Audit ch13

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 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.

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 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.

A machine was sold for cash which was recorded, but the retirement was not recorded

Analyze the Miscellaneous Revenue account for the year just completed.

A machine was sold for cash which was recorded, but the retirement was not recorded.

Analyze the Miscellaneous Revenue account for the year just completed.

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

CONTROL

Modification of packaging equipment to increase its operating speed by approximately 40%.

Capitalize

Rearrangement of equipment to increase efficiency of operations in the future.

Capitalize

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

DETAIL LEDGERS

Depreciation was not taken on a very major piece of equipment.

Depreciation was not taken on a very major piece of equipment.

A gain recorded on an exchange of non-monetary assets that lacks commercial substance

ERROR

A purchase of equipment are erroneously reported in a maintenance and expense account

ERROR

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

ERROR

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

ESTIMATES

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

Examination of the client's property tax bills.

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

Existence of obsolete machinery.

Repainting of the primary bottling machine.

Expense

Repairs of the primary bottling machine. These repairs bring operating speed of the machine back to where it was prior to the repair.

Expense

Replanting grass around the plant to replace grass that had died due to frost damage.

Expense

Expenditures for repairs and maintenance intentionally recorded as Property, Plant and equipment to overstate income

FRAUD

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

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

INHERENT

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.

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

The audit of intangible assets typically involves 1) Vouching the Cost of Assets: Yes, Testing Allocation Methods: Yes 2) Vouching the Cost of Assets: Yes, Testing Allocation Methods: No 3) Vouching the Cost of Assets: No, Testing Allocation Methods: Yes 4) Vouching the Cost of Assets: No, Testing Allocation Methods: No

Option (1)

A piece of equipment was stolen from the warehouse.

Physically examine recorded assets as of year-end.

A recorded purchase of equipment was part of a fraud scheme (including false documentation from purchase order through a fraudulent equipment receiving report). No equipment was received and the cash payment was misappropriated.

Physically examine recorded assets as of year-end.

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.

Land was exchanged for a long-term note receivable, but the exchange was not recorded.

Review current property tax bills.

An expenditure for equipment was improperly expensed.

Review expenditures charged to a repairs and maintenance account for the year just completed.

A lien exists on certain equipment.

Review fire insurance policies.

A purchase prior to year-end was improperly recorded in the following year

Review transactions recorded shortly after year-end.

A purchase prior to year-end was improperly recorded in the following year.

Review transactions recorded shortly after year-end.

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.

The auditors may conclude that depreciation charges are relatively accurate when:

There is little activity in plant assets accounts and the amount of depreciation is similar to the prior year. There are few gains or losses on disposals of assets retired.

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

Utilization of serially numbered retirement work orders.

A property acquisition was capitalized for an improper amount due and the wrong amount was paid due to a transposition input error.

Vouch recorded additions to equipment accounts for the year just completed

A property acquisition was capitalized for an improper amount due and the wrong amount was paid due to a transposition input error.

Vouch recorded additions to equipment accounts for the year just completed.

The cost of repairing a machine was improperly capitalized.

Vouch recorded additions to equipment accounts for the year just completed.

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.

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.

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

YES

The plant and equipment budget is designed to control __________ of property items.

acquisitions (purchases) and retirements

A company may not actually own property recorded as an asset; instead the company may have rights to the asset under the terms of a __________.

capital lease

The intangible asset known as __________ arises in accounting for a business combination, and should only be amortized when its value becomes impaired below its book value.

goodwill

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

Possession of a deed is not proof of present __________ of property.

ownership

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.

repairs and maintenance

To provide assurance that the accounting department is notified of property retirements, a system of serially numbered __________ should be used by the company.

retirement work orders

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

revenue (or current year)

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 and related journal entries.

A company should maintain a __________ for plant and equipment, consisting of a separate record for each unit of property.

subsidiary ledger

In the auditors' first examination of a new client that has changed auditors, the beginning balances of property, plant, and equipment accounts may be substantiated by referring to the predecessor auditors' __________.

working papers