Answers at the Bottom
Please post your answers to the Multiple Choice questions to the
Assignments section.
1. Which of the following approaches is most suitable for auditing the finance and
investment cycle?
a. Perform extensive tests of controls and limit substantive procedures to analytical
procedures.
b. Ignore internal controls and perform extensive substantive procedures.
c. Review internal controls, and perform extensive substantive procedures.
d. Ignore internal controls and limit substantive procedures to analytical procedures.
2. Loan covenants are used for which of the following reasons?
a. To protect the lender from the borrower substantially weakening the borrower’s
financial position.
b. To protect the borrower from the lender calling the loan early.
c. To protect the auditor from false information by the borrower.
d. To protect shareholders from management taking on too much debt.
3. A related-party is a person or entity that
a. Has a family tie to a management member.
b. Does business with the company.
c. Can exert significant influence over or be influenced by the company.
d. Is a member of the company’s management.
4. 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 income?
a. Tracing recorded dividend income to cash receipts records and validated deposit
slips.
b. Utilizing analytical procedures and statistical sampling.
c. Comparing recorded dividends with amounts appearing on federal information
Form 1099.
d. Comparing recorded dividends with a standard financial reporting service’s record
of dividends.
5. 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 securities already counted for other securities that should be on
hand but are not.
d. Substitution of authentic securities with counterfeit securities.
6. In connection with the audit of an issue of long-term bonds payable, the auditor
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 see if it is substantially the same as the
rates for similar issues.
c. Decide whether the bond issue was made without violating state or local law.
d. Ascertain that the client has obtained the opinion of counsel on the legality of the
issue.
7. 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 and stock splits during the year under audit were approved by the
stockholders.
c. Stock dividends are capitalized at par or stated value on the dividend declaration
date.
d. Entries in the capital stock account can be traced to resolutions in the minutes of
meetings of the board of directors.
8. If the auditor discovers 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, the auditor should insist that
a. The approximate market value of the investments be shown in parentheses on the
face of the balance sheet.
b. The investments be classified as long term for balance sheet purposes with full
disclosure in the footnotes.
c. The loss in value is recognized in the financial statements.
d. The equity section of the balance sheet separately shows a charge equal to the
amount of the loss.
9. 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 interest expense.
c. Ascertain the reasonableness of imputed interest.
d. Detect unrecorded liabilities.
10. The auditor should insist that a representative of the client be present during the
inspection and count of securities to
a. Lend authority to the auditor’s directives.
b. Detect forged securities.
c. Coordinate the return of all securities to proper locations.
d. Acknowledge the receipt of securities returned.
ANSWERS TO THE WEEK 3 MULTIPLE-CHOICE QUESTIONS
1.
2.
3.
4.
5.
6.
7.
A
A
C
D
C
D
B
8. C
9. D
10. D