Chapter 19- Audit

4) The auditor must know the client's capitalization policies to determine whether acquisitions are: NYN

Treated consistently with those of the preceding year

16) A set of records for each piece of equipment that includes descriptive information, date of acquisition, original cost, current year depreciation, and accumulated depreciation is the: A) acquisitions journal. B) depreciation schedule. C) fixed asset master file. D) file of purchase requisitions.

c

1) Which of the following accounts would normally not be a part of the acquisition and payment cycle of Prepaid Insurance? A) Cash B) Insurance Payable C) Insurance Expense D) Prepaid Insurance

B

9) The audit procedure that requires an auditor to "foot the acquisition schedule" relates to which balance-related audit objective? A) Classification B) Detail tie-in C) Existence D) Cut-off

B

) ________ expense is rarely analyzed unless analytical procedures indicate high potential for material misstatement. A) Repairs and maintenance B) Legal C) Utilities D) Rent and lease

C

1) You are auditing the acquisition and payment cycle and note the presence of excessive recurring losses on retired assets. You may conclude that: A) insured values are greater than book values. B) there are a large number of fully depreciated assets. C) depreciation charges may by insufficient. D) company has a policy of selling relatively new assets.

C

1) Which of the following accounts is not associated with the acquisition and payment cycle? A) Common stock B) Property, plant and equipment C) Accrued property taxes D) Income tax expense

A

11) Which of the following audit procedures would be the most correct in determining the audit objective of existence for the equipment account in the fixed asset master file? A) Examine vendor invoices and receiving reports. B) Review transactions near the balance sheet date. C) Recalculate vendor invoices. D) Examine vendor invoices for correct accounting treatment.

A

20) The test of details of balances procedure to "examine vendors' invoices of closely related accounts such as repairs to uncover items that should be property, plant, and equipment" satisfies the audit objective of: A) completeness. B) detail tie-in. C) cutoff. D) existence.

A

1) Which of the following audit tests both have the effect of simultaneously verifying balance sheet and income statement accounts? A) Analytical procedures and substantive tests of transactions B) Tests of controls and substantive tests of transactions C) Tests of details of balances and substantive tests of transactions D) Tests of controls and analytical procedures

B

15) Which of the following is an analytical procedure to determine if there is idle equipment or equipment that was disposed of but not written off? A) Compare depreciation expense divided by gross equipment cost with previous years. B) Compare gross manufacturing cost divided by some measure of production with previous years. C) Compare accumulated depreciation divided by gross equipment cost with previous years. D) Compare annual repairs and maintenance accounts with previous years.

B

25) A major consideration in verifying the ending balance in fixed assets is the possibility of existing legal encumbrances. Tests to identify possible legal encumbrances would satisfy the audit objective of: A) existence. B) presentation and disclosure. C) detail tie-in. D) classification.

B

27) The auditor needs to gain reasonable assurance that the equipment accounts in the fixed asset master file are not understated. Which of the following accounts would most likely be reviewed in making that determination? A) Depreciation expense B) Repairs and maintenance expense C) Gains/losses on sales and retirements D) Cash

B

3) The auditor needs to be aware that most users of financial statements rely most heavily on the ________ for making decisions. A) balance sheet B) income statement C) statement of cash flows D) statement of stockholders' equity

B

10) You are auditing Manufacturing Company and testing the audit related objective of completeness for the equipment accounts. Which of the following audit procedures is most likely to achieve your objective? A) Examine vendor invoices and receiving reports. B) Physically examine assets. C) Examine vendor invoices of closely related accounts such as repairs and maintenance. D) Trace individual acquisitions to the fixed asset master file.

C

2) Which of the following expenses is not typically evaluated as part of the audit of the acquisition and payment cycle? A) Depreciation expense B) Insurance expense C) Estimated liability for warranties D) Property tax expense

C

13) Failure to capitalize a fixed asset at the correct amount would impact which financial statements until the company disposes of the asset? A) The balance sheet only B) The income statement only C) The cash flow statement only D) Both the income statement and the balance sheet

D

2) The most effective and efficient audit approach in the examination of the income statement would be which of the following? A) Examine income statement accounts concurrently with the related balance sheet accounts. B) Compare company's components of net income to other businesses in the same industry. C) Compare company's components of net income to the previous two years. D) Examine changes in all balance sheet accounts.

A

28) Changing circumstances may require a change in the useful life of an asset. When this occurs, it involves a change in: A) accounting estimate rather than a change in accounting principle. B) accounting principle rather than a change in accounting estimate. C) both accounting principle and accounting estimate. D) neither accounting principle nor accounting estimate.

A

3) When auditors verify accrued property taxes two audit objectives are especially significant. These are: A) completeness and accuracy. B) completeness and net realizable value. C) detail tie-in and completeness. D) accuracy and classification.

A

30) The auditor is examining the accounting entries made to the accumulated depreciation account during the year and notices a significant amount of debits to the account. Which of the following provides the most logical explanation? A) Large number of asset retirements B) Salvage values were revised downward C) Useful lives were revised downward D) Allocation of fixed overhead were revised

A

33) The most common audit test to verify equipment additions is to: A) examine vendors' invoices. B) perform an inventory of the fixed assets. C) confirm the additions with the vendors. D) trace the vendor invoices to the cash disbursements journal.

A

34) The auditor is testing for unrecorded retirements/disposals of equipment. Which of the following audit procedures would the auditor most likely use? A) Select items from the fixed asset master file and then physically locate them. B) Examine the repairs and maintenance amount for large debits. C) Compare current years depreciation expense with the previous year's depreciation expense. D) Trace acquisition documents to the fixed asset master file.

A

36) One of the primary objectives in examining the repairs and maintenance accounts is to obtain evidence that: A) expenditures of equipment have not been charged to expense. B) the actual amount recorded is the same as the budgeted amount. C) expenditures for equipment have been recorded in the proper period. D) revenue expenditures made on behalf of equipment have been recorded in the proper period.

A

38) Which of the following explanations might satisfy an auditor who discovers significant debits to an accumulated depreciation account? A) Extraordinary repairs have lengthened the life of an asset. B) Prior years' depreciation charges were erroneously understated. C) A reserve for possible loss on retirement has been recorded. D) An asset has been recorded at its fair value.

A

5) Insurance expense for the period is a function of which of the following? A) The beginning prepaid balance, current premium payments and the ending prepaid balance B) The beginning prepaid balance and the current period premium payments C) The current period premium payments D) The current period premium payments and the ending prepaid balance

A

31) In determining the reasonableness of the client's amount for depreciation expense the auditor is primarily concerned that the client has followed a consistent policy and the calculations are correct. Which of the following audit objectives best addresses the above concerns? A) Existence B) Accuracy C) Valuation D) Allocation

B

32) Which of the following audit procedures would be least likely to lead the auditor to find an unrecorded fixed asset disposal? A) Examination of insurance policies B) Review of repairs and maintenance expense C) Review of property tax files D) Scanning of invoices for fixed asset additions

B

37) The auditor's main objectives in the verification of the sale, trade-in, or abandonment of equipment are to gather sufficient appropriate evidence that all disposals are ________ and at the ________. A) verified, historical cost B) recorded, correct amounts C) accurate, proper gain or loss amount D) classified properly, net realizable value

B

4) A record of insurance policies in force and the due date of each policy is contained in the: A) voucher register. B) insurance register. C) insurance expense account. D) prepaid insurance account.

B

6) The primary accounting record for manufacturing equipment and other fixed assets is the: A) depreciation ledger. B) fixed asset master file. C) asset inventory. D) equipment roster.

B

7) Which of the following statements about the audit of fixed assets is the least correct? A) The primary accounting record for manufacturing equipment and other property, plant and equipment is generally a fixed asset master file. B) Manufacturing equipment and current assets are normally audited in the same fashion regardless of the activity within a particular account. C) The emphasis on auditing fixed assets is on verification of current-period acquisitions. D) Failure to record the acquisition of a fixed asset affects the income statement until the assets are fully depreciated.

B

2) Which of the following would generally not be a component of the audit of the acquisition and payment cycle? A) Adequacy of controls over acquisitions of long-lived assets B) Tracing disposals of long-lived assets to the fixed asset master file C) Determining the adequacy of the funds available for capital expenditures D) Reperformance of recorded depreciation expense

C

21) The auditor's starting point for verifying disposals of property, plant, and equipment is the: A) equipment account in the general ledger. B) file of shipping documents. C) client's schedule of recorded disposals. D) equipment subsidiary ledger.

C

23) Because the failure to record disposals of property, plant, and equipment can significantly affect the financial statements, the search for unrecorded disposals is essential. Which of the following is not a procedure used to verify disposals? A) Make inquiries of management and production personnel about the possibility of the disposal of assets. B) Review whether newly acquired assets replace existing assets. C) Test the valuation of fixed assets recorded in prior periods. D) Review plant modifications and changes in product line, taxes, or insurance coverage.

C

26) When auditing depreciation expense, the two major concerns related to the accuracy audit objective are: A) consistent application of depreciation method and useful lives. B) consistent application of depreciation method and classification of assets. C) correctness of calculations and consistent application of depreciation policies. D) cost of the fixed asset and useful lives.

C

29) The auditor normally does not need to test the accuracy or classification of fixed assets recorded in prior periods if they are the continuing auditor because: A) they are rarely material to the audit. B) they rarely contain misstatements. C) they are verified in previous audits. D) they don't affect the balance sheet.

C

3) When an auditor recomputes the unexpired portion of prepaid insurance, they are satisfying which audit objective? A) Completeness B) Existence C) Accuracy and detail tie-in D) Rights

C

4) When auditing accrued property taxes: A) the auditors will generally only verify the larger payments since there are usually many property tax payments. B) property taxes should only be charged to one expense account. C) the auditor begins by obtaining a schedule of property tax payments from the client. D) the auditor must generally spend a considerable amount of time in this area.

C

6) In connection with a review of the prepaid insurance account, which of the following audit procedures would you be least likely to use? A) Recompute the portion of the premium that expired during the year. B) Prepare excerpts of insurance policies for audit working papers. C) Confirm premium rates with an independent insurance broker. D) Examine support for premium payments.

C

1) When auditing accrued property taxes: A) the source for the debits to the liability account is the acquisitions journal. B) realizable value is an important balance-related audit objective. C) the ending balance in the account should be confirmed with the applicable taxing authority. D) the most important consideration for the auditor is that the same portion of each tax payment for the accrual that was used in the preceeding year is used in the current year.

D

12) The source of debits in the equipment account is the: A) sales journal. B) cash disbursements journal. C) cash receipts journal. D) acquisitions journal.

D

14) Which of the following tests are typically not necessary when auditing a client's schedule of recorded disposals? A) Footing the schedule B) Tracing schedule totals to the general ledger C) Tracing cost and accumulated depreciation of the disposals to the property master file D) All of the above are necessary.

D

17) In testing acquisitions the auditor needs to understand the appropriate accounting guidance related to acquisition accounting. Which of the following is not an accounting consideration for the auditor as regards to acquisition cost? A) Inclusion of material transportation and installation costs B) Recording of trade-in costs C) Allocating costs when building and equipment are purchased at one price D) Verifying that purchased equipment amounts correspond to the budgeted amount

D

18) Methods used to determine if there are legal encumbrances related to fixed assets include all but which of the following? A) Reading terms of loan and credit agreements B) Reviewing loan confirmations received from banks C) Having discussions with the client or sending letters to legal counsel D) All of the above may be used to identify legal encumbrances.

D

19) When performing the test of details of balances, the balance-related audit objective of classifications is closely related to the objective of: A) accuracy. B) detail tie-in. C) existence. D) completeness.

D

2) The estimated unpaid obligations for services or benefits that have been received before the balance sheet date are: A) accounts payable. B) accounts receivable. C) unearned liabilities. D) accrued liabilities.

D

2) Which type of audit procedure would normally be sufficient for purposes of auditing prepaid expenses and deferred charges? A) Tests of controls B) Tests of transactions C) Tests of details of balances D) Analytical procedures

D

22) Improperly classifying a fixed asset by recording the amount in the repairs and maintenance expense account will have an effect on which of the following financial statements until the asset would normally have been depreciated? A) The balance sheet B) The income statement C) The cash flow statement D) Both the income statement and the balance sheet

D

24) When the auditor is determining whether the client followed a consistent depreciation policy from period to period, and the client's depreciation calculations are correct, the balance-related audit objective of ________ is being determined for depreciation expense. A) completeness B) existence C) classification D) accuracy

D

3) Normally it may be unnecessary to examine supporting documentation for each addition to property, plant, and equipment, but it would be customary to verify: A) all large transactions. B) all unusual transactions. C) a representative sample of typical additions. D) all three of the above.

D

35) The failure to capitalize a permanent asset, or the recording of an asset acquisition at the improper amount, affects the balance sheet: A) forever. B) for the current period. C) for the depreciable life of the asset. D) until the firm disposes of the asset.

D

5) The audit procedures used to verify accrued liabilities differ from those employed for the verification of accounts payable because: A) accrued liability balances are less material than accounts payable balances. B) accrued liabilities at year end will become accounts payable during the following year. C) evidence supporting accrued liabilities is non-existent, whereas evidence supporting accounts payable is readily available. D) accrued liabilities usually pertain to services of a continuing nature, whereas accounts payable are the result of completed transactions.

D

5) To be capitalized as part of property, plant and equipment, assets must: A) have expected useful lives of more than one year. B) not be acquired for resale. C) be useful in multiple productive capacities within the organization. D) A and B, but not C.

D

7) Controls over the acquisition and recording of insurance are a part of which of the following transaction cycles? A) Inventory and warehousing cycle B) Capitalization cycle C) Treasury cycle D) Acquisition and payment cycle

D

8) Which balance-related audit objective is not relevant to an audit of prepaid expenses? A) Rights B) Accuracy C) Detail tie-in D) Realizable value

D

8) You are the in-charge auditor for a company who has been an audit client for several years. Which of the following is not a category of tests commonly associated with the audit of manufacturing equipment? A) Verification of depreciation expense B) Analytical procedures C) Verification of current-period disposals D) Verification of the beginning balance in the equipment account

D