Today's question: BEC

Which of the following correctly describes debentures?

A)   Income bonds that require interest payments only when earnings permit.

B)   Income bonds that require interest payments only when earnings permit.

C)   Subordinated debt and rank behind convertible bonds.

D)   A form of lease financing similar to equipment trust certificates.

Correct Answer: C

Explanation: Debentures are bonds secured by the full faith and credit of the issuing firm. Debentures are not income bonds that require interest payments only earnings permit. Debentures are not subordinated debt and ranked behind convertible bonds. Debentures are not a form of lease financing similar to equipment trust certificates. 

Today’s question: AUD

A principal auditor decides not to refer to the audit of another CPA who audited a subsidiary of the principal auditor's client. After making inquiries about the other CPA's professional reputation and independence, the principal auditor most likely would:

A)   Add an explanatory paragraph to the auditor's report indicating that the subsidiary's financial statements are not material to the consolidated financial statements.

B)   Document in the engagement letter that the principal auditor assumes no responsibility for the other CPA's work and opinion.

C)   Obtain written permission from the other CPA to omit the reference in the principal auditor's report.

D)   Contact the other CPA and review the audit programs and working papers pertaining to the subsidiary.