Question 1

Auditors can usually gather sufficient,competent evidence on prepaid insurance by performing substantive analytical procedures.Why is this?

Accepted Answer

The audit of prepaid insurance should ordinarily take a relatively small amount of audit time because the balance in prepaid insurance is normally immaterial,there are ordinarily few transactions made during the year,and these transactions are ordinarily not complex.

Question 2

Which of the following is the most important control activity over acquisitions of property,plant,and equipment?

Accepted Answer

A)   Establishing a written company policy distinguishing between capital and revenue expenditures.
B)   Using a budget to forecast and control acquisitions and retirements.
C)   Analyzing monthly variances between authorized expenditures and actual costs.
D)   Requiring acquisitions to be made by user departments. B

Question 3

Testing a sample of repairs and maintenance items to ensure that they were properly classified as repairs as opposed to property,plant,and equipment tests which of the following assertions for the property,plant,and equipment account?

Accepted Answer

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

Question 4

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 5

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 6

In testing for unrecorded retirements of equipment,an auditor most likely would

Accepted Answer

A)   Select items of equipment from the accounting records and then locate them during the plant tour.
B)   Compare depreciation journal entries with similar prior-year entries in search of fully depreciated equipment.
C)   Inspect items of equipment observed during the plant tour and then trace them to the equipment subsidiary ledger.
D)   Scan the general journal for unusual equipment additions and excessive debits to repairs and maintenance expense.

Question 7

Prepaid expenses provide economic benefit for longer than a year.

Accepted Answer

A) True 
 B)False

Question 8

In testing plant and equipment balances,an auditor examines new additions listed on an analysis of plant and equipment.This procedure most likely obtains evidence concerning management's assertion of

Accepted Answer

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

Question 9

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.

Question 10

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

Accepted Answer

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

Question 11

Property,plant,and equipment is often a significant portion of a company's assets.Describe the inherent risk factors that can affect the audit of this account.

Accepted Answer

The answer of Property,plant,and equipment is often a significant portion...

Question 12

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

Accepted Answer

A)   Depreciation expense.
B)   Accounts payable.
C)   Cash.
D)   Repairs and maintenance expense.

Question 13

Equipment acquisitions that are misclassified as maintenance expenses most likely would be detected by a control activity that provides for

Accepted Answer

A)   Segregation of duties of employees in the accounts payable department.
B)   Independent verification of invoices for disbursements recorded as equipment acquisitions.
C)   Investigation of variances within a formal budgeting system.
D)   Authorization by the board of directors of significant equipment acquisitions.

Question 14

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

Accepted Answer

A)   The estimated remaining useful lives of plant assets were revised upward.
B)   Plant assets were retired during the year.
C)   The prior year's depreciation expense was erroneously understated.
D)   Overhead allocations were revised at year-end.

Question 15

Substantive analytical procedures should not be used in the audit of property,plant,and equipment.

Accepted Answer

A) True 
 B)False

Question 16

A normal audit procedure is to analyze the current year's repairs and maintenance accounts to provide evidence in support of the audit proposition that

Accepted Answer

A)   Expenditures for fixed assets have been recorded in the proper period.
B)   Capital expenditures have been properly authorized.
C)   Noncapitalizable expenditures have been properly expensed.
D)   Expenditures for fixed assets have been capitalized.

Question 17

In auditing intangible assets,an auditor most likely would review or recompute amortization and determine whether the amortization period is reasonable in support of management's financial statement assertion of

Accepted Answer

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

Question 18

The auditor is least likely to learn of retirement of equipment through which of the following?

Accepted Answer

A)   Reviewing the purchase return and allowance account.
B)   Reviewing depreciation.
C)   Analyzing debits to the accumulated depreciation account.
D)   Reviewing insurance policy riders.

Question 19

There are a number of important disclosure items to consider when auditing the property management process.List two.Where in the financial statements can some of the disclosures relating to property,plant,and equipment be found?

Accepted Answer

The answer of There are a number of important disclosure...

Question 20

When there are numerous property and equipment transactions during the year,an auditor planning to set control risk at the minimum level usually plans to obtain an understanding of internal control and to perform

Accepted Answer

A)   Tests of controls and extensive tests of property and equipment balances at the end of the year.
B)   Extensive tests of current year property and equipment transactions.
C)   Tests of controls and limited tests of current year property and equipment transactions.
D)   Analytical procedures for property and equipment balances at the end of the year.

Exam 14: Auditing the Financinginvesting Process: Prepaid Expenses, Intangible Assets, and Property, Plant, and Equipment