The following questions are part of an internal control questionnaire for the long-term debt and owners’ equity process. For each question:
a. Describe the misstatement in the financial statements that could occur if the client answered the question “no.”
b. Explain how you would design a substantive test to evaluate the potential misstatement in the financial statements because of the missing control.
c. If the client answers “yes,” describe an internal control that the client could use.
d. Describe how you could test the internal control described in part (c).
Answer the following internal control questions for the long-term debt and owners’ equity process:
(1) Did the board of directors authorize direct borrowings on notes payable?
(2) Did the board of directors approve cash dividends?
(3) Did senior officers review footnotes for long-term debt and owners’ equity?
(4) Did the board of directors authorize purchases of treasury stock?
(5) Did the board of directors approve stock options issued to management?