Deck 13: Audit of Long-Lived Assets and Related Expense Accounts

Question 1

Knowledge of business conditions is not crucial to the auditor's identification of the potential for impairment of assets as the auditor must focus attention on the accounting rules.

Answer 1

False

Question 2

Asset impairment is not typically assessed by the independent auditor,but is assessed by the internal auditor.

Answer 2

False

Question 3

A corporation should always anticipate and record gains on the disposal of assets.

Answer 3

False

Question 4

The auditor should determine whether property and equipment have reasonable useful lives.

Question 5

When a decision is made to discontinue an operation,the net assets should be written down to a best estimate of net realizable value.

Question 6

Improper recording of a capital lease as an operating lease is an inherent risk associated with the audit of property,plant,and equipment.

Question 7

The client should have methods in place to identify the impairment of significant assets.

Question 8

The auditor would conclude that the client was not depreciating the cost of fixed assets rapidly enough if there were a large number of losses on the disposals of assets.

Question 9

The auditor should be aware of material asset additions that are in remote locations and physically observe such assets.

Question 10

Asset impairment is assessed by the audit team for assets in the manufacturing environment,but not for office equipment and buildings.

Question 11

Once the auditor obtains a fixed asset additions schedule from the client,testing of the existence of the additions must immediately ensue to ensure effectiveness.

Question 12

The auditor would be most likely to request a schedule of repairs and maintenance expense to satisfy the auditor about the presentation and disclosure assertions for fixed assets.

Question 13

A major risk associated with property,plant,and equipment is that of the innovative methods of manipulating earnings by recording invalid amounts to asset accounts.

Question 14

A first-time audit of the property,plant,and equipment accounts will involve additional work on the part of the auditor to test the opening balances.

Question 15

The auditor should perform detailed tests of labor charges when the client company constructs its own assets.

Question 16

The auditor typically tests management's estimate of the impaired value of a fixed asset through the analysis of the future undiscounted cash flows of the asset.

Question 17

The auditor would be most likely to request a schedule of repairs and maintenance expense to satisfy the auditor about the completeness assertion for fixed assets.

Question 18

In the audit of the depreciation methods and possible impairment of manufacturing equipment,the auditor tours the facility during operations to determine if any of the machines are idle.

Question 19

Gains on the sale of equipment usually signal the auditor that the lives of the assets are too long.

Question 20

Internal controls over fixed assets should ensure that all purchases are authorized.

Question 21

Companies always enter into lease agreements to finance the purchase of expensive assets over time.

Question 22

Auditors will perform an analysis of leases using FAS Statement No.13 and FASB ASC 840 criteria to substantiate the accounting treatment.

Question 23

Auditors often recalculate the present value of capital lease agreements to assess the valuation of recorded liabilities.

Question 24

A bargain purchase option is a good indicator that an arrangement should be accounted for as an operating lease.

Question 25

U.S.accounting principles require that lease agreements are treated as capital leases if all of the four criteria apply.

Question 26

Bluewire Technologies,Inc.obtained a patent for its MegaK2000 product five years ago and should expense the entire amount of the unamortized balance if MegaK2000 is no longer sold.

Question 27

The auditor must be aware of management's motivations to present financial information in a certain light when leases are utilized.

Question 28

The accounting for leases is often misapplied in order to achieve off-balance sheet financing.

Question 29

Leases that qualify as operating are expensed as rent each period.

Question 30

An auditor will read the footnotes related to discontinued operations to ensure that,among other things,the justification of the decision and the write-down of assets are adequately disclosed.

Question 31

It is simple for auditors to test the costs capitalized for discovery of natural resources because only successful efforts may be recorded

Question 32

Strong internal control activities in the fixed assets cycle include the use of identification tags secured to assets for proper tracking.

Question 33

Reclamation expenses associated with the use of the land in a mining operation should be estimated,accrued,and allocated to depletion costs over time.

Question 34

When testing a client's additions to an asset for research and development,the auditor must remember that such costs should be amortized over the lesser of their legal lives or useful lives.

Question 35

If the beginning balance of property,plant and equipment is established through previous audit work,the test of property accounts usually can be limited to selected tests of property additions and disposals during the year.

Question 36

Title transfer by the end of a lease is one of the criteria for capital lease recognition.

Question 37

Accounting principles allow goodwill to be held on the books of a company indefinitely and not amortized over time.

Question 38

Companies often increase depreciation and impairment expenses through manipulation in order to increase profits.

Question 39

The cost of defending patents may not be capitalized.

Question 40

Changes in the ages of equipment may be identified by analyzing depreciation expense as a percent of assets.

Question 41

When a company decides to dispose of a particular line of operation by selling it to another company,the related assets should

A)be written up in anticipation of a gain on disposal.
B)be considered scrap material.
C)be held at historical cost.
D)be written down on the expectation of a loss on disposal.

Question 42

Auditors test management's estimates of impaired value through reference to which of the following?

A)economic plans.
B)evidence of fair market value.
C)estimated cash flow.
D)All of the above.

Question 43

Analytical estimation of depreciation by the auditor is an important audit test because it does which of the following?

A)it signals which additions will be vouched.
B)it yields statistical precision in sampling.
C)it is a good starting point for determining additional procedures.
D)it gives the auditor an indication of the impaired balances existing in financial statements.

Question 44

When testing fixed assets for the reasonableness of the client's estimated useful lives,the audit team should do which of the following?

A)consult the IRS code for regulated lives.
B)make the decision for the client upon purchase.
C)understand the economics of the client's business.
D)compare them with other clients in different industries.

Question 45

Which of the following is the best example of a fixed asset that will be physically inspected by the auditor in the period under audit?

A)An adding machine acquired in the current period.
B)A warehouse purchased three years previously.
C)An office building constructed in the current period.
D)Desktop computers purchased in the previous period.

Question 46

All of the following represent risks associated with fixed assets and related expenses except

A)Incomplete recording of asset disposals
B)Environmental liabilities or claims related to violations of safety and protection regulations
C)Failure to properly recognize impairment in value
D)All represent risks

Question 47

In testing property,plant and equipment the scope and extent of testing can vary based on the complexity of assets utilized,the difficulty of estimating useful life,and the risk associated with the client.

Question 48

Asset losses or impairment are recognized when they occur,while asset gains are not recognized until realized.

Question 49

The tour of the manufacturing plant may best assist the auditor in identifying which of the following?

A)that all purchases are authorized.
B)machinery that is inoperative in the production cycle.
C)management's impairment strategy.
D)estimates of depreciation expense.

Question 50

Intangible assets are amortized over the remaining legal life of patents or copyrights associated with the asset or their useful life.

Question 51

If the audit team notes the client has made a significant change in its product line which requires that new equipment be purchased,that may be an indication of

A)book value.
B)scrap value.
C)impaired value.
D)depreciation value.

Question 52

Property,plant and equipment is written down when its value becomes impaired and may be written back up if its value go up at a later date.

Question 53

Which method might an auditor utilize in testing depletion expense?

A)using analytical procedures.
B)observation of the physical count.
C)obtaining management representation.
D)estimating the useful life of the natural resource.

Question 54

If the auditor determines that beginning balances of fixed assets have not changed from previously audited amounts,much of the testing for existence can be accomplished by which of the following?

A)sampling receiving reports.
B)inquiring of management.
C)vouching current period additions.
D)recomputing depreciation.

Question 55

Which one of the following is not a risk associated with property,plant,and equipment.

A)obsolescence of assets
B)impairment of assets
C)incomplete recording of disposals
D)sum-of-years digits depreciation

Question 56

The first-time audit of a company with property,plant,and equipment may cause the auditor to do which of the following?

A)request a complete physical inventory of the certain items in the account.
B)start fresh with an audit as of the end of the period.
C)send a confirmation to a sample of equipment suppliers.
D)review original invoices of immaterial equipment purchased during the period.

Question 57

Management may determine that an asset is impaired through the use of which of the following?

A)discounted cash flows.
B)internal rate of return.
C)Black Scholes modeling.
D)acid test ratios.

Question 58

Which one of the following procedures is most appropriate for testing proper authorization for major capital projects?

A)examination of proper recording of the equipment.
B)examination of board of directors minutes.
C)examination of the cash budget.
D)examination of useful lives.

Question 59

The auditor should be aware of the possibility that management may be manipulating earnings by inappropriately expensing capital items or inappropriately capitalizing expense items.

Question 60

Which one of the following procedures would provide the best evidence about the original cost of a piece of equipment?

A)fixed asset schedule
B)purchase invoice
C)receiving report
D)inquiry of the purchasing agent

Question 61

Which of the following procedures would evidence the client's control over the existence of machinery and equipment?

A)Useful lives are only entered into the system by the controller.
B)Impairment testing takes place in accordance with a formal assessment of business changes and events as they relate to fixed assets.
C)Fixed assets are assigned a control identification number and that number is permanently affixed to the asset for periodic inventory.
D)Only the CFO can enter additions into the fixed asset module of the system.

Question 62

Which of the following represents a primary audit concern for errors in the recording of intangible assets?

A)Capitalized research and development costs.
B)Amortization of patents.
C)Capitalized costs to successfully defend a patent.
D)Amortization of franchise fees.

Question 63

In a tour of a client's manufacturing facility,the auditor is most likely attempting to satisfy the which of the following assertions related to long-lived assets?

A)cutoff.
B)existence.
C)rights.
D)presentation.

Question 64

Analytical review procedures for depreciation expense and accumulated depreciation would include all of the following ratios except

A)current depreciation as a percentage of previous year assets.
B)fixed assets as a percentage of previous year assets.
C)depreciation expense as a percentage of assets each year.
D)average age of assets.

Question 65

Leases in the U.S.should be capitalized on the books of the client if it meets one of four conditions.Which of the following is not one of those four conditions.

A)the lease contract transfers ownership.
B)the lease contains a bargain purchase option.
C)the lease term covers at least 80% of the useful life of the asset.
D)the present value of the minimum lease payments is at least equal to 90% of the assets fair market value.

Question 66

The audit of the repairs and maintenance expense account is extremely important as it helps the auditor to determine if

A)depreciation expense includes charges for repairs.
B)the net book value of assets achieves precision.
C)items that should be included as assets are charged as expenses.
D)all repairs and maintenance expenses add value to the assets.

Question 67

If a lease does not meet at least one of four conditions described in U.S.GAAP,then it is classified as which of the following?

A)capital lease.
B)operating lease.
C)direct financing lease.
D)sales-type lease.

Question 68

Which one of the following does not constitute probable relationships between accounts?

A)Equipment and depreciation.
B)Patent and amortization.
C)Assets under capital leases and amortization.
D)Oil reserves and depreciation.

Question 69

Which of the following meets the criteria for a capitalized lease under GAAP in the U.S.?

A)The present value of the future minimum payments is $90,000 and the fair value is $110,000.
B)The lessee can purchase the asset for an amount that is greater than fair vale at the end of the lease.
C)The lease term is ten years and the useful life of the asset is 11 years.
D)Title does not transfer by the end of the lease term.

Question 70

Cloud Company determines that the future undiscounted cash flow generated from the use of its fleet of small aircraft are less than carrying values.For impairment purposes,an auditor would wish to further obtain evidence regarding which of the following?

A)parts inventory for the aircraft.
B)an economic outlook for the company's stock.
C)an independent valuation of the aircraft.
D)the historical cost of the aircraft.

Question 71

Which is the primary assertion tested in conjunction with the obtaining of evidence regarding impairment?

A)Valuation.
B)Cutoff.
C)Existence.
D)Rights.

Question 72

An estimate of the reasonableness of depreciation expense and accumulated depreciation may be accomplished by performing which of the following?

A)tests of controls.
B)substantive tests of transactions.
C)analytical review procedures.
D)management inquiry.

Question 73

The auditor selects a sample of asset disposals and examines the sales documentation evidencing disposal of the equipment and recomputes gain or loss on the disposal.This audit steps primarily tests which of the following assertions for the equipment account?

A)existence assertion.
B)presentation assertion.
C)rights assertion.
D)valuation assertion.

Question 74

The auditor performs tests on property,plant and equipment to determine if assets have been pledged as collateral or title has transferred primarily to assess which assertions?

A)Valuation and completeness.
B)Rights and disclosure.
C)Obligations and legality.
D)Cutoff and accuracy.

Question 75

As it relates to property,plant and equipment,what specific risk relating to earnings management do the auditors assess?

A)Equipment has been initially recorded at cost.
B)Depreciation has been recorded using accelerated methods.
C)Repairs and maintenance have been expensed rather than included as assets.
D)Useful lives have been extended without justification.

Question 76

The best approach to determine whether a capital lease has been "kept off the books" is to do which of the following?

A)review all capital lease agreements that have been recorded.
B)examine the canceled checks for all recorded capital leases.
C)review all major lease agreements to determine whether there are other leases to be capitalized.
D)physically examine the asset and trace it to the general ledger.

Question 77

An auditor wishes to test the net valuation of the equipment in the financial statements of a client.How will the auditor best perform this testing?

A)Vouch the recorded equipment to an invoice supporting the cost of the equipment when originally purchased.
B)Compare the ID number on the fixed asset schedule to the identification tag on the asset itself.
C)Recalculate annual depreciation expense for major additions and a sample of all other equipment.
D)Confirm material equipment with customers.

Question 78

A test of controls to determine proper authorization for the addition of a major piece of equipment would include all of the following except

A)examination of purchase agreements.
B)review of minutes of the board of directors' meetings.
C)review of approvals by a capital budgeting committee.
D)examination of the identification tags attached to equipment.

Question 79

Which of the following is a term used to describe management's recognition that a significant portion of fixed assets is no longer as productive as had originally been expected?

A)asset depreciation.
B)asset amortization.
C)asset impairment.
D)asset disposal.

Question 80

Analytical procedures for depreciation expense and accumulated depreciation would include all of the following ratios except

A)current depreciation as a percentage of previous year depreciation.
B)fixed assets as a percentage of previous year assets.
C)accumulated depreciation as a percentage of gross assets each year.
D)average cost of assets.