Deck 19: Completing the Tests in the Acquisition and Payment Cycle: Verification of Selected Accounts

Question 1

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

A)
B)
C)
D)

Answer 1

D

Question 2

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.

Answer 2

B

Question 3

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

Answer 3

C

Question 4

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

Question 5

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

Question 6

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.

Question 7

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.

Question 8

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

Question 9

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

Question 10

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

Question 11

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.

Question 12

Accrued payroll taxes are normally considered to be associated with the acquisition and payment cycle.

Question 13

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.

Question 14

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.

Question 15

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.

Question 16

The source of debits in the equipment account is the:

A)sales journal.
B)cash disbursements journal.
C)cash receipts journal.
D)acquisitions journal.

Question 17

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.

Question 18

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

Question 19

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.

Question 20

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.

Question 21

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

Question 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

Question 23

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.

Question 24

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.

Question 25

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.

Question 26

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.

Question 27

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.

Question 28

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.

Question 29

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.

Question 30

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.

Question 31

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

Question 32

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.

Question 33

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.

Question 34

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

Question 35

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

Question 36

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

Question 37

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.

Question 38

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.

Question 39

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.

Question 40

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

Question 41

In auditing depreciation expense, one of the auditor's concerns is determining that the client's calculations are correct.In making this determination,the auditor must weigh four considerations.List these four considerations.

Question 42

One of the auditor's primary objectives when auditing manufacturing equipment is completeness.

Question 43

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.

Question 44

Depreciation amounts are determined by exchange transactions with outside parties.

Question 45

The primary accounting record for property, plant, and equipment accounts is the fixed asset master file.What is included for each fixed asset in the master file?

Question 46

Property, plant, and equipment is normally audited in a different manner than current asset accounts.State three reasons why this is so, and discuss the differences in how property, plant, and equipment is audited compared to current assets.

Question 47

The transportation and installation costs for a piece of equipment should be charged to an expense account.

Question 48

The primary characteristic that distinguishes property, plant, and equipment from inventory, prepaid expenses, and investments is the intention to use property, plant, and equipment as a part of the operations of the client's business over their expected life.

Question 49

When auditing disposals of property, plant, and equipment, the search for unrecorded disposals is essential.State the four audit procedures frequently used for verifying disposals.

Question 50

In testing acquisitions, the auditor must understand the relevant accounting standards to insure the client adheres to accepted accounting practices for property, plant, and equipment.Describe three of the auditor's concerns in this area.

Question 51

The starting point for the verification of current-year acquisitions of property, plant, and equipment is normally a client-prepared schedule of all acquisitions recorded in the general ledger during the year.

Question 52

The emphasis in auditing manufacturing equipment is on the verification of current-period disposals and acquisitions.

Question 53

The auditor receives the client's schedule of recorded disposals and then performs detail tie-in tests of the recorded disposals schedule.What procedures does the auditor perform on the client's schedule of recorded disposals?

Question 54

The most important audit objective for depreciation expense is detail tie-in.

Question 55

The auditor's tests for proper cutoff of current year acquisitions of property, plant, and equipment are usually done as part of accounts payable cutoff tests.

Question 56

Completeness and existence are the auditor's primary objectives in auditing manufacturing equipment.

Question 57

State four of the seven specific balance-related audit objectives for property, plant, and equipment additions and, for each objective, describe one common test of details of balances.

Question 58

Discuss the key internal controls related to the disposal of property, plant, and equipment.

Question 59

One of the reasons that auditors verify equipment differently from current assets is the amount of any given equipment acquisition is often material.

Question 60

Depreciation expense is normally verified as a part of tests of details of balances rather than as part of tests of controls or substantive tests of transactions.

Question 61

Describe the audit procedures used to verify the accuracy and detail tie-in objectives for prepaid insurance.

Question 62

The audit procedure "foot the schedule of fixed assets acquisitions and trace the total to the general ledger" relates most closely to the completeness objective for fixed assets acquisitions.

Question 63

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.

Question 64

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

Question 65

Ordinarily, if you are auditing a continuing client, it is unnecessary to test the accuracy objective or the classification objective for fixed assets acquired in prior years.

Question 66

Discuss the key internal controls for prepaid insurance that affect the auditor's extent of testing of the prepaid insurance account.

Question 67

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

Question 68

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

Question 69

Describe the two tests auditors can perform to test for the existence and omissions of insurance policies in force.

Question 70

The approach to auditing patents and copyrights is similar to that used for property, plant, and equipment accounts.

Question 71

Confirmations are commonly used to verify additions of property, plant, and equipment.

Question 72

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

Question 73

The company's choices for determining the fixed asset's useful life and residual value impact the amount of depreciation recorded.

Question 74

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

Question 75

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.

Question 76

One very useful method of auditing depreciation is to use an analytical procedure to test for reasonableness.

Question 77

When auditing acquisitions of property, plant, and equipment, the auditor's review of lease and rental agreements most closely relate to the cutoff objective.

Question 78

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

Question 79

What are several analytical procedures used in the audit of prepaid insurance and insurance expense?

Question 80

Recording an acquisition of a fixed asset at an improper amount affects the balance sheet until the company disposes of the asset, but the income statement is not affected.