AUD- Ch. 13 PPE, Depreciation, and depletion

The audit of intangible assets typically involves: yes or no for: vouching the costs of assets testing allocation methods

yes and yes. Vouching the Cost of Assets and Testing Allocation Methods

For the audit of a continuing nonpublic client, the emphasis of the testing for property accounts is on: 1)all transactions resulting in the ending balance. 2)tests of controls over disposals 3)transactions that occurred during the year 4)performing analytical procedures on beginning balances of the accounts.

3) transactions that occurred during the year. (the account turns over slowly, also audits performed under PCAOB as 2110 also require consideration of internal control over property, plant, and equipment.

which of the following statements is not typical of PPE as compared to most current asset accounts? 1)a PPE cutoff error near year-end has more significant effect on net income. 2)relatively few transactions occur in PPE during the year. 3)the assets involved with PPE ordinarily have relatively longer lives. 4)PPE accounts typically have a higher dollar value.

1)a PPE cutoff error near year end has more significant effect on net income

audit of which of the following accounts is most likely to reveal evidence relating to recorded retirements of equipment? 1)accumulated depreciation 2)cost of goods sold 3)purchase return and allowances 4)purchase discount

1)accumulated depreciation (proper recording of a retirement requires elimination of the accumulated depreciation related to the retired equipment. provided evidence about a recorded retirement)

to strengthen internal control over the custody of heavy mobile equipment, the client would most likely institute a policy requiring a periodic: 1)increase in insurance coverage 2)inspection of equipment and reconciliation with accounting records. 3)verification of liens, pledges, and collateralizations. 4)accounting for work orders.

2) inspection of equipment and reconciliation of accounting records.

which of the following is an internal control weakness related to factory equipment? 1)check issued in payment of purchase of equipment are not signed by the controller. 2)all purchases of factory equipment are required to be made by the department in need of the department. 3)factory equipment replacements are generally made when estimated useful lives, as indicated in depreciation scheduled, have expired. 4)proceeds from sales of fully depreciated equipment are credited to other income.

2)all purchases of factory equipment are required to be made by the department in need of the department. (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 insure that all purchases are made in accordance with the company policy.)

To assure accountability for fixed asset retirements, management should implement an internal control that includes: 1)continuous analysis of miscellaneous revenue to locate any cash proceeds from the sale of plant assets. 2)periodic inquiry of plant executives by internal auditors as to whether any plant assets have been retired. 3)utilization of serially numbered retirement work orders. 4)Periodic observation of plant assets by the internal auditors.

3) Utilization of 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 inquires and observations by internal auditors would come after the fact of asset retirements.

the auditors are most likely to seek information from the plant manager with respect to the: 1) adequacy of the provisions for uncollectible accounts. 2)appropriateness of physical inventory observation procedures. 3)existence of obsolete machinery. 4)deferral of procurement of certain necessary insurance coverage.

3)existence of obsolete machinery

an effective procedure for identifying unrecorded retirements of equipment is to: 1)foot related property records 2)recalculate depreciation on the related equipment 3)select items of equipment in the accounting records and then locate them in the plant. 4)select items of equipment and then locate them in the accounting records.

3)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.)

which of the following is not an overall test of the annual provision for depreciation expense? 1)compare rates used in the current year with those used in prior years. 2)test computation of depreciation provisions for a representative number of units. 3)test deductions from accumulated depreciation for assets purchased during the year. 4) perform analytical procedures

3)test deductions from accumulated depreciation for assets purchased during the year. (assets purchased in the year should not result from deductions from the accumulated depreciation account.)

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? 1) depreciation 2)accounts payable 3)cash 4)repairs

4) repairs (in recording expenditures on PPE, the logical choice is usually between a revenue expenditure and a capital expenditure. if outlay is judged to be a revenue expenditure (rightly or wrongly) it will be recorded in the repairs and maintenance account. if the items that should be capitalized are erroneously charged to repairs and maintenance, the result will be an understatement of PPE. which means that auditors can gain reasonable assurance that additions to PPE are not understated.

The Auditors may conclude that depreciation charges are insufficient by noting: 1) insured values greatly in excess of book values. 2) large amounts of fully depreciated assets. 3)continuous trade-ins of relatively new assets. 4)excessive recurring losses on assets retired.

4)Excessive recurring losses on assets retired (shoe that the depreciation expense recognized during the actual useful lives of the assets has been less than the real cost of using the asset. )