Question 3 (6 points)

Items 1 through 3 are questions typically found in a standard internal control questionnaire used by auditors to obtain an understanding of internal control for notes payable. In using the questionnaire for a client, a yes response indicates a possible internal control, whereas a no indicates a potential deficiency:

1. Are liabilities for notes payable incurred only after written authorization by a proper company official?
2. Are paid notes cancelled and retained in the company files?
3. Are interest expense and accrued interest recomputed periodically by an individual who does not record interest transactions?

a. For each of the preceding questions, identify the type of financial statement misstatement that can occur if the control were not in effect.

b. For each of the potential misstatement in part a above, list an audit procedure that can be used to determine whether a material misstatement exists.

Question 4 (6 points)

The following audit procedures are commonly performed by auditors in the verification of owners equity:

1. Review the articles of incorporation and bylaws for provisions about owners equity.
2. Account for all certificate numbers in the capital stock book for all shares outstanding.
3. Examine the stock certificate book for any stock that was cancelled.

a. State the purpose of each of these three audit procedures.

b. List the type of misstatements the auditors can uncover by the use of each audit procedure.