Question 1

Which balance-related audit objective is not relevant to an audit of prepaid expenses?

Accepted Answer

A)  rights 
B)  accuracy 
C)  detail tie-in 
D)  realizable value 
A)  rights 
B)  accuracy 
C)  detail tie-in 
D)  realizable value

Question 2

Equipment on hand which is no longer used in operations but which the auditor has physically verified as being in existence does not need to be evaluated for potential impairment.

Accepted Answer

A) True 
 B)False

Question 3

Goodwill is often identified as a significant audit risk area by auditors and is likely to be a critical audit matter disclosed in audit reports for companies with goodwill impairment(s).

Accepted Answer

A) True 
 B)False

Question 4

Completeness and existence are the auditor's primary objectives in auditing manufacturing equipment.

Accepted Answer

A) True 
 B)False

Question 5

The auditor can rely on the combination of management's estimates of fair value estimates and any associated impairment write downs that result to long-lived assets, when required, combined with the opinion of the specialist hired by management in auditing management's estimates and write downs.

Accepted Answer

A) True 
 B)False

Question 6

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 7

The billing of customers and collection of the related accounts receivable are normally considered to be associated with the acquisition and payment cycle.

Accepted Answer

A) True 
 B)False

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

Other accrued expenses are normally considered to be associated with the acquisition and payment cycle.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following is not one of the reasons auditors verify equipment differently from current asset accounts?

Accepted Answer

A)  There are usually fewer current period acquisitions of equipment. 
B)  The amount of any given acquisition is often material. 
C)  The equipment is likely to be kept and maintained in the accounting records for several years. 
D)  Current assets are subject to liens and encumbrances while equipment is not. 
A)  There are usually fewer current period acquisitions of equipment. 
B)  The amount of any given acquisition is often material. 
C)  The equipment is likely to be kept and maintained in the accounting records for several years. 
D)  Current assets are subject to liens and encumbrances while equipment is not.

Question 11

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 12

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 13

When performing the test of details of balances, the balance-related audit objective of classifications is closely related to the objective of

Accepted Answer

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

Question 14

Failure to capitalize a fixed asset at the correct amount would impact which financial statements?

Accepted Answer

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

Question 15

Confirmations are commonly used to verify additions of property, plant, and equipment.

Accepted Answer

A) True 
 B)False

Question 16

Generally, in most situations, the audits of property, plant, and equipment accounts are similar.

Accepted Answer

A) True 
 B)False

Question 17

Property, plant, and equipment is normally audited in a different manner than current asset accounts. State three reasons why this is so, and discuss the differences in how property, plant, and equipment is audited compared to current assets.

Accepted Answer

• There are usually fewer current period

Question 18

The failure to capitalize a permanent asset, or the recording of an asset acquisition at the improper amount, affects the balance sheet

Accepted Answer

A)  forever. 
B)  for the current period. 
C)  for the depreciable life of the asset. 
D)  until the firm disposes of the asset. 
A)  forever. 
B)  for the current period. 
C)  for the depreciable life of the asset. 
D)  until the firm disposes of the asset.

Question 19

One of the reasons that auditors verify equipment differently from current assets is the amount of any given equipment acquisition is often material.

Accepted Answer

A) True 
 B)False

Question 20

Because the failure to record disposals of property, plant, and equipment can significantly affect the financial statements, the search for unrecorded disposals is essential. Which of the following is not a procedure used to verify disposals?

Accepted Answer

A)  Make inquiries of management and production personnel about the possibility of the disposal of assets. 
B)  Review whether newly acquired assets replace existing assets. 
C)  Test the valuation of fixed assets recorded in prior periods. 
D)  Review plant modifications and changes in product line, property taxes, or insurance coverage. 
A)  Make inquiries of management and production personnel about the possibility of the disposal of assets. 
B)  Review whether newly acquired assets replace existing assets. 
C)  Test the valuation of fixed assets recorded in prior periods. 
D)  Review plant modifications and changes in product line, property taxes, or insurance coverage.

Exam 19: Completing the Tests in the Acquisition and Payment Cycle: Verification of Selected Accounts

Which balance-related audit objective is not relevant to an audit of prepaid expenses?

Equipment on hand which is no longer used in operations but which the auditor has physically verified as being in existence does not need to be evaluated for potential impairment.

Goodwill is often identified as a significant audit risk area by auditors and is likely to be a critical audit matter disclosed in audit reports for companies with goodwill impairment(s).

Completeness and existence are the auditor's primary objectives in auditing manufacturing equipment.

The auditor can rely on the combination of management's estimates of fair value estimates and any associated impairment write downs that result to long-lived assets, when required, combined with the opinion of the specialist hired by management in auditing management's estimates and write downs.

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

The billing of customers and collection of the related accounts receivable are normally considered to be associated with the acquisition and payment cycle.

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

Other accrued expenses are normally considered to be associated with the acquisition and payment cycle.

Which of the following is not one of the reasons auditors verify equipment differently from current asset accounts?

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

When auditing prepaid insurance,

When performing the test of details of balances, the balance-related audit objective of classifications is closely related to the objective of

Failure to capitalize a fixed asset at the correct amount would impact which financial statements?

Confirmations are commonly used to verify additions of property, plant, and equipment.

Generally, in most situations, the audits of property, plant, and equipment accounts are similar.

Property, plant, and equipment is normally audited in a different manner than current asset accounts. State three reasons why this is so, and discuss the differences in how property, plant, and equipment is audited compared to current assets.

The failure to capitalize a permanent asset, or the recording of an asset acquisition at the improper amount, affects the balance sheet

One of the reasons that auditors verify equipment differently from current assets is the amount of any given equipment acquisition is often material.

Because the failure to record disposals of property, plant, and equipment can significantly affect the financial statements, the search for unrecorded disposals is essential. Which of the following is not a procedure used to verify disposals?

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Assessing the Risk of Material Misstatement

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