B is corrent because the auditor would examine notes payable (a noncurrent account) to determine financing and investing activities that occurred (i.e., by examining changes in the noncurrent accounts). Each transaction involving notes payable is generally considered a financing and investing activity which requires disclosure. The auditor’s interest in notes payable is equally true when the statement of cash flows is based on a working capital approach.
A is incorrect because the auditor analyzes the changes in the noncurrent accounts rather than the cash account if a working capital format is used. If a cash format is used, the auditor also analyzes the individual changes in the noncurrent accounts as well as the gross changes in the current accounts.
C is incorrect because dividends payable represent a current item, and the net change would be included as an item affecting operations if the statement of cash flows is based upon the cash format.
D is incorrect because trade receivables represent a current item, and the net change would be included as an item affecting operations if the statement of cash flows is based upon the cash format.
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