The following multiple choice questions concern interest-bearing liabilities. Choose the best response.
a. Which of the following controls will most likely justify a reduced assessed level of
control risk for the completeness assertion for notes payable?
(1) The accounting staff reviews board of director minutes for any indication of any
transactions involving outstanding debt to make sure all borrowings are included
in the general ledger.
(2) All borrowings that exceed $500,000 require approval from the board of direc-
tors before loan contracts can be finalized.
(3) Before approving disbursement of principal payments on notes payable, the trea-
surer reviews terms in the note.
(4) Accounting maintains a detailed schedule of outstanding notes payable that is
reconciled monthly to the general ledger.
b. When an auditor observes that the recorded interest expense seems to be excessive
in relation to the balance in the bonds payable account, the auditor might suspect
that
(1) discount on bonds payable is understated.
(2) bonds payable are understated.
(3) bonds payable are overstated.
(4) premium on bonds payable is overstated.
c. In the audit of notes payable, which balance-related audit objective is generally one of the most important for the auditor to verify?
(1) Notes payable reflected on the balance sheet at the end of the year exist.
(2) Notes payable due to related parties are properly reflected on the balance sheet.
(3) Existing notes payable are included on the balance sheet as of year end.
(4) Notes payable are reflected at net realizable value as of the balance sheet date.
