Chapter 13

Inspecting selected assets in the plant and tracing the assets to the detailed records provides evidence for which assertions? a. existence b. presentation and disclosure c. valuation d. completeness

D

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

True

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

Auditors review these comparisons to judge overall reasonableness of recorded amounts for plant and equipment: (Select all that apply) a. acquisitions for the current year with prior years b. repairs and maintenance expense on monthly basis and from year to year c. retirements for the current year with future years d. depreciation for the current year with prior years

A, B

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

Assisted

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

Authorization

The summary analysis of PPE emphasizes: a. a sample of changes during the year under audit b. changes during the year under audit c. balances as of the YE under audit

B

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

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

Which subgroup of PPE is subject to depletion? a. buildings, machinery, equipment, and land improvements b. natural resources c. land

B

Auditors need to perform a complete historical analysis of the property accounts for a client that has never been audited because: a. asset additions may have been recorded in property accounts b. retirements of property may have been credited to property accounts c. repair and maintenance expenses may have been capitalized

C

Auditors physically inspect rental property owned by client to: a. identify property that may be impaired in value b. determine recorded lease expense is appropriate c. identify property that is occupied and producing revenue

C

Because PPE assets are not vulnerable to theft and are easy to observe, for the existence assertion, auditors typically assess inherent risk as: a. high b. moderate c. low

C

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

For the first audit of PPE for a company that has never been audited but has been in business for many years, auditors should: (Select all that apply) a. thoroughly review all repairs and maintenance expense account transactions since inception b. thoroughly review all depreciation expense account transactions since inception c. thoroughly review all major additions to the property accounts since inception d. thoroughly review all major retirements to the property accounts since inception

C, D

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

Control

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

Analysis of which account is least likely to reveal evidence relating to recorded retirement of equipment? a. accumulated depreciation b. insurance expense c. PPE d. purchase returns and allowances

D

For effective internal control over PPE, periodic physical inventories of plant assets should be compared with the: a. serially numbered work orders for acquisitions b. budgets for acquisitions of plant assets c. repairs and maintenance ledger accounts d. ledger accounts for the plant assets

D

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

D

Disclosure requirements for PPE include all of the following except: a. method(s) of computing depreciation b. balances of major classes of depreciable assets c. accumulated depreciation by major class or total d. total acquisitions and retirements for the current year

D (balances only - not changes)

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

False

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

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

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

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

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

Occurrence

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

Subsidiary ledgers

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

True

The audit of intangible assets typically involves: a. vouching the cost of assets and testing allocation methods b. vouching the cost of assets only c. testing the allocation methods only d. None of the above

A

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

A

Auditors should test for potential impairments in PPE by all of the following except: a. evaluating objective estimates of the FV of the assets b. developing their own estimate of FV c. testing the assumptions management made to develop the estimate d. testing the process management used to develop the estimate

A (subjective estimates of FV)

Assets acquired in a nonmonetary exchange, should be generally recorded at: a. historical cost b. cost of direct materials, direct labor, and applicable overhead c. fair value

C

Because of limited number of transactions, most of the audit work on PPE and intangibles can be done: a. at the YE date b. at field work after the YE date c. at interim before the YE date

C

Evidence of legal ownership of PPE include: a. receipts for deposits to a mortgage b. rental payments for the property c. property tax bills

C

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 accounts

C

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

False

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

True

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

Realizable value

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

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

The audit of depreciation relates most directly to which audit objectives? a. valuation or allocation b. existence or occurrence c. presentation and disclosure d. completeness

A

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

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

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

A

To test the accuracy of the repairs and maintenance expense accounts, auditors trace expenses to: (Select all that apply) a. vendors' invoices b. fixed asset subsidiary ledger c. labor time records d. depreciation records

A, C

Key controls applicable to plant and equipment are: (Select all that apply) a. a policy requiring all purchase of plant and equipment to be handled by the warehouse department b. use of capital works orders to record advance authorizations of all plant and equipment acquisitions c. an annual plant budget used to forecast and control acquisitions and retirements

B, C

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

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

False

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

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

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

False

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

False

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

False

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

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

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

A

For any inherent risks identified by the auditors that involve the possibility of fraud, auditors should: (Select all that apply) a. design an appropriate response to the risk b. understand the programs and controls established by management to control the risk c. determine that management has established programs and controls to eliminate the risk d. determine the controls established by management are working effectively

A, B

Auditors prepare this working paper to determine that the totals of recorded accumulated depreciation agrees with the applicable general ledger controlling accounts. a. list of retirements during the year b. summary analysis by account c. list of acquisitions during the year

B

An important consideration to the auditor in the audit of equipment is to determine: a. that theft of the equipment is impossible. b. when the client should replace the equipment. c. that the equipment is properly maintained. d. whether a large recorded gain on a trade of equipment is appropriate.

D

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

A

Acceptable depreciation methods include: (Select all that apply) a. straight-line b. sum-of-the-lives digits c. declining-balance d. modified de-accelerated cost recovery system e. units of output

A, C, D

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

True

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

Valuation

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

A

Match the error or fraud with the audit procedure that is most likely to detect the error or fraud. a. Analyze the Miscellaneous Revenue account. b. Review current property tax bills. c. Review expenditures charged to a repairs and maintenance account. d. Review fire insurance policies. e. Vouch additions to equipment accounts. A machine was sold for cash, but the retirement was not recorded.

A

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

Inherent

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

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

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

Circumstances that may indicate the recoverability of PPE has been impaired include: (Select all that apply) a. an adverse change in the physical condition of the asset b. significant decrease in market value of asset c. significant adverse change in the way the asset is used d. expected undercounted future cash flows from asset is more than the carrying value

A, B, C

What factor(s) lead to a smaller proportion of total audit time on PPE compared to current assets? (Select all that apply) a. usually little change in property accounts from year to year b. high dollar value but few transactions c. proper cutoff of YE transactions is of lesser importance d. YE cutoff error will greatly impact net income for the year

A, B, C

To discover unrecorded retirements, auditors should: (Select all that apply) a. determine if old equipment was traded in or replaced for major additions b. investigate increases in insurance coverage c. analyze the miscellaneous revenue account for cash proceeds from sales of assets d. inquire of warehouse personnel whether plant assets have been retired during the year

A, C *Inquire of executives and supervisors

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

B

Match the error or fraud with the audit procedure that is most likely to detect the error or fraud. a. Analyze the Miscellaneous Revenue account. b. Review current property tax bills. c. Review expenditures charged to a repairs and maintenance account. d. Review fire insurance policies. e. Vouch additions to equipment accounts. Land was exchanged for a long-term note receivable, but the exchange was not recorded.

B

Improper accounting techniques for PPE leases include all of the following except: a. assets recorded as an operating lease that meet the requirements for a capital lease b. assets for a lease that meets the requirements of an operating lease are not capitalized c. a rent holiday in the lease that is not amortized over the life of the lease d. leasehold improvements depreciated over the estimated useful life instead of the shorter lease term when renewal is not assured

B

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

B

To test additions to PPE, auditors need to: (Select all that apply) a. check for authorization by warehouse personnel b. vouch purchases to invoices and other supporting documentation c. recompute extensions, footings, and discounts on invoices and supporting documents d. make certain all repairs/maintenance expenditures have been capitalized e. make certain no sales tax related to equipment purchase has been capitalized

B, C

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

Match the error or fraud with the audit procedure that is most likely to detect the error or fraud. a. Analyze the Miscellaneous Revenue account. b. Review current property tax bills. c. Review expenditures charged to a repairs and maintenance account. d. Review fire insurance policies. e. Vouch additions to equipment accounts. An expenditure for equipment was improperly expensed.

C

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 relating to controls maintained over formula confidentiality. c. confer with management regarding transfer of the amount from the balance sheet to the income statement. d. confer with management regarding a change in the title of the account to "goodwill".

C

The main reason auditors investigate PPE that has been replaced, sold, dismantled, or abandoned during the year is to: a. make sure the asset is still recorded in PPE b. determine that the retirement asset was disposed of correctly c. determine that the retirement is recorded

C

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

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. Paid real estate tax bills. d. Closing statement.

C

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

Match the error or fraud with the audit procedure that is most likely to detect the error or fraud. a. Analyze the Miscellaneous Revenue account. b. Review current property tax bills. c. Review expenditures charged to a repairs and maintenance account. d. Review fire insurance policies. e. Vouch additions to equipment accounts. A lien exists on certain equipment.

D

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

Match the error or fraud with the audit procedure that is most likely to detect the error or fraud. a. Analyze the Miscellaneous Revenue account. b. Review current property tax bills. c. Review expenditures charged to a repairs and maintenance account. d. Review fire insurance policies. e. Vouch additions to equipment accounts. The cost of repairing a machine was improperly capitalized.

E

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

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