ACC 492 Week 3 Individual Multiple Choice Quiz

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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
borrowers 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 companys 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
services 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 clients 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 clients 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 auditors directives.
b. Detect forged securities.
c. Coordinate the return of all securities to proper locations.
d. Acknowledge the receipt of securities returned.