Chapter 13: Property, Plant, and Equipment: Depreciation and Depletion

Because of limited number of transactions, most of the audit work on plant, equipment, and intangibles can be done at ______. -interim before the year-end date -field work after the year-end date -the year-end date

-interim before the year-end date

A key control applicable to plant and equipment is a written company policy that distinguishes between __________(1) expenditures and __________(2) expenditures. (Enter only one word per blank.)

(1) capital (2) revenue

What factor(s) lead to a smaller proportion of total audit time on property, plant, and equipment compared to current assets? -Usually little change in the property accounts from year to year -High dollar value but few transactions -A proper cutoff of year-end transactions is of lesser importance -A year-end cutoff error will greatly impact net income for the year

-Usually little change in the property accounts from year to year -High dollar value but few transactions -A proper cutoff of year-end transactions is of lesser importance

Audit procedures for property, plant, and equipment typically performed at an interim date 2 months before year-end include ______. -an impairment test of intangible assets -tests of depreciation expense as of year-end -considering internal control over property, plant, and equipment -an analysis of acquisitions for the first 10 months of the year

-considering internal control over property, plant, and equipment -an analysis of acquisitions for the first 10 months of the year

When auditing property, plant, and equipment, auditors also gather evidence on the related accounts of ______ expense -office -depreciation -repairs and maintenance -amortization

-depreciation -repairs and maintenance

Due to the complexity in determining the basis for depletion for mining and oil and gas, auditors most often use ______. -specialists such as mining engineers and geologists -the work of internal auditors -the amounts that were used in the prior year's audit

-specialists such as mining engineers and geologists

The key audit working paper for property, plant, and equipment is ______. -tests of depreciation -a summary analysis of assets and accumulated depreciation accounts -an analysis of current year's additions and retirements -an analysis of repairs and maintenance accounts

-a summary analysis of assets and accumulated depreciation accounts

Intangible assets ______. -may qualify as current assets -lack physical substance -provide rights or economic advantages -are nonmonetary

-lack physical substance -provide rights or economic advantages -are nonmonetary

For the first audit of property, plant, and equipment for a company that has never been audited but has been in business for many years, auditors should thoroughly review all ______. -major additions to the property accounts since inception -all repairs and maintenance expense account transactions since inception -all depreciation expense account transactions since inception -major retirements to the property accounts since inception

-major additions to the property accounts since inception -major retirements to the property accounts since inception

For effective internal control over property, plant, and equipment, periodic physical inventories of plant assets should be compared with the ______. -ledger accounts for the plant assets -repairs and maintenance ledger accounts -budgets for acquisitions of plant assets -serially numbered work orders for acquisitions

-ledger accounts for the plant assets

Auditors need to perform a complete historical analysis of the property accounts for a client that has never been audited because ______. -asset additions may have been recorded in property accounts -repair and maintenance expenses may have been capitalized -retirements of property may have been credited to property accounts

-repair and maintenance expenses may have been capitalized

To test depreciation auditors may ______. -compare current year rates to prior years and investigate variances -look for excessive depreciation of fully depreciated assets -compare retirements for the current year to retirements for last year -compare accumulated depreciation credits with depreciation expense debits

-compare current year rates to prior years and investigate variances -look for excessive depreciation of fully depreciated assets -compare accumulated depreciation credits with depreciation expense debits

Which subgroup of property, plant, and equipment is subject to depreciation? -Land such as property used in the operation of the business -Buildings, machinery, equipment, and land improvements -Natural resources

-Buildings, machinery, equipment, and land improvements

Fences and parking lots are examples of __________(1) __________(2) which are subject to depreciation. (Enter only one word per blank.)

(1) land (2) improvements

To confirm their understanding of internal control over property, plant, and equipment, auditors will ______. -inspect serially numbered work orders -inspect the plant and equipment budget -observe segregation of duties over plant asset acquisitions -review the repairs and maintenance account for expenditures that should be capitalized

-inspect serially numbered work orders -inspect the plant and equipment budget -observe segregation of duties over plant asset acquisitions

The depletion of timberlands is usually based on physical quantities established by __________(1), a term that means the inspection of a tract of forestland for the purpose of estimating the total lumber yield. (Enter only one word per blank.)

(1) cruising

If asset recovery periods are not reasonable, __________(1) expense may be materially misstated and the auditors will not be in a position to issue an unqualified opinion on the financial statements. (Enter only one word per blank.)

(1) depreciation

The summary analysis of property, plant, and equipment emphasizes ______ under audit. -all changes during the year -balances as of the year-end -a sample of changes during the year

-all changes during the year

Variances between plant budgets and actual expenditures for plant assets should be subject to review and approval of ______. -internal audit -warehouse department -purchasing department -executives

-executives

Intangible assets tend to be difficult to audit because of all of the following factors except ______. -payments made to acquire assets can be reviewed -they lack physical substance -they are subject to amortization or impairment -their value lies in rights or economic advantages

-payments made to acquire assets can be reviewed

The audit of depreciation relates most directly to the audit objectives of ______. -valuation or allocation -existence or occurrence -presentation and disclosure -completeness

-valuation or allocation

Compared to PPE, auditors typically spend a larger proportion of audit time on ______. -current assets -stockholder's equity -current liabilities

-current assets

Auditors need to gather evidence regarding the presentation and disclosure of property, plant, and equipment including disclosure of ______. -related transactions -rights to property, plant, and equipment -depreciation methods

-depreciation methods

True or false: A typical analytical procedure for testing depreciation is to compute the ratio of depreciation expense to total expenses and compare it to last year. -True -False

-False

True or false: Some audit clients choose to maintain their depreciation records using federal income tax rules such as MACRS. This practice can lead to materially misstated depreciation expense. -True -False

-True

The approach typically used by auditors to audit depreciation is ______. -independently develop an estimate of the amount to compare to management's estimate -review subsequent events or transactions bearing on the estimate -review and test management's process of developing the estimate

-review and test management's process of developing the estimate

Key controls applicable to plant and equipment are ______. -use of capital works orders to record advance authorizations of all plant and equipment acquisitions -an annual plant budget used to forecast and control acquisitions and retirements -a policy requiring all purchase of plant and equipment to be handled by the warehouse department

-use of capital works orders to record advance authorizations of all plant and equipment acquisitions -an annual plant budget used to forecast and control acquisitions and retirements