CH 13 Audit

What factors lead to a smaller proportion of total audit time on property, plant, and equipment compared to current assets?

-A proper cutoff of year-end transactions is of lesser importance -Usually little change in the property accounts from year to year -High dollar value but few transactions

The key audit working paper for plant, property, and equipement is:

a summary analysis of assets and accumulated depreciation accounts.

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

accumulated depreciation

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

acquisitions and retirements

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

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

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

While testing property at an interim date, ____ can be tested in coordination with property.

depreciation

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

detailed ledgers

Auditors should produce an estimate of the overall annual provision of depreciation expense to:

determine the overall reasonableness of the expense.

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

excessive recurring losses on assets retired.

The vouching process utilizes a working paper analysis of the

general ledger control accounts.

_____ assets can be audited at an interim date.

intangible

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

interim before the year-end date.

Property, plant, and equipment that are temporarily idle:

need not to be reclassified

Beginning balances for property and equipment accounts on the summary analysis can be verified by reference to:

prior year's working papers.

The best evidence of continuing ownership of property is:

property tax bills.

Good evidence of ownership of property often is found by examining current ____ bills.

property tax.

To test for proper authorization, receipt and recording of acquisitions, auditors should select a sample of:

purchases of plant and equipment.

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.

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

In assessing the risks of material misstatements and designing further audit procedures for property, plant and equipment, some of the risks may be considered

significant risks that require special audit consideration.

Vouching additions to the property, plant, and equipment accounts is on the most important

substantive tests.

Overall test of the annual provision for depreciation expense

-Compare rates used in the current year with those used in prior years. -Test computation of depreciation provisions for a representative number of units. -perform analytical procedure.

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

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

fair value

When the price a company paid to acquire another company exceeds the fair value of the identifiable net assets acquired,

goodwill is recorded and auditors must review it annually for impairment.

Auditor physically inspect rental property owned by client to:

identify property that is occupied and producing revenue.

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 need to test assets acquired from related parties because of the risk the transactions have been recorded at:

inflated amounts.

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.

A December 30 acquisition of a new plant asset was recorded after year-end rather than prior year-end. Such an error does not usually result in a significant misstatement of ____.

net income

Auditors design test of controls and substantiate the existence of property, plant, and equipment and the

occurrence of the related transactions.

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

ownership.

A summary analysis of the property accounts indicates additions and ____.

retirements.

The approach typically used by the auditors to audit depreciation is:

review and test management's process of developing the estimate.

Debits to intangible assets accounts should have documentary evidence that:

rights or benefits were acquired payment was made.

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 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.

Adequate financial statement presentation and disclosure requires the basis of

valuation should be explicitly stated.

Auditors may ______ the beginning balance of plant assets by reference to the prior year audit.

verify

In testing plant and equipment balances, an auditor may select recorded additions in the analysis of plant and equipment and inspect the actual assets involved. Which management assertion is this procedure most directly related to?

Existence

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

Existence of obsolete machinery.

A piece of equipment was stolen from the warehouse

Physically examine recorded assets as of year-end.

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 accounts should be reviewed by the auditors to gain reasonable assurance that additions to property, plant, and equipment are not understated?

Repairs

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

Transactions that occurred during the year.

The cost of repairing a machine was improperly capitalized

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

The physical inspection of plant assets may be limited to major units acquired during the year.

When a complete inventory property, plant, and equipment is made, the auditors' role is observer.

Retirements may also be tested for _____ and supporting work orders.

authorization

Most of the work on property can be done ______ the balance sheet date.

before.

When analyzing repairs and maintenance expense accounts, auditors should be aware of the company's

capitalization policy

Auditors review rental revenue accounts and compare amounts to lease agreements and:

cash records

Auditors should test for potential impairments in property, plant, and equipment by all of the following except:

evaluating objective estimates of the fair value of the assets. -subject estimates of fair value.

Variances between plant budgets and actual expenditures for plant assets should be subject to review and approval of:

executives

Tracing items in the plant ledger to the physical assets provides evidence the

existence assertion

Fraud ex

expenditures for repairs and maintenance intentionally recorded as PP,E to overstate income.

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

Utilization of serially numbered retirement work orders.

when the cost of self-constructed asset exceeds the cost of similar assets that could be purchased, the excess costs should be:

expensed in the period that construction is completed.

Intangible assets tend to be difficult to audit because of all of the following:

they are subject to amortization or impairment their value lies in rights or economic advantages they lack physical substance

Ratio used by auditors to judge the overall reasonableness of recorded amounts for plant and equipment include:

total cost of plant assets / CGS total cost of plant assets / annual output in dollars or other units.

Auditors need to test ____ from construction in progress to property.

transfers.

Error=

-Purchases of equipment are erroneously reported in a maintenance and expense account. -An asset that has been replaced is discarded due to lack of value, with no entry to the general ledger. -A gain recorded on an exchange of non-monetary assets the lacks commercial substance.

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

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

To discover unrecorded retirements, auditors should:

-analyze the miscellaneous revenue account for cash proceeds from sales of assets -determine if old equipment was traded in or replaced for major additions

intangible assets:

-are non monetary -lack physical substance -provide rights or economic advantages.

The auditor considers the following when testing for the lease agreements:

-existence -presentation -rights -valuation

To test additions to property, plant, and equipment, auditors need to:

-recompute extensions, footings, and discounts on invoices and supporting documents -vouch purchases to invoices and other supporting documentation

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

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

Key controls applicable to plant and equipement are:

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

The audit of intangible assets typically involves

-vouching the cost of assets (yes) -testing allocation methods (yes)

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.