audit quiz #13

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:

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

The auditors may conclude that depreciation charges are insufficient by noting:

Excessive recurring losses on assets retired.

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?

Existence

A plant manager would be most likely to provide information on which of the following?

Existence of obsolete inventory.

The auditors are most likely to seek information from the plant manager with respect to the

Existence of obsolete machinery.

To strengthen internal control over the custody of heavy mobile equipment, the client would most likely institute a policy requiring a periodic:

Inspection of equipment and reconciliation with accounting records.

Property acquisitions that are misclassified as maintenance expense would most likely be detected by an internal control system that provides for:

Investigation of variances within a formal budgeting system.

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:

More audit time.

Which of the following is the best evidence of real estate ownership at the balance sheet date?

Paid real estate tax bills.

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?

Property, plant, and equipment.

Analysis of which account is least likely to reveal evidence relating to recorded retirement of equipment?

Purchase returns and allowances.

The most likely technique for the current year audit of goodwill which was acquired three years ago by a continuing audit client:

Recomputation

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?

Repairs and Maintenance.

For which of the following ledger accounts would the auditor be most likely to analyze the details to identify understatements of equipment acquisitions?

Repairs and maintenance expense.

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?

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

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:

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

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

t

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

t

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

t

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

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

Which of the following is a customary audit procedure for the verification of the legal ownership of real property?

Examination of deeds and title guaranty policies on hand.

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

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

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

An important consideration to the auditor in the audit of equipment is to determine:

whether a recorded gain on trade of equipment is appropriate.

The audit of intangible assets typically involves

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

Audit of which of the following accounts is most likely to reveal evidence relating to recorded retirements of equipment?

Accumulated depreciation.

Which of the following is the best evidence of continuous ownership of property?

Examination of rent receipts from lessees of the property.

The auditors may expect a proper debit to goodwill due to:

A business combination.

Which of the following statements is not typical of property, plant, and equipment as compared to most current asset accounts?

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?

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

In the examination of property, plant, and equipment, the auditor tries to determine all of the following except the:

Adequacy of replacement funds.

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?

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?

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

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.

Which of the following is used to obtain evidence that the client's equipment accounts are not understated?

Analyzing repairs and maintenance expense accounts.

For the audit of a continuing nonpublic client, the emphasis of the testing for property accounts is on:

Transactions that occurred during the year.

Which of the following is not a control that should be established for purchases of equipment?

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

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.

Which of the following audit procedures would be least likely to lead the auditors to find unrecorded fixed asset disposals?

Review of repairs and maintenance expense.

The auditors are least likely to learn of retirements of equipment through which of the following?

Review of the purchase returns and allowances account.

In testing for unrecorded retirements of equipment, an auditor might:

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

An effective procedure for identifying unrecorded retirements of equipment is to:

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?

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:

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

Which of the following best describes the auditors' typical observation of plant and equipment?

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

Which of the following is the most important control procedure over acquisitions of property, plant, and equipment?

Using a budget to forecast and control acquisitions and retirements.

To assure accountability for fixed asset retirements, management should implement an internal control that includes:

Utilization of serially numbered retirement work orders.

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.

Which of the following is not a test primarily used to test property, plant and equipment accounts for overstatement?

Vouching retirements of plant and equipment.

In the examination of property, plant, and equipment, the auditors try to determine all of the following except the:

adequacy of replacement funds.

To achieve effective internal control over fixed-asset additions, a company should establish procedures that require:

authorization and approval of major fixed-asset additions.

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:

confer with management regarding ownership of the secret formula.

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 capitalized.

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

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

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

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

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

f

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

f

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

Which of the following is not one of the auditors' objectives in auditing depreciation?

Establishing the reasonableness of the client's replacement policy.

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:

Deed.

An auditor has identified numerous debits to accumulated depreciation of equipment. Which of the following is most likely?

Plant assets were retired 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?

Plant assets were retired during the year.

Which of the following would be least likely to address control over the initiation and execution of equipment transactions?

Procedures exist to restrict access to equipment.

A search for overstated property, plant, and equipment purchases would most likely include:

Property, plant, and 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?

Property, plant, and equipment.

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