Kaplan University Material Items in Liabilities and Equity Questions

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Because liabilities and equity are material items on a company’s balance sheet, auditors look at these areas very closely. You will demonstrate your understanding of audit tests over different aspects of liabilities and equity in your response to this Assignment.

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Unit 1 Assignment Auditing Question 14-37 The following are typical questions that might appear on an internal control questionnaire for accounts payable. 1. Are monthly statements from vendor reconciled with accounts payable listing? 2. Are vendor’s invoices matched with receiving report before they are approved for payment? • Described the purpose of each of the above internal control activities. • Described the manner which each of the above procedures might be tested. • Assuming that the operating effectiveness of each of the above procedures is found to be inadequate, described how the auditors might alter their substantive procedures to compensate for the increased level of their risks of material misstatement. Question 14-38 As part of your first audit of the financial statements of Marina del Rey, Inc,. you have decided to confirm some of some of the accounts payable. You are in the process of selecting the individual companies to who you will send accounts payable confirmation requests. Among the accounts payable you are considering are the following: Company Amount Payable At the year-end Total purchase from Vendor during year Day, Inc. Gearbox, Inc. Landon Co. Western Supply $ _____ 22,650 65,000 190,000 $1,980,000 46,100 75,000 2,123,000 • • Which of the above four accounts payable would you select as the most important t confirm? Explain your choice in terms of the audit objectives in sending accounts payable confirmations request? Assume that you are selecting accounts receivable to be confirmed. Assume also that the four companies listed above are costumers of your client rather than suppliers and that the dollar amounts are accounts receivable balances and total sales for the year. Which two companies would you select as the most important to confirm? Explain your choice? Question 15-30 You are retained by Columbia Corporation to audit its financial statements for the fiscal year ended June 30. Your consideration of internal control indicates a fairly satisfactory condition, Although there are not enough employees to permit an extensive separation of duties. The company is one of the smaller units in its industry, but it has realized net income of about $500, 000 in each of the last three years. Near the end of your field work, you overhear a telephone call received by the president of the company while you are discussing the audit with him. The telephone conversation indicates that on May 15 of the current year the Columbia Corporation made an accommodation endorsement of a 60 days $430,000 note issued by a major costumer, Brill Corporation, to its bank. The purpose of the telephone call from Brill was to inform your client that the note before overhearing the telephone call. • From an ethical standpoint, do you think the auditors would be justified in acting on information acquired in this manner? • Should the balance sheet as of June 30 disclose the contingent liability? Give reasons for answer? • Prepare a list of auditing procedures that might have brought the contingency to light. Explain fully the likelihood of detection of the accommodation endorsement by each procedure listed. Question 13-32 Multiple Choice Select the best answer choice for each of the following, and justify your selection in a brief statement. 1. a. b. c. Which one of the following is least likely to be an audit objective for debt? Determined the existence of record debt. Establish the completeness of recorded debt. Determine that the client has rights to receive proceeds relating to the redemption of debt. d. Determine the valuation of debt is in accordance with generally accepted accounting principles. 2. The auditors would be most likely to find unrecorded long term liabilities by analyzing: a. Interest payment. b. Discounts on long term liabilities c. Premiums on long term liabilities d. Recorded long term liability accounts. 3. A likely reasons that consideration of client compliance with debt provisions is important to an audit is the violations of such debt provisions may affect the total recorded: a. Number of debt restrictions. b. Current liabilities c. Long term assets d. Capital stock. 4. A transfer agent and a register are most likely to provide the auditor with evidence on: a. Restrictions on the payment of accounts payable. b. Shares issued and outstanding. c. Preffered stock liquidation value. d. Transfers occurring between management and related parties. 5.The audit procedure of confirmation is least appropriate with respect to: a. The trustee of an issue of bonds payable. b. Holders of commons stock. c. Holders notes receivable. d. Holders of notes payable. 6. An auditor I most likely to trace treasury stock purchase transactions to the: a. Numbered stock certificate on hand. b. Article of incorporation. c. Year’s interest expense. d. Minutes of the audit committee. 7. 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? a. Owner’s equity. b. Revenue c. Assets d. Liabilities 8 The auditors can be best verify a client’s bond sinking fund transactions and year - end balance by: a. Recomputation of interest expense, interest payable, and amortization of bond discount or premium. b. Confirmation with the individual holders of retired bonds. c. Confirmation with the bonds trustee. d. Examination and count of the bonds retired during the year. 9. All corporate capital stock transactions should ultimately be traced to the: a. Minutes of the board of directors. b. Cash receipts journal c. Cash disbursement journal d. Numbered stock certificates. 10. Which of the following is most likely to be an audit objective in the audit of owner’s equity? a. Establish the recorder owner’s equity includes all long term debt and equity balances. b. Determine that common stock is valued at current market value. c. Determine that the presentation and disclosure of owner’s equity appropriate. d.Determine that the existence of recorded owner’s equity is in conformity with equity accounting rule valuations. 11. In an audit of a sole proprietorship, common difficulty is lack of: a. Segregation of personal net worth and business capital. B Availability of the owner. c. Agreement as to the distribution between retained earnings and owner’s capital. d. Proper measures of dividends. 12. which of the following questions, would an auditor most likely include on an internal control questionnaire for notes payable? a. Are assets that collateralize notes payable critically needed for the intity’s continued existence? b. Are two or more authorized signatures required on checks that repay notes payable? c. Are the proceeds from notes payable used for the purchase noncurrent assets? d. Are direct borrowing on notes payable authorized by the board of directors? 13. The primary responsibility of a bank acting as registrar of capital stock is to: a. Ascertain that dividends declared do not exceed the statutory amount allowable in the state of incorporation. b Account for stock certificates by comparing the total shares outstanding to the total in the shareholder’s subsidiary ledger. c. Act as an independent third party between the board of directors and outside investors concerning mergers, acquisitions, and the sale of treasury stock. d. Verify that stock is issued in accordance with the authorization of the board of directors and the articles of incorporations. 14. Where an independent stock transfer agent is not employed and the corporation issues its own stock and maintains stocks records, canceled stock certificates should: a. Be defaced to prevent reissuance and attached to their corresponding stubs b. Not be defaced to but segregated from other stock certificates and retained in a canceled certificates file. c. Be destroyed to prevent fraudulent reissuance. d. Be defaced and sent to the secretary of state. 15. An auditor most likely would inspect loan agreements under which an entity’s inventories are pledged to support management’s financial statement assertion of; a. b. c. d. Presentation and disclosure. Valuation or allocation. Existence or occurrence. Completeness 16. An auditor usually obtains evidence of stockholder’s equity transactions by reviewing the entity’s: a. b. c. d. Minutes of board of directors meetings. Transfer agent’s records. Canceled stock certificates. Treasury stock certificate book.
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RUNNING HEAD: ACCOUNTING AUDITING

ACCOUNTING AUDITING
Material Items in Liabilities and Equity
STUDENTS NAME
PROFESSORS NAME
COURSE
DATE

1

Material Items in Liabilities and Equity

2

Unit 1 Assignment Auditing
Question 14-37
The following are typical questions that might appear on an internal control questionnaire
for accounts payable.
1. Are monthly statements from vendor reconciled with accounts payable listing?
Monthly statements from vendors are reconciled with accounts payable listing to
eliminate the risk of understatement or overstatement of the accounts payable.
2. Are vendor’s invoices matched with receiving report before they are approved for
payment?
Vendors’ invoices are matched with receiving report before they are approved for
payment to help in eliminating the risk of making payment of goods that were not
delivered or received.
• Described the purpose of each of the above internal control activities.
The process of reconciliation of the monthly statements from vendors with accounts
payable listing helps the vendors to give an actual estimate of the accounts payable which
reduces the risk of understatement or overstatement of the accounts payable. On the other
hand the matching of the vendors invoices with the receiving report helps in making
payment for goods that were received only and eliminate the risk of making payment of
goods which could not be received in an organization.
• Described the manner which each of the above procedures might be tested.
The process of reconciliation for the monthly statement for the accounts payable listing
can be tested by reviewing accounts payable for the previous financial year which is
subjected to the general ledger. On the other hand the process of matching vendors’
invoices with the receiving report can be tested by the process of bookkeeping which
gives the accounting department the records for the goods that might have been received
to make their payment.
• Assuming that the operating effectiveness of each of the above procedures is found
to be inadequate, described how the auditors might alter their substantive
procedures to compensate for the increased level of their risks of material
misstatement.
To alter the substantive procedure in reconciliation of the monthly statements an auditor
is responsible for identifying a list of steps in the compensation for vendor’s
reconciliation. These include the process of checking for missing payments, duplicating
bills check for missing credits and checking the amount of discrepancies which help in
reducing the risk of material misstatement. On the other hand the auditing process for the
vendors invoices matching, an auditor should identify the accounts payable in the balance
sheet and the general ledger to obtain information on the disputed balances. This will
help in auditor’s compensation for the increased level of the risks of material
misstatement in the vendors invoice matching wit...


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