,-h 17

31. The use of variable interest entities increase inherent risks:

a. with respect to presentation and disclosure of shareholders'equity.
b. when they are included in the client's consolidated financial statements
c. except when authorized by the board of directors.
d. as to the completeness assertions for investing and financing.
e. with respect to the rights and obligations assertions for shareholders' equlty.

32. The disclosure committee would not ordinarily:

a. review and confirm financing transactions with the bond trustee or transfer agent.
b. review reporting of transactions involving variable interest entities.
c. review amortization of bond premiums or discounb at the time o{ issuance.
d. review controls over the completeness of transactions.
e. review the accounting for fixed asset disposals.

Answers to Multlple Choice

c
1.. 12. c 23. e
2. a 13.e 24. a
3.e14.a 25. c
4. d 15.b 25. b
5.b 16. e 27. e
6.c 17. b 28. b
7. e 18. a 29. a
8.d \9. c 30. d
9. b 20. d 31. d
10. a 2-J.. c 32. a
11. d 22. d

l
 d. reading the copies of the contracts.
e. reading the minutes of the board of directors meetings.

28. Return on common stoekholders, equity is calculated as:

a. net income + weighted average common shares oubtanding.
b. (net income - preferred dividends) + average corunon stockholders, equity.
c. weighted average common shares ouktanding - net income.
d. average cofilmon stockholders' equitjz + (net income - preferred dividends).
e. operating income + average common stockholders, equity.

29. Earnings per share is calculated as:

a. net income - weighted average common shares outstanding.
b. (net income - preferred dividends) + average common stocfholders, equity.
c. weighted average common shares outstanding - net income.
d. average cornmon stockholders' equity + (net i*o**
- preferred dividends).
e. operating income + average corunon stockholders. equity.

30. Entries for dividend declarations and retained earnings appropriations are traced to
the
minutes book. In determining the propriety of Ure aiJtriUuliory the auditor should:
a- eltablish that preferential or other rights of stockholders and any restrictions on
dividend dishibutions have been recognized.
b. establish the number of shares outstanding on the date of record. and verify the
accuracy of the total dividend declaration by recalculation.
c. ascertain the propriety of the entry to record the declaration.
d. review the minutes to provide evidence of stockholders'equity transactions
authorized during the year.
e. trace dividend payments to canceled checks and other documentation.
21.. The ratio times interest earned is calculated as:
a. (interest expense + capitalized interest) + income before interest and income taxes.
b. net income + (interest expense + capitalized interest).
c. income before interest and income taxes + (interest expense + capitaltzed interest).
d. (interest expense + capitalized interest) + net income.
e. income before interest and income taxes + (interest income + capitalized interest).
22. The classes of transactions associated with the audit of plant assets do not include:
a. disposals of fixed assets.
b. repair and maintenance transactions.
c. depreciationexpense.
d. board minutes authorizing asset acquisitions.
e. manufacture of fixed assets.

23. Dividend payout rate is calculated as:

a. total dividends + operating income.
b. cash dividends * operating income.
c. total dividends + by net income.
d. operating income = total dividends.
e. cash dividends + net income.

24. During inspection of the stock certificate book, the auditor determines that all unissued
certificates are intact. This relates primarily to the:
a. completeness assertion.
b. valuation or allocation assertion.
c. existence or occurrence assertion.
cl. rights and obligations assertion.
e. presentation or disclosure assertion.
25. The following statement about inherent risk for long-lived assets is not true:
a. The rights and obligations assertion is significant because assets are usually
pledged as collateral for the underlying debt.
b. Impairment of long-lived assets poses an inherent risk for the valuation assertion.
c. The compieteness assertion rarely presents a high inherent risk.
d. Misstatements of disclosures represent only a moderate inherent risk.
e. Inherent risk for the existence assertion is often low.

26. Analytical procedures used to audit plant assets often inciude calculation of :
a. refurn on commorl equity.
b. refurn on total assets. ,
c. interest bearing debt to totiel assets.
d. inventory turnover.
e. sustainable growth rate.

27. The auditor wiil nor:nally find evidence concerning the proper authorization of
transactions in the financing cycle by:
a. direct confirmation by the investors.
b. inquiring of the audit committee.
c. inquiring of management.
 ']'6' The specific financing rycle audit objective, long-term debt
and related income
statement balances and stockholders'equity bilances are properly
identified and
a. rights and obligations assertion.
b. completeness assertion.
c. existence or occurrence assertion.
d. valuation or allocation assertion.
e. presentation or disclosure assertion.

17. The specific financing-cycle audit objective, stockholders'equit5r

balances include the
effects of all transactionspertaining to paid-in capital andietained
emnings through
the balance sheet date, relates to the:
a. rights and obligations assertion.
b. completeness assertion.
c. existence or occurrence assertion.
d. valuation or allocation assertion.
e. presentation or disclosure assertion.
18. The specific financing cycle audit ob1'ective, all recorded long-term
debt balances are
obligations of the reporting entity, ielates to the:
a. rights and obligations assertion.
b. completeness assertion.
C. existence or occurrence assertion.
d. valuation or allocation assertion.
e. presentation or disclosure assertion.

19. The specific financing rycle audit objective, stockholders'equity balances

represent the
ortners'interests that exist at the balance sheet date, relatei to th",
a. rights and obligations assertion.
b. completeness assertion.
c. existence or occurrence assertion.
d. valuation or allocation assertion.
e. presentation or disclosure assertion.

24. The specific financing cycle audit objective, long-term debt and related income
statement balances and stockholders'equity balances are properly valued in
accordance with GAAp, relates to the:
a. rights and obligations assertion.
b. completeness assertion.
c. existence or occurrence assertion.
d. valuation or allocation assertion.
e. presentation or disclosure assertion.
 d. tests of details of balances.
e. presentation and disclosure.

11. The substantive test of inspecting plant asset additions is categorized under:
a. initial procedures.
b. analytical procedures.
c. tests of details of hansactions.
d. tests of details of balances.
e- presentation and disclosure.

12. The substantive test of vouching plant asset disposals to supporting documentation is
categorized under:
a. initial procedures.
b. analyticalprocedures.
c. tests of details of transactions.
d. tests of details of balances.
e. presentation and disclosure.

13. The substantive test of comparing financial statement presentation with GAAP is
categorized under:
a. initial procedures.
b. analytical procedures.
c. tests of details of transactions.
d. tests of details of balances.
e. presentation and disclosure.

L4. The following procedures may be useful to the auditor in determining whether all
retirements have been recorded except:
a. analyze the miscellaneous expense account for proceeds from sales of plant assets.
b. investigate the disposition of facilities associated with discontinued product lines
and operations.
C. trace retirement work orders and authorizations for retirements to the accounting
records.
d. review insurance policies for termination or reductions of coverage.
e. make inqurry of memagement as to retiremenb.
15. The financing cycle inte"fu*s with the:
a. investing cycle.
b. expenditure rycle.
C, revenue cycle.
d. production rycle.
e. personnel services cycle.
 6. The audit significance of the financial ratio, fixed asset turnover, is:
a. this financial ratio provides a reasonableness test of the entity's proportion of equity
that may be compared with prior years'experience or industry data.
b. an unexpected increase or decrease in the depreciation expense as a percent of
depreciable assets may indicate an error in calculating depreciation.
c. an unexpected increase in this financial ratio may indicate the failure to'record or
capitalize deprec iable assets.
d. this financial ratio provides a test of the entity's ability to generate earnings to cover
the cost of service debt.
e' this financial ratio provides a reasonableness test of shareholders' equity given the
company's eamings and financing strucfure.

The audit significance of the financial ratio, return on common equity is:
a. this financial ratio provides a reasonableness test of the entity's proportion of equity
that may be compared with prior years' experience or industry data.
b. an unexpected increase or decrease in the depreciation expense as a percent of
depreciable assets may indicate an error in calculating depreciation.'
c. an unexpected increase in this financial ratio may indicate the failure to record or
capitalize depreciable assets.
d. this financial ratio provides a test of the entity's ability to generate earnings to cover
the cost of service debt.
e. this financial ratio provides a reasonableness test of shareholders' equity given the
company's earnings and financing strucfure.

8. The audit significance of the financial ratio, times interest earned, is:
a. this financial ratio provides a reasonableness test of the entity's proportion of equity
that may be compared with prior years' experience or industry data.
b. an unexpected increase or decrease in the depreciation expense as a percent of
depreciable assets may indicate an error in calculating depreciation.
c. an unexpected increase in this financial ratio may indicate the failure to record or
capitalize deprec iable assets.
d. this financial ratio provides a test of the entity's ability to generate eamings to cover
the cost of service debt.
e. this financial ratio provides a reasonableness test of shareholders' equity given the
company's earnings and financing strucfure.

9. The substantive test of calculating fixed asset turncver is categorized under:

a. initial procedures.
b. analytical procedures.
c. tests of details of transdctions.
d. tests of details of balances.
e. presentation and disclosure.

10. The substantive test of determining the significance of plant assets, and changes in
plant assets, to the entity is categorized under:
a. initial procedures.
b. analytical procedures.
c. tests of details of transactions.
 CHAPTER 17: Auditing the Investing and
Financing Cycles
REOUIREDi Indicate the best ansu/er choice for each of the following.
1. \lflhich one of the following is an investing activity?
a. acquiring debt
b. capital leases
c. selling land
d. issuing bonds
e. issuing preferred stock
2. The specific account balance audit objective, the entity o$rut or has rights to all recorded
plant assets at the balance sheet date, relates to the:
a. rights and obligatbns assertion"
b. completeness assertion.
c. existence or occurrence assertion.
d. valuation or allocation assertion.
e. presentation or disclosure assertion.

3. The specific account balance audit ob;'ective, plant assets and related expenses iile
properly identified and classified in the financial statements, relates to the:
a. rights and obligations assertion.
b. completeness assertion.
c. existence or occurrence assertion.
d. valuation or allocation assertion.
e. presentation or disclosure assertion.

4. The specific account balance audit oblective, plant assets are stated at cost less
accumulated depreciation, relates to the:
a. rights and obligations assertion.
b. completenes s assertion.
c, existence or occurrence assertion.
d. valuation or allocation assertinn.
e, presentation or disclosure assertion.

5. The specific account balance audit objective, plant asset balances include the effects of
all applicable transactions for the period, relates to the:
a. rights and obligations assertion.
b. completeness assertion.
C. existence or occurrence assertion.
d. valuation or allocation assertion.
e. presentation or disclosure assertion.