audit quiz #13

Listed below are types of errors and fraud that might occur in financial statements and audit procedures. Match the error or fraud with the audit procedure that is most likely to detect the error or fraud. Error or fraud: A machine was sold for cash, but the retirement was not recorded.

Analyze the miscellaneous revenue account.

An important control for plant and equipment is the plant and equipment budget.

t

Goodwill should only be recorded if it was acquired as a part of a business combination.

t

A typical audit procedure in examining plant and equipment is an analysis of the Miscellaneous Revenue account.

t

Evidence of continued ownership of property is obtained by vouching payments to a mortgage trustee.

t

If property, plant, and equipment represent 40% of the total assets of a continuing audit client, the budget for property, plant and equipment will ordinarily be less than 40% of the total audit effort devoted to assets.

t

In the audit of depletion the auditors must often rely on the work of specialists.

t

Loss payable endorsements on insurance policies may indicate the existence of liens on particular assets.

t

Material purchases of assets from an affiliated company should be disclosed in the financial statements.

t

The auditors' approach to the audit of property, plant, and equipment largely results from the fact that relatively few transactions occur.

t

Unrecorded retirements of plant and equipment are more likely a type of error than unrecorded acquisitions.

t

Most companies that use a budget to forecast and control acquisitions and retirements of plant and equipment also maintain detailed accounting records for plant and equipment.

t

Physical inventories of plant and equipment assets frequently reveal misstated assets.

t

The auditors typically vouch major additions to plant and equipment recorded during the period under audit.

t

Auditors typically observe the client's physical inventory of plant and equipment.

f

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

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

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

Which of the following is used to obtain evidence that the client's equipment accounts are not understated? A) Analyzing repairs and maintenance expense accounts. B) Vouching purchases of plant and equipment. C) Recomputing depreciation expense. D) Analyzing the miscellaneous revenue account.

A. Analyzing repairs and maintenance expense accounts.

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: A) Closing statement. B) Canceled checks. C) Deed. D) Interest expense.

A. Deed.

A continuing audit client's property, plant, and equipment and accounts receivable accounts have approximately the same year-end balance. In this circumstance, when compared to property, plant, and equipment, one would normally expect the audit of accounts receivable to require: A) More audit time. B) Less audit time. C) Approximately the same amount of audit time. D) Similar confirmation procedures.

A. More audit time.

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

A. Property, plant, and equipment.

When performing an audit of the property, plant, and equipment accounts, an auditor should expect which of the following to be most likely to indicate a departure from generally accepted accounting principles? A) Repairs have been capitalized to repair equipment that had broken down. B) Interest has been capitalized for self-constructed assets. C) Assets have been acquired from affiliated corporations with the related transactions recorded and described in the financial statements. D) The cost of freight-in on an acquisition has been capitalized.

A. Repairs have been capitalized to repair equipment that had broken down.

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

A. Review of repairs and maintenance expense.

The auditors are least likely to learn of retirements of equipment through which of the following? A) Review of the purchase returns and allowances account. B) Review of depreciation. C) Analysis of the debits to the accumulated depreciation account. D) Review of insurance policy riders.

A. Review of the purchase returns and allowances account.

The audit of intangible assets typically involves a. vouching the cost of assets and testing allocation methods b. vouching the cost of assets only c. testing the allocation methods only d. None of the above

A. Vouching the Cost of Assets and Testing Allocation Methods

Which of the following best describes the auditors' approach to the audit of the ending balance of property, plant and equipment for a continuing nonpublic client? A) Direct audit of the ending balance. B) Agreement of the beginning balance to prior year's working papers and audit of significant changes in the accounts. C) Audit of changes in the accounts since inception of the company. D) Audit of selected purchases and retirements for the last few years.

B. Agreement of the beginning balance to prior year's working papers and audit of significant changes in the accounts.

Which of the following is an internal control weakness related to factory equipment? a. Checks issued in payment of purchases of equipment are not signed by the controller b. All purchases of factory equipment are required to be made by the department in need of the equipment 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

B. All purchases of factory equipment are required to be made by the department in need of the equipment.

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? A. Existence (yes) Classification and Understandability (yes) B. Existence (yes) Classification and Understandability (no) C. Existence (no) Classification and Understandability (yes) D. Existence (no) Classification and Understandability (no)

B. Existence (yes) Classification and Understandability (no)

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

B. Inspection of equipment and reconciliation with accounting records.

Analysis of which account is least likely to reveal evidence relating to recorded retirement of equipment? A. Accumulated depreciation B. Insurance expense C. PP&E D. Purchase returns and allowances

D. Purchase returns and allowances.

An auditor has identified numerous debits to accumulated depreciation of equipment. Which of the following is most likely? A) The estimated remaining useful lives of equipment were increased. B) Plant assets were retired during the year. C) The prior year's deprecation expense was erroneously understated. D) Overhead allocations were revised at year-end.

B. Plant assets were retired during the year.

Which of the following is not a control that should be established for purchases of equipment? A) Establishing a budget for capital acquisitions. B) Requiring that the department in need of the equipment order the equipment. C) Requiring that the receiving department receive the equipment. D) Establishing an accounting policy regarding the minimum dollar amount of purchase that will be considered for capitalization.

B. Requiring that the department in need of the equipment order the equipment.

Which of the following is the most important control procedure 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.

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

B. authorization and approval of major fixed-asset additions.

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: a. observing, during the physical inventory observation that the warehouse has been painted. b. reviewing the titles and descriptions for all construction work orders issued during the year. c. examining in detail a sample of construction requests. d. discussing Tennessee's capitalization policies with its controller.

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

Which of the following is the best evidence of continuous ownership of property? A) Examination of the deed. B) Examination of rent receipts from lessees of the property. C) Examination of the title policy. D) Examination of canceled check in payment for the property.

B. xamination of rent receipts from lessees of the property.

The auditors may expect a proper debit to goodwill due to: A) Purchase of a trademark. B) Establishment of an extraordinarily profitable product. C) A business combination. D) Capitalization of human resources.

C. A business combination.

In the examination of property, plant, and equipment, the auditor tries to determine all of the following except the: A) Extent of the control risk. B) Extent of property abandoned during the year. C) Adequacy of replacement funds. C) Reasonableness of the depreciation.

C. Adequacy of replacement funds.

A plant manager would be most likely to provide information on which of the following? A) Adequacy of the provision for uncollectible accounts. B) Appropriateness of physical inventory valuation techniques. C) Existence of obsolete inventory. D)Deferral of certain purchases of office supplies.

C. Existence of obsolete inventory.

The auditors are 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 of procurement of certain necessary insurance coverage

C. Existence of obsolete machinery.

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

C. Paid real estate tax bills.

The most likely technique for the current year audit of goodwill which was acquired three years ago by a continuing audit client: A) Confirmation. B) Observation. C) Recomputation. D) Inquiry.

C. Recomputation

For which of the following ledger accounts would the auditor be most likely to analyze the details to identify understatements of equipment acquisitions? A) Service revenue. B) Sales. C) Repairs and maintenance expense. D) Sales salaries expense.

C. Repairs and maintenance expense.

Which of the following is a customary audit procedure for the verification of the legal ownership of real property? A) Examination of correspondence with the corporate counsel concerning acquisition matters. 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.

In violation of company policy, Lowell Company erroneously capitalized the cost of painting its warehouse. The auditors examining Lowell's financial statements would most likely detect this when: A) Discussing capitalization policies with Lowell's controller. B) Examining maintenance expense accounts. C) Observing, during the physical inventory observation, that the warehouse had been painted. D) Examining the construction work orders supporting items capitalized during the year.

D. Examining the construction work orders supporting items capitalized during the year.

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

D. Plant assets were retired during the curret year.

Which of the following would be least likely to address control over the initiation and execution of equipment transactions?A) Requests for major repairs are approved by a higher level than the department initiating the request. B) Prenumbered purchase orders are used for equipment and periodically accounted for. C) Requests for purchases of equipment are reviewed for consideration of soliciting competitive bids. D) Procedures exist to restrict access to equipment.

D. Procedures exist to restrict access to equipment.

For which of the following accounts is it most likely that most of the audit work can be performed in advance of the balance sheet date? A) Accounts receivable. B) Cash. C) Current marketable securities. D) Property, plant, and equipment.

D. Property, plant, and equipment.

Which of the following best describes the auditors' typical observation of plant and equipment? A) The auditors observe a physical inventory of plant and equipment, annually. B) The auditors observe all additions to plant and equipment made during the year. C) The auditors observe all major plant and equipment items in the clients' accounts each year. D) The auditors observe major additions to plant and equipment made during the year.

D. The auditors observe major additions to plant and equipment made during the year.

Which of the following is not a test primarily used to test property, plant and equipment accounts for overstatement? A) Investigation of reductions in insurance coverage. B) Review of property tax bills. C) Examination of retirement work orders prepared during the year. D) Vouching retirements of plant and equipment.

D. Vouching retirements of plant and equipment.

A normal audit procedure is to analyze the current year 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. non capitalizable expenditures have been properly expensed. d. expenditures for fixed assets have been capitalized.

D. expenditures for fixed assets have been capitalized.

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

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

Property, plant, and equipment ordinarily should be recorded at the lower of cost or market.

f

Listed below are types of errors and fraud that might occur in financial statements and audit procedures. Match the error or fraud with the audit procedure that is most likely to detect the error or fraud. Error or fraud: Land was exchanged for a long-term note receivable, but the exchange was not recorded.

Review current property tax bills.

Listed below are types of errors and fraud that might occur in financial statements and audit procedures. Match the error or fraud with the audit procedure that is most likely to detect the error or fraud. Error or fraud: An expenditure for equipment was improperly expensed.

Review expenditures charged to a repairs and maintenance account.

Listed below are types of errors and fraud that might occur in financial statements and audit procedures. Match the error or fraud with the audit procedure that is most likely to detect the error or fraud. Error or fraud: A lien exists on certain equipment.

Review fire insurance policies.

Listed below are types of errors and fraud that might occur in financial statements and audit procedures. Match the error or fraud with the audit procedure that is most likely to detect the error or fraud. Error or fraud: The cost of repairing a machine was improperly capitalized.

Vouch additions to equipment accounts.

The auditors should take exception to any accounting policy that involves the expensing of minor capital assets.

f

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

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

The auditors typically observe all major items of property, plant, and equipment every year.

f

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

f

A major control procedure related to plant and equipment is a budget for depreciation.

f

A typical procedure in the audit of property is examination of public records to verify the ownership of the property.

f

An error in the year-end cutoff of plant and equipment transactions affects the company's income for the year in the same manner as an error in the year-end cutoff of sales or inventory transactions.

f

Which of the following is not one of the auditors' objectives in auditing depreciation? A) Establishing the reasonableness of the client's replacement policy. B) Establishing that the methods used are appropriate. C) Establishing that the methods are consistently applied. D) Establishing the reasonableness of depreciation computations.

A. Establishing the reasonableness of the client's replacement policy.

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

A. Excessive recurring losses on assets retired.

Property acquisitions that are misclassified as maintenance expense would most likely be detected by an internal control system that provides for: A) Investigation of variances within a formal budgeting system. B) Review and approval of the monthly depreciation entry by the plant supervisor. C) Segregation of duties of employees in the accounts payable department. D) Examination by the internal auditors of vendor invoices and canceled checks for property acquisitions.

A. Investigation of variances within a formal budgeting system.

In testing for unrecorded retirements of equipment, an auditor might: A) Select items of equipment from the accounting records and then attempt to locate them during the plant tour. B) Compare depreciation expense with the prior year's depreciation expense. C) Trace equipment items observed during the plant tour to the equipment subsidiary ledger. D) Scan the general journal for unusual equipment retirements.

A. Select items of equipment from the accounting records and then attempt to locate them during the plant tour.

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

A. adequacy of replacement funds.

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

Accumulated depreciation.

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

C. 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? a. Compare rates used in the current year with those used in prior years b. Test computation of depreciation provisions for a representative number of units c. Test deductions from accumulated depreciation for assets purchased during the year d. Perform analytical procedures

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

When there are numerous property and equipment transactions during the year, an auditor who plans to assess control risk at a low level usually performs: A) Tests of controls and extensive tests of property and equipment balances at the end of the year. B) Analytical procedures for 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.

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

C. Transactions that occurred during the year.

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

C. Utilization of serially numbered retirement work orders.

When comparing an initial audit with a subsequent year audit for a particular client, the scope of audit procedures for which of the following accounts would be expected to decrease the most? A) Accounts receivable. B) Cash. C) Marketable securities. D) Property, plant, and equipment

D. Property, plant, and equipment.

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? a. Depreciation b. Accounts Payable c. Cash d. Repairs and Maintenance.

D. Repairs and Maintenance.

An essential step in the auditors' verification of the legal ownership of land and buildings listed on a client's balance sheet is examination of turnover rates.

f

Better evidence of continuing ownership of property is provided by examination of the deed.

f

Corporations should inventory their plant and equipment at least once per month.

f

Goodwill should be systematically amortized over a period not exceeding 40 years.

f

Idle equipment will generally need to be reclassified as a current asset.

f

In an initial audit engagement, the auditors must always perform a historical analysis of the property accounts for one year prior to the year under audit.

f

The department in need of the assets should make plant and equipment purchases.

f

The primary purpose of internal control over plant and equipment is to safeguard the assets from theft.

f