Deck 14: Auditing the Financing Investing Process: Prepaid Expenses Intangible Assets and Property Plant and Equipment

Question 1

The property, plant, and equipment records function should be segregated from the custodial function.

Answer 1

True

Question 2

Reviewing capital budgets and comparing the amounts spent with amounts budgeted is an example of a substantive analytical procedure for auditing prepaid accounts.

Answer 2

False

Question 3

Inherent risk for prepaid expenses would generally be assessed as low because these accounts do not usually include complex transactions.

Answer 3

True

Question 4

The auditor is most likely to seek information from the plant manager with respect to the

A) Adequacy of the provision for uncollectible accounts.
B) Appropriateness of physical inventory observation procedures.
C) Existence of obsolete machinery.
D) Deferral or procurement of certain necessary insurance coverage.

Question 5

Which of the following questions would an auditor least likely include on an internal control questionnaire concerning the initiation and execution of equipment transactions?

A) Are requests for major repairs approved at a higher level than the department initiating the request?
B) Are prenumbered purchase orders used for equipment and periodically accounted for?
C) Are requests for purchases of equipment reviewed for consideration of soliciting competitive bids?
D) Are procedures in place to monitor and properly restrict access to equipment?

Question 6

Substantive analytical procedures should not be used in the audit of property, plant, and equipment.

Question 7

In the examination of property, plant, and equipment, the auditor tries to determine all of the following except the

A) Adequacy of controls.
B) Extent of property abandoned, retired, or sold during the year.
C) Adequacy of replacement funds.
D) Reasonableness of the depreciation.

Question 8

Inquiry of entity personnel and a review of lease transactions for the same period can provide evidence on proper cutoff for capital leases.

Question 9

The purchase of capital assets should be consistent with the authorization table used by the entity to approve such transactions. However, no such table is normally used for lease transactions.

Question 10

Which of the following policies constitutes a control weakness related to the acquisition of factory equipment?

A) Acquisitions are to be made through and approved by the department in need of the equipment.
B) Advance executive approvals are required for equipment acquisitions.
C) Variances between authorized equipment expenditures and actual costs are to be immediately reported to management.
D) Depreciation policies are reviewed only once a year.

Question 11

Generally, auditors rely on controls when auditing the property management function and therefore less substantive testing is used.

Question 12

If an entity has few capital asset purchases, it will generally not have a formal control system over such transactions.

Question 13

If the auditor has detected misstatements in prior audits, the assessment of inherent risk for the property management process will usually be set higher.

Question 14

Assets no longer used in operations are accounted for in essentially the same manner as those used in operations.

Question 15

An auditor typically sets inherent risk for intangible assets at this level

A) Low.
B) Moderate.
C) Zero.
D) High.

Question 16

Disposition of capital assets through sale, exchange, retirement, or abandonment are transactions that occur in the property management process.

Question 17

Prepaid expenses provide economic benefit for longer than a year.

Question 18

Substantive analytical procedures are commonly used to test prepaid accounts.

Question 19

An example of a prepaid account is prepaid interest.

Question 20

If a periodic physical inventory of property, plant, and equipment is taken, the individual responsible for the inventory should be independent of the custodial and record-keeping functions.

Question 21

Which of the following accounts would most likely be reviewed by the auditor to gain reasonable assurance that additions to property, plant, and equipment are not understated?

A) Depreciation expense.
B) Accounts payable.
C) Cash.
D) Repairs and maintenance expense.

Question 22

In verifying the amount of goodwill recorded by an entity, the most convincing evidence that an auditor can obtain is by comparing the recorded value of assets acquired with the

A) Assessed value as evidenced by tax bills.
B) Seller's book value as evidenced by financial statements.
C) Insured value as evidenced by insurance policies.
D) Appraised value as evidenced by independent appraisals.

Question 23

The auditor may conclude that depreciation charges are insufficient by noting

A) Insured values greatly in excess of book values.
B) Large amounts of fully depreciated assets.
C) Continuous trade-ins of relatively new assets.
D) Excessive recurring losses on assets retired.

Question 24

Testing depreciation calculations for a sample of property, plant, and equipment tests the assertion of

A) Existence.
B) Completeness.
C) Valuation and allocation.
D) Rights and obligations.

Question 25

Which of the following situations has the best chance of being detected when a CPA compares revenues and expenses reported for the year being audited (current year) with the prior year and investigates all changes exceeding a fixed percentage?

A) An increase in property tax rates has not been recognized in the company's current year accrual.
B) The cashier began lapping accounts receivable in the current year.
C) Because of worsening economic conditions, the current year provision for uncollectible accounts was inadequate.
D) The company changed its capitalization policy for small tools in the current year.

Question 26

Equipment acquisitions that are misclassified as maintenance expenses most likely would be detected by a control activity that provides for

A) Segregation of duties of employees in the accounts payable department.
B) Independent verification of invoices for disbursements recorded as equipment acquisitions.
C) Investigation of variances within a formal budgeting system.
D) Authorization by the board of directors of significant equipment acquisitions.

Question 27

Recomputing the unexpired portion of insurance policies in effect tests which of the following assertions for prepaid insurance?

A) Existence.
B) Classification.
C) Rights and obligations.
D) Valuation.

Question 28

To achieve effective control over fixed asset additions, a company should establish activities that require

A) Capitalization of the cost of fixed asset additions in excess of a specific dollar amount.
B) Performance of recurring fixed asset maintenance work solely by maintenance department employees.
C) Any fixed asset additions that are not used in the business to be classified as investments.
D) Authorization and approval of major fixed asset additions.

Question 29

To improve accountability for fixed asset retirements, management most likely would implement a system of internal control that includes

A) Continuous analysis of the repairs and maintenance account.
B) Periodic inquiry of plant executives by internal auditors as to whether any plant assets have been retired.
C) Continuous utilization of sequentially numbered retirement work orders.
D) Periodic inspection of insurance policies by the internal auditors.

Question 30

In auditing intangible assets, an auditor most likely would review or recompute amortization and determine whether the amortization period is reasonable in support of management's financial statement assertion of

A) Valuation and allocation.
B) Existence.
C) Completeness.
D) Rights and obligations.

Question 31

Which of the following constitutes a control weakness related to factory equipment?

A) A policy requiring all purchases of factory equipment to be made by the department in need of the equipment.
B) Checks issued in payment of purchases of equipment are not signed by the controller.
C) Factory equipment replacements are generally made when estimated useful lives, as indicated in depreciation schedules, have expired.
D) Proceeds from sales of fully depreciated equipment are credited to other income.

Question 32

The cutoff assertion for prepaid insurance

A) Is never tested because amounts always are immaterial.
B) Is best tested as part of the testing of property and equipment purchasing.
C) Is best tested exclusively by sending confirmations to vendors.
D) Is best tested by recomputing the unexpired portion of insurance policies in effect.

Question 33

In testing plant and equipment balances, an auditor examines new additions listed on an analysis of plant and equipment. This procedure most likely obtains evidence concerning management's assertion of

A) Completeness.
B) Occurrence.
C) Classification.
D) Accuracy.

Question 34

Tennessee Company violated company policy by erroneously capitalizing the cost of painting its warehouse. The CPA examining Tennessee's financial statements would most likely learn of this error by

A) Discussing Tennessee's capitalization policies with its controller.
B) Reviewing the titles and descriptions for all construction work orders issued during the year.
C) Observing during the physical inventory observation that the warehouse has been painted.
D) Examining in detail a sample of construction work orders.

Question 35

The auditor is least likely to learn of retirement of equipment through which of the following?

A) Reviewing the purchase return and allowance account.
B) Reviewing depreciation.
C) Analyzing debits to the accumulated depreciation account.
D) Reviewing insurance policy riders.

Question 36

Which of the following is likely the most effective audit procedure for the verification of the legal ownership of real property?

A) Examination of correspondence with the corporate counsel concerning acquisitions.
B) Examination of ownership documents registered and on file at a public hall of records.
C) Examination of corporate minutes and resolutions concerning the approval to acquire property, plant, and equipment.
D) Examination of deeds and title guaranty policies on hand.

Question 37

A normal audit procedure is to analyze the current year's repairs and maintenance accounts to provide evidence in support of the audit proposition that

A) Expenditures for fixed assets have been recorded in the proper period.
B) Capital expenditures have been properly authorized.
C) Noncapitalizable expenditures have been properly expensed.
D) Expenditures for fixed assets have been capitalized.

Question 38

When there are numerous property and equipment transactions during the year, an auditor planning to set control risk at low usually plans to obtain an understanding of internal control and to perform

A) Tests of controls and extensive tests of property and equipment balances at the end of the year.
B) Extensive tests of current year property and equipment transactions.
C) Tests of controls and limited tests of current year property and equipment transactions.
D) Analytical procedures for property and equipment balances at the end of the year.

Question 39

Complex accounting issues for property, plant, and equipment include all of the following except

A) Lease accounting.
B) Testing goodwill for impairment.
C) Capitalized interest.
D) Self-constructed assets.

Question 40

Which of the following accounts would most likely be reviewed by the auditor to gain reasonable assurance that additions to the equipment account are not understated?

A) Repairs and maintenance expense.
B) Depreciation expense.
C) Gain on disposal of equipment.
D) Accounts payable.

Question 41

In performing a search for unrecorded retirements of fixed assets, an auditor most likely would

A) Inspect the property ledger and the insurance and tax records and then tour the entity's facilities.
B) Tour the entity's facilities and then inspect the property records and the insurance and tax records.
C) Analyze the repair and maintenance account and then tour the entity's facilities.
D) Tour the entity's facilities and then analyze the repair and maintenance account.

Question 42

Which of the following explanations might satisfy an auditor who discovers significant debits to an accumulated depreciation account?

A) Several fully depreciated assets were retired during the year.
B) Prior years' depreciation charges were erroneously understated.
C) A reserve for possible loss on retirement has been recorded.
D) An asset has been recorded at its fair value.

Question 43

Which of the following best describes the independent auditor's approach to obtaining satisfaction concerning depreciation expense in the income statement?

A) Verifying the mathematical accuracy of the amounts charged to income as a result of depreciation expense.
B) Determining the method for computing depreciation expense and ascertaining that it is in accordance with generally accepted accounting principles.
C) Reconciling the amount of depreciation expense to those amounts credited to accumulated depreciation accounts.
D) Establishing the reasonableness of useful lives and depreciation methods for depreciable assets and recomputing the depreciation expense.

Question 44

Testing a sample of repairs and maintenance items to ensure that they were properly classified as repairs as opposed to property, plant, and equipment tests which of the following assertions for the property, plant, and equipment account?

A) Occurrence.
B) Completeness.
C) Cutoff.
D) Authorization.

Question 45

If the ratio of repairs and maintenance expense to property, plant, and equipment is higher than expected, which of the following is a plausible explanation?

A) Routine maintenance on an important piece of machinery was charged to repairs and maintenance expense.
B) An addition to a building was charged to repairs and maintenance expense.
C) The company forgot to depreciate all of its equipment.
D) The company purchased an unusual amount of new equipment.

Question 46

Auditors will examine the insurance register primarily to

A) Ensure that dollar coverage amounts are adequate.
B) Examine policy expiration dates to verify that prepaid insurance is properly stated.
C) Ensure that insurance agents are not related parties.
D) Ensure that all assets are insured.

Question 47

The controller of Excello Manufacturing, Inc., wants to use ratio analysis to identify the possible existence of idle equipment or the possibility that equipment has been disposed of without having been written off. Which of the following ratios would best accomplish this objective?

A) Depreciation expense/book value of manufacturing equipment.
B) Accumulated depreciation/book value of manufacturing equipment.
C) Repairs and maintenance cost/direct labor costs.
D) Gross manufacturing equipment cost/units produced.

Question 48

Determining that proper amounts of depreciation are expensed provides assurance about management's assertions of presentation and disclosure and

A) Valuation and allocation.
B) Completeness.
C) Rights and obligations.
D) Existence.

Question 49

An auditor analyzes repairs and maintenance accounts primarily to obtain evidence in support of the audit assertion that all

A) Noncapitalizable expenditures for repairs and maintenance have been recorded in the proper period.
B) Expenditures for property and equipment have been recorded in the proper period.
C) Noncapitalizable expenditures for repairs and maintenance have been properly charged to expense.
D) Expenditures for property and equipment have not been charged to expenses.

Question 50

Which of the following explanations most likely would satisfy an auditor who questions management about significant debits to the accumulated depreciation accounts?

A) The estimated remaining useful lives of plant assets were revised upward.
B) Plant assets were retired during the year.
C) The prior year's depreciation expense was erroneously understated.
D) Overhead allocations were revised at year-end.

Question 51

In an interview with the plant manager regarding operations, the auditor is most likely to obtain evidence that raises concerns regarding

A) The capitalization vs. expensing policy.
B) The allocation of fixed and variable costs.
C) The need to write-off equipment that has become obsolete.
D) The adequacy of depreciation expense.

Question 52

Testing a sample of repairs and maintenance expense items to ensure that they were properly classified as repairs as opposed to property, plant, and equipment tests which of the following assertions for the repairs and maintenance expense account?

A) Occurrence.
B) Completeness.
C) Cutoff.
D) Authorization.

Question 53

Which of the following audit procedures would be least likely to lead the auditor to find unrecorded fixed asset disposals?

A) Examination of insurance policies for evidence of a dropped or cancelled policy.
B) Review of repairs and maintenance expense.
C) Review of property tax files.
D) Scanning of invoices for fixed asset additions for evidence of a purchase to replace a previously owned fixed asset.

Question 54

Which of the following is the best evidence of real estate ownership at the balance sheet date?

A) Title insurance policy.
B) A duplicate of the original deed held in the entity's safe.
C) Paid real estate tax bills.
D) Closing statements.

Question 55

In testing for unrecorded retirements of equipment, an auditor most likely would

A) Select items of equipment from the accounting records and then locate them during the plant tour.
B) Compare depreciation journal entries with similar prior-year entries in search of fully depreciated equipment.
C) Inspect items of equipment observed during the plant tour and then trace them to the equipment subsidiary ledger.
D) Scan the general journal for unusual equipment additions and excessive debits to repairs and maintenance expense.

Question 56

In testing plant and equipment balances, an auditor may inspect new additions listed on the analysis of plant and equipment. This procedure is designed to obtain evidence concerning management's assertion(s) about

A) Presentation and disclosure.
B) Existence or occurrence.
C) Both (1) presentation and disclosure and (2) existence and occurrence.
D) Neither (1) presentation and disclosure nor (2) existence and occurrence.

Question 57

Due to a weakness observed in internal control over recording retirements of equipment, the auditor may decide to

A) Inspect certain items of equipment in the plant and trace those items to the accounting records.
B) Review the subsidiary ledger to ascertain whether depreciation was taken on each item of equipment during the year.
C) Trace additions to the "other assets" account to search for equipment that is still on hand but no longer is being used.
D) Select certain items of equipment from the accounting records and locate them in the plant.

Question 58

If the ratio of insurance expense to related property, plant, and equipment is higher than expected, which of the following is a plausible explanation?

A) Too much expired insurance is still included in prepaid insurance.
B) PP&E insurance expense includes some expenses related to product liability insurance.
C) Depreciation expense was based on overly short useful lives.
D) Some routine maintenance on equipment was added to the equipment asset account.

Question 59

Which of the following is the most important control activity over acquisitions of property, plant, and equipment?

A) Establishing a written company policy distinguishing between capital and revenue expenditures.
B) Using a budget to forecast and control acquisitions and retirements.
C) Analyzing monthly variances between authorized expenditures and actual costs.
D) Requiring acquisitions to be made by user departments.

Question 60

By selecting a sample of additions to property, plant, and equipment and then examining the related vendor invoices, the auditor is testing which of the following assertions for property, plant, and equipment?

A) Occurrence.
B) Completeness.
C) Cutoff.
D) Classification.

Question 61

Auditors can usually gather sufficient, competent evidence on prepaid insurance by performing substantive analytical procedures. Why is this?

Question 62

Match each of the following intangible assets with its proper general category.

Question 63

For each analytical procedure listed below, identify a potential misstatement in the property management accounts it could help find.
a. Compute the ratio of depreciation expense to the related property, plant, and equipment accounts and compare to prior years' ratios
b. Compare monthly or annual repairs and maintenance with previous years
c. Compute ratio of insurance expense to the related property, plant, and equipment accounts and compare to prior years' ratios

Question 64

There are a number of important disclosure items to consider when auditing the property management process. List two. Where in the financial statements can some of the disclosures relating to property, plant, and equipment be found?

Question 65

List two ways an auditor can test the existence and completeness of insurance policies.

Question 66

For each of the following tests, state whether it is a test of details of account balances or a test of details of transactions. Then note for which property management assertion the test provides evidence.
Test depreciation calculations for a sample of capital assets
For assets written off, test amounts charged against income and accumulated depreciation
Physically examine the capital asset additions
Vouch transactions included in repairs and maintenance for items that should be capitalized
Vouch significant additions and dispositions to vendor invoices or other supporting documentation
Examine of confirm deeds or title documents for proof of ownership

Question 67

Property, plant, and equipment is often a significant portion of a company's assets. Describe the inherent risk factors that can affect the audit of this account.

Question 68

How do accounting standards regarding accounting for the impairment or disposal of long-lived assets affect the audit of property, plant, and equipment?

Question 69

Identify the types of transactions that occur in the property management process.

Question 70

Describe the types of information that should be included in the schedule of prepaid insurance that is used by the auditor as the basis for auditing prepaid insurance.

Question 71

What tests do auditors typically perform on a lead schedule for property, plant, and equipment and what assertion are they testing?