CHAPTER 15
Question a:
(3) Determine that the client has rights to receive proceeds relating to the redemption of debt. The client not get the proceeds that are related to the redemption of its interest-bearing debt (that is, it will pay off the debt) (Whittington & Pany, 2014).
Question b:
- Interest payment: normally auditors will test the existing relationship between the registered long term liabilities and interest payment. When the interest payment is seem, to be too high, it can be due to unrecorded liabilities. On addition, the process of carrying out procedures to establish whom interest is paid to can show unrecorded debt.
Question c:
- Current liabilities: when there is a violation of debt provision the long term debt in many cases becomes immediately payable and hence, a current liability.
Question d
(2) Shares issued and outstanding: a transfer agent and a registrar keep information regarding the issued, and outstanding shares and information on owners of that stock.
Question e
- Holders of common stock: normally, the stockholding is not confirmed through direct communication with the individual stockholders. This is because for an actively trading stock, confirming it by contacting individual stockholders would be very costly and it would not be likely to produce a satisfactory fraction of replies.
Question f
- Numbered stock certificates on hand: usually, auditors are supposed to trace the treasury stock purchase transactions to that on the certificates on hand. When the certificates are not on hand, they are supposed to be verified directly with the custodian.
Question g
- Owners’ Equity: the transactions in owners’ equity accounts are usually few compared to the other three group’s volume of entries. As a result, the time required for the audit of the owner’s equity is mainly smaller compared to the assets, revenue, or liabilities.
Question h
(3) Confirmation with the bond trustee. The bond trustee is able to offer information on both the yearend balance and sinking fund transactions.
Question i
(2) Examination of copies of debt agreements: the assessment of long term debt by the auditors, includes the evaluation of copies of debet agreements to make sure the client does not violate the covenants contained in these agreements.
Question j
(1) Minutes of the board of directors: the board of directors of the client is supposed to approve the capital stock transactions.
Question k
(3) Determine that the presentation and disclosure of owners’ equity are appropriate: the aim of the equity owner is to establish that disclosure and presentation are appropriate.
Question l
(1) Segregation of personal net worth and business capital: the main challenge for sole proprietorship is segregating the business and personal assets with the personal net worth. For instance, cash accounts and credit cards may be used for personal and busi8ness purposes which complicates the accounting process.
Question m
(4) Are direct borrowings on notes payable authorized by the board of directors? companies in many times require that direct borrowings on the notes payables are to be authorized by the board, hence the auditors will establish whether proper policy is followed.
Question n
(4) Verify that stock is issued in accordance with the authorization of the board of directors and the articles of incorporation: the primary role of the registrar of stock is to hinder any other issuance of stock and hence verify that the stock is issued in a proper way.
Question o
(1) Be defaced to prevent reissuance and attached to their corresponding stubs: the cancelled stock certificates are supposed to be defaced and be attached to their corresponding stubs just like it is done to the voided checks. The aim of control is to hinder reissuance.
Question p
(1) Presentation and disclosure: the disclosure and pre…………………
