Question 1

For each of the following tests, state whether it is a test of details of account balances or a test of details of transactions. Then note for which property management assertion the test provides evidence.
Test depreciation calculations for a sample of capital assets
For assets written off, test amounts charged against income and accumulated depreciation
Physically examine the capital asset additions
Vouch transactions included in repairs and maintenance for items that should be capitalized
Vouch significant additions and dispositions to vendor invoices or other supporting documentation
Examine of confirm deeds or title documents for proof of ownership

Accepted Answer

1. Account balances - Valuation and allocation
2. Transactions - Accuracy
3. Account balances - Existence
4. Transactions - Classification
5. Transactions - Occurrence
6. Account balances - Rights and obligations

Question 2

Which of the following questions would an auditor least likely include on an internal control questionnaire concerning the initiation and execution of equipment transactions?

Accepted Answer

A)   Are requests for major repairs approved at a higher level than the department initiating the request?
B)   Are prenumbered purchase orders used for equipment and periodically accounted for?
C)   Are requests for purchases of equipment reviewed for consideration of soliciting competitive bids?
D)   Are procedures in place to monitor and properly restrict access to equipment? D

Question 3

To improve accountability for fixed asset retirements, management most likely would implement a system of internal control that includes

Accepted Answer

A)   Continuous analysis of the repairs and maintenance account.
B)   Periodic inquiry of plant executives by internal auditors as to whether any plant assets have been retired.
C)   Continuous utilization of sequentially numbered retirement work orders.
D)   Periodic inspection of insurance policies by the internal auditors. C

Question 4

Identify the types of transactions that occur in the property management process.

Accepted Answer

The answer of Identify the types of transactions that occur...

Question 5

The property, plant, and equipment records function should be segregated from the custodial function.

Accepted Answer

A) True 
 B)False

Question 6

For each analytical procedure listed below, identify a potential misstatement in the property management accounts it could help find.
a. Compute the ratio of depreciation expense to the related property, plant, and equipment accounts and compare to prior years' ratios
b. Compare monthly or annual repairs and maintenance with previous years
c. Compute ratio of insurance expense to the related property, plant, and equipment accounts and compare to prior years' ratios

Accepted Answer

The answer of For each analytical procedure listed below, identify...

Question 7

By selecting a sample of additions to property, plant, and equipment and then examining the related vendor invoices, the auditor is testing which of the following assertions for property, plant, and equipment?

Accepted Answer

A)   Occurrence.
B)   Completeness.
C)   Cutoff.
D)   Classification.

Question 8

To achieve effective control over fixed asset additions, a company should establish activities that require

Accepted Answer

A)   Capitalization of the cost of fixed asset additions in excess of a specific dollar amount.
B)   Performance of recurring fixed asset maintenance work solely by maintenance department employees.
C)   Any fixed asset additions that are not used in the business to be classified as investments.
D)   Authorization and approval of major fixed asset additions.

Question 9

In an interview with the plant manager regarding operations, the auditor is most likely to obtain evidence that raises concerns regarding

Accepted Answer

A)   The capitalization vs. expensing policy.
B)   The allocation of fixed and variable costs.
C)   The need to write-off equipment that has become obsolete.
D)   The adequacy of depreciation expense.

Question 10

Testing depreciation calculations for a sample of property, plant, and equipment tests the assertion of

Accepted Answer

A)   Existence.
B)   Completeness.
C)   Valuation and allocation.
D)   Rights and obligations.

Question 11

If the ratio of insurance expense to related property, plant, and equipment is higher than expected, which of the following is a plausible explanation?

Accepted Answer

A)   Too much expired insurance is still included in prepaid insurance.
B)   PP&E insurance expense includes some expenses related to product liability insurance.
C)   Depreciation expense was based on overly short useful lives.
D)   Some routine maintenance on equipment was added to the equipment asset account.

Question 12

Disposition of capital assets through sale, exchange, retirement, or abandonment are transactions that occur in the property management process.

Accepted Answer

A) True 
 B)False

Question 13

What tests do auditors typically perform on a lead schedule for property, plant, and equipment and what assertion are they testing?

Accepted Answer

The answer of What tests do auditors typically perform on...

Question 14

Which of the following is likely the most effective audit procedure for the verification of the legal ownership of real property?

Accepted Answer

A)   Examination of correspondence with the corporate counsel concerning acquisitions.
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.

Question 15

Recomputing the unexpired portion of insurance policies in effect tests which of the following assertions for prepaid insurance?

Accepted Answer

A)   Existence.
B)   Classification.
C)   Rights and obligations.
D)   Valuation.

Question 16

In testing plant and equipment balances, an auditor may inspect new additions listed on the analysis of plant and equipment. This procedure is designed to obtain evidence concerning management's assertion(s) about

Accepted Answer

A)   Presentation and disclosure.
B)   Existence or occurrence.
C)   Both (1)  presentation and disclosure and (2)  existence and occurrence.
D)   Neither (1)  presentation and disclosure nor (2)  existence and occurrence.

Question 17

If an entity has few capital asset purchases, it will generally not have a formal control system over such transactions.

Accepted Answer

A) True 
 B)False

Question 18

How do accounting standards regarding accounting for the impairment or disposal of long-lived assets affect the audit of property, plant, and equipment?

Accepted Answer

The answer of How do accounting standards regarding accounting for...

Question 19

Substantive analytical procedures are commonly used to test prepaid accounts.

Accepted Answer

A) True 
 B)False

Question 20

Which of the following constitutes a control weakness related to factory equipment?

Accepted Answer

A)   A policy requiring all purchases of factory equipment to be made by the department in need of the equipment.
B)   Checks issued in payment of purchases of equipment are not signed by the controller.
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.

Exam 14: Auditing the Financing Investing Process: Prepaid Expenses Intangible Assets and Property Plant and Equipment

Which of the following questions would an auditor least likely include on an internal control questionnaire concerning the initiation and execution of equipment transactions?

To improve accountability for fixed asset retirements, management most likely would implement a system of internal control that includes

Identify the types of transactions that occur in the property management process.

The property, plant, and equipment records function should be segregated from the custodial function.

By selecting a sample of additions to property, plant, and equipment and then examining the related vendor invoices, the auditor is testing which of the following assertions for property, plant, and equipment?

To achieve effective control over fixed asset additions, a company should establish activities that require

In an interview with the plant manager regarding operations, the auditor is most likely to obtain evidence that raises concerns regarding

Testing depreciation calculations for a sample of property, plant, and equipment tests the assertion of

If the ratio of insurance expense to related property, plant, and equipment is higher than expected, which of the following is a plausible explanation?

Disposition of capital assets through sale, exchange, retirement, or abandonment are transactions that occur in the property management process.

What tests do auditors typically perform on a lead schedule for property, plant, and equipment and what assertion are they testing?

Which of the following is likely the most effective audit procedure for the verification of the legal ownership of real property?

Recomputing the unexpired portion of insurance policies in effect tests which of the following assertions for prepaid insurance?

In testing plant and equipment balances, an auditor may inspect new additions listed on the analysis of plant and equipment. This procedure is designed to obtain evidence concerning management's assertion(s) about

If an entity has few capital asset purchases, it will generally not have a formal control system over such transactions.

How do accounting standards regarding accounting for the impairment or disposal of long-lived assets affect the audit of property, plant, and equipment?

Substantive analytical procedures are commonly used to test prepaid accounts.

Which of the following constitutes a control weakness related to factory equipment?