Solutions Chapters 10

Solutions Chapters 10 - SOLUTIONS FOR MULTIPLE-CHOICE...

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SOLUTIONS FOR MULTIPLE-CHOICE QUESTIONS 10.22 a. Incorrect Because of the large amounts of the items a substantive approach is preferred. b. Incorrect Auditors can never ignore internal controls. c. Correct Controls must be reviewed (and tested for public companies); however, a substantive approach is preferred. d. Incorrect This would be the least effective approach. 10.23 a. Correct This is the purpose of covenants. b. Incorrect The covenants are to protect the lender. c. Incorrect Auditors' are not involved in structuring client transactions. d. Incorrect The board of directors should protect the shareholders from too much debt.
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10.24 a. Incorrect This is a related party, but the definition is incomplete. b. Incorrect This is a related party, but the definition is incomplete. c. Correct This is the complete definition. d. Incorrect This is a related party, but the definition is incomplete. 10.25 a. Incorrect This ignores accruals. b. Incorrect This procedure does not lend itself to statistical sampling because of the low volume of transactions. c. Incorrect This also ignores dividends receivable. d. Correct Independent evidence from an outside dividend reporting service is the best evidence for existence, completeness, and valuation. 10.26 a. Incorrect This should be prevented by controls, not the audit. b. Incorrect See answer a. c. Correct The danger is that someone might move securities so the auditor counts them twice. d. Incorrect This is a danger, but audits cannot be relied upon to detect counterfeit securities. 10.27 a. Incorrect Related parties can own the bonds, but their ownership must be disclosed. b. Incorrect This is not the responsibility of external auditors. c. Incorrect This is not a primary responsibility of external auditors. d. Correct Among the choices available, obtaining an opinion from legal counsel is the best response. The legality of a bond issue is important, although not the only important thing. 10.28 a. Incorrect A company does not necessarily need to use a transfer agent. b. Incorrect These are usually approved by directors. c. Incorrect Stock dividends are recorded at fair market value. d. Correct Capital stock transactions are important by definition, and the directors should have approved all of them. 10.29 c. Correct Losses on investment should be recorded in the accounts and shown in the financial statements. (Losses on trading securities in the income statement; loss on available-for-sale securities in the equity section.) 10.30 a. Incorrect This is a substantive test that has little to do with controls. b.
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Solutions Chapters 10 - SOLUTIONS FOR MULTIPLE-CHOICE...

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