QUIZ 1 AP

Internal control over investments in financial instruments is enhanced when

• Securities are held by the company treasurer.

• Securities are held under joint control of at least two officials.

• Securities are registered in the name of the security broker.

• Securities are registered in the name of the company treasurer.

The auditors should conduct the count and inspection of securities held by a client as investment in the presence of a client’s representative in order to

• Acknowledge the receipt of securities returned

• Obtain assistance in the physical count and inspection of the securities

• Detect switching of securities with other liquid assets of the entity

• Detect forged signatures

The auditors’ count of the client’s investment securities should be simultaneous with the

• Confirmation of accounts receivable

• Count of cash balance

• Count of inventories

• Confirmation of accounts payable

Jones was engaged to audit the financial statements of Gamma Corporation for the year ended June 30, 20XX. Having completed an examination of the investment securities, which of the following is the best method of verifying the accuracy of dividend income?

• Trading recorded dividend income to cash receipts records and validated deposit slips.

• Utilizing analytical techniques and statistical sampling.

• Comparing recorded dividends with amounts appearing on income tax return of the client.

• Comparing recorded dividends with a standard financial reporting services record of dividends.

A company’s decision to use the fair value option rather than amortized cost for debt investments is most likely to affect which of the following assertions?

• Completeness

• Existence

• Measurement

• Occurrence

When a client engages in transactions involving derivatives, the auditor should

• Develop an understanding of the economic substance of each derivative.

• Confirm with the client’s broker whether the derivatives are for trading purposes.

• Notify the audit committee about the risks involved in derivative transactions.

• Add an explanatory paragraph to the auditor’s report describing the risk associated with each derivative.

Which of the following is the most effective audit procedure for testing the reasonableness of interest income on debt investments?

• Tracing interest declarations to an independent record book.

• Recomputing interest earned.

• Confirming interest rate with the debtor.

• Vouching the receipt and deposit of interest checks.

A company holds bearer bonds as temporary investment. Responsibility for the custody of these bonds and submission of coupons for interest collections should be delegated to the

• Chief accountant

• Company president

• Company treasurer

• Internal auditor

In establishing the existence and ownership of long-term investments in the form of publicly traded securities, an auditor most likely would

• Correspond with the investee company to verify the number of shares owned.

• Confirm the number of shares owned that are held by an independent custodian.

• Apply analytical procedures to the dividend income and investment accounts.

• Inspect the cash receipts journal for amounts that could represent the sale of securities.

To establish the existence and ownership of an investment in ordinary shares of a publicly held company, an auditor ordinarily performs

• Determines market share at the end of the reporting period using published price quotation.

• Corresponds with the investee regarding the number of shares owned.

• Relies on the internal control structure if the auditor has tested the controls and has reasonable assurance they are operating as prescribed.

• Confirms the number of shares owned with an independent registrar.