Chapter 13

The audit of intangible assets typically involves Vouching the Cost of Assets : Y/N Testing Allocation Methods: Y/N

Yes Yes

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 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. Acquisitions are to be made through and approved by the department in need of the equipment.

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

a. authorization and approval of major fixed-asset additions.

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

a. excessive recurring losses on assets retired.

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

a. whether a large recorded gain on a trade of equipment is appropriate.

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.

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.

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.

b. Test deductions from accumulated depreciation for assets purchased during the year.

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. expenditures for fixed assets have been capitalized. c. capital expenditures have been properly authorized. d. non capitalizable expenditures have been properly expensed.

b. expenditures for fixed assets have been capitalized.

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.

Which of the following is the best evidence of real estate ownership at the balance sheet date? a. Closing statement. b. Title insurance policy. c. Paid real estate tax bills. d. Original deed held in the client's safe.

c. Paid real estate tax bills.

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.

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

c. adequacy of replacement funds.

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.

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 and Maintenance.

d. Repairs and Maintenance.

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

d. Review of repairs and maintenance expense.

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. confer with management regarding a change in the title of the account to "goodwill". b. confirm that the secret formula is registered and on file with the county clerk's office. c. confer with management relating to controls maintained over formula confidentiality. d. confer with management regarding transfer of the amount from the balance sheet to the income statement.

d. confer with management regarding transfer of the amount from the balance sheet to the income statement.

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

d. reviewing the titles and descriptions for all construction work orders issued during the year.