Chapter 13 Audit Homework

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

FALSE

Physical inventories of plant and equipment assets frequently reveal misstated assets

True

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

TRUE

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

TRUE

The purchased land was in part financed through obtaining a loan from a financial institution. Interest on that loan is being capitalized as part of the cost of the land.

Yes

An existing building on the land was torn down to allow construction of new building on the land. The cost of the demolition was capitalized as part of the cost of the new building.

No

Auditors test effectiveness of controls to ensure they can justify their planned levels of ______risk.

control

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

TRUE

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

FALSE

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

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

A) Accumulated depreciation

Analysis of which account is least likely to reveal evidence relating to recorded retirement of equipment? a) Purchase returns and allowances b) property, plant and equipment C) accumulated depreciation d) insurance expense

A) Purchase returns and allowances

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

B) Acquisitions are to be made through and approved 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: a) Interest expense b) Canceled checks c) Deed d) Closing Statement

C) Deed

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

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

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 account

C) Transactions that occurred during the year

Patentex developed a new secret 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: a) confirm that the secret formula is registered and on file with the county clerk's office b) 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 d) 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

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) closing statement d) Paid real estate tax bills

D) Paid real estate tax bills

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.

FALSE

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.

FALSE

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

FALSE

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.

FALSE

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

FALSE

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

FALSE

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

FALSE

The department needing the assets should make plant and equipment purchases.

FALSE

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

False

After obtaining an understanding of the client and its environment, auditors must identify the _____risks related to accounts.

Inherent

Hwang purchased land for a new plant that it intends to construct. A portion of the cost was a commission paid to a real estate agent. That commission was capitalized as part of the cost of the land.

NO

Subsequent to the land purchase, Hwang purchased certain equipment from a vendor who had filed for bankruptcy. Hwang's management believes that the equipment was purchased for an amount equal to approximately half what at least one other supplier sells it for. Hwang recorded the transaction at its cost.

No

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

TRUE

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.

TRUE

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

TRUE

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.

TRUE

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

TRUE

Hwang cut down a number of trees on the land and sold the wood. Other income was recorded on the transaction for the amount of the cash received.

Yes

The audit of intangible assets typically involves: a) Vouching the cost of assets and testing allocation methods b) Vouching the cost of assets c) Testing allocation methods d) neither

a) Vouching the cost of assets and testing allocation methods

A search for overstated property, plant and equipment purchases would most likely include: a) purchase discounts b) property, plant and equipment c) repairs and maintenance expense d) accounts receivable

b) Property, plant and equipment

Which of the following would the auditor NOT be testing for by examining lease agreements?

estimates

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 procedure most directly related to? a) Completeness b) existence c) rights d) valuation

B) Existence

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.

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

B) excessive recurring losses on assets retired

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

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

C) authorization and approval of major fixed-asset additions

The auditors 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.

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

D) Plant assets were retired during the year

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

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

D) Review of repairs and maintenance expense

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

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

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

D) adequacy of replacement funds

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) when the client should replace the equipment b) that the equipment is properly maintained c) that theft of the equipment is impossible d) whether a large recorded gain on a trade of equipment is appropriate

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

Auditors must confirm that the _____ of Property, plant and equipment agree with the general ledger.

Detail ledgers

It is important for the auditor to verify that the control described by the employees during the auditor's survey of controls over property, plant, and equipment have actually been ____.

implemented