Auditing - Chapter 15

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Debenture bond

An unsecured bond, dependent upon the general credit of the issuer.

Sinking fund

Cash or other assets set aside for the retirement of a debt.

Stock certificate book

A book of serially numbered certificates with attached stubs. Each stub shows the corresponding certificate number and provides space for entering the number of shares represented by the certificate, the name of the shareholder, and the serial number of the certificate surrendered in exchange for the new one. Surrendered certificates are canceled and replaced in the certificate book.

Stock registrar

An institution charged with responsibility for avoiding over issuance of a corporation's stock. Every new certificate must be presented to the registrar for examination and registration before it is issued to stockholder.

Stock transfer agent

An institution responsible for maintaining detailed records of shareholders and handling transfers of stock ownership.

Stockholders ledger

A record showing the number of shares owned by each stockholder. This is the basic record used for preparing dividend payments and other communications with shareholders.

Treasury stock

Shares of its own stock acquired by a corporation for the purpose of being reissued at a later date.

Trust indenture

The formal agreement between bondholders and the issuer as to the terms of the debt.

Internal control - Capital stock (1 of 2)

1) Proper authorization of transactions by board of directors an corporate officers 2) Segregations of duties in handling transactions 3) Maintenance of adequate records 4) Board of directors control of capital stock transactions

Internal control - Capital stock (2 of 2)

5) Large companies - independent registrar and stock transfer agent control issuance of stock 6) Small companies - control by segregations of duties of authorization of transactions, custody of stock certs, and record keeping (stock certs book, stockholders' ledger) 7) Control over dividend payment

What is the principal reason for testing the reasonableness of the Interest Expense account in conjunction with the verification of notes payable?

The principal reason for testing the reasonableness of interest expense is to discover an unrecorded
Interest-bearing liabilities that the client is making interest payments on.

What specific steps may be taken by the auditors to determine that all their client's interest-bearing liabilities are recorded?

For the auditor to determine that all their client's interest-bearing liabilities are recorded they can review the interest expense to discover any payments related to unrecorded interest-bearing liabilities, review minutes from the directors' meetings, and send separate confirmation letters to financial institutions.

Which of the following is least likely to be an audit objective for debt?

Determine that the client has rights to receive proceeds relating to the redemption of debt

The auditors would be most likely to find unrecorded long-term liabilities by analyzing:

Interest payments

A likely reason that consideration of client compliance with debt provisions is important to an audit is that violation of such debt provisions may affect the total recorded:

Current liabilities

A transfer agent and registrar are most likely to provide the auditor with evidence on:

Shares issued and outstanding

The audit procedure of confirmation is least appropriate with respect to:

Holders of common stock

An auditor is most likely to trace treasury stock purchase transactions to the:

Number of stock certificates on hand

In the continuing audit of a manufacturing company of medium size, which of the following areas would you expect to require the least amount of audit time?

Owners' equity

The auditors can best verify a client's bond sinking fund transactions and year-end balance by:

Confirmation with the bond trustee

The auditors' program for the examination of long-term debt should include steps that require the:

Examination of copies of debt agreements

All corporate capital stock transactions should ultimately be traced to the:

Minutes of the board of directors

Which of the following is most likely to be an audit objective in the audit of owners' equity?

Determine that the presentation and disclosure of owners' equity is appropriate

In an audit of a sole proprietorship, a common difficulty is lack of:

Segregation of personal net worth and business capital

Which of the following questions would an auditor most likely include on an internal control questionnaire for note payable?

Are direct borrowings on notes payable authorized by the board of directors

The primary responsibility of a bank acting as registrar of capital stock is to:

Verify that stock is issued in accordance with the authorization of the board of directors and the articles of incorporation

Where an independent stock transfer agent is not employed and the corporation issues its own stocks and maintains stock records, canceled stock certificates should:

Be defaced to prevent reissuance and attached to their corresponding stubs

An auditor most likely would inspect loan agreements under which an entity's inventories are pledged to support management's financial statement assertion of:

Completeness

An auditor usually obtains evidence of stockholders' equity transactions by reviewing the entity's:

Minutes of board of directors meetings

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