Chapter 13 Audit

For the audit of a continuing nonpublic client, the emphasis of the testing for property accounts is on:

Transactions that occurred during the year.

2. In the auditors' first examination of a new client that has changed auditors, the beginning balances of property, plant, and equipment accounts may be substantiated by referring to the predecessor auditors' __________.

Working Papers

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

FALSE

3. The auditors' principal objective in analyzing __________ expense accounts is to discover property items that should have been capitalized.

Repairs and maintenance

3. A dollar minimum ordinarily should be established to be used by accounting personnel for distinguishing between capital and __ expenditures.

Revenue

2. Land was exchanged for a long-term note receivable, but the exchange was not recorded.

Review current property tax bills

The auditors are least likely to learn of retirements of equipment through which of the following?

Review of the purchase returns and allowances account.

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:

More audit time.

Which of the following is an internal control weakness related to factory equipment?

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

In testing for unrecorded retirements of equipment, an auditor might:

Analyze miscellaneous revenue.

3. A machine was sold for cash which was recorded, but the retirement was not recorded.

Analyze the Miscellaneous Revenue account for the year just completed

4. Depreciation was not taken on a very major piece of equipment.

Perform analytical procedures on income statement accounts

5. A recorded purchase of equipment was part of a fraud scheme (including false documentation from purchase order through a fraudulent equipment receiving report). No equipment was received and the cash payment was misappropriated.

Physically examine recorded assets as of year-end.

10. The intangible asset known as __ arises in accounting for a business combination, and should be amortized as its value becomes impaired over the years.

Goodwill

For which of the following ledger accounts would the auditor be most likely to analyze the details to identify understatements of equipment acquisitions?

Repairs and maintenance expense.

4. Possession of a deed is not proof of present __________ of property.

ownership

Which of the following statements is not typical of property, plant, and equipment as compared to most current asset accounts?

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?

Accumulated depreciation.

7. The plant and equipment budget is designed to control __ of property items.

Acquisitions and retirements

Which of the following policies is an internal control weakness related to the acquisition of factory equipment?

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

Treetop Corporation acquired a building and arranged mortgage financing during the year. Verification of the related mortgage acquisition costs would be least likely to include an examination of the related:

Deed

11. A company may not actually own property recorded as an asset; instead the company may have rights to the asset under the terms of a __.

Capital Lease

The auditors may conclude that depreciation charges are insufficient by noting:

Excessive recurring losses on assets retired.

The auditors are most likely to seek information from the plant manager with respect to the:

Existence of obsolete machinery.

A plant manager would be most likely to provide information on which of the following?

Existence of obsolete production equipment.

In testing plant and equipment balances, an auditor may select recorded additions in the analysis of plant and equipment and inspect the actual asset(s) involved. Which management assertion is this procedure most directly related to?

Existence.

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

FALSE

To strengthen internal control over the custody of heavy mobile equipment, the client would most likely institute a policy requiring a periodic:

Inspection of equipment and reconciliation with accounting records.

The audit of intangible assets typically involves Vouching the Cost of Assets Testing Allocation Methods (1) Yes Yes (2) Yes No (3) No Yes (4) No No

Option (1)

Which of the following explanations most likely would satisfy an auditor who questions management about significant debits to the accumulated depreciation accounts?

Plant assets were retired during the year.

9. Good evidence of ownership of property often is found by examining current __ bills.

Property Tax

A search for overstated property, plant, and equipment purchases would most likely include:

Property, plant, and equipment.

1. A purchase prior to year-end was improperly recorded in the following year.

Review transactions recorded shortly after year-end

An effective procedure for identifying unrecorded retirements of equipment is to:

Select items of equipment in the accounting records and then locate them in the plant.

2. A company should maintain a __ for plant and equipment, consisting of a separate record for each unit of property.

Subsidiary Ledger

Equipment considered idle on a permanent basis should not be classified as plant and equipment.

TRUE

Evidence of continued ownership of property is obtained by vouching payments for property taxes.

TRUE

In the audit of depletion the auditors must often rely on the work of specialists.

TRUE

Which of the following is not an overall test of the annual provision for depreciation expense?

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

Which of the following best describes the auditors' typical observation of plant and equipment?

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

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?

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?

Property, plant, and equipment.

Analysis of which account is least likely to reveal evidence relating to recorded retirement of equipment?

Purchase returns and allowances.

Which of the following accounts should be reviewed by the auditor to gain reasonable assurance that additions to property, plant, and equipment are not understated?

Repairs and maintenance.

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?

Repairs.

To assure accountability for fixed-asset retirements, management should implement an internal control that includes:

Utilization of serially numbered retirement work orders.

1. A December 30 acquisition of a new plant asset was recorded after year-end rather than prior to year-end. Such an error does not usually result in a significant misstatement of __________.

net income

a. 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

c. 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

d. 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

5. To provide assurance that the accounting department is notified of property retirements, a system of serially numbered __________ should be used by the company.

retirement work orders

b. 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

e. 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