Exam (elaborations)
Chapter 22 Audit of the Capital Acquisition and Repayment Cycle
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Chapter 22 Audit of the Capital Acquisition and Repayment Cycle Auditing and Assurance Services 14th Edition Test Bank
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Auditing and Assurance Services, 14e (Arens)
Chapter 22 Audit of the Capital Acquisition and Repayment Cycle
Learning Objective 22-1
1)Which of the following statements is correct regarding the capital acquisition and
payment cycle? A) Bonds are frequently issued by companies in small amounts.
B) There are relatively few transactions and each transaction is typically
highly material. C) A primary emphasis in auditing debt is on existence.
D) Audit procedures for Notes Payable and Interest Income are often performed
simultaneously. Answer: B
Terms: Capital acquisition and payment cycle
Diff: Easy
Objective: LO 22-1
AACSB: Reflective thinking skills
2)The capital acquisition and repayment cycle does not include:
A) payment of interest.
B)payment of dividends.
C) payment of vendor invoices.
D) acquisition of capital through interest-
bearing debt. Answer: C
Terms: Capital acquisition and payment cycle
Diff: Easy
Objective: LO 22-1
AACSB: Reflective thinking skills
3)Which of the following statements regarding the capital acquisition and repayment
cycle is most correct?
A) Relatively few transactions affect the cycle, and most are smaller
amounts. B) Large numbers of transactions affect the cycle, and most
are smaller amounts. C) Relatively few transactions affect the cycle,
and most are highly material.
D) Large number of transaction affect the cycle, and most are
highly material. Answer: C
Terms: Capital acquisition and repayment cycle
Diff: Easy
Objective: LO 22-1
AACSB: Reflective thinking skills
4)The primary audit objectives to focus on when auditing debt are:
A) accuracy and completeness.
B)accuracy and existence.
C) completeness and valuation.
D) accuracy and
valuation. Answer: A
Terms: Primary audit objectives focus on when auditing debt
Diff: Easy
Objective: LO 22-1
AACSB: Reflective thinking skills
1
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
, To
To downloaddownload moremore ebooks,ebooks, slides,slides, SMSM andand TBTB visit:visit: http://testbanklancerhtp:/testbanklancer..blogspotblogspot..comcom
5)Tolerable misstatement is often set at a(n) ________ level for
notes payable. A) high
B)
moderate
C) low
D)
unknown
Answer: C
Terms: Tolerable misstatement level for notes payable
Diff: Easy
Objective: LO 22-1
AACSB: Reflective thinking skills
6)When auditing interest-bearing debt, the auditor should ________ verify the related
interest expense and interest payable.
A) not
B) attempt to
C)
simultaneously
D) never
Answer: C
Terms: Audit of interest-bearing debt and related interest expense and interest payable
Diff: Easy
Objective: LO 22-1
AACSB: Reflective thinking skills
7)Assessed control risk and results of substantive tests of transactions are normally
unimportant for designing tests of details of balances for which of the following
accounts?
A) Accounts
receivable B)
Inventory
C) Accounts
payable D) Notes
payable Answer:
D
Terms: Assessed control risk; Results of substantive tests of transactions; Unimportant for
designing tests of details of balances
Diff: Moderate
Objective: LO 22-1
AACSB: Reflective thinking skills
8)In the audit of the transactions and amounts in the capital acquisitions and repayments
cycle, the auditor must take great care in making sure that the significant legal
requirements affecting the financial statements have been properly fulfilled and:
A) any violations are reported to the SEC.
B) are adequately disclosed in the financial
statements. C) must issue a disclaimer if they
haven't been fulfilled.
D) any departures from the agreements are made with management's knowledge
and consent. Answer: B
Terms: Audit of transactions and amounts in the capital acquisitions and repayments cycle
Diff: Moderate
Objective: LO 22-1
AACSB: Reflective thinking skills
2
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
, To
To downloaddownload moremore ebooks,ebooks, slides,slides, SMSM andand TBTB visit:visit: http://testbanklancerhtp:/testbanklancer..blogspotblogspot..comcom
9)Describe the methodology for designing tests of details of balances for
notes payable. Answer: The methodology is:
• Identify client business risks affecting notes payable.
• Set tolerable misstatement and access inherent risk for notes payable.
• Assess control risk for notes payable.
• Design and perform tests of controls and substantive tests of transactions for the
acquisition and payment cycle and notes payable.
• Design and perform analytical procedures for notes payable balance.
• Design tests of details of notes payable balance to satisfy balance-related audit
objectives. Decide sample size, items to select for testing, audit procedures, and timing
of procedures.
Terms: Methodology for designing tests of details of balances for notes payable
Diff: Moderate
Objective: LO 22-1
AACSB: Reflective thinking skills
10) Discuss the four characteristics of the capital acquisition and repayment cycle
that make it unique from other cycles.
Answer: The four characteristics are:
• Relatively few transactions affect the account balances, but each transaction is often
highly material in amount.
• The exclusion of a single transaction could be material in itself.
• There is a legal relationship between the client entity and the holder of the stock,
bond, or similar ownership document.
• There is a direct relationship between the interest and dividends accounts and debt and
equity.
Terms: Unique characteristics of capital acquisition and repayment cycle
Diff: Challenging
Objective: LO 22-1
AACSB: Reflective thinking skills
3
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
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