Multiple Choice Questions
1. An auditor’s program to audit long-term debt should include steps that require
a. Examining bond trust indentures.
b. Inspecting the accounts payable subsidiary ledger.
c. Investigating credits to the bond interest income account.
d. Verifying the existence of the bondholders.
2. In gathering evidence to evaluate unrecorded long-term bonds payable, an auditor most likely will
a. Perform analytical procedures on the bond premium and discount accounts.
b. Examine documentation of assets purchased with bond proceeds for liens.
c. Compare interest expense with the bond payable amount for reasonableness.
d. Confirm the existence of individual bondholders at year-end.
3. 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 management's assertion of
a. Existence or occurrence.
c. Valuation or allocation.
d. Presentation and disclosure.
4. When a client's company does not maintain its own stock records, the auditor should obtain written confirmation from the transfer agent and registrar concerning
a. Restrictions on the payment of dividends.
b. The number of shares issued and outstanding.
c. Guarantees of preferred stock liquidation value.
d. The number of shares subject to agreements to repurchase.
5. An auditor usually obtains evidence of a company's equity transactions by reviewing its
a. Minutes of board of directors meetings.
b. Transfer agent's records.
c. Canceled stock certificates.
d. Treasury stock certificate book.
6. During the audit of a publicly held company, the auditor should obtain written confirmation regarding debenture transactions from the
a. Debenture holders.
b. Client's attorney.
c. Internal auditors.
7. Most likely, an auditor's purpose in reviewing the renewal of a note payable shortly after the balance sheet date is to obtain evidence concerning management's assertions about
a. Existence or occurrence.
b. Presentation and disclosure.
d. Valuation or allocation.
8. In the audit of a medium-sized manufacturing concern, which one of the following areas can be expected to require the least amount of audit time?
9. An audit program for the retained earnings account should include a step that requires verification of the
a. Fair value used to charge retained earnings to account for a two-for-one-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.
10. In performing tests concerning the granting of stock options, an auditor should
a. Confirm the transaction with the Secretary of State in the state of incorporation.
b. Verify the existence of option holders in the entity’s payroll records or stock ledgers.
c. Determine that sufficient treasury stock is available to cover any new stock issued.
d. Trace the authorization for the transaction to a vote of the board of directors.