Chief financial officer and the chairman of the
board of directors.
c. Chairman of the audit committee of the board of
directors.
d. Chief executive officer, and the chairman of the
board of directors, and the client's lawyer.
ANSWER: A
4. Generally accepted auditing standards require the auditor to

apply analytical procedures in both the planning and review
stages of the audit. The major reason for applying
analytical procedures as part of audit review is
a. To identify abnormalities that warrant audit attention.
b. To assist the auditor in establishing materiality
thresholds.
c. To ascertain that the auditor has gathered adequate
evidence to resolve suspicions arising during the
planning stages of the audit.
d. To provide documentary evidence in the event of future
litigation.
ANSWER: C
5. The existence of a related party transaction may be

indicated when another entity
a. Sells real estate to the corporation at a price that
is comparable to its appraised value.
b. Absorbs expenses of the corporation.
c. Borrows from the corporation at a rate of interest
which equals the current market rate.
d. Lends to the corporation at a rate of interest which
equals the current market rate.
ANSWER: B
6. The main purpose of the auditor/client conference held at

the close of audit field work is to
a. Discuss unresolved matters and audit fee arrangements.
b. Review proposed audit adjustments, internal control
weaknesses, and needed disclosures, and agree on the
type of audit report to be rendered.
c. Discuss areas of major audit risk and use of client
personnel to assist in high risk areas.
d. Arrange for a meeting with outside legal counsel for
the purpose of discussing pending litigation.
ANSWER: B
7. After discovering that a related party transaction exists,

the auditor should be aware that the
a. Substance of the transaction could be significantly
different from its form.
b. Adequacy of disclosure of the transaction is secondary
to its legal form.
c. Transaction is assumed to be outside the ordinary
course of business.
d. Financial statements should recognize the legal form
of the transaction rather than its substance.
ANSWER: A
8. Which of the following matters describes a "reportable

condition" that should be included in the auditor's
communication of the same?
a. A significant audit adjustment was required because a
major year-end adjustment was inadvertently overlooked
by the client.
b. The client's recently installed on-line real-time
computer system lacks necessary input editing features.
c. A major customer of the client is verging on
bankruptcy.
d. The auditors do not agree with the economic feasibility
of the client's proposed acquisition of a new
subsidiary.
ANSWER: B
9. An attorney is responding to an independent auditor as a

result of the audit client's letter of inquiry. The
attorney may appropriately limit the response to
a. Asserted claims and litigation.
b. Matters to which the attorney has given substantive
attention in the form of legal consultation or
representation.
c. Asserted, overtly threatened, or pending claims and
litigation.
d. Items which have an extremely high probability of
being resolved to the client's detriment.
ANSWER: B
10. An auditor is verifying a company's ownership of equipment

What is the best evidence of ownership?
a. The current year's depreciation expense journal entry.
b. A canceled check written to acquire the equipment.
c. An interview with the equipment custodian verifying
company ownership.
d. The presence of the equipment on the company's balance
sheet.
ANSWER: B
11. If a lawyer refuses to furnish corroborating information

regarding litigation, claims, and assessments, the auditor
should
a. Honor the confidentiality of the client-lawyer
relationship.
b. Consider the refusal to be tantamount to a scope
limitation.
c. Seek to obtain the corroborating information from
management.
d. Disclose this fact in a footnote to the financial
statements.
ANSWER: B
12. In auditing investments for proper valuation, the auditor

should do all but the following:
a. Confirm securities held in safekeeping off the client's
premises.
b. Vouch purchases and sales of securities by tracing to
brokers' advices and canceled checks.
c. Compare cost and market by reference to year end market
values for selected securities.
d. Recalculate gain or loss on disposals.
ANSWER: A
13. When examining a client's statement of cash flows for audit

evidence, an auditor will rely primarily upon
a. Determination of the amount of working capital at
year-end.
b. Cross-referencing to balances and transactions reviewed
in connection with the examination of the other
financial statements.
c. Analysis of significant ratios of prior years as
compared to the current year.
d. The guidance provided by the APB Opinion on the
statement of cash flows.
ANSWER: B
14. A limitation on the scope of the auditor's examination

sufficient to preclude an unqualified opinion will always
result when management
a. Prevents the auditor from reviewing the working papers
of the predecessor auditor.
b. Engages the auditor after the year-end physical

inventory count is completed.
c. Fails to correct a material internal control weakness
that had been identified during the prior year's audit.
d. Refuses to furnish a client representation letter to
the auditor.
ANSWER: D
15. When an audit is made in accordance with generally accepted

auditing standards, the auditor should always
a. Test control procedures by reprocessing a representa-
tive sample of completed transactions.
b. Examine all negotiable and nonnegotiable securities,
regardless of location.
c. Obtain certain written representations from management.
d. Observe the taking of the physical inventory on the

balance sheet date.
ANSWER: C
16. Which of the following audit procedures provides the best

evidence about the collectability of notes receivable?
a. Confirmation of note receivable balances with the
debtors.
b. Examination of notes for appropriate debtors'
signatures.
c. Examination of cash receipts records to determine
promptness of interest and principal payments.
d. Reconciliation of the detail of notes receivable and
the provision for uncollectible amounts to the general
ledger control.
ANSWER: C
17. An audit program for the examination of the retained

earnings account should include a step that requires
verification of the
a. Market value used to charge retained earnings for a
two-for-one stock split.
b. Approval of the adjustment to the beginning balance as
a result of a write-down of an account receivable.
c. Authorization for both cash and stock dividends.
d. Gain or loss resulting from disposition of treasury
shares.
ANSWER: C
18. In testing the reasonableness of interest income, an auditor

could most effectively use analytical tests involving
a. The beginning balance in the investments account for
fixed income securities.
b. The average monthly balance in the investments account
for fixed income securities.
c. The ending balance in the investments accounts for
fixed income securities.
d. Documentary support of specific entries in the account.
ANSWER: B
19. Which of the following would provide the best form of

evidential matter pertaining to the annual valuation of a
long-term investment in which the independent auditor's

client owns a 30% voting interest?
a. Market quotations of the investee company's stock.
b. Current fair value of the investee company's assets.
c. Historical cost of the investee company's assets.
d. Audited financial statements of the investee company.
ANSWER: D
20. Which of the following is a "Type I" subsequent event?

a. The client's Long Island warehouse was destroyed by
fire two weeks following the balance sheet date. The
warehouse and its contents were uninsured and
represented 15% of the client's total assets.
b. As the result of an uninsured flood loss, one of the
client's major customers declared bankruptcy. The
client doesn't expect to recover more than 5% of the
outstanding receivable which accounts for 30% of total
accounts receivable. The flood and bankruptcy
declaration both occurred after the balance date but
before the release of the audit report. No additional
provision for loss had been made as of year end.
c. Three weeks after the balance sheet date, a major
strike was called by the labor union representing 80%
of the client's work force.
d. After the balance sheet date, but prior to release of
the audit report, a product liability judgment against
the client was rendered by a judge. The judgment
assessed damages and fines totaling 30% of audited net
income. The events giving rise to the judgment
occurred prior to the balance sheet date. The client
does not plan to appeal the decision.
ANSWER: D
21. Which of the following statements regarding the audit of

negotiable notes receivable is not correct?
a. The auditor should confirm all notes receivable as of
the balance sheet date.
b. Materiality of the amount involved is a factor
considered when selecting the accounts to be confirmed.
c. Physical inspection of a note by the auditor does not
provide conclusive evidence.
d. Notes receivable discounted with recourse need to be
confirmed.
ANSWER: A
22. Which of the following matters should not be included in the

auditor's letter of communication with the client's audit
committee?
a. An audit adjustment was required reducing inventory by
40%.
b. Management was reluctant to answer the auditor's
questions concerning the economic substance of material
related party transactions.
c. Contrary to a previous understanding, the client did
not have an adjusted trial balance completed prior to
the commencing of audit field work. Moreover, several
errors were detected by the audit team as a result of
significant weaknesses in internal control.
d. An internal control weakness discovered during the

previous year's audit was corrected during the current
year.
ANSWER: D
23. Apex, Incorporated issued common stock to acquire another

company, in an acquisition that was accounted for as a
pooling of interests. The auditor examining this
transaction would be least interested in
a. The net book value of the acquired company.
b. The par value of the stock that was issued.
c. Whether or not the acquisition was approved by the
board of directors of Apex, Incorporated.
d. Whether the fair market value of the acquired assets
were independently appraised.
ANSWER: D
24. An internal auditor discovered an error in a receivable due

from a major stockholder. The receivable's balance accounts
for less than one percent of the company's total
receivables. Would the auditor be likely to consider the
error material?
a. Yes, if relative risk is low.
b. No, if there will be further transactions with
this stockholder.
c. Yes, because a related party is involved.
d. No, because a small dollar amount is in error.
ANSWER: C
25. Two months before the year end, the bookkeeper erroneously
recorded the receipt of a long-term bank loan by a debit to
cash and a credit to sales. Which of the following is the
most effective procedure for detecting this type of error?
a. Analyze the notes payable journal.
b. Analyze bank confirmation information.
c. Prepare a year-end bank reconciliation.
d. Prepare a year-end bank transfer schedule.
ANSWER: B
26. Of the following statements regarding further analysis of

materiality thresholds during audit review, which one is
true?
a. Audit adjustments reducing net income may suggest a
need to lower individual item and aggregate materiality
thresholds.
b. Audit adjustments reducing net income may suggest a
need to lower the individual item threshold, but
should not affect aggregate materiality thresholds.
c. Audit adjustments that increase net income may suggest
a need to lower aggregate materiality thresholds.
d. An increase in the assessment of control risk suggests
a need to lower the individual item materiality
threshold.
ANSWER: A
27. A written understanding between the auditor and the client

concerning the auditor's responsibility for the discovery of
illegal acts is usually set forth in a(an)
a. Client representation letter.

b. Letter of audit inquiry.
c. Management letter.
d. Engagement letter.
ANSWER: D
28. A letter from the company's attorney in response to

inquiries about possible litigation is best described as:
a. Confirmation evidence.
b. Analytical evidence.
c. Documentary evidence.
d. Physical evidence.
ANSWER: A
29. The auditor can best verify a client's bond sinking fund
transactions and year-end balance by
a. Confirmation with individual holders of retired bonds.
b. Confirmation with the bond trustee.
c. Recomputation of interest expense, interest payable,
and amortization of bond discount or premium.
d. Examination and count of the bonds retired during the
year.
ANSWER: B
30. Which of the following procedures would an auditor

ordinarily perform during the review of subsequent
events?
a. An analysis of related party transactions for the
discovery of possible fraud.
b. A review of the cut-off bank statements for the
period after the year-end.
c. An inquiry of the client's legal counsel concerning
litigation.
d. An investigation of material weaknesses in internal
control previously communicated to the client.
ANSWER: C
31. Which of the following is not an audit procedure which the

independent auditor would perform with respect to
litigation, claims, and assessments.
a. Inquire of and discuss with management the policies
and procedures adopted for identifying, evaluating, and
accounting for litigation, claims, and assessments.
b. Obtain from management a description and evaluation
of litigation, claims, and assessments that
existed at the balance sheet date.
c. Obtain assurance from management that it has disclosed
all unasserted claims that the lawyer has advised are
probable of assertion and must be disclosed.
d. Confirm directly with the client's lawyer that all
claims have been recorded in the financial statements.
ANSWER: D
32. The auditee has acquired another company by purchase. Which

of the following would be the best audit procedure to test
the appropriateness of the allocation of cost to tangible
assets?
a. Determine whether assets have been recorded at their

book value at the date of purchase.
b. Evaluate procedures used to estimate and record fair
market values for purchased assets.
c. Evaluate the reasonableness of recorded values by use
of replacement cost data.
d. Evaluate the reasonableness of recorded values by
discussion with operating personnel.
ANSWER: B
33. A CPA has received an attorney's letter in which no

significant disagreements with the client's assessments
of contingent liabilities were noted. The resignation of
the client's lawyer shortly after receipt of the letter
should alert the auditor that
a. Undisclosed unasserted claims may have arisen.
b. The attorney was unable to form a conclusion with
respect to the significance of litigation, claims,
and assessments.
c. The auditor must begin a completely new examination of
contingent liabilities.
d. An adverse opinion will be necessary
ANSWER: A
34. An audit procedure that provides evidence about proper

valuation of marketable securities arising from a short-term
investment of excess cash is
a. Comparison of carrying value with current market
quotations.
b. Confirmation of securities held by broker.
c. Recalculation of investment carrying value by applying
the equity method.
d. Calculation of premium or discount amortization.
ANSWER: A
35. Hall accepted an engagement to audit the 2002 financial

statements of XYZ Company. XYZ completed the preparation of
the 2002 financial statements on February 13, 2003, and Hall
began the field work on February 17, 2003. Hall completed
the field work on March 24, 2003, and completed the report
on March 28, 2003. The client's representation letter
normally would be dated
a. February 13, 2003
b. February 17, 2003
c. March 24, 2003
d. March 28, 2003
ANSWER: C
36. The auditee has just acquired another company by purchasing

all its assets. As a result of the purchase, "goodwill" has
been recorded on the auditee's books. Which of the
following comparisons would be the most appropriate audit
test for the amount of recorded goodwill?
a. The purchase price and the book value of assets
purchased.
b. The figure for goodwill specified in the contract for
purchase.
c. Earnings in excess of 15% of net assets for the past
five years.
d. The purchase price and the fair market value of assets

purchased.
ANSWER: D
37. All corporate capital stock transactions should ultimately

be traced to the
a. Minutes of the Board of Directors.
b. Cash receipts journal.
c. Cash disbursements journal.
d. Numbered stock certificates.
ANSWER: A
38. A logical substantive test for accrued interest receivable

would be to
a. Compare the interest income with published interest-
investment records.
b. Verify the interest income by a calculation based on
the face amount of notes and the nominal interest rate.
c. Verify the cost, carrying value, and market value of
notes receivable.
d. Recalculate interest earned and compare it to the
amounts received.
ANSWER: D
39. In verifying the amount of goodwill recorded by a client,

the most convincing evidence which an auditor can
obtain is by comparing the recorded value of assets acquired
with the
a. Assessed value as evidenced by tax bills.
b. Seller's book value as evidenced by financial
statements.
c. Insured value as evidenced by insurance policies.
d. Appraised value as evidenced by independent appraisals.
ANSWER: D
40. An auditor who wishes to substantiate the gross balance of

the account "Trade Notes Receivable" is considering the
advisability of performing the four procedures listed below.
Which pair of procedures is best suited to this objective?
I. Age the receivables.
II. Confirm the notes with the makers.
III. Inspect the notes.
IV. Trace a sample of postings from the sales journal to
the notes receivable ledger.
a. I and III.
b. I and IV.
c. II and III.
d. II and IV.
ANSWER: C
41. Jones was engaged to examine the financial statements of

Gamma Corporation for the year ended June 30, 2002.
Having
completed an examination of the investment securities, which
of the following is the best method of verifying the
accuracy of recorded dividend income?
a. Tracing recorded dividend income to cash receipts
records and validated deposit slips.
b. Utilizing analytical review techniques and statistical

sampling.
c. Comparing recorded dividends with amounts appearing on
federal information forms 1099.
d. Comparing recorded dividends with a standard financial
reporting service's record of dividends.
ANSWER: D
42. An auditor's program to examine long-term debt most likely

would include steps that require
a. Comparing the carrying amount of the debt to its year-
end market value.
b. Correlating interest expense recorded for the period
with outstanding debt.
c. Verifying the existence of the holders of the debt by
direct confirmation.
d. Inspecting the accounts payable subsidiary ledger for
unrecorded long-term debt.
ANSWER: B
Source: Test Bank for Auditing and Assurance Services A Systematic Approach 7th Edition
Messier
MULTIPLE CHOICE [18 items]
d 1. A company holds bearer bonds as a short-term investment. Responsibility for custody of these
bonds and submission of coupons for periodic interest collections probably should be delegated to
the
a. Chief accountant.
b. Internal auditor.
c. Cashier.
d. Treasurer. (AICPA ADAPTED)
b 2. Of the following, which is the most efficient audit procedure for testing accrued interest earned
on bond investments?
a. Tracing interest declarations to an independent record book.
b.Recomputing interest earned.
c. Confirming interest rate with the issuer of the bonds.
d.Vouching the receipt and deposit of interest checks. (AICPA ADAPTED)
d 3. During the audit of a publicly held company, the auditor could obtain written confirmation
regarding long-term bond transactions from the
a. Bond holders.
b. Client's attorney.
c. Internal auditors.
d. Trustee. (AICPA ADAPTED)
b 4. The auditor's program for examining long-term debt should include

a. Verification of the existence of the bondholders.
b. Examination of any bond trust agreement.
c. Inspection of the accounts payable subsidiary ledger.
d.Investigation of credits to the bond interest income account. (AICPA ADAPTED)
d 5. Jones was engaged to audit the financial statements of Gamma Corporation, a June 30 year-end
client. Having completed testing of the investment securities, which of the following is the best
method of verifying the accuracy of recorded dividend income?
a. Tracing recorded dividend income to cash receipts records and validated deposit slips.
b. Utilizing analytical review techniques and statistical sampling.
c. Comparing recorded dividends with amounts appearing on Federal Information Form 1099.
d. Comparing recorded dividends with a standard financial reporting service's record of dividends.
(AICPA ADAPTED)
a 6. A company has temporarily excess funds to invest. The board of directors decided to purchase
marketable securities and assigned the future purchase and sale decisions to a responsible
financial executive. The best person(s) to make periodic reviews of the investment activity would
be
a. The investment committee of the board of directors.
b. The treasurer.
c. The corporate controller.
d. The chief operating officer of the company. (AICPA ADAPTED)
a 7. Which of the following is a responsibility that should not be assigned to only one employee?
a. Access to securities in the company's safe deposit box.
b. Custodianship of the cash working fund.
c. Reconciliation of bank statements.
d. Custodianship of tools and small equipment. (AICPA ADAPTED)
a 8. When no independent stock transfer agents are employed and the corporation issues its own
stocks and maintains stock records, canceled stock certificates should
a. Be defaced to prevent reissuance and attached to their corresponding stubs.
b. Not be defaced but segregated from other stock certificates and retained in a canceled certificates
file.
c. Be destroyed to prevent fraudulent reissuance.
d. Be defaced and sent to the secretary of state. (AICPA ADAPTED)
a 9. Which of the following is not one of the auditor's concerns in an examination of marketable
securities?
a. To determine whether securities are authentic.
b. To determine whether securities are the property of the client.
c. To determine whether securities actually exist.
d. To determine whether securities are properly classified on the balance sheet.
(AICPA ADAPTED)
c 10. When negotiable securities are of considerable volume, planning by the auditor is necessary to
guard against
a. Unauthorized negotiation of the securities before they are counted.
b. Unrecorded sales of securities after they are counted.
c. Substitution of securities already counted for other securities which should be on hand but are not.
d.Substitution of authentic securities with counterfeit securities. (AICPA ADAPTED)
b 11. During its fiscal year, a company issued, at a discount, a substantial amount of first-mortgage
bonds. When performing audit work, the independent auditor
a. Confirms the existence of the bondholders.
b. Reviews the minutes for authorization.
c. Traces the net cash received from the issuance to the bonds payable account.
d.Inspects the records maintained by the bond trustee. (AICPA ADAPTED)
d 12. In the audit of a medium-sized manufacturing concern, which of the following areas would be
expected to require the least amount of audit time?
a. Revenue.
b. Assets.
c. Liabilities.
d.Owner's equity. (AICPA ADAPTED)
a 13. All corporate capital stock transactions should ultimately be traced to the
a. Minutes of the board of directors.
b. Cash receipts journal.
c. Cash disbursements journal.
d. Numbered stock certificates. (AICPA ADAPTED)
c 14. If a company employs a capital stock registrar and/or a transfer agent, the registrar or agent
should be requested to confirm directly to the auditor the number of shares of each class of stock
a. Surrendered and canceled during the year.
b. Authorized at the balance sheet date.
c. Issued and outstanding at the balance sheet date.
d. Authorized, issued, and outstanding during the year. (AICPA ADAPTED)
b 15. The auditor's program for testing long-term debt should include steps that require
a. Verifying the existence of the bondholders.
b. Examining any bond trust indenture.
c. Inspecting the accounts payable subsidiary ledger.
d. Investigating credits to bond interest income. (AICPA ADAPTED)
b 16. During the year under audit, a company has completed a private placement of a substantial
amount of bonds. Which of the following steps is the most important in the auditor's tests of
existence?
a. Confirm the amount issued with the bond trustee.
b. Trace cash received from the issue to the accounting records.
c. Examine bond records maintained by the transfer agent.
d. Recompute annual interest cost and the effective yield. (AICPA ADAPTED)
a 17. During the course of an audit, an auditor observes that the recorded interest expense seems
excessive in relation to the balance in long-term debt. This observation could lead the auditor to
suspect that
a. Long-term debt is understated.
b. Discount on bonds payable is overstated.
c. Long-term debt is overstated.
d. Premium on bonds payable is understated. (AICPA ADAPTED)
d 18. Which of the following information is most important when auditing shareholders’ equity?
a. Changes in the capital stock account are verified by an independent stock transfer agent.
b. Stock dividends and/or stock splits during the year were approved by the shareholders.
c. Stock dividends are capitalized at par or stated value on the dividend declaration date.
d. Entries in the capital stock account can be traced to a resolution in the minutes of the board of
directors' meetings. (AICPA ADAPTED)
Source: Auditing and Assurance Services, 14th Edition – Alvin E. Arens, Michigan State
University
[40 Items]
1) Which of the following statements is correct regarding the capital acquisition and payment cycle?
A) Bonds are frequently issued by companies in small amounts.
B) There are relatively few transactions and each transaction is typically highly material.
C) A primary emphasis in auditing debt is on existence.
D) Audit procedures for Notes Payable and Interest Income are often performed simultaneously.
Answer: B
Terms: Capital acquisition and payment cycle
Diff: Easy
Objective: LO 22-1
AACSB: Reflective thinking skills
2) The capital acquisition and repayment cycle does not include:

A) payment of interest.
B) payment of dividends.
C) payment of vendor invoices.
D) acquisition of capital through interest-bearing debt.
Answer: C
Terms: Capital acquisition and payment cycle
Diff: Easy
Objective: LO 22-1
3) Which of the following statements regarding the capital acquisition and repayment cycle is most
correct?
A) Relatively few transactions affect the cycle, and most are smaller amounts.
B) Large numbers of transactions affect the cycle, and most are smaller amounts.
C) Relatively few transactions affect the cycle, and most are highly material.
D) Large number of transaction affect the cycle, and most are highly material.
Answer: C
Terms: Capital acquisition and repayment cycle
Diff: Easy
Objective: LO 22-1
4) The primary audit objectives to focus on when auditing debt are:

A) accuracy and completeness.
B) accuracy and existence.

C) completeness and valuation.
D) accuracy and valuation.
Answer: A
Terms: Primary audit objectives focus on when auditing debt
Diff: Easy
Objective: LO 22-1
5) Tolerable misstatement is often set at a(n) ________ level for notes payable.
A) high
B) moderate
C) low
D) unknown
Answer: C
Terms: Tolerable misstatement level for notes payable
Diff: Easy
Objective: LO 22-1
6) When auditing interest-bearing debt, the auditor should ________ verify the related interest expense
and interest payable.
A) not
B) attempt to
C) simultaneously
D) never
Answer: C
Terms: Audit of interest-bearing debt and related interest expense and interest payable
Diff: Easy
Objective: LO 22-1
7) Assessed control risk and results of substantive tests of transactions are normally unimportant for
designing tests of details of balances for which of the following accounts?
A) Accounts receivable
B) Inventory
C) Accounts payable
D) Notes payable
Answer: D
Terms: Assessed control risk; Results of substantive tests of transactions; Unimportant for designing tests of details
of balances
Diff: Moderate
Objective: LO 22-1
8) In the audit of the transactions and amounts in the capital acquisitions and repayments cycle, the
auditor must take great care in making sure that the significant legal requirements affecting the financial
statements have been properly fulfilled and:
A) any violations are reported to the SEC.
B) are adequately disclosed in the financial statements.
C) must issue a disclaimer if they haven't been fulfilled.
D) any departures from the agreements are made with management's knowledge and consent.
Answer: B
Terms: Audit of transactions and amounts in the capital acquisitions and repayments cycle
Diff: Moderate
Objective: LO 22-1
9) One unique characteristic of the capital acquisition and repayment cycle is that relatively few
transactions affect the account balances, but each transaction is often highly material in amount.
A) True
B) False
Answer: A
Terms: Characteristic of capital acquisitions and repayment cycle
Diff: Easy
Objective: LO 22-1
10) Auditors seldom learn about the capital acquisition and repayment cycle when gaining an
understanding of the client's business and industry.
A) True
B) False
Answer: B
Terms: Capital acquisition and repayment cycle
Diff: Easy
Objective: LO 22-1
11) When auditing the capital acquisition and repayment cycle, it is common to verify each transaction
taking place in the cycle for the entire year as a part of verifying the balance sheet accounts.
A) True
B) False
Answer: A
Terms: Auditing capital acquisition and repayment cycle; Verify transactions
Diff: Moderate
Objective: LO 22-1
12) Which of the following is not an objective of the auditor's examination of notes payable?
A) To determine whether internal controls are adequate.
B) To determine whether client's financing arrangements are effective and efficient.
C) To determine whether transactions regarding the principal and interest of notes are properly
authorized.
D) To determine whether the liability for notes and related interest expense and accrued liabilities are
properly stated.
Answer: B
Terms: Objectives of auditor's examination of notes payable
Diff: Easy
Objective: LO 22-2
13) Responsibility for the issuance of new notes payable would normally be vested in the:
A) board of directors.
B) purchasing department.
C) accounting department.
D) accounts payable department.
Answer: A
Terms: Responsibility for issuance of notes payable
Diff: Easy
Objective: LO 22-2
14) An auditor is determining whether an issuance of notes payable for cash was correctly recorded. Her
best course of action would be to:
A) confirm with the bond trustee as to the amount of bonds issued.
B) confirm with the underwriter as to the appropriate market yield on the bonds.
C) trace the cash received from the proceeds to the accounting records.
D) verify that the amount was included in a footnote disclosure.
Answer: C
Terms: Audit of bonds payable
Diff: Challenging
Objective: LO 22-2
AACSB: Analytic skills
15) The auditor's independent estimate of interest expense from notes payable uses average interest rates
and:
A) average notes payable outstanding.
B) year-end notes payable outstanding.
C) only notes payable above the level of materiality.
D) only notes payable to major lenders.
Answer: A
Terms: Auditor's independent estimate of interest expense from notes payable
Diff: Easy
Objective: LO 22-2
16) The tests of details of balances procedure which requires the auditor to trace the totals of the notes
payable list to the general ledger satisfies the audit objective of:
A) accuracy.
B) existence.
C) detail tie-in.
D) completeness.
Answer: C
Terms: Tests of details of balances procedures for notes payable
Diff: Easy
Objective: LO 22-2
17) The audit objective to determine that notes payable in the schedule actually exist is verified by the test
of details of balances procedure to:
A) foot the notes payable list.
B) confirm notes payable.
C) recalculate interest expense.
D) examine the balance sheet for proper disclosure of noncurrent portions.
Answer: B
Terms: Audit objective to determine notes payable actually exist
Diff: Easy
Objective: LO 22-2
18) An auditor's substantive analytical procedure provides the auditor with an interest expense amount
that is significantly higher than the client's recorded interest expense. This finding would most likely lead
the auditor to conclude that:
A) client has not recorded all long-term interest bearing debt in the accounting records.
B) client has not recorded all interest expense paid or accrued.
C) client has not properly accounting for the discount of bonds payable account.
D) client has not properly recorded interest income.
Answer: B
Terms: Substantive analytical procedures results in interest expense higher than actually recorded
Diff: Easy
Objective: LO 22-2
19) You are auditing the long-term notes payable account for a client. Which of the following audit
procedures would you most likely employ?
A) compare interest expense recorded by the client with the notes payable account for reasonableness
B) confirm bonds payable with individual bond holders
C) perform analytical procedures on the bond discount or premium account
D) examine bond documents for the presence of hybrid securities
Answer: A
Terms: Audit of long-term bonds payable
Diff: Challenging
Objective: LO 22-2
20) The two most important balance related audit objectives for notes payable are:
A) completeness and detail tie-in.
B) completeness and valuation.
C) accuracy and valuation.
D) accuracy and completeness.
Answer: D
Terms: Most important balance related audit objectives for notes payable
Diff: Moderate
Objective: LO 22-2
21) Which of the following audit tests would provide evidence regarding the balance-related audit
objective of existence for an audit of notes payable?
A) Examine due dates on duplicate copies of notes.

B) Examine balance sheet for proper presentation and disclosure of notes payable.
C) Examine corporate minutes for loan approval.
D) Foot the notes payable list for notes payable and accrued interest.
Answer: C
Terms: Audit tests to provide evidence regarding the balance-related audit objective of existence for audit of notes
payable
Diff: Moderate
Objective: LO 22-2
22) Which of the following balance-related audit objectives is not applicable to the audit of notes payable?
A) Realizable value
B) Detail tie-in
C) Cutoff
D) Classification
Answer: A
Terms: Balance-related audit objectives not related to audit of notes payable
Diff: Moderate
Objective: LO 22-2
23) When there are not numerous transactions involving notes payable during the year, the normal
starting point for the audit of notes payable is:
A) a schedule of notes payable and accrued interest prepared by the audit team.
B) a schedule of notes payable and accrued interest obtained from the client.
C) a schedule of only those notes with unpaid balances at the end of the year prepared by the client.
D) the notes payable account in the general ledger.
Answer: B
Terms: Starting point for audit of notes payable
Diff: Moderate
Objective: LO 22-2
24) The tests of details of balances procedure which requires the auditor to examine notes paid after year-
end to determine whether they were liabilities at the balance sheet date is an attempt to satisfy the audit
objective of:
A) existence.
B) completeness.
C) accuracy.
D) classification.
Answer: B
Terms: Tests of details of balances procedures to examine notes paid after year-end satisfies audit objective
Diff: Moderate
Objective: LO 22-2
25) The audit objective that requires that existing notes payable be included in the notes payable schedule
is satisfied by performing which of the following audit procedures?
A) confirm notes payable
B) trace the total of the notes payable schedule to the general ledger
C) review the notes payable schedule to determine whether any are related parties
D) obtain confirmations from creditors who have held notes from the client in the past and are not
currently included in the notes payable schedule
Answer: D
Terms: Audit objective that requires existing notes payable be included in notes payable schedule
Diff: Moderate
Objective: LO 22-2
26) The audit objective that requires the auditor to determine that notes payable on the notes payable
schedule are properly classified can be tested by performing the procedure to:
A) confirm notes payable.
B) examine corporate minutes for loan approval.
C) examine notes, minutes, and bank confirmations for restrictions.
D) review the notes to determine whether any are with related parties.
Answer: D
Terms: Audit objective that requires auditor to determine that notes payable are properly classified
Diff: Moderate
Objective: LO 22-2
27) During the course of an audit, a CPA observes that the recorded interest expense seems to be
excessive in relation to the balance in the long-term debt account. This observation could lead the auditor
to suspect that:
A) long-term debt is understated.
B) discount on bonds payable is overstated.
C) long-term debt is overstated.
D) premium on bonds payable is understated.
Answer: A
Terms: CPA observes recorded interest expense excessive in relation to balance in long-term debt account
Diff: Challenging
Objective: LO 22-2
28) A company issued long-term notes payable for cash during the year under audit. To ascertain that
this transaction was properly recorded, the auditor's best course of action is to:
A) trace the cash received from the issuance to the accounting records.
B) confirm the results of the issuance with the underwriter or investment banker.
C) verify that the new cash received is credited to an account entitled "Bonds Payable."
D) request a statement from the bond trustee as to the amount of bonds issued and outstanding.
Answer: A
Terms: Issuance of bonds properly recorded
Diff: Challenging
Objective: LO 22-2
29) In the audit of notes payable, it is common to include tests of principal and interest payments as a part
of the audit of the acquisitions and payment cycle because the payments are in the cash disbursements
journal that is being sampled. It is also normal to test these transactions as part of the capital acquisitions
and repayment cycle because:
A) it is not unusual for the auditor to duplicate a process, thereby gathering a larger quantity of evidence.
B) replicating the evidence will provide the auditor with a higher level of assurance.
C) the tests done in the acquisitions and payments cycle will look only at the cash credit side so the tests
done in the capital acquisitions and repayment cycle will look at the debit side of the transaction.
D) due to the infrequency of these transactions, in many cases no transactions involving notes payable are
included in the sample tests of acquisitions and payments.
Answer: D
Terms: Audit of notes payable tests of principal and interest payments
Diff: Challenging
Objective: LO 22-2
30) Which of the following is not an important control over notes payable?
A) proper authorization over the issuance of new notes payable
B) notes payable are issued when the business climate is favorable
C) adequate controls exist over repayment of interest and principal
D) there exists proper documents and records
Answer: B
Terms: Issuance of mortgage bonds
Diff: Challenging
Objective: LO 22-2
31) The audit procedure "examine duplicate copies of notes payable to determine whether the notes
payable were dated on or before the balance sheet date" is done for which of the following balance-
related audit objective?
A) completeness
B) cut-off
C) detail tie-in
D) existence
Answer: B
Terms: Balance-related audit objective to examine duplicate copies of notes payable
Diff: Challenging
Objective: LO 22-2
32) The two most important balance related objectives in notes payable are:
A) completeness and accuracy
B) existence and completeness
C) accuracy and classification
D) existence and occurrence
Answer: A
Terms: Audit of bond seeking fund transactions
Diff: Challenging
Objective: LO 22-2
33) Notes payable are generally for short periods of time.

A) True
B) False
Answer: B
Terms: Notes payable time
Diff: Easy
Objective: LO 22-2
34) When performing analytical procedures for notes payable, if actual interest expense is materially
larger than the auditor's expectation, one possible cause would be interest payments on unrecorded notes
payable.
A) True
B) False
Answer: A
Terms: Analytical procedures for notes payable
Diff: Easy
Objective: LO 22-2
35) The balance-related audit objective realizable value is not applicable when auditing notes payable.
A) True
B) False
Answer: A
Terms: Auditing notes payable and balance-related audit objective realizable value
Diff: Moderate
Objective: LO 22-2
36) The three most important balance-related audit objectives for notes payable are existence, realizable
value, and accuracy.
A) True
B) False
Answer: B
Terms: Balance-related audit objectives for notes payable; Existence, realizable value and accuracy
Diff: Moderate
Objective: LO 22-2
37) The audit procedure "Foot the notes payable list and trace the totals to the general ledger" is
performed when verifying the accuracy objective for notes payable.
A) True
B) False
Answer: B
Terms: Verifying accuracy objective for notes payable audit procedure
Diff: Moderate
Objective: LO 22-2
38) The audit procedure "Examine notes payable, minutes, and bank confirmations for restrictions" is
performed when verifying the classification objective for notes payable.
A) True
B) False
Answer: A
Terms: Audit procedure to verify classification objective for notes payable
Diff: Moderate
Objective: LO 22-2
39) The audit procedure "Examine paid notes for cancellation to make sure they are not still outstanding"
is performed when verifying the completeness objective for notes payable.
A) True
B) False
Answer: A
Terms: Audit procedure performed when verifying completeness objective for notes payable
Diff: Moderate
Objective: LO 22-2
40) Which of the following would generally not need to be approved by the board of directors?
A) Issuing capital stock
B) Repurchasing capital stock
C) Declaration of a Dividend
D) Payment of a Dividend
Answer: D
Terms: Not need approval by board of directors
Diff: Moderate
Objective: LO 22-3

Source: Auditing: A Risk Analysis Approach 5 Edition by Larry F. Konrath

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TEST BANKS – FINANCING AND INVESTING CYCLE

Source: Auditing: A Risk Analysis Approach 5th Edition by Larry F. Konrath

MULTIPLE CHOICE:[42 items]

1. Which of the following expressions is least likely to be

2. When reviewing working papers, an audit supervisor will be

b. Working papers adequately support the audit findings,

d. Auditing department's standard formats and tick marks

3. A written representation from a client's management which,

4. Generally accepted auditing standards require the auditor to

5. The existence of a related party transaction may be

6. The main purpose of the auditor/client conference held at

7. After discovering that a related party transaction exists,

8. Which of the following matters describes a "reportable

9. An attorney is responding to an independent auditor as a

10. An auditor is verifying a company's ownership of equipment

11. If a lawyer refuses to furnish corroborating information

12. In auditing investments for proper valuation, the auditor

13. When examining a client's statement of cash flows for audit

14. A limitation on the scope of the auditor's examination

b. Engages the auditor after the year-end physical

15. When an audit is made in accordance with generally accepted

d. Observe the taking of the physical inventory on the

16. Which of the following audit procedures provides the best

17. An audit program for the examination of the retained

18. In testing the reasonableness of interest income, an auditor

19. Which of the following would provide the best form of

long-term investment in which the independent auditor's

20. Which of the following is a "Type I" subsequent event?

21. Which of the following statements regarding the audit of

22. Which of the following matters should not be included in the

d. An internal control weakness discovered during the

23. Apex, Incorporated issued common stock to acquire another

24. An internal auditor discovered an error in a receivable due

26. Of the following statements regarding further analysis of

27. A written understanding between the auditor and the client

a. Client representation letter.

28. A letter from the company's attorney in response to

30. Which of the following procedures would an auditor

31. Which of the following is not an audit procedure which the

32. The auditee has acquired another company by purchase. Which

a. Determine whether assets have been recorded at their

33. A CPA has received an attorney's letter in which no

34. An audit procedure that provides evidence about proper

35. Hall accepted an engagement to audit the 2002 financial

36. The auditee has just acquired another company by purchasing

d. The purchase price and the fair market value of assets

37. All corporate capital stock transactions should ultimately

38. A logical substantive test for accrued interest receivable

39. In verifying the amount of goodwill recorded by a client,

40. An auditor who wishes to substantiate the gross balance of

41. Jones was engaged to examine the financial statements of

b. Utilizing analytical review techniques and statistical

42. An auditor's program to examine long-term debt most likely

MULTIPLE CHOICE [18 items]

b 4. The auditor's program for examining long-term debt should include

2) The capital acquisition and repayment cycle does not include:

4) The primary audit objectives to focus on when auditing debt are:

B) accuracy and existence.

AACSB: Reflective thinking skills

A) Examine due dates on duplicate copies of notes.

33) Notes payable are generally for short periods of time.

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