ch. 13 hw

The audit of intangible assets typically involves

Vouching the Cost of Assets Testing Allocation Methods

Analysis of which account is least likely to reveal evidence relating to recorded retirement of equipment? Multiple Choice Accumulated depreciation. Insurance expense. Property, plant, and equipment. Purchase returns and allowances.

Purchase returns and allowances.

The auditors may conclude that depreciation charges are insufficient by noting: Multiple Choice Insured values greatly in excess of book values. Large amounts of fully depreciated assets. Continuous trade-ins of relatively new assets. Excessive recurring losses on assets retired.

Excessive recurring losses on assets retired. Explanation Excessive recurring losses on assets retired show that the depreciation expense recognized during the actual useful lives of the assets has been less than the real cost of using the assets.

Which of the following statements is not typical of property, plant, and equipment as compared to most current asset accounts? A property, plant, and equipment cutoff error near year-end has a more significant effect on net income. Relatively few transactions occur in property, plant, and equipment during the year. The assets involved with property, plant, and equipment ordinarily have relatively longer lives. Property, plant, and equipment accounts typically have a higher dollar value.

A property, plant, and equipment cutoff error near year-end has a more significant effect on net income. A property, plant and equipment cutoff error has less of an effect, not more, on net income. This is because the only effect on income is the small amount of depreciation involved.

Treetop Corporation acquired a building and arranged mortgage financing during the year. Verification of the related mortgage acquisition costs would be least likely to include an examination of the related: Deed. Canceled checks. Closing statement. Interest expense.

Deed

In testing plant and equipment balances, an auditor may select recorded additions in the analysis of plant and equipment and inspect the actual asset(s) involved. Which management assertion is this procedure most directly related to? Multiple Choice Existence. Completeness. Rights. Valuation.

Existence

To strengthen internal control over the custody of heavy mobile equipment, the client would most likely institute a policy requiring a periodic: Multiple Choice Increase in insurance coverage. Inspection of equipment and reconciliation with accounting records. Verification of liens, pledges, and collateralizations. Accounting for work orders.

Inspection of equipment and reconciliation with accounting records. Inspection of equipment and the reconciliation of the equipment with accounting records will strengthen internal control over custody of the equipment.

Which of the following explanations most likely would satisfy an auditor who questions management about significant debits to the accumulated depreciation accounts? The estimated remaining useful lives of plant assets were revised upward. Plant assets were retired during the year. The prior year's depreciation expense was erroneously understated. Overhead allocations were revised at year-end.

Plant assets were retired during the year.

A search for overstated property, plant, and equipment purchases would most likely include: Multiple Choice Accounts receivable. Property, plant, and equipment. Purchase discounts. Repairs and maintenance expense.

Property, plant, and equipment.

An effective procedure for identifying unrecorded retirements of equipment is to: Foot related property records. Recalculate depreciation on the related equipment. Select items of equipment in the accounting records and then locate them in the plant. Select items of equipment and then locate them in the accounting records.

Select items of equipment in the accounting records and then locate them in the plant. An inability to locate assets may reveal to the auditors that unrecorded retirements have occurred.

For the audit of a continuing nonpublic client, the emphasis of the testing for property accounts is on: All transactions resulting in the ending balance. Tests of controls over disposals. Transactions that occurred during the year. Performing analytical procedures on beginning balances of the accounts.

Transactions that occurred during the year. Explanation Ordinarily, the emphasis for testing property accounts is on transactions that occurred during the year because the account turns over so slowly. Note, however, that audits performed under PCAOB AS 2110 also require consideration of internal control over property, plant and equipment.

Audit of which of the following accounts is most likely to reveal evidence relating to recorded retirements of equipment? Multiple Choice Accumulated depreciation. Cost of goods sold. Purchase returns and allowances. Purchase discounts.

Accumulated depreciation. Explanation Because the proper recording of a retirement requires elimination of the accumulated depreciation related to the retired equipment, review of this account is most likely to provide evidence about a recorded retirement.

Which of the following is an internal control weakness related to factory equipment? Multiple Choice Checks issued in payment of purchases of equipment are not signed by the controller. All purchases of factory equipment are required to be made by the department in need of the equipment. Factory equipment replacements are generally made when estimated useful lives, as indicated in depreciation schedules, have expired. Proceeds from sales of fully depreciated equipment are credited to other income.

All purchases of factory equipment are required to be made by the department in need of the equipment. The purchase of factory equipment should be made by the purchasing department regardless of which unit of the company will use the equipment. The purchasing department has the expertise and the established procedures and documents to ensure that all purchases are made in accordance with company policy.

The auditors are most likely to seek information from the plant manager with respect to the: Adequacy of the provision for uncollectible accounts. Appropriateness of physical inventory observation procedures. Existence of obsolete machinery. Deferral of procurement of certain necessary insurance coverage.

Existence of obsolete machinery. The plant manager would be the most appropriate individual for inquiries about the existence of machinery that is no longer useable.

Which of the following accounts should be reviewed by the auditors to gain reasonable assurance that additions to property, plant, and equipment are not understated? Depreciation. Accounts Payable. Cash. Repairs.

Repairs. In recording expenditures on property, plant, and equipment, the logical choice usually is between a revenue expenditure and a capital expenditure. If the outlay is judged to be a revenue expenditure (rightly or wrongly), it will probably be recorded in the Repairs and Maintenance account. If items that should be capitalized are erroneously charged to Repairs and Maintenance, the result will be an understatement of property, plant, and equipment. Consequently, the auditors can gain evidence that additions to property, plant, and equipment are not understated by reviewing the Repairs and Maintenance account. The other alternatives suggested in the question are not plausible. An erroneous debit to cash would be disclosed quickly because of the disagreement between cash receipts and the cash being deposited daily in the bank. A debit to Accounts Payable would lead to protests from creditors. A debit to Depreciation Expense would be a conspicuous error because of the timing of the entry and the lack of a related credit to Accumulated Depreciation.

Which of the following is not an overall test of the annual provision for depreciation expense? Compare rates used in the current year with those used in prior years. Test computation of depreciation provisions for a representative number of units. Test deductions from accumulated depreciation for assets purchased during the year. Perform analytical procedures.

Test deductions from accumulated depreciation for assets purchased during the year. Assets purchased during the year should not result in deductions from the accumulated depreciation account.

To assure accountability for fixed-asset retirements, management should implement an internal control that includes: Multiple Choice Continuous analysis of miscellaneous revenue to locate any cash proceeds from the sale of plant assets. Periodic inquiry of plant executives by internal auditors as to whether any plant assets have been retired. Utilization of serially numbered retirement work orders. Periodic observation of plant assets by the internal auditors.

Utilization of serially numbered retirement work orders. Serially numbered retirement work orders provide a systematic means of assuring that units of plant and equipment are not retired without authorization by management. Retirement work orders also provide the accounting department with the information necessary to record the retirement of equipment in the accounting records. The alternative procedures suggested are not satisfactory. Some retirements of plant asset do not involve cash receipts. The inquiries and observations by internal auditors would come after the fact of asset retirements.