audit ~ ch 14

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?

An addition to a building was charged to repairs and maintenance expense.

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

Appraised value as evidenced by independent appraisals.

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

Are procedures in place to monitor and properly restrict access to equipment?

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

Authorization and approval of major fixed asset additions.

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?

Repairs and maintenance expense.

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?

Repairs and maintenance expense.

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

Testing goodwill for impairment.

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

Tests of controls and limited tests of current year property and equipment transactions.

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?

The company changed its capitalization policy for small tools in the current year.

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

The need to write-off equipment that has become obsolete.

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

A policy requiring all purchases of factory equipment to be made by the department in need of the equipment.

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

Acquisitions are to be made through and approved by the department in need of the equipment.

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

Adequacy of replacement funds.

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?

Completeness.

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

Continuous utilization of sequentially numbered retirement work orders.

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

Establishing the reasonableness of useful lives and depreciation methods for depreciable assets and recomputing the depreciation expense.

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

Examination of deeds and title guaranty policies on hand.

Auditors will examine the insurance register primarily to

Examine policy expiration dates to verify that prepaid insurance is properly stated.

The auditor may conclude that depreciation charges are insufficient by noting

Excessive recurring losses on assets retired.

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

Existence of obsolete machinery.

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

Existence or occurrence.

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

Expenditures for fixed assets have been capitalized.

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

Expenditures for property and equipment have not been charged to expenses.

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?

Gross manufacturing equipment cost/units produced.

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

High.

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

Inspect the property ledger and the insurance and tax records and then tour the entity's facilities.

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

Investigation of variances within a formal budgeting system.

The cutoff assertion for prepaid insurance

Is best tested by recomputing the unexpired portion of insurance policies in effect.

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?

Occurrence.

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

Occurrence.

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?

Occurrence.

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

PP&E insurance expense includes some expenses related to product liability insurance.

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

Paid real estate tax bills.

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

Plant assets were retired during the year.

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

Review of repairs and maintenance expense.

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

Reviewing the purchase return and allowance account.

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

Reviewing the titles and descriptions for all construction work orders issued during the year.

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

Select certain items of equipment from the accounting records and locate them in the plant.

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

Select items of equipment from the accounting records and then locate them during the plant tour.

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

Several fully depreciated assets were retired during the year.

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

Using a budget to forecast and control acquisitions and retirements.

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

Valuation and allocation.

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

Valuation and allocation.

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

Valuation and allocation.

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

Valuation.