Question: What information about capital stock could be

> Which of the following accounts does not appear in the acquisition and expenditure cycle? a. Cash. b. Purchases returns. c. Sales returns. d. Prepaid insurance.

> How could auditors have discovered the off-balance-sheet financing described in the Off-Balance-Sheet Inventory Financing case?

> Which of the following procedures would best prevent or detect the theft of valuable items from an inventory that consists of hundreds of different items selling for $1 to $10 and a few items selling for hundreds of dollars? a. Maintain a perpetual inven

> What features of the cost accounting system would be expected to prevent the omission of recording materials used in production?

> An audit team would most likely verify the interest earned on bond investments by a. Vouching the receipt and deposit of interest checks. b. Confirming the bond interest rate with the issuer of the bonds. c. Recomputing the interest earned on the basis o

> What primary functions should be separated in the acquisition and expenditure cycle?

> What makes the recording of inventory at its proper amount difficult on the financial statements?

> What are the short-term effect and the long-term effect of improperly capitalizing expenditures on the financial statements?

> Why is a service expense a good account for recording a fictitious expense?

> To make a year-to-year comparison of inventory turnover most meaningful, the auditor performs the analysis a. For the company as a whole. b. By division. c. By product. d. All of the above.

> If the actual sales for the year are substantially lower than the sales forecasted at the beginning of the year, what potential valuation problems could arise in the production cycle accounts?

> How might an auditor use a client’s sales forecast for general familiarity with the production cycle or for evaluation of slow-moving inventory?

> What unfortunate lesson did the auditors learn from the situation in the Unregistered Sale of Securities case? What should auditors do when a violation of U.S. securities laws is suspected?

> Why is a “blind” purchase order used as a receiving report document?

> How can purchasing managers use their position to defraud the company? What can be done to prevent it?

> Your client, Boos & Becker Inc., is a medium-size manufacturer of products for the leisure-time activities market (camping equipment, scuba gear, bows and arrows, and the like). During the past year, a computer system was installed, and inventory records

> What is a voucher? What is a voucher package?

> What are some of the important assertions found in investment accounts?

> When an entity uses a trust company as custodian of its marketable securities, the possibility of concealing fraud most likely would be reduced if the a. Trust company has no direct contact with the entity employees responsible for maintaining investment

> What documentation should an auditor inspect when a client has paid off a bank note? How could an employee defraud the company if the bank note has no indication of being paid?

> You are engaged in the audit of the financial statements of Bass Corporation for the year ended December 31 and you are about to begin an audit of the investment securities. Bass’s records indicate that the company owns various bearer bonds as well as 25

> When the client holds a large amount of negotiable securities, auditors need to plan 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 secu

> What are some specific transactions that an auditor would expect to be approved by the board of directors? How would it affect the audit if these transactions were not required to be approved by the board?

> Cassandra Corporation, a manufacturing company, periodically invests large sums in marketable equity securities. The investment committee of the board of directors established the investment policy. The treasurer is responsible for carrying out the inves

> Follow the instructions preceding the case in problem 10.60. Write the audit approach section like the cases in the chapter. Rogue Trader In February 1989, 22-year-old Nicholas Leeson joined Barings Investment Bank. In 1993, he began trading on behalf o

> Follow the instructions preceding the case in problem 10.60. Write the audit approach section like the cases in the chapter. In Plane View Whiz Corporation owned 160,000 shares of Wing Company stock, carried on the books as an investment in the amount o

> Hide the Loss under the Goodwill Gulwest Industries, a public company, decided to discontinue its unprofitable line of business of manufacturing sporting ammunition. Gulwest had capitalized the startup cost of the business, and with its discontinuance, t

> You have been engaged to audit the financial statements of Hardy Hardware Distributors Inc., as of December 31. In your review of the corporate nonfinancial records, you have found that Hardy Hardware owns 15 percent of the outstanding voting common stoc

> You are a CPA engaged in an audit of the financial statements of Pate Corporation for the year ended December 31. The financial statements and records of Pate Corporation have not been audited by a CPA in prior years. The stockholders’ equity section of

> Sammy Smith is the partner in charge of the audit of Blue Distributing Corporation, a wholesaler that owns one warehouse containing 80 percent of its inventory. Smith is reviewing the audit documentation that was prepared to support the firm’s opinion on

> You are the continuing auditor of Sussex Inc. and are beginning the audit of the common stock and treasury stock accounts. You have decided to design substantive procedures with reliance on internal controls. Sussex has no-par, no-stated-value common sto

> What items could indicate a significant risk of fraud in the acquisition and expenditure cycle (i.e., be red flags)?

> The following covenants are extracted from the indenture of a bond issue. The indenture provides that failure to comply with its terms in any respect automatically advances the due date of the loan to the date of noncompliance (the stated date is 20 year

> Which cycle is not directly linked to the production cycle? a. Acquisition and expenditure cycle. b. Payroll cycle. c. Revenue and collection cycle. d. Finance and investment cycle.

> You have been engaged to audit the financial statements of Broadwall Corporation for the year ended December 31, 2017. During the year, Broadwall obtained a long-term loan from a local bank pursuant to a financing agreement, which provided the following:

> A loan covenant is a condition requiring the borrower to comply with the terms of a loan agreement. If the borrower does not act in accordance with the covenants, the loan can be considered in default and the lender has the right to demand payment (usual

> Jones was engaged to examine the financial statements of Gamma Corporation for the year ended June 30. Having completed an examination of the investment securities, which of the following is the best method of verifying the accuracy of recorded dividend

> The balance sheet of a company lists $25 million of inventory. What assertions is management making regarding inventory?

> What information is used in the cost accounting department to calculate cost of goods sold for a production operation? What are the significant risks that would make this calculation inaccurate?

> Describe a walkthrough of a production transaction from receiving production orders to making an entry in the finished goods perpetual inventory records. What document copies would be collected? What controls noted? What duties separated?

> Why is it important to obtain shipping and receiving cutoff information during the inventory observation?

> What inventory information should auditors document?

> For each of the following independent events, indicate the (1) effect of the error or fraud on the financial statements and (2) what auditing procedures could have detected the misstatement resulting from error or fraud. a. The physical inventory count o

> Why do auditors consider inventory errors pervasive?

> What are some of the specific relevant aspects of management’s control over the estimation process? What are some inquiries auditors can make?

> All corporate capital stock transactions should ultimately be traced to the a. Minutes of the meetings of the board of directors. b. Cash receipts journal. c. Cash disbursements journal. d. Numbered stock certificates.

> An auditor reviews job cost sheets to test which transaction assertion? a. Occurrence. b. Completeness. c. Accuracy. d. Classification.

> If a company does not monitor notes payable for due dates and interest payment dates in relation to financial statement dates, what misstatements can appear in the financial statements?

> Define and give examples of off-balance-sheet information. Why should auditors be concerned with such items?

> How can confirmations be used in auditing (a) stockholder capital accounts and (b) notes and bonds payable?

> What are some of the important assertions found in the long-term liability accounts?

> What are some of the important assertions found in stockholders’ equity account balances and disclosures?

> ACE Corporation does not conduct a complete annual physical count of purchased parts and supplies in its principal warehouse but uses statistical sampling to estimate the year-end inventory. ACE maintains a perpetual inventory record of parts and supplie

> How can auditors gain assurance about fair value estimates in the investment cycle?

> How can confirmations be used in auditing investments in stocks?

> What are some of the typical areas of concern to auditors involving investment accounts?

> Are these specific fraud detection procedures designed to detect fraudulent financial reporting or misappropriation of assets? Explain.

> The auditors should insist that a representative of the client be present during the inspection and count of securities to a. Lend authority to the auditors’ directives. b. Detect forged securities. c. Coordinate the return of all securities to proper lo

> When a client company does not maintain its own capital stock records, the auditors 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 outsta

> The primary reason for preparing a reconciliation between interest-bearing obligations outstanding during the year and interest expense in the financial statements is to a. Evaluate internal control over securities. b. Determine the validity of prepaid i

> If the auditors discover that the carrying amount of a client’s investments is overstated because of a loss in value that is other than a temporary decline in market value, they should insist that a. The approximate market value of the investments be sho

> Which of the following is the most important audit consideration when examining the stockholders’ equity section of a client’s balance sheet? a. Changes in the capital stock account are verified by an independent stock transfer agent. b. Stock dividends

> In connection with the audit of an issue of long-term bonds payable, the audit team should a. Determine whether bondholders are persons other than owners, directors, or officers of the company issuing the bond. b. Calculate the effective interest rate to

> In the audit of investment securities, auditors develop specific audit assertions related to the investments. They then design specific substantive procedures to obtain evidence about each of these assertions. Following is a selection of investment secur

> Your client took a complete physical inventory count under your observation as of December 15 and adjusted the inventory control account (perpetual inventory method) to agree with the physical inventory. After considering the count adjustments as of Dece

> You are in charge of the audit of the financial statements of Demot Corporation for the year ended December 31. The corporation has a policy of investing its surplus funds in marketable securities. Its stock and bond certificates are kept in a safe depos

> Union Pacific Corp. opened its new 19-story, $260 million headquarters in Omaha, Nebraska. The railroad operator is the owner of the city’s largest building, the Union Pacific Center. Under an initial operating lease, Union Pacific guaranteed 89.9 percen

> Describe the purpose and give examples of specific fraud detection procedures in the acquisition and expenditure cycle.

> Describe the purpose and give examples of audit procedures in the search for unrecorded liabilities.

> How would substantive procedures for accounts payable be affected by (a) a low risk of material misstatement or (b) a high risk of material misstatement?

> List the management reports and computer files that can be used for audit evidence. What information in them can be useful to auditors?

> What population of documents would an auditor examine to determine whether (a) all authorized production was completed and placed in inventory or recorded as scrap and (b) finished goods inventory was actually produced and the costs were accounted for pr

> How does the production order record provide a control over the quantity of materials used in production?

> Describe how the functions of (a) authorization of production transactions, (b) recording of these transactions, and (c) physical custody of inventories can be separated among the production, inventory, and cost accounting departments.

> During the audit of Mason Company Inc. for the calendar year 2014, you noted that the company produces aluminum cans at the rate of about 40 million units annually. On the plant tour, you noticed a large stockpile of raw aluminum in storage. Your invento

> Which of the following questions would auditors most likely include on an internal control questionnaire for notes payable? a. Are assets that collateralize notes payable critically needed for the entity’s continued existence? b. Are two or more authoriz

> Sorenson Manufacturing Corporation was incorporated on January 3, 2016. The corporation’s financial statements for its first year’s operations were not examined by a CPA. You have been engaged to audit the financial st

> A client has a separate sales group for its largest “preferred” customers, a select group of customers who normally make purchases in excess of $250,000 and often have accounts receivable balances in excess of $1 million. Which of the following audit pro

> To conceal a theft involving receivables, a dishonest bookkeeper might charge which of the following accounts? a. Miscellaneous income. b. Petty cash. c. Miscellaneous expense. d. Sales returns.

> Based on this information, the auditor interviewed the sales manager, who stated that the increase in sales without a corresponding increase in cost of goods sold was due to a price increase enacted by the company during the year. How would the auditor t

> Based on this information, the auditor is most likely concerned about a. Unrecorded costs. b. Improper credit approvals. c. Improper sales cutoff. d. Fictitious sales.

> Auditors sometimes use comparisons of ratios as audit evidence. An unexplained decrease in the ratio of gross profit to sales may suggest which of the following possibilities? a. Unrecorded purchases. b. Unrecorded sales. c. Merchandise purchases being c

> Why is it important to emphasize the existence assertion when auditing accounts receivable?

> What is dual-direction test of controls sampling in the revenue and collection cycle?

> What is a walkthrough of a sales transaction? How can the walkthrough work complement the use of an internal control questionnaire?

> What specific control procedures (in addition to separation of duties and responsibilities) should be in place and operating in internal controls governing revenue recognition?

> A good fraud prevention program should address employees’ motivation to steal from the company. The best method for doing this is to a. Establish employee assistance programs. b. Require a fidelity bond on all employees. c. Require reconciliations of all

> What effect do entity level controls have on the control risk assessments of an auditor?

> Embezzlement is a type of fraud that involves a. An employee’s misappropriating an employer’s money or property not entrusted to him or her. b. A manager’s falsification of financial statements for the purpose of misleading investors and creditors. c. An

> Which of the following internal control activities will most likely prevent the concealment of a cash shortage by improperly writing off a trade account receivable? a. Write-offs must be approved by a responsible officer after review of credit department

> Which of the following would be the best protection for a company that wishes to prevent the “lapping” of trade accounts receivable? a. Separate duties so that the bookkeeper in charge of the general ledger has no access to incoming mail. b. Separate dut

> The control procedure “credit sales approved by credit department” is directed toward which assertion? a. Existence/Occurrence. b. Completeness. c. Valuation/Accuracy. d. Cutoff.

> When auditing the revenue and collection cycle, auditors normally select balances to confirm from the a. Sales journal. b. Accounts receivable listing. c. General ledger. d. Cash receipts listing.

> What are some red flags that may indicate a cover-up or concealment of a fraud?

> Sales are normally recorded on the date of the a. Customer purchase order. b. Bill of lading. c. Sales invoice. d. Payment check.

> Revenues are normally considered to have been earned when a. All possibility of return has expired. b. The company has substantially accomplished what it must to be entitled to the benefits. c. The cash is collected. d. Goods have been shipped.

> During the confirmation of accounts receivable, an auditor receives a confirmation via the client’s fax machine. Which of the following actions should the auditor take? a. Not accept the confirmation and select another customer’s balance to confirm. b. N

> An auditor is required to confirm accounts receivable if the accounts receivable balances are a. Older than the prior year. b. Material to the financial statements. c. Smaller than expected. d. Subject to valuation estimates.

> The financial records of the Movitz Company show that R. Dennis owes $4,100 on an account receivable. An independent audit is being carried out, and the auditors send a positive confirmation to R. Dennis. What is the most likely reason as to why a positi

> What is lapping? What procedures can auditors employ to detect lapping?