1A. When auditing debt obligations, the primary substantive analytical procedure would involve the auditor developing an independent expectation of interest expense.

Select the analytic procedures that the auditor could use to test the accuracy of interest expense reported by the client. Select all that apply.

A. Estimate interest expense based on average interest rates and average debt outstanding.

B. Calculate the long-term debt-to-equity ratio and perform a trend analysis with prior periods.

C. Perform a trend analysis of the balances in notes payable, interest expense, and accrued interest with prior periods, considering known client activities related to debt.

D. Calculate return on equity and perform a trend analysis with prior periods.

E. Calculate the debt-to-equity ratios and perform a trend analysis with prior periods.

F. Calculate the times interest earned ratio and perform a trend analysis with prior periods.

1B. Assume the client has preferred stock that includes a maturity date at which time the entity is obliged to reacquire the preferred stock. The client has classified the preferred stock as equity and the related annual distributions to stockholders as dividends declared. Select the item that best describes how the auditor will deal with this preferred stock.

A. The classification is correct as it is.

B. The preferred stock dividends should be reclassified as interest expense.

C. The preferred stock should be reclassified to debt and the preferred stock dividends should be reclassified as interest expense.

D. Assure that the preferred stock appears first in priority in the paid in capital section of stockholders equity.