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D. Count The Certificates at The Same Time Other Securities Are Counted

The document contains 10 multiple choice questions regarding auditing procedures related to shareholders' equity. Specifically, the questions cover procedures for verifying treasury shares, restrictions on retained earnings, authorization of dividends and share transactions, audit time required for shareholders' equity accounts, and assertions made in financial statements. The answers provided explain the reasoning for the correct choice in each case.

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170 views4 pages

D. Count The Certificates at The Same Time Other Securities Are Counted

The document contains 10 multiple choice questions regarding auditing procedures related to shareholders' equity. Specifically, the questions cover procedures for verifying treasury shares, restrictions on retained earnings, authorization of dividends and share transactions, audit time required for shareholders' equity accounts, and assertions made in financial statements. The answers provided explain the reasoning for the correct choice in each case.

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© © All Rights Reserved
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PART 1

1. If the client corporation has a material amount of, treasury shares on hand at year-end, the author
should

A. Count the certificates only if the company reports treasury shares as an asset.
B. Not count the certificates if treasury shares are reported as a deduction from total shareholder's
equity
C. Count the certificates only if the company had material treasury share transactions during the year.
D. Count the certificates at the same time other securities are counted.

ANSWER: D.
Counting the securities at the same time the other securities are counted provide direct evidence that
the treasury shares exist and in the position of the client.
Answers A, B, and C are incorrect because the auditor must verify all share capital transactions.
Thus, the auditor should count and inspect treasury share certificates at year-end. Moreover, treasury
shares are never reported as an asset.

2. During an audit of a company's shareholders' equity accounts, the auditor determines whether there
are restrictions or retained earnings resulting from loans, agreement, or law. This audit procedure most
likely is intended to verify management's assertion of

A. Existence
B. Presentation and disclosure
C. Completeness
D. Valuation and allocation

ANSWER: B.
The auditor should determine that restrictions on retained earnings have been properly disclosed in the
financial statements.

Answers A, C, and D are incorrect because restrictions on retained earnings fo not significantly affect
management's assertions of existence, completeness, and valuation and allocation.

3. An audit program for retained earnings account should include a step that requires verification of the
A. Gain or loss resulting from disposition of treasury shares
B. Approval of the adjustment to the beginning balance as a result of a write-down of an account
receivable.
C. Authorization for both cash and stock dividends.
D. Fair value used to charge retained earnings to account for a two-for-one share split.

ANSWER: B.
Because cash or stock dividends declared are recognized on books by a charge to retained earnings, the
audit of retained earnings should include verification of dividends.
The auditor should examine minutes of meetings of the board of directors to obtain evidence that
proper authorization has been made for both cash and stock dividends.

4. In the audit of a medium-sized manufacturing concern, which one of the following areas can be
expected to require the least amount of audit time?
A. Revenue
B. Assets
C. Liabilities
D. Shareholder's equity

ANSWER: D.
Shareholders equity transactions typically involbe stock issuances, acquisitions and sales of treasury
stock, and dividends.
These transactions are usually few but may involve significant amounts.
Hence, the audit of shareholders' equity requires a small amount of audit time compared to those
accounts that are affected by high volumes of transactions.

5. In an audit of shareholder's equity, an auditor is most concerned that


A. Share capital transactions are properly authorized
B. All changes in the shareholder's equity accounts atr monitored by an independent transfer agent and
registrar
C. Share splits are charged to retained earnings at par or stated value
D. Dividends declared during the year were approved by the shareholders

ANSWER: A.
Because share capital transactions are usually significant in amount, the auditor's primary concern is
that all share capital transactions are properly authorized.
Accordingly, the auditor vouches all entries in the share capital account to the minutes of the board of
director's meetings.
The auditor also revuews the company's articles of incorporation, by-laws, and minutes of shareholders'
meetings.

6. Which of the following transactions would not require a debit to retained earnings?
A. An appropriation of retained earnings for treasury shares
B. A 5% stock dividend
C. A two-for-one share split
D. A 25% stock dividend

ANSWER: C.
A share split increases the number of shares with a proportionate dectrase in the par or stated value per
share.
No journal entry is prepared for a share split because it does not affect the company's asset , liabilities,
and equity elements.
However, a memorandum entry is made to indicate the change in the number of shares and the par or
stated value per share.
7. The auditor is concerned with establishing that dividends are paid to client corporation shareholders
owning shares as of the
A. Payment date
B. Record date
C. Declaration date
D. Issued date

ANSWER: B.
Dividends are paid to shareholders owning shares as of the record
date.

8. In representing that the financial statements are presented fairly, ij all material respects, in
accordance with the applicable financial reporting framework, management implicity or explicity makes
____ regarding the recognition, measurement, presentation, and disclosure of the values elements of
the financial statements and related disclosures.
A. Assertions
B. Allegations
C. Conclusions
D. Assurance

ANSWER: A.
Assertions are representations by management, explicit or otherwise, that are embodied in the financial
statement.

9. Which of the following groups should have the operational responsibility for the accuracy and
completeness of computer-based information?
A. External Auditors
B. Internal Auditors
C. User
D. Top Management

ANSWER: C.
Users are in the best position to review the completeness of computer output in relation to the input
provided.
Thus, the operational responsibility for the accuracy and completeness of computer-based information
should be placed on users.

10. The auditor should apply analytical procedures


I. As risk assessment procedure
II. As substantive procedure
III. In the overall review at the end of the audit.

A. I and II only
B. II and III only
C. I and II only
D. I, II, and III

ANSWER: D
The auditor should apply analytical procedure as risk assessment procedures to obtain understanding of
the entity and its environment and in the overall review at the end of the audit.
Analytical procedures may also be applied as substantive test procedures.

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