Chapter 14 - Audit

Which of the following constitutes a control weakness related to factory equipment? A. A policy requiring all purchases of factory equipment to be made by the department in need of the equipment. B. Checks issued in payment of purchases of equipment are not signed by the controller. C. Factory equipment replacements are generally made when estimated useful lives, as indicated in depreciation schedules, have expired. D. Proceeds from sales of fully depreciated equipment are credited to other income.

A. 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? A. Acquisitions are to be made through and approved by the department in need of the equipment. B. Advance executive approvals are required for equipment acquisitions. C. Variances between authorized equipment expenditures and actual costs are to be immediately reported to management. D. Depreciation policies are reviewed only once a year.

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

In performing a search for unrecorded retirements of fixed assets, an auditor most likely would A. Inspect the property ledger and the insurance and tax records and then tour the client's facilities. B. Tour the client's facilities and then inspect the property records and the insurance and tax records. C. Analyze the repair and maintenance account and then tour the client's facilities. D. Tour the client's facilities and then analyze the repair and maintenance account.

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

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? A. Occurrence. B. Completeness. C. Cutoff. D. Classification.

A. 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? A. Occurrence. B. Completeness. C. Cutoff. D. Authorization.

A. Occurrence.

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? A. Repairs and maintenance expense. B. Depreciation expense. C. Gain on disposal of equipment. D. Accounts payable.

A. Repairs and maintenance expense.

The auditor is least likely to learn of retirement of equipment through which of the following? A. Reviewing the purchase return and allowance account. B. Reviewing depreciation. C. Analyzing debits to the accumulated depreciation account. D. Reviewing insurance policy riders.

A. Reviewing the purchase return and allowance account.

In testing for unrecorded retirements of equipment, an auditor most likely would A. Select items of equipment from the accounting records and then locate them during the plant tour. B. Compare depreciation journal entries with similar prior-year entries in search of fully depreciated equipment. C. Inspect items of equipment observed during the plant tour and then trace them to the equipment subsidiary ledger. D. Scan the general journal for unusual equipment additions and excessive debits to repairs and maintenance expense.

A. 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? A. Several fully depreciated assets were retired during the year. B. Prior years' depreciation charges were erroneously understated. C. A reserve for possible loss on retirement has been recorded. D. An asset has been recorded at its fair value.

A. Several fully depreciated assets were retired during the year.

Determining that proper amounts of depreciation are expensed provides assurance about management's assertions of presentation and disclosure and A. Valuation and allocation. B. Completeness. C. Rights and obligations. D. Existence.

A. 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 A. Valuation and allocation. B. Existence. C. Completeness. D. Rights and obligations.

A. Valuation and allocation.

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? A. Occurrence. B. Completeness. C. Cutoff. D. Authorization.

B. Completeness.

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? A. Routine maintenance on an important piece of machinery was charged to repairs and maintenance expense. B. An addition to a building was charged to repairs and maintenance expense. C. The company forgot to depreciate all of its equipment. D. The company purchased an unusual amount of new equipment.

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

Auditors will examine the insurance register primarily to A. Ensure that dollar coverage amounts are adequate. B. Examine policy expiration dates to verify that prepaid insurance is properly stated. C. Ensure that insurance agents are not related parties. D. Ensure that all assets are insured.

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

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 A. Presentation and disclosure. B. Existence or occurrence. C. Both (1) presentation and disclosure and (2) existence and occurrence. D. Neither (1) presentation and disclosure nor (2) existence and occurrence.

B. Existence or 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 A. Completeness. B. Occurrence. C. Classification. D. Accuracy.

B. 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? A. Too much expired insurance is still included in prepaid insurance. B. PP&E insurance expense includes some expenses related to product liability insurance. C. Depreciation expense was based on overly short useful lives. D. Some routine maintenance on equipment was added to the equipment asset account.

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

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

B. 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? A. Examination of insurance policies for evidence of a dropped or cancelled policy. B. Review of repairs and maintenance expense. C. Review of property tax files. D. Scanning of invoices for fixed asset additions for evidence of a purchase to replace a previously owned fixed asset.

B. Review of repairs and maintenance expense.

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 A. Discussing Tennessee's capitalization policies with its controller. B. Reviewing the titles and descriptions for all construction work orders issued during the year. C. Observing during the physical inventory observation that the warehouse has been painted. D. Examining in detail a sample of construction work orders.

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

Complex accounting issues for property, plant, and equipment include all of the following except A. Lease accounting. B. Testing goodwill for impairment. C. Capitalized interest. D. Self-constructed assets.

B. Testing goodwill for impairment.

Which of the following is the most important control activity over acquisitions of property, plant, and equipment? A. Establishing a written company policy distinguishing between capital and revenue expenditures. B. Using a budget to forecast and control acquisitions and retirements. C. Analyzing monthly variances between authorized expenditures and actual costs. D. Requiring acquisitions to be made by user departments.

B. Using a budget to forecast and control acquisitions and retirements.

In the examination of property, plant, and equipment, the auditor tries to determine all of the following except the A. Adequacy of controls. B. Extent of property abandoned, retired, or sold during the year. C. Adequacy of replacement funds. D. Reasonableness of the depreciation.

C. Adequacy of replacement funds.

To improve accountability for fixed asset retirements, management most likely would implement a system of internal control that includes A. Continuous analysis of the repairs and maintenance account. B. Periodic inquiry of plant executives by internal auditors as to whether any plant assets have been retired. C. Continuous utilization of sequentially numbered retirement work orders. D. Periodic inspection of insurance policies by the internal auditors.

C. Continuous utilization of sequentially numbered retirement work orders.

The auditor is most likely to seek information from the plant manager with respect to the A. Adequacy of the provision for uncollectible accounts. B. Appropriateness of physical inventory observation procedures. C. Existence of obsolete machinery. D. Deferral or procurement of certain necessary insurance coverage.

C. Existence of obsolete machinery.

Equipment acquisitions that are misclassified as maintenance expenses most likely would be detected by a control activity that provides for A. Segregation of duties of employees in the accounts payable department. B. Independent verification of invoices for disbursements recorded as equipment acquisitions. C. Investigation of variances within a formal budgeting system. D. Authorization by the board of directors of significant equipment acquisitions.

C. Investigation of variances within a formal budgeting system.

Which of the following is the best evidence of real estate ownership at the balance sheet date? A. Title insurance policy. B. A duplicate of the original deed held in the client's safe. C. Paid real estate tax bills. D. Closing statements.

C. Paid real estate tax bills.

When there are numerous property and equipment transactions during the year, an auditor planning to set control risk at the minimum level usually plans to obtain an understanding of internal control and to perform A. Tests of controls and extensive tests of property and equipment balances at the end of the year. B. Extensive tests of current year property and equipment transactions. C. Tests of controls and limited tests of current year property and equipment transactions. D. Analytical procedures for property and equipment balances at the end of the year.

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

In an interview with the plant manager regarding operations, the auditor is most likely to obtain evidence that raises concerns regarding A. The capitalization vs. expensing policy. B. The allocation of fixed and variable costs. C. The need to write-off equipment that has become obsolete. D. The adequacy of depreciation expense.

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

Testing depreciation calculations for a sample of property, plant, and equipment tests the assertion of A. Existence. B. Completeness. C. Valuation and allocation. D. Rights and obligations.

C. Valuation and allocation.

In verifying the amount of goodwill recorded by a client, the most convincing evidence that an auditor can obtain is by comparing the recorded value of assets acquired with the A. Assessed value as evidenced by tax bills. B. Seller's book value as evidenced by financial statements. C. Insured value as evidenced by insurance policies. D. Appraised value as evidenced by independent appraisals.

D. 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? A. Are requests for major repairs approved at a higher level than the department initiating the request? B. Are prenumbered purchase orders used for equipment and periodically accounted for? C. Are requests for purchases of equipment reviewed for consideration of soliciting competitive bids? D. Are procedures in place to monitor and properly restrict access to equipment?

D. 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 A. Capitalization of the cost of fixed asset additions in excess of a specific dollar amount. B. Performance of recurring fixed asset maintenance work solely by maintenance department employees. C. Any fixed asset additions that are not used in the business to be classified as investments. D. Authorization and approval of major fixed asset additions.

D. Authorization and approval of major fixed asset additions.

Which of the following best describes the independent auditor's approach to obtaining satisfaction concerning depreciation expense in the income statement? A. Verifying the mathematical accuracy of the amounts charged to income as a result of depreciation expense. B. Determining the method for computing depreciation expense and ascertaining that it is in accordance with generally accepted accounting principles. C. Reconciling the amount of depreciation expense to those amounts credited to accumulated depreciation accounts. D. Establishing the reasonableness of useful lives and depreciation methods for depreciable assets and recomputing the depreciation expense.

D. 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? A. Examination of correspondence with the corporate counsel concerning acquisitions. B. Examination of ownership documents registered and on file at a public hall of records. C. Examination of corporate minutes and resolutions concerning the approval to acquire property, plant, and equipment. D. Examination of deeds and title guaranty policies on hand.

D. Examination of deeds and title guaranty policies on hand.

The auditor may conclude that depreciation charges are insufficient by noting A. Insured values greatly in excess of book values. B. Large amounts of fully depreciated assets. C. Continuous trade-ins of relatively new assets. D. Excessive recurring losses on assets retired.

D. Excessive recurring losses on assets retired.

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 A. Expenditures for fixed assets have been recorded in the proper period. B. Capital expenditures have been properly authorized. C. Noncapitalizable expenditures have been properly expensed. D. Expenditures for fixed assets have been capitalized.

D. 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 A. Noncapitalizable expenditures for repairs and maintenance have been recorded in the proper period. B. Expenditures for property and equipment have been recorded in the proper period. C. Noncapitalizable expenditures for repairs and maintenance have been properly charged to expense. D. Expenditures for property and equipment have not been charged to expenses.

D. 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? A. Depreciation expense/book value of manufacturing equipment. B. Accumulated depreciation/book value of manufacturing equipment. C. Repairs and maintenance cost/direct labor costs. D. Gross manufacturing equipment cost/units produced.

D. Gross manufacturing equipment cost/units produced.

An auditor typically sets inherent risk for intangible assets at this level A. Low. B. Moderate. C. Zero. D. High.

D. High.

The cutoff assertion for prepaid insurance A. Is never tested because amounts always are immaterial. B. Is best tested as part of the testing of property and equipment purchasing. C. Is best tested exclusively by sending confirmations to vendors. D. Is best tested by recomputing the unexpired portion of insurance policies in effect.

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

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? A. Depreciation expense. B. Accounts payable. C. Cash. D. Repairs and maintenance expense.

D. Repairs and maintenance expense.

Due to a weakness observed in internal control over recording retirements of equipment, the auditor may decide to A. Inspect certain items of equipment in the plant and trace those items to the accounting records. B. Review the subsidiary ledger to ascertain whether depreciation was taken on each item of equipment during the year. C. Trace additions to the "other assets" account to search for equipment that is still on hand but no longer is being used. D. Select certain items of equipment from the accounting records and locate them in the plant.

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

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? A. An increase in property tax rates has not been recognized in the company's current year accrual. B. The cashier began lapping accounts receivable in the current year. C. Because of worsening economic conditions, the current year provision for uncollectible accounts was inadequate. D. The company changed its capitalization policy for small tools in the current year.

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

Recomputing the unexpired portion of insurance policies in effect tests which of the following assertions are for prepaid insurance? A. Existence. B. Classification. C. Rights and obligations. D. Valuation.

D. Valuation.