Question: Does a failure to record the retirement

> Name three situations that might place a restriction on retained earnings, limiting or preventing dividend payments. Explain how the auditors might become aware of each such restricting factor.

> What relationship exists between the expected population deviation rate and sample size?

> In auditing the financial statements of Foster Company, you observe a debit entry for $200,000 labeled as Dividends in the Retained Earnings account. Explain in detail how you would verify this entry.

> In your second annual audit of a corporate client, you find a new account in the general ledger called Treasury Stock, which has a balance of $306,000. Describe the procedures you would follow to verify this item.

> Corporations sometimes issue their own capital stock in exchange for services and various assets other than cash. As an auditor, what evidence would you look for to determine the propriety of the values used in recording such transactions?

> Long-term creditors often insist upon placing certain restrictions upon the borrowing company for the term of the loan. Give three examples of such restrictions, and indicate how each restriction protects the long-term creditor.

> Your new client, Black Angus Valley Ranch, is a small corporation with fewer than 100 stockholders. It does not utilize the services of an independent stock registrar or transfer agent. For your first audit, you want to obtain or prepare a year-end list

> You have been retained to perform an audit of Valley Products, a small corporation that has not been audited during the previous 10 years of its existence. How will your work on the Capital Stock account in this initial audit differ from that required in

> Describe the ordinary role of paper stock certificates when a direct registration system (DRS) is utilized.

> In the audit of a small corporation that issues paper stock certificates and does not utilize the services of an independent stock registrar and stock transfer agent, what use is made of the stock certificate book by the auditors?

> What is the primary responsibility of an independent registrar with respect to capital stock?

> What do you consider to be the most important control a corporation can adopt with respect to capital stock transactions?

> If a sample of 100 items indicates a deviation rate of 3 percent, should the auditors conclude that the entire population also has approximately a 3 percent deviation rate?

> Compare the auditors’ examination of owners’ equity with their work on assets and current liabilities. Among other factors to be considered are the relative amounts of time involved and the character of the transactions to be inspected.

> Two assistant auditors were assigned by the auditor-in-charge to the verification of long-term liabilities. Some time later, they reported to the auditor-in-charge that they had determined that all long-term liabilities were properly recorded and that al

> Mansfield Corporation has outstanding an issue of 30-year bonds payable. There is no sinking fund for these bonds. Under what circumstances, if any, should this bond issue be classified as a current liability?

> “Auditors are not qualified to pass on the legality of a bond issue; this is a question for the company’s attorneys. It is therefore unnecessary for the auditors to inspect the bond indenture.” Criticize the quotation.

> What does the trust indenture used by a corporation in creating long-term bonded indebtedness have to do with the payment of dividends on common stock?

> List the major responsibilities of an accounts payable department.

> The operating procedures of a well-managed accounts payable department will provide for the verification of several specific points before a vendor’s invoice is recorded as an approved liability. What are the points requiring verification?

> Describe briefly an internal control activity that would prevent a paid disbursement voucher from being presented for payment a second time.

> The auditors usually find in the client’s possession documentary evidence, such as invoices, supporting both accounts receivable and accounts payable. Is there any difference in the quality of such evidence for accounts receivable and for accounts payabl

> Compare the auditors’ approach to the verification of liabilities with their approach to the verification of assets.

> When performing a dual-purpose test, how does the auditor arrive at the required sample size?

> Suggest two reasons why the adjustments proposed by independent auditors more often than not call for reducing recorded earnings.

> Assume that a highly placed employee has stolen company assets and is now planning to conceal the fraud by failing to make an accounting entry for a large transaction. Would the omission probably be for a transaction creating an asset or a liability? Exp

> What differences should auditors expect to find in supporting evidence for accrued liabilities as contrasted with accounts payable?

> What documentary evidence created outside the client’s organization is particularly important to the auditors in verifying accrued property taxes?

> Most auditors are interested in performing as many phases of an audit as possible in advance of the balance sheet date. The verification of accounts payable, however, generally is regarded as something to be done after the balance sheet date. What specif

> What is the purpose of the auditors’ review of cash payments subsequent to the balance sheet date?

> What do you consider to be the most important single procedure in the auditors’ search for unrecorded accounts payable? Explain.

> Identify three audit procedures (other than “Search for unrecorded accounts payable”) that are concerned directly or indirectly with disclosing unrecorded accounts payable.

> Explain how the auditors coordinate the year-end cutoff of accounts payable with their observation of the year-end physical inventory.

> Lawsuits against CPA firms are most likely to allege that the auditors were negligent in not detecting which of the following? (a) overstatement of liabilities and earnings, (b) understatement of assets and earnings, or (c) overstatement of owners’ equit

> What is a dual-purpose test?

> Vendors’ statements and accounts payable confirmations are both forms of documentary evidence created outside the client organization and useful in audit work on accounts payable. Which of these two represents higher-quality evidence? Why?

> Whitehall Company records its liabilities in an accounts payable subsidiary ledger. The auditors have decided to select some of the accounts for confirmation by direct communication with vendors. The largest volume of purchases during the year has been m

> Is the confirmation of accounts payable by direct communication with vendors as useful and important an audit procedure as such confirmation of accounts receivable? Explain.

> Outline a method by which the auditors may test the propriety of cash discounts taken on accounts payable.

> As part of the investigation of accounts payable, auditors sometimes vouch entries in selected creditors’ accounts back through the journals to original documents, such as purchase orders, receiving reports, invoices, and paid checks. What is the princip

> During the verification of the individual invoices composing the total of accounts payable at the balance sheet date, the auditors discovered some receiving reports indicating that the merchandise covered by several of these invoices was not received unt

> What internal control activity would you recommend to call attention to a failure to pay invoices within the discount period?

> For which documents relating to the accounts payable operation would you recommend the use of serial numbers as an internal control activity?

> Which do you consider the more significant step in establishing strong internal control over accounts payable transactions: the approval of an invoice for payment or the issuance of a check in payment of an invoice? Explain.

> In achieving adequate internal control over operations of the accounts payable department, a company should establish procedures that will ensure that extensions and footings are proved on all invoices and that the propriety of prices is reviewed. What i

> What effects will an auditor’s belief that the population’s actual deviation rate exceeds the tolerable deviation rate have on the test of controls sample size?

> If a corporation overstates its earnings, are its liabilities more likely to be overstated or understated? Explain.

> You are making your first audit of Clarke Manufacturing Company. The Plant and Equipment account represents a very substantial portion of the total assets. What verification, if any, will you make of the balances of the ledger accounts for Plant and Equi

> The auditors’ verification of current assets such as cash, securities, and inventories emphasizes observation, inspection, and confirmation to determine the physical existence of these assets. Should the auditors take a similar approach to establish the

> Moultrie Company discovered recently that a number of its property and equipment assets had been retired from use several years ago without any entries being made in the accounting records. The company asks you to suggest procedures that will prevent unr

> Explain the use of a system of authorizations for additions to plant and equipment.

> Identify at least three elements of strong internal control over property, plant, and equipment.

> What are the objectives of establishing internal control over plant and equipment?

> Suggest several comparisons to be made as part of the auditors’ analytical procedures for a. Plant and Equipment. b. Depreciation.

> Explain how the existence of lease agreements may result in understated plant and equipment.

> When performing attributes sampling, may auditors include several types of attributes in their definition of a deviation? Explain.

> K-J Corporation has current assets of $5 million and approximately the same amount of plant and equipment. Should the two groups of assets require about the same amount of audit time? Give reasons.

> Explain why the auditors may need to use the work of a specialist in the audit of goodwill.

> Do the auditors question the service lives adopted by the client for plant assets, or do they accept the service lives without investigation? Explain.

> List three substantive procedures the auditors could use to detect unrecorded retirements of property, plant, and equipment.

> Gibson Manufacturing Company acquired new factory machinery this year and ceased using the old machinery. The old equipment was retained, however, and is capable of being used if the demand for the company’s products warrants additional production. How s

> What is a principal objective of the auditors in analyzing a Maintenance and Repairs expense account?

> Hamlin Metals Company has sales representatives covering several states and provides automobiles for them and for its executives. Describe any substantive procedures you would consider appropriate for the company’s fleet of more than 100 automobiles, oth

> Should the independent auditors observe a physical inventory of property and equipment in every audit engagement? Discuss.

> In response to threats from a terrorist organization, Technology International installed protective measures consisting of chainlink fences, concrete road barriers, electronic gates, and underground parking at its manufacturing facilities. The costs of t

> Should the auditors examine public records to determine the legal title of property apparently owned by the client?

> When using attributes sampling, the auditors must estimate the expected population deviation rate. What sources are used to make this estimate?

> Define, and differentiate between, nonstatistical (judgmental) sampling and statistical sampling.

> Define insurance.

> Identify the components of PITI.

> When should you request that private mortgage insurance be canceled if such insurance was required at the time of purchase of a home?

> Explain why the down payment and mortgage principal and interest understate the actual up-front and monthly costs of home ownership.

> Why do lenders use points in home loans, and who is responsible for paying points?

> If you make a down payment that is lower than standard, identify the extra cost you will be required to pay.

> What is the standard down payment amount on a mortgage loan?

> How do you comparison shop between financing and leasing?

> How do you choose between a low interest rate and a rebate?

> Explain why lease payments for a new vehicle are lower than loan payments for the same vehicle.

> James Canter of Auburn, Alabama, is a good shopper. He always comparison shops and uses coupons every week. James figures he saves at least $40 a month as a result. Assuming an interest rate of 2 percent, what is the future value of this amount over ten

> Summarize what is involved in comparison shopping for a safe vehicle.

> What is the goal of comparison shopping?

> What is a service contract and what is its disadvantages?

> Explain the difference between an implied warranty and an express warranty, and how do they relate to the term as is?

> What are some pitfalls of leasing?

> What are your action steps to dispute an error on a billing statement?

> What is the liability for a lost or stolen credit card?

> How does a penalty rate work on a credit card?

> Distinguish between transaction and posting dates on a credit statement.

> Distinguish between a statement date and a payment due date on a credit statement.

> Allison Jones of Flagstaff, Arizona, is considering paying $400 a year for an extended warranty on several of her major appliances. If the appliances are expected to last for five years and she can earn 2 percent on her savings, what would be the future

> Explain what happens if you choose to retire earlier than your full retirement age, which is probably 67.

> Distinguish between the benefits provided under Social Security for a worker who is fully insured and a worker who is currently insured.

> Summarize how workers become qualified for retirement Social Security benefits.

> How do public corporations use stocks and bonds?

> Distinguish between common stocks and bonds in investments.

> What average investment returns from stocks do you anticipate in the future?

> What are the two parts of an investor’s total return?

> How does savings differ from investing?

> Offer some suggestions on where to get money to invest.

> What two factors in the process of calculating life insurance needs are likely to be the most expensive to replace?