Question 1

Which of the following accounts would normally not be a part of the acquisition and payment cycle of prepaid insurance?

Accepted Answer

A) cash 
B) insurance payable 
C) insurance expense 
D) prepaid insurance 
A) cash 
B) insurance payable 
C) insurance expense 
D) prepaid insurance B

Question 2

State four of the seven specific balance-related audit objectives for property,plant,and equipment additions and,for each objective,describe one common test of details of balances.

Accepted Answer

•Current-year acquisitions in the acquisitions schedule agree with related master file amounts,and the total agrees with the general ledger (detail tie-in).(1)Foot the acquisitions schedule,(2)trace the individual acquisitions to the master file for amounts and descriptions,and (3)trace the total to the general ledger.
•Current-year acquisitions as listed exist (existence).(1)Examine vendors' invoices and receiving reports and (2)physically examine assets.
•Existing acquisitions are recorded (completeness).(1)Examine vendors' invoices of closely related accounts such as repairs and maintenance to uncover items that should be recorded as equipment,and (2)review lease and rental agreements.
•Current-year acquisitions as listed are accurate (accuracy).Examine vendors' invoices.
•Current-year acquisitions as listed are correctly classified (classification).(1)Examine vendors' invoices in various equipment accounts to uncover items that should be classified as manufacturing or office equipment,part of buildings,or repairs,(2)examine vendors' invoices of closely related accounts such as repairs to uncover items that should be recorded as equipment,and (3)examine rent and lease expense for capitalizable leases.
•Current-year acquisitions are recorded in the correct period (cutoff).Review transactions near the balance sheet date for correct period.
•The client has rights to current-year acquisitions (rights).Examine vendors' invoices.

Question 3

In testing acquisitions,the auditor must understand the relevant accounting standards to insure the client adheres to accepted accounting practices for property,plant,and equipment.Describe three of the auditor's concerns in this area.

Accepted Answer

(Answers may vary.)
•inclusion of material transportation and installation costs as part of the asset's acquisition cost
•failure to properly record the trade-in of existing equipment
•client's capitalization policy to determine whether acquisitions are treated consistently with those of the preceding year
•examine whether the client has the right to record the equipment as an asset (Capitalization of leased equipment or classification of the equipment as an operating lease)
•Correct classification among various equipment accounts
•Improper inclusion of transactions that should be recorded as assets in repairs and maintenance expense,lease expense,supplies,small tools,and similar accounts

Question 4

A set of records for each piece of equipment that includes descriptive information,date of acquisition,original cost,current year depreciation,and accumulated depreciation is the

Accepted Answer

A) acquisitions schedule. 
B) depreciation schedule. 
C) fixed asset master file. 
D) file of purchase requisitions. 
A) acquisitions schedule. 
B) depreciation schedule. 
C) fixed asset master file. 
D) file of purchase requisitions.

Question 5

The emphasis in auditing manufacturing equipment is on the verification of current-period disposals and acquisitions.

Accepted Answer

A) True 
 B)False

Question 6

The most important audit objective for depreciation expense is detail tie-in.

Accepted Answer

A) True 
 B)False

Question 7

When auditing prepaid insurance,

Accepted Answer

A) for many audits,significant substantive procedures are needed if the control risk is low. 
B) companies often have a standard monthly journal entry to reclassify prepaid insurance as insurance expense. 
C) the emphasis in the tests of details of balances is on insurance expense. 
D) the auditor must prepare the insurance register. 
A) for many audits,significant substantive procedures are needed if the control risk is low. 
B) companies often have a standard monthly journal entry to reclassify prepaid insurance as insurance expense. 
C) the emphasis in the tests of details of balances is on insurance expense. 
D) the auditor must prepare the insurance register.

Question 8

When auditing acquisitions of property,plant,and equipment,the auditor's review of lease and rental agreements most closely relate to the cutoff objective.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following tests are typically not necessary when auditing a client's schedule of recorded disposals?

Accepted Answer

A) footing the schedule 
B) tracing the totals on the schedule to the recorded disposals in the general ledger 
C) tracing cost and accumulated depreciation of the disposals to the property master file 
D) All of the above are necessary. 
A) footing the schedule 
B) tracing the totals on the schedule to the recorded disposals in the general ledger 
C) tracing cost and accumulated depreciation of the disposals to the property master file 
D) All of the above are necessary.

Question 10

After the accrual and property tax expense for each piece of property has been recalculated,the totals are added and compared with the general ledger.

Accepted Answer

A) True 
 B)False

Question 11

In the analysis of expense accounts,the auditor verifies transactions in specific accounts to determine whether the transactions are properly classified and accurately recorded.

Accepted Answer

A) True 
 B)False

Question 12

The transportation and installation costs for a piece of equipment should be charged to an expense account.

Accepted Answer

A) True 
 B)False

Question 13

The auditor is testing for unrecorded retirements/disposals of equipment.Which of the following audit procedures would the auditor most likely use?

Accepted Answer

A) Select items from the fixed asset master file and then physically locate them. 
B) Examine the repairs and maintenance amount for large debits. 
C) Compare current year's depreciation expense with the previous year's depreciation expense. 
D) Trace acquisition documents to the fixed asset master file. 
A) Select items from the fixed asset master file and then physically locate them. 
B) Examine the repairs and maintenance amount for large debits. 
C) Compare current year's depreciation expense with the previous year's depreciation expense. 
D) Trace acquisition documents to the fixed asset master file.

Question 14

Which of the following statements about the audit of fixed assets is the least correct?

Accepted Answer

A) The primary accounting record for manufacturing equipment and other property,plant and equipment is generally a fixed asset master file. 
B) Manufacturing equipment and current assets are normally audited in the same fashion regardless of the activity within a particular account. 
C) The emphasis on auditing fixed assets is on verification of current-period acquisitions. 
D) Failure to record the acquisition of a fixed asset affects the income statement until the assets are fully depreciated. 
A) The primary accounting record for manufacturing equipment and other property,plant and equipment is generally a fixed asset master file. 
B) Manufacturing equipment and current assets are normally audited in the same fashion regardless of the activity within a particular account. 
C) The emphasis on auditing fixed assets is on verification of current-period acquisitions. 
D) Failure to record the acquisition of a fixed asset affects the income statement until the assets are fully depreciated.

Question 15

Changing circumstances may require a change in the useful life of an asset.When this occurs,it involves a change in

Accepted Answer

A) accounting estimate rather than a change in accounting principle. 
B) accounting principle rather than a change in accounting estimate. 
C) both accounting principle and accounting estimate. 
D) neither accounting principle nor accounting estimate. 
A) accounting estimate rather than a change in accounting principle. 
B) accounting principle rather than a change in accounting estimate. 
C) both accounting principle and accounting estimate. 
D) neither accounting principle nor accounting estimate.

Question 16

A record of insurance policies in force and the due date of each policy is contained in the

Accepted Answer

A) voucher register. 
B) insurance register. 
C) insurance expense account. 
D) prepaid insurance account. 
A) voucher register. 
B) insurance register. 
C) insurance expense account. 
D) prepaid insurance account.

Question 17

Improperly classifying a fixed asset by recording the amount in the repairs and maintenance expense account will have an effect on which of the following financial statements until the asset would normally have been depreciated?

Accepted Answer

A) the balance sheet 
B) the income statement 
C) the cash flow statement 
D) both the income statement and the balance sheet 
A) the balance sheet 
B) the income statement 
C) the cash flow statement 
D) both the income statement and the balance sheet

Question 18

The test of details of balances procedure to "examine vendors' invoices of closely related accounts such as repairs to uncover items that should be property,plant,and equipment" satisfies the audit objective of

Accepted Answer

A) completeness. 
B) detail tie-in. 
C) cutoff. 
D) existence. 
A) completeness. 
B) detail tie-in. 
C) cutoff. 
D) existence.

Question 19

The auditor should keep in mind that the amount in insurance expense is a residual amount.

Accepted Answer

A) True 
 B)False

Question 20

When an auditor recomputes the unexpired portion of prepaid insurance,they are satisfying which audit objective?

Accepted Answer

A) completeness 
B) existence 
C) accuracy and detail tie-in 
D) rights 
A) completeness 
B) existence 
C) accuracy and detail tie-in 
D) rights

Exam 19: Completing the Tests in the Acquisition and Payment Cycle:

Which of the following accounts would normally not be a part of the acquisition and payment cycle of prepaid insurance?

State four of the seven specific balance-related audit objectives for property,plant,and equipment additions and,for each objective,describe one common test of details of balances.

In testing acquisitions,the auditor must understand the relevant accounting standards to insure the client adheres to accepted accounting practices for property,plant,and equipment.Describe three of the auditor's concerns in this area.

A set of records for each piece of equipment that includes descriptive information,date of acquisition,original cost,current year depreciation,and accumulated depreciation is the

The emphasis in auditing manufacturing equipment is on the verification of current-period disposals and acquisitions.

The most important audit objective for depreciation expense is detail tie-in.

When auditing prepaid insurance,

When auditing acquisitions of property,plant,and equipment,the auditor's review of lease and rental agreements most closely relate to the cutoff objective.

Which of the following tests are typically not necessary when auditing a client's schedule of recorded disposals?

After the accrual and property tax expense for each piece of property has been recalculated,the totals are added and compared with the general ledger.

In the analysis of expense accounts,the auditor verifies transactions in specific accounts to determine whether the transactions are properly classified and accurately recorded.

The transportation and installation costs for a piece of equipment should be charged to an expense account.

The auditor is testing for unrecorded retirements/disposals of equipment.Which of the following audit procedures would the auditor most likely use?

Which of the following statements about the audit of fixed assets is the least correct?

Changing circumstances may require a change in the useful life of an asset.When this occurs,it involves a change in

A record of insurance policies in force and the due date of each policy is contained in the

Improperly classifying a fixed asset by recording the amount in the repairs and maintenance expense account will have an effect on which of the following financial statements until the asset would normally have been depreciated?

The test of details of balances procedure to "examine vendors' invoices of closely related accounts such as repairs to uncover items that should be property,plant,and equipment" satisfies the audit objective of

The auditor should keep in mind that the amount in insurance expense is a residual amount.

When an auditor recomputes the unexpired portion of prepaid insurance,they are satisfying which audit objective?

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