Audit Chapter 12

An auditor's review of the repair expense to identify any capital expenditures is a test related to which management assertion? a. Rights and obligations. b. Valuation. c. Completion. d. Existence.

C

As part of auditing equipment, the auditor will inspect new equipment additions selected from the client's property ledger. When performing this procedure, which assertion is the auditor focusing on? a. Valuation. b. Completeness. c. Existence. d. Rights and obligations.

C

Assume that a client's controls over recording retirements of long-lived tangible assets are not well designed. Which of the following procedures would the auditor plan to perform as a way of responding to the heightened risk of material misstatement? a. The auditor would perform all of the above procedures to respond to the heightened risk of material misstatement due to poor client controls over recording retirements. b. Inspect long-lived tangible assets located at the client location and trace those assets to the property ledger. c. Select long-lived tangible assets recorded in the property ledger and locate them for inspection. d. Review the tangible long-lived asset property ledger to see if depreciation was recorded on each tangible long-lived asset.

C

Assume that the auditor decides to only perform substantive tests of details when auditing the equipment account. Which of the following statements best describes the account being audited? a. The client does not have effective controls over equipment. b. The equipment account involves only a few assets of relatively high value. c. Either the client does not have effective controls over equipment or the equipment account involves only a few assets of relatively high value could be descriptive of the account being audited. d. Neither the client does not have effective controls over equipment or the equipment account involves only a few assets of relatively high value could be descriptive of the account being audited.

C

If the auditor is performing substantive procedure to determine whether the long-lived asset balance is reflected on the balance sheet in the noncurrent section, which of the following assertions is being tested? a. Existence. b. Rights and obligations. c. Presentation and disclosure. d. Completeness.

C

If the auditor is testing long-lived asset account balances to see if they include all relevant transactions that have taken place during the period, what is the primary assertion being tested? a. Presentation and disclosure. b. Existence. c. Completeness. d. Valuation.

C

If the auditor is testing the reasonableness of depreciation expense for the year, which assertion is being tested? a. Completeness. b. Rights and obligations. c. Valuation. d. Existence.

C

In a tour of a client's manufacturing facility, the auditor is most likely attempting to satisfy which of the following management assertions related to long-lived assets? a. Completeness. b. Rights. c. Existence. d. Presentation and disclosure.

C

The auditor selects a sample of asset disposals and examines the sales documentation evidencing disposal of the equipment and recomputes gain or loss on the disposal. This audit procedure primarily tests which of the following assertions for the equipment account? a. Existence. b. Rights. c. Valuation. d. Presentation and disclosure.

C

A client has implemented a policy requiring the establishment and enforcement of property management training for all personnel involved in the use, stewardship, and management of equipment. Which of the following is not a test that could be used in testing the control? a. Review of financial statements. b. Observation. c. Inquiry. d. Inspection of documentation.

A

As natural resources are used up, the client has to recognize which of the following types of expense? a. Depletion expense. b. Depreciation expense. c. Amortization expense. d. Reclamation expense

A

Audit procedures should be proportional to which of the following? a. The assessed risks. b. Size of the client. c. The assessed misstatements. d. Size of the firm

A

Reconciling the physical asset inventory with the property ledger on a periodic basis is a control related to which management assertion? a. Existence. b. Valuation. c. Completeness. d. Rights and obligations.

A

The FASB has set a hierarchy of inputs to consider in assessing fair value. Which of the following relates to Level 3? a. Unobservable inputs to be used in situations where markets do not exist. b. Observable information for similar items in active or inactive markets. c. Unobservable inputs to be used in illiquid situations. d. Quoted prices for identical items in active, liquid, and visible markets.

A

Which of the following assertions are usually the two most relevant assertions related to long-lived assets? a. Existence and valuation. b. Completeness and existence. c. Valuation and completeness. d. Existence and presentation.

A

Which of the following controls would be most useful in providing reasonable assurance about the valuation of tangible long-lived assets? a. A policy requiring that deprecation categories and lives be periodically assessed. b. A policy requiring the reconciliation of the physical asset count with the property ledger. c. Written policies requiring authorization for the acquisition of long-lived assets. d. A formal budgeting process.

A

Which of the following procedures could the auditor perform to test the effectiveness of controls over asset impairment? a. Inquire of management as to its process for determining assessment impairment, and follow up as appropriate. b. Perform substantive analytical procedures. c. Inspect the asset for potential impairment. d. Send confirmations to the management specialist who performed work related to the impairment.

A

Which of the following risks is an inherent risk related to asset impairment? a. Determination of asset impairment requires management judgment. b. It is difficult to identify the costs associated with the discovery of natural resources. c. Management might have incentives to not record all asset disposals. d. All of the above are inherent risks related to asset impairment.

A

Which of the following statements is true? a. Intangible assets should be recorded at cost. b. Intangible assets should not be recorded. c. Intangible assets should be recorded at fair market value. d. Intangible assets should be recorded at future market value.

A

Which of the following statements is true? a. Existence and valuation assertions related to long-lived assets are usually the most relevant assertions. b. A concern regarding the existence of long-lived assets relates to whether management has properly recorded depreciation. c. Depletion expense is not an account that would be included when auditing long-lived assets. d. All of these statements are true.

A

An auditor performing planning analytical procedures scans the repairs and maintenance expense accounts. Which of the following statements is likely consistent with the auditor's focus? a. Expenditures for long-lived assets have been recorded in the correct period. b. Expenditures for long-lived assets have not been charged to expense. c. Expenditures for long-lived assets have been properly approved. d. The auditor would not be performing scanning as a planning analytical procedure.

B

Assume that the audit team notes the client has made a significant change in its product line which requires that new equipment be purchased. Which of the following would be of greatest concern to the auditor? a. Inappropriate book value of new equipment. b. Impaired value of old equipment. c. Inappropriate depreciation calculation for new equipment. d. Impaired value of new equipment.

B

In the FASB hierarchy of inputs to consider for assessing fair value, which is associated with Level 1? a. Nonexistence of active markets. b. Quoted prices on identical items. c. Observable information on similar items. d. Relevant economic and industry factors.

B

In the audit approach for assessing fair value, which should the auditor determine for Level 2 assets? a. Sensitivity of model used for marking to model. b. The correspondence of the client's assets to similar assets in an active market. c. The performance of tests of controls. d. Contingent liabilities.

B

The FASB has set a hierarchy of inputs to consider in assessing fair value. Which of the following valuations are generally viewed as the most subjective? a. Level 2. b. Level 3. c. Level 1. d. Level 0.

B

When auditing intangible assets, the auditor would likely recompute amortization and determine whether management's recorded amount is reasonable. When performing this procedure, which assertion is the auditor focusing on? a. Rights and obligations. b. Valuation. c. Existence. d. Completeness.

B

Which of the following controls is not a typical control that affects multiple assertions for long-lived assets? a. Formal budgeting process with appropriate follow-up variance analysis. b. Reviewing insurance policies for adequate replacement coverage of assets. c. Periodic comparison of physical assets to subsidiary records with the general ledger. d. Periodic reconciliations of subsidiary records with the general ledger.

B

Which of the following is a term used to describe management's recognition that a significant portion of long-lived assets is no longer as productive as originally expected? a. Asset depreciation. b. Asset impairment. c. Asset amortization. d. Asset disposal.

B

Which of the following is not a circumstance indicating potential impairment of intangible assets? a. An accumulation of costs that are significantly in excess of the amount originally expected to be needed to acquire or construct the asset. b. The asset generates just as much cash flow as in the past. c. A change in circumstances, such as the legal environment or business climate, that could affect the asset's value. d. Losses or projections indicating continuing losses associated with an asset used to generate revenue.

B

Which of the following models is associated with Level 3 in the FASB hierarchy for ascertaining fair value? a. Replacement model. b. Mark to model. c. Mark to market model. d. Historical cost model.

B

Which of the following procedures is a substantive procedure that relates to the rights and obligations assertion? a. Assess management's impairment estimates. b. Examine documents of title. c. Inquire of management about assets that are idle. d. Recalculate amortization expense.

B

Which of the following procedures is not a procedure used by an auditor in searching for unrecorded disposals of long-lived assets? a. Make client inquiries. b. Send confirmations to insurance agents. c. Examine scrap sales accounts. d. Examine property tax records.

B

Which of the following statements is false regarding fraud risk related to long-lived assets? a. A potential fraud scheme involves not removing sold assets from the books. b. Because long-lived assets are typically an audit area of low risk, auditors do not need to perform brainstorming activities related to long-lived assets. c. Management might use unreasonably long depreciable lives in an effort to reduce current-period expenses. d. None of these statements is false.

B

Which one of the following approaches does not represent how the auditor will become aware of risks associated with long-lived assets? a. Reviewing the minutes of board of directors' meetings. b. All represent how the auditor will become aware of risks associated with long-lived assets and related expenses. c. Obtaining knowledge of the client business. d. Reviewing the business plan related to major acquisitions.

B

Which one of the following is not an audit procedure used when testing restructuring charges? a. Review and independently test the estimates by reviewing (a) contracts, (b) appraisals for property or estimates from investment bankers, and (c) severance contracts. b. Evaluate the qualifications of management. c. Mathematically test the estimates. d. Review current and proposed financial accounting standards to determine if changes have occurred in accounting for restructuring.

B

Which statement is true about a company's choice of capitalization policy? a. The company may elect to capitalize operating expenses which exceed the minimum threshold for asset capitalization. b. The company's policy is usually determined relative to materiality. c. All assets with a useful life of more than one year must be capitalized. d. The company's policy must meet the minimum capitalization amounts established by GAAP.

B

Which of the following controls should management have in place to provide reasonable assurance about asset impairment judgments? a. Limits to physical access of long-lived assets. b. A policy requiring the reconciliation of the physical asset count with the property ledger. c. A systematic process to identify assets that are not currently in use. d. A formal budgeting process

C

Which of the following evidence items would an auditor most likely not consider when evaluating the potential impairment of goodwill? a. The cash flows and operating data of the reporting unit since acquisition compared with estimates made at the time of acquisition. b. The current market capitalization of the organization in comparison with its net book value. c. The acquisition made by a competitor of an organization that is not a direct competitor of the client. d. The growth or decline in market share of the reporting unit since acquisition.

C

Which of the following expense accounts is associated with intangible assets with a definite life? a. Depletion expense. b. Depreciation expense. c. Amortization expense. d. None of the above.

C

Which of the following is a true statement about accounting for leases under the FASB standard issued in 2016? a. Fewer leases will be capitalized under the new standard. b. Classification criteria under the new standard apply only to lessees and not to lessors. c. The new standard requires companies to move leased assets and related liabilities out of footnote disclosures and onto the balance sheet. d. The standard does not require capitalization of any lease embedded in another contract.

C

Which of the following is false regarding the valuation of goodwill? a. U.S. accounting standards require that goodwill be specifically identified with an operating segment or a reporting unit. b. Goodwill is the excess of the purchase price over the fair market value of the acquired company's tangible assets, identifiable intangible assets, and liabilities. c. Goodwill is tested for impairment quarterly. d. By definition, acquired parts of the business (or goodwill) must be sufficiently identifiable so that they can be managed as a unit or may be separately identified and sold as a unit.

C

Which of the following is not a significant challenge related to valuation issues for audits of merger and acquisition transactions? a. Valuing the liabilities upon acquisition. b. Measuring restructuring charges. c. Measuring the qualifications of personnel from the acquired company. d. Valuing the assets upon acquisition.

C

Which of the following is not a typical internal control over long-lived assets? a. Identify obsolete or scrapped equipment and write it down to scrap value. b. Periodically review management strategy and systematically assess the impairment of assets. c. Periodically reassess the appropriateness of depletion categories. d. Reconcile physical asset inventory with the property ledger.

C

Which of the following is not an audit challenge relevant to fair value estimation of Level 1, 2, and 3 assets? a. Determining similar assets and relevant markets. b. Determining appropriate model and inputs expected cash flows. c. Assessing client methodology and cash flows to originally estimate value. d. Determining identical assets and active markets.

C

Which of the following long-lived assets presents the most difficulty in determining its cost? a. Equipment. b. Inventory. c. Patent. d. All the above are equally difficult in determining cost.

C

Which of the following procedures is not a fraud-related audit procedure used to respond to identified fraud risk factors? a. Use the work of a specialist for asset valuations, including impairments. b. Physically inspect tangible assets, including major additions, and agree serial numbers with invoices or other supporting documents. c. All of the above are fraud-related audit procedures. d. Confirm the terms of significant additions of property or intangibles with other parties involved in the transaction.

C

Which one of the following does not constitute a probable relationship between accounts? a. Assets under capital leases and amortization. b. Patent and amortization. c. Oil reserves and depreciation. d. Equipment and depreciation.

C

Which statement is true? a. Management is always reluctant to write down asset values. b. The incomplete recording of asset disposals understates the asset balance. c. Complex ownership structures may create challenges in the recording of assets. d. Intangible assets do not require effective controls because they have low inherent risk.

C

Which one of the following factors is not an inherent risk associated with long-lived assets? a. Obsolescence of assets. b. Incomplete recording of disposals. c. Impairment of assets. d. Lack of physical controls over the long-lived assets.

D

Which one of the following is not a management assertion relevant to long-lived assets? a. Valuation. b. Existence. c. Completeness. d. Reporting.

D

After a natural resource such as gas or coal is used up by the client, the client is responsible for restoring the land to its original condition. What is the cost of this restoration called? a. Amortization expense. b. Depletion expense. c. Impairment expense. d. Reclamation expense.

D

For intangible assets, controls should be designed to do which of the following? a. Identify and account for intangible asset impairments. b. Develop amortization schedules that reflect the remaining useful life of patents or copyrights associated with the asset. c. Provide reasonable assurance that decisions are appropriately made as to when to capitalize or expense research and development expenditures. d. All of the above.

D

If no control deficiencies are identified, how will the extent of substantive testing required differ from a setting where deficiencies in internal control were identified? a. The extent of testing is not affected by control deficiencies. b. The extent of testing will be more. c. The extent of testing will be the same in the two settings. d. The extent of testing will be less.

D

The auditor performs substantive procedures related to property, plant, and equipment to determine if the assets have been pledged as collateral or title has transferred. What is the primary assertion the auditor is testing? a. Completeness. b. Valuation. c. Existence. d. Rights.

D

The tour of the manufacturing plant may best assist the auditor in determining which of the following? a. Estimates of depreciation expense. b. Whether all purchases are authorized. c. Management's strategy for assessing impairment. d. Whether any machinery is inoperative in the production cycle.

D

When performing preliminary analytical procedures related to long-lived assets, which of the following should the auditor compare the unaudited financial statements with? a. Past results. b. Industry trends. c. Future company projections. d. Both A and B.

D

Which is the primary assertion tested in conjunction with obtaining evidence regarding impairment? a. Cutoff. b. Existence. c. Rights. d. Valuation.

D

Which of the following actions is not a potential fraud scheme related to long-lived assets? a. Impairment losses on long-lived assets are not recognized. b. Costs that should have been expenses are improperly capitalized. c. Amortization of intangible assets is miscalculated. d. All the above are potential fraud schemes

D

Which of the following valuation issues are associated with merger and acquisition activity? a. Valuing assets of the acquired organization at their FMV at the time of acquisition. b. Measuring restructuring charges associated with the acquisition. c. Valuing liabilities of the acquired organization at their FMV at the time of acquisition. d. All of these.

D

Which of the following analyses might an auditor perform as part of planning analytical procedures for long-lived assets? a. Develop an overall estimate of depreciation expense. b. Compare capital expenditures with the client's capital budget. c. Perform a trend analysis of the ratio of depreciation expense to total depreciable long-lived tangible assets. d. All of these could be performed as part of planning analytical procedures.

D

Which of the following approaches for determining fair value of Level 3 assets is used by the auditor? a. Performing an analysis of volume of trading activity. b. Reviewing contracts to determine if loss is other than temporary. c. Performing an analysis of trades on similar assets. d. Determining appropriate model and sensitivity of model.

D

Which of the following controls related to management's asset impairment judgments does the auditor need to understand? a. A systematic process to identify assets that are not currently in use. b. Projections of future cash flows that is based on management's strategic plans and economic conditions. c. Systematic development of current market values of similar assets prepared by the client. d. All of the above.

D

Which of the following expense accounts is associated with natural resources? a. Depreciation expense. b. Capitalization expense. c. Amortization expense. d. Depletion expense.

D

Which of the following factors is not an inherent risk related to asset impairment? a. Management is normally not interested in identifying and writing down assets. b. Sometimes management wants to write down every potentially impaired asset to a minimum realizable value. c. Determining asset impairment requires a good information system, a systematic process, effective controls, and professional judgment. d. All of the above are inherent risk factors.

D

Which of the following information should be included in management's documentation regarding intangible assets? a. Manner of acquisition. b. Basis for the capitalized amount c. Expected period of benefit. d. All the above should be included.

D

Which of the following is a long-lived asset? a. Tangible assets such as equipment. b. Intangible assets such as patents. c. Natural resources. d. All of these.

D

Which of the following is not a substantive audit procedure for leases? a. Obtain and read copies of lease agreements and develop a schedule of leases. b. Review the client's disclosure of lease obligations for compliance with GAAP. c. Review relevant expense accounts and determine if there are entries related to leases. d. For all operating leases, determine that the client has recorded assets and lease obligations properly.

D

Which of the following is not a technique that auditors can use when performing planning analytical procedures related to long-lived assets? a. Perform an overall estimate of depreciation expense. b. Review and analyze gains/losses on disposals of equipment. c. Compare depreciable lives used by the client for various asset categories with those of the industry. d. All the above are techniques that auditors can use

D

Which of the following is not a typical internal control over intangible assets? a. Procedures to provide reasonable assurance that decisions are appropriately made as to when to capitalize or expense research and development expenditures. b. Development of amortization schedules that reflect the remaining useful life of patents or copyrights associated with the assets. c. Procedures to identify and account for intangible asset impairment. d. All of the above are typical controls for intangible assets.

D

Which of the following is not an inherent risk related to long-lived asset accounts? a. Failing to record asset disposals. b. Capitalizing repairs and maintenance expense. c. Changing depreciation estimates to manage earnings. d. All of these are inherent risks related to long-lived asset accounts.

D

Which of the following items is not used by natural resource companies to estimate the asset value of natural resources over the life of the resource, e.g., oil or coal? a. Depletion rate. b. Reserves. c. Reclamation expense. d. Restoration rate.

D

Which of the following procedures is not a substantive procedure used for testing the valuation of long-lived assets? a. Assess management's impairment estimates. b. Inquire of management about assets that are idle. c. Develop an independent estimate of amortization expense. d. All of the above are procedures used for testing the valuation assertion.

D

Which of the following should the client have as part of its process for estimating fair value? a. An analysis of transactions that have taken place within the client's organization. b. A systematic process to identify each asset that is subject to realizable value estimation. c. A process to identify relevant historical values. d. A realistic process to estimate future cash flows to discount back to a present value.

D

Which of the following situations would lead an auditor to test controls over long-lived assets? a. Tests of details identified many errors in recording long-lived asset transactions. b. The auditor has decided that the additional effort to test controls would not exceed the potential reduction in substantive procedures. c. Substantive analytical procedures suggested that controls over long-lived assets were not effective. d. Risk assessment procedures indicated that controls were effectively designed.

D

Which of the following techniques can managers use to prevent the outright theft of long-lived assets? a. Assign accountability for long-lived assets to specific individuals. b. Conduct physical counts of existing and new long-lived assets purchased during the year. c. Capitalize transactions that they should expense. d. Two of these.

D