Chapter 13

True or false: A major control procedure related to plant and equipment is a budget for depreciation.

False

True or false: A typical procedure in the audit of property is examination of public records to verify the ownership of the property.

False

True or false: Idle equipment will generally need to be reclassified as a current asset.

False

True or false: The auditors typically observe all major items of property, plant and equipment every year.

False

True or false: The primary purpose of internal control over plant and equipment is to safeguard the assets from theft.

False

True or false: Even when internal control is weak, a significant portion of the audit work on property, plant and equipment may be performed at an interim date.

True

True or false: Evidence of continued ownership of property is obtained by vouching payments to a mortgage trustee.

True

True or false: In the audit of depletion the auditors must often rely on the work of specialists.

True

True or false: Material purchases of assets from an affiliated company should be disclosed in the financial statements.

True

True or false: The auditors' approach to the audit of property, plant and equipment largely results from the fact that relatively few transactions occur.

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) 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? a) Accumulated depreciation b) Cost of goods sold c) Purchase returns and allowances d) Purchase discounts

a) Accumulated depreciation

Which of the following is used to obtain evidence that the client's equipment accounts are not understated? a) Analyzing repairs and maintenance expense accounts b) Vouching purchases of plant and equipment c) Recomputing depreciation expense d) Analyzing the miscellaneous revenue account

a) Analyzing repairs and maintenance expense accounts

Which of the following is not one of the auditors' objectives in auditing depreciation? a) Establishing the reasonableness of the client's replacement policy b) Establishing that the methods used are appropriate c) Establishing that the methods are consistently applied d) Establishing the reasonableness of depreciation computations

a) Establishing the reasonableness of the client's replacement policy

When performing an audit of the property, plant and equipment accounts, an auditor should expect which of the following to be most likely to indicate a departure from generally accepted accounting principles? a) Repairs have been capitalized to repair equipment that had broken down b) Interest has been capitalized for self-constructed assets c) Assets have been acquired from affiliated corporations with the related transactions recorded and described in the financial statements d) The cost of freight-in on an acquisition has been capitalized

a) Repairs have been capitalized to repair equipment that had broken down

The auditors are least likely to learn of retirements of equipment through which of the following? a) Review of the purchase returns and allowances account b) Review of depreciation c) Analysis of the debits to the accumulated depreciation account d) Review of insurance policy riders

a) Review of the purchase returns and allowances account

Property acquisitions that are misclassified as maintenance expense would most likely be detected by an internal control system that provides for: a) investigation of variances within a formal budgeting system b) review and approval of the monthly depreciation entry by the plant supervisor c) segregation of duties of employees in the accounts payable department d) examination by the internal auditors of vendor invoices and cancelled checks for property acquisitions

a) investigation of variances within a formal budgeting system

A continuing audit client's property, plant and equipment and accounts receivable accounts have approximately the same year-end balance. In this circumstance, when compared to property, plant and equipment one would normally expect the audit of accounts receivable to require: a) more audit time b) less audit time c) approximately the same amount of audit time d) similar confirmation procedures

a) more audit time

In testing for unrecorded retirements of equipment, an auditor might: a) select items of equipment from the accounting records and then attempt to locate them during the plant tour b) compare depreciation expense with the prior year's depreciation expense c) trace equipment items observed during the plant tour to the equipment subsidiary ledger d) scan the general journal for unusual equipment retirements

a) select items of equipment from the accounting records and then attempt to locate them during the plant tour

The audit of intangible assets typically involves: a) vouching the cost of the asset and testing allocation methods b) vouching the cost of the asset, but not testing allocation methods c) testing allocation methods, but not vouching the cost of the asset d) neither vouching the cost of asset nor testing allocation methods

a) vouching the cost of the asset and testing allocation methods

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? a) Direct audit of the ending balance b) Agreement of the beginning balance to prior year's working papers and audit of significant changes in the accounts c) Audit of changes in the accounts since inception of the company d) Audit of selected purchases and retirements for the last few years

b) Agreement of the beginning balance to prior year's working papers and audit of significant changes in the accounts

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) All purchases of factory equipment are required to be made by the department in need of the equipment

Which of the following is the best evidence of continuous ownership of property? a) Examination of the deed b) Examination of rent receipts from lessees of the property c) Examination of the title policy d) Examination of cancelled check in payment for the property

b) Examination of rent receipts from lessees of the property

An auditor has identified numerous debits to accumulated depreciation of equipment. Which of the following is most likely? a) The estimated remaining useful lives of equipment were increased b) Plant assets were retired during the year c) The prior year's depreciation expense was erroneously understated d) Overhead allocations were revised at year-end

b) Plant assets were retired during the year

Which of the following is not a control that should be established for purchases of equipment? a) Establishing a budget for capital acquisitions b) Requiring that the department in need of the equipment order the equipment c) Requiring that the receiving department receive the equipment d) Establishing an accounting policy regarding the minimum dollar amount of purchase that will be considered for capitalization

b) Requiring that the department in need of the equipment order the equipment

Which of the following is the most important control procedure over acquisitions of property, plant, and equipment? a) Establishing a written company policy distinguishing between capital and revenues expenditures b) Using a budget to forecast and control acquisitions and retirements c) Analyzing monthly variances between authorized expenditures and actual costs d) Requiring acquisitions to be made by user departments

b) Using a budget to forecast and control acquisitions and retirements

The audit procedure of analyzing the repairs and maintenance accounts is primarily designed to provide evidence in support of the audit proposition that all a) capital expenditures have been properly authorized b) expenditures for fixed assets have been capitalized c) noncapitalizable expenditures have been properly expensed d) expenditures for fixed assets have been recorded in the proper period

b) expenditures for fixed assets have been capitalized

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) inspection of equipment and reconciliation with accounting records

A plant manager would be most likely to provide information on which of the following? a) Adequacy of the provision for uncollectible accounts b) Appropriateness of physical inventory valuation techniques c) Existence of obsolete inventory d) Deferral of certain purchases of office supplies

c) Existence of obsolete inventory

For which of the following ledger accounts would the auditor be most likely to analyze the details to identify understatements of equipment acquisitions? a) Service Revenue b) Sales c) Repairs and maintenance expense d) Sales salaries expense

c) Repairs and maintenance expense

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) Test deductions from accumulated depreciation for assets purchased during the year

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: a) Tests of controls and extensive tests of property and equipment balances at the end of the year b) Analytical procedures for current year property and equipment transactions c) Tests of controls and limited tests of current year property and equipment transactions d) Analytical procedures for property and equipment balances at the end of the year

c) Tests of controls and limited tests of current year property and equipment transactions

The auditors may expect a proper debit to goodwill due to: a) purchase of a trademark b) establishment of an extraordinarily profitable product c) a business combination d) capitalization of human resources

c) a business combination

In the examination of property, plant, and equipment, the auditor tries to determine all of the following except the: a) extent of the control risk b) extent of property abandoned during the year c) adequacy of replacement funds d) reasonableness of the depreciation

c) adequacy of replacement funds

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) existence of obsolete machinery

The auditors may use data analytics to help test repairs and maintenance expense for overstatement by: a) identifying expenditures for repairs and maintenance that were not performed b) identifying capital expenditures that should have been expensed c) identifying expenditures with characteristics that indicate they are capital expenditures d) vouching large repair and maintenance expenditures

c) identifying expenditures with characteristics that indicate they are capital expenditures

The most likely technique for the current year audit of goodwill which was acquired three years ago by a continuing audit client: a) confirmation b) observation c) recomputation d) inquiry

c) recomputation

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) select items of equipment in the accounting records and then locate them in the plant

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) transactions that occurred during the year

To assure accountability for fixed asset retirements, management should implement an 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) utilization of serially numbered retirement work orders

Which of the following best describes the independent auditors' approach to obtaining satisfaction concerning depreciation expense in the income statement? a) Verify the mathematical accuracy of the amounts charged to income as a result of depreciation expense b) Determine the method for computing depreciation expense and ascertain that is in accordance with GAAP c) Reconcile the amount of depreciation expense to those amounts credited to accumulated depreciation accounts d) Establish the basis for depreciable assets and verify the depreciation expense

d) Establish the basis for depreciable assets and verify the depreciation expense

Which of the following is a customary audit procedure for the verification of the legal ownership of real property? a) Examination of correspondence with the corporate counsel concerning acquisition matters b) Examination of ownership documents registered and on file at a public hall of records c) Examination of corporate minutes and resolutions concerning the approval to acquire property, plant, and equipment d) Examination of deeds and title guaranty policies on hand

d) Examination of deeds and title guaranty policies on hand

Which of the following would be least likely to address control over the initiation and execution of equipment transactions? a) Requests for major repairs are approved by a higher level than the department initiating the request b) Prenumbered purchase orders are used for equipment and periodically accounted for c) Requests for purchases of equipment are reviewed for consideration of soliciting competitive bids d) Procedures exist to restrict access to equipment

d) Procedures exist to restrict access to equipment

For which of the following accounts is it most likely that most of the audit work can be performed in advance of the balance sheet date? a) Accounts receivable b) Cash c) Current marketable securities d) Property, plant, and equipment

d) Property, plant, and equipment

When comparing an initial audit with a subsequent year audit for a particular client, the scope of audit procedures for which of the following accounts would be expected to decrease the most? a) Accounts receivable b) Cash c) Marketable securities d) Property, plant, and equipment

d) Property, plant, and equipment

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) Repairs

Which of the following best describes the auditors' typical observation of plant and equipment? a) The auditors observe a physical inventory of plant and equipment, annually b) The auditors observe all additions to plant and equipment made during the year c) The auditors observe all major plant and equipment items in the clients' accounts each year d) The auditors observe major additions to plant and equipment made during the year

d) The auditors observe major additions to plant and equipment made during the year

Which of the following is not a test primarily used to test property, plant and equipment accounts for overstatement? a) Investigation of reductions in insurance coverage b) Review of property tax bills c) Examination of retirement work orders prepared during the year d) Vouching retirements of plant and equipment

d) Vouching retirements of plant and equipment

In violation of company policy, Lowell Company erroneously capitalized the cost of painting its warehouse. The auditors examining Lowell's financial statements would most likely detect this when: a) discussing capitalization policies with Lowell's controller b) examining maintenance expense accounts c) observing, during the physical inventory observation, that the warehouse had been painted d) examining the construction work orders supporting items capitalized during the year

d) examining the construction work orders supporting items capitalized during the year

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) excessive recurring losses on assets retired