Audit Ch 13 - Property, Plant, and Equipment

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. *Hint: Land should be capitalized, not Building.

Adjusting entry? - Yes

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.

Adjusting entry? - Yes

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.

Adjusting entry? - Yes

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.

Adjusting entry? - No

Fraud or error: Expenditures for repairs and maintenance intentionally recorded as property, plant, and equipment to overstate income

Fraud

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.

repair and maintenance

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

revenue

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.

Adjusting entry? - No

Fraud or error: Purchases of equipment are erroneously reported in a maintenance and expense account

Error

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 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. The purchase of factory equipment should be made by the purchasing department regardless of which unit of the company will use the equipment. The purchasing department has the expertise and the established procedures and documents to ensure that all purchases are made in accordance with company policy.

Fraud or error: An asset that has been replaced is discarded due to lack of value, with no entry to the general ledger

Error

Fraud or error: A gain recorded on an exchange of non-monetary assets that lacks commercial substance

Error

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

Excessive recurring losses on assets retired. Excessive recurring losses on assets retired show that the depreciation expense recognized during the actual useful lives of the assets has been less than the real cost of using the assets.

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

Existence of obsolete machinery

Which of the following accounts should be reviewed by the auditors to gain reasonable assurance that additions to property, plant, and equipment are notunderstated?

Repairs In recording expenditures on property, plant, and equipment, the logical choice usually is between a revenue expenditure and a capital expenditure. If the outlay is judged to be a revenue expenditure (rightly or wrongly), it will probably be recorded in the Repairs and Maintenance account. If items that should be capitalized are erroneously charged to Repairs and Maintenance, the result will be an understatement of property, plant, and equipment. Consequently, the auditors can gain evidence that additions to property, plant, and equipment are not understated by reviewing the Repairs and Maintenance account. The other alternatives suggested in the question are not plausible. An erroneous debit to cash would be disclosed quickly because of the disagreement between cash receipts and the cash being deposited daily in the bank. A debit to Accounts Payable would lead to protests from creditors. A debit to Depreciation Expense would be a conspicuous error because of the timing of the entry and the lack of a related credit to Accumulated Depreciation.

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. An inability to locate assets may reveal to the auditors that unrecorded retirements have occurred.

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

Utilization of serially numbered retirement work orders. Serially numbered retirement work orders provide a systematic means of assuring that units of plant and equipment are not retired without authorization by management. Retirement work orders also provide the accounting department with the information necessary to record the retirement of equipment in the accounting records. The alternative procedures suggested are not satisfactory. Some retirements of plant asset do not involve cash receipts. The inquiries and observations by internal auditors would come after the fact of asset retirements.

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

control Auditors need to determine that the controls are effective in order to ensure they have calculated the correct level of control risk.

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

detail ledgers Auditors must confirm that the detail ledgers of Property, Plant, and Equipment tie to the general ledger.

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

estimates Lease agreements help auditors understand that the company has rights to the assets.

The intangible asset known as __________ arises in accounting for a business combination, and should be amortized as its value becomes impaired over the years.

goodwill

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 To be effective, controls need to be implemented.

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

inherent After understanding the nature of the client and its environment, auditors must identify the inherent risk.

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