MULTIPLE-CHOICE QUESTIONS

1. Which of the following can be used by organizations for obtaining financing?

a. Notes.

b. Mortgages.

c. Bonds.

d. All of the above.

2. Which of the following accounts would not typically be included in the audit of debt obligations?

a. Interest income.

b. Interest expense.

c. Bonds payable.

d. Notes payable.

3. Inherent risks related to debt obligations primarily include which of the following?

a. Debt is not properly authorized.

b. Interest expense is not properly accrued.

c. Debt covenants are not properly disclosed.

d. Debt is not appropriately classified as short or long term.

e. All of the above are inherent risks related to debt obligations.

4. Which of the following is not an inherent risk typically associated with the existence of dividends?

a. Dividends are recorded before being declared.

b. Dividends are not properly amortized.

c. Dividends have not been approved before being declared.

d. Dividends are recorded in the wrong period.

5. Which of the following most accurately describes the nature of fraud related to debt obligations described in the case of Federico Quinto, Jr., CPA presented in the Professional Judgment in Context feature?

a. Interest expense was recorded in the wrong period.

b. Entire loan payments were charged to principal.

c. Debt covenants and potential violations were not appropriately presented and disclosed.

d. Long-term debt was misclassified as short-term debt.

6. Which of the following most accurately describes the nature of fraud related to stockholders' equity accounts described in the case of Delphi Corporation presented in the Professional Judgment in Context feature?

a. Stock options were back dated.

b. Stock sales were not authorized.

c. Proceeds from stock sales were misappropriated.

d. Expenses were charged directly to retained earnings rather than to the appropriate expense accounts.

7. Which of the following would an auditor typically not perform as part of gaining an understanding of the client's controls related to debt obligations?

a. Review the client's documentation of controls.

b. Recalculate interest expense.

c. Inquire of management about the process for reviewing compliance with debt covenants.

d. Review policies related to approval required for new debt.

8. Which of the following is a control the auditor would expect a client to have related to stockholders' equity transactions?

a. A policy requiring approval by the board of directors for all stock transactions.

b. Reconciliation of equity accounts to the general ledger.

c. CFO and CEO authorization of all stock transaction approved by the board of directors.

d. The auditor would typically expect all of the above controls to be in place.