Chapter 13 Exam 2

For any inherent risks identified by the auditors that involve the possibility of fraud, auditors should:

1. design an appropriate response to the risk 2. understand the programs and controls established by management to control the risk

Match the error or fraud with the audit procedure that is most likely to detect the error or fraud. A machine was sold for cash, but the retirement was not recorded.

Analyze the Miscellaneous Revenue account.

T or F: The department needing the assets should make plant and equipment purchases.

False

Propose an adjusting entry? An existing building on the land was torn down to allow construction of a new building on the land. The cost of the demolition was capitalized as part of the cost of the new building.

No

Propose an adjusting entry? 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

Match the error or fraud with the audit procedure that is most likely to detect the error or fraud. Land was exchanged for a long-term note receivable, but the exchange was not recorded.

Review current property tax bills.

Match the error or fraud with the audit procedure that is most likely to detect the error or fraud. An expenditure for equipment was improperly expensed.

Review expenditures charged to a repairs and maintenance account.

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

Auditors must confirm that the ____________ of Property, Plant, and Equipment agree with the general ledger.

Subsidiary ledgers

T or F: 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

T or F: Physical inventories of plant and equipment assets frequently reveal misstated assets.

True

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

True

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

True

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

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

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

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 capitalized.

Assets acquired in a nonmonetary exchange, should be generally recorded at:

fair value

Auditors physically inspect rental property owned by client to:

identify property that is occupied and producing revenue

For effective internal control over PPE, periodic physical inventories of plant assets should be compared with the:

ledger accounts for the plant assets

Because PPE assets are not vulnerable to theft and are easy to observe, for the existence assertion, auditors typically assess inherent risk as:

low

Which subgroup of PPE is subject to depletion?

natural resources

Evidence of legal ownership of PPE include:

property tax bills

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

purchase returns and allowances

Auditors need to perform a complete historical analysis of the property accounts for a client that has never been audited because:

repair and maintenance expenses may have been capitalized

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.

Acceptable depreciation methods include:

straight-line, declining-balance, and modified de-accelerated cost recovery system

Auditors prepare this working paper to determine that the totals of recorded accumulated depreciation agrees with the applicable general ledger controlling accounts.

summary analysis by account

Disclosure requirements for PPE include all of the following except:

total acquisitions and retirements for the current year (balances only - not changes)

What factor(s) lead to a smaller proportion of total audit time on PPE compared to current assets?

usually little change in property accounts from year to year, high dollar value but few transactions, and proper cutoff of YE transactions is of lesser importance

The audit of depreciation relates most directly to which audit objectives?

valuation or allocation

The audit of intangible assets typically involves:

vouching the cost of assets and testing allocation methods

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

If asset recovery periods are not reasonable, __________ expense may be materially misstated and the auditors will not be in a position to issue an unqualified opinion on the financial statements.

Depreciation

T or 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.

False

T or 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.

False

T or F: Goodwill should be systematically amortized over a period not exceeding 40 years.

False

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

False

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

Inherent

Match the error or fraud with the audit procedure that is most likely to detect the 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.

T or F: Loss payable endorsements on insurance policies may indicate the existence of liens on particular assets.

True

T or F: 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

The summary analysis of PPE emphasizes:

changes during the year under audit

Inspecting selected assets in the plant and tracing the assets to the detailed records provides evidence for which assertions?

completeness

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:

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

Which of the following would the auditor NOT be testing for by examining lease agreements? a. estimates b. existence c. presentation d. rights e. valuation

estimates

To test the accuracy of the repairs and maintenance expense accounts, auditors trace expenses to:

1. vendors' invoices 2. labor time records

To discover unrecorded retirements, auditors should:

1. determine if old equipment was traded in or replaced for major additions 2. analyze the miscellaneous revenue account for cash proceeds from sales of assets *Inquire of executives and supervisors

For the first audit of PPE for a company that has never been audited but has been in business for many years, auditors should:

1. thoroughly review all major additions to the property accounts since inception 2. thoroughly review all major retirements to the property accounts since inception

Key controls applicable to plant and equipment are:

1. use of capital works orders to record advance authorizations of all plant and equipment acquisitions 2. an annual plant budget used to forecast and control acquisitions and retirements

To test additions to PPE, auditors need to:

1. vouch purchases to invoices and other supporting documentation 2. recompute extensions, footings, and discounts on invoices and supporting documents

Match the internal control weakness or risk factor with its potential fraud or error. a. Undue pressure to meet earnings targets b. Inadequate accounting personnel c. Failure to use retirement work orders 1. No accounting entry made for asset that has been discarded due to lack of value 2. Repairs/maintenance expenditures erroneously recorded as PPE acquisitions 3. Repairs/maintenance expenditures intentionally recorded as PPE acquisitions

A - 3 B - 2 C - 1

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 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.

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

To make detailed tests of all of the client's depreciation computations, auditors should use computer __________ audit techniques.

Assisted

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

Control

The depletion of timberlands is usually based on physical quantities established by ____________, a term that means the inspection of a tract of forestland for the purpose of estimating the total lumber yield.

Cruising

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

Excessive recurring losses on assets retired

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

Existence of obsolete machinery

T or F: Auditors typically observe the client's physical inventory of plant and equipment.

False

T or F: Corporations should inventory their plant and equipment at least once per month.

False

T or 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.

False

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

Implemented

Auditors design tests of controls and substantive procedures to substantiate the existence of PPE and the __________ of the related transactions.

Occurrence

Idle equipment should be written down to estimated ____________ and excluded from the plant and equipment classification.

Realizable value

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

T or F: An important control for plant and equipment is the plant and equipment budget.

True

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

True

Adequate financial statement presentation and disclosure requires the basis of ___________ should be explicitly stated.

Valuation

In testing PPE for impairment, auditors may decide to use the work of a(n) ____________ specialist whose professional qualifications and experience needs to be evaluated.

Valuation

Obtaining a summary analysis of changes in property owned and reconciling it to ledgers addresses the primary audit objective of __________.

Valuation

Match the error or fraud with the audit procedure that is most likely to detect the error or fraud. The cost of repairing a machine was improperly capitalized.

Vouch additions to equipment accounts.

Propose an adjusting entry? 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

Improper accounting techniques for PPE leases include all of the following except:

assets for a lease that meets the requirements of an operating lease are not capitalized

Because of limited number of transactions, most of the audit work on PPE and intangibles can be done:

at interim before the Year-end date

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

authorization and approval of major fixed-asset additions.

The main reason auditors investigate PPE that has been replaced, sold, dismantled, or abandoned during the year is to:

determine that the retirement is recorded

Auditors should test for potential impairments in PPE by all of the following except:

evaluating objective estimates of the FV of the assets (subjective estimates of FV)

Auditors review these comparisons to judge overall reasonableness of recorded amounts for plant and equipment:

1. acquisitions for the current year with prior years 2. repairs and maintenance expense on monthly basis and from year to year

Circumstances that may indicate the recoverability of PPE has been impaired include:

1. an adverse change in the physical condition of the asset 2. significant decrease in market value of asset 3. significant adverse change in the way the asset is used

T or F: Better evidence of continuing ownership of property is provided by examination of the deed.

False

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

Paid real estate tax bills.

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

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

Transactions that occurred during the year

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

True

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

False

A sample of recorded retirements will be tested for proper ___________ by executives written on a serially numbered retirement work order.

Authorization

T or F: The auditors' principal objective in analyzing depreciation expense is to discover items that should have been capitalized.

False

When the price a company paid to acquire another company exceeds the FV of the identifiable net assets acquired, ___________ is recorded and auditors must review it annually for impairment.

Goodwill

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

Propose an adjusting entry? 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 - fixed assets recorded at cost

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

Utilization of serially numbered retirement work orders

For first audits of companies that have not been audited, auditors need to perform procedures to establish the ___________ of the beginning balances of PPE and accumulated depreciation.

Validity

Propose an adjusting entry? 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

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

adequacy of replacement funds.