audit ch. 13

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

Accumulated depreciation.

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

A property, plant, and equipment cutoff error near year-end has a more significant effect on net income.

Which of the following policies is an internal control weakness related to the acquisition of factory equipment? Multiple Choice Depreciation policies are reviewed only once a year. Acquisitions are to be made through and approved by the department in need of the equipment. Variances between authorized equipment expenditures and actual costs are to be immediately reported to management. Advance executive approvals are required for equipment acquisitions.

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

Which of the following is an internal control weakness related to factory equipment? Multiple Choice 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. 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.

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: Multiple Choice Interest expense. Closing statement. Canceled checks. Deed.

Deed.

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

Existence of obsolete machinery.

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 Completeness. Existence. Valuation. Rights.

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 Accounting for work orders. Inspection of equipment and reconciliation with accounting records. Verification of liens, pledges, and collateralizations. Increase in insurance coverage.

Inspection of equipment and reconciliation with accounting records.

The audit of intangible assets typically involves 1) Vouching the Cost of Assets: Yes, Testing Allocation Methods: Yes 2) Vouching the Cost of Assets: Yes, Testing Allocation Methods: No 3) Vouching the Cost of Assets: No, Testing Allocation Methods: Yes 4) Vouching the Cost of Assets: No, Testing Allocation Methods: No Multiple Choice Option (3) Option (2) Option (1) Option (4)

Option (1)

Which of the following is the best evidence of real estate ownership at the balance sheet date? Multiple Choice Paid real estate tax bills. Title insurance policy. Closing statement. Original deed held in the client's safe.

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? Multiple Choice Overhead allocations were revised at year-end. Plant assets were retired during the year. The prior year's depreciation expense was erroneously understated. The estimated remaining useful lives of plant assets were revised upward.

Plant assets were retired during the year.

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

Property, plant, and equipment.

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

Purchase returns and allowances.

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? Cash. Depreciation. Accounts Payable. Repairs.

Repairs.

Which of the following audit procedures would be least likely to lead the auditors to find unrecorded fixed asset disposals? Multiple Choice Examination of insurance policies. Review of property tax files. Review of repairs and maintenance expense. Scanning of invoices for fixed-asset additions.

Review of repairs and maintenance expense.

An effective procedure for identifying unrecorded retirements of equipment is to: Multiple Choice Select items of equipment and then locate them in the accounting records. 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 in the accounting records and then locate them in the plant.

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

Test deductions from accumulated depreciation for assets purchased during the year.

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

Transactions that occurred during the year.

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

Utilization of serially numbered retirement work orders.

The plant and equipment budget is designed to control __________ of property items.

acquisitions (purchases) and retirements

In the examination of property, plant, and equipment, the auditors try to determine all of the following except the: Multiple Choice reasonableness of the depreciation. adequacy of replacement funds. adequacy of internal control. extent of property abandoned during the year.

adequacy of replacement funds.

To achieve effective internal control over fixed-asset additions, a company should establish procedures that require: Multiple Choice classification as investments of those fixed-asset additions that are not used in the business. performance of recurring fixed-asset maintenance work solely by maintenance department employees. capitalization of the cost of fixed-asset additions in excess of a specific dollar amount. authorization and approval of major fixed-asset additions.

authorization and approval of major fixed-asset additions.

A company may not actually own property recorded as an asset; instead the company may have rights to the asset under the terms of a __________.

capital lease

Patentex developed a new formula that is of great value because it resulted in a virtual monopoly. Patentex has capitalized all of its research and development costs associated with this formula. Greene, CPA, who is examining this account will probably: confirm that the secret formula is registered and on file with the county clerk's office. confer with management regarding transfer of the amount from the balance sheet to the income statement. confer with management regarding a change in the title of the account to "goodwill". confer with management relating to controls maintained over formula confidentiality.

confer with management regarding transfer of the amount from the balance sheet to the income statement.

Tennessee Company violated company policy by erroneously capitalizing the cost of painting its warehouse. The auditors examining Tennessee's financial statements would most likely learn of this error by: Multiple Choice reviewing the titles and descriptions for all construction work orders issued during the year and related journal entries. examining in detail a sample of construction requests. observing, during the physical inventory observation that the warehouse has been painted. discussing Tennessee's capitalization policies with its controller.

eviewing the titles and descriptions for all construction work orders issued during the year and related journal entries.

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

excessive recurring losses on assets retired.

A normal audit procedure is to analyze the current year repairs and maintenance accounts to provide evidence in support of the audit proposition that: expenditures for fixed assets have been recorded in the proper period. expenditures for fixed assets have been capitalized. capital expenditures have been properly authorized. non capitalizable expenditures have been properly expensed.

expenditures for fixed assets have been capitalized.

The intangible asset known as __________ arises in accounting for a business combination, and should only be amortized when its value becomes impaired below its book value.

goodwill

A December 30 acquisition of a new plant asset was recorded after year-end rather than prior to year-end. Such an error does not usually result in a significant misstatement of __________.

net income

Possession of a deed is not proof of present __________ of property.

ownership

9.Good evidence of ownership of property often is found by examining current __________ bills.

property tax

The auditors' principal objective in analyzing __________ expense accounts is to discover property items that should have been capitalized.

repairs and maintenance

To provide assurance that the accounting department is notified of property retirements, a system of serially numbered __________ should be used by the company.

retirement work orders

A dollar minimum ordinarily should be established to be used by accounting personnel for distinguishing between capital and __________ expenditures.

revenue (or current year)

A company should maintain a __________ for plant and equipment, consisting of a separate record for each unit of property.

subsidiary ledger

An important consideration to the auditor in the audit of equipment is to determine: when the client should replace the equipment. that theft of the equipment is impossible. that the equipment is properly maintained. whether a large recorded gain on a trade of equipment is appropriate.

whether a large recorded gain on a trade of equipment is appropriate.

In the auditors' first examination of a new client that has changed auditors, the beginning balances of property, plant, and equipment accounts may be substantiated by referring to the predecessor auditors' __________.

working papers