Deck 12: Auditing Long-Lived Assets: Acquisition, Use, Impairment, and Disposal

Question 1

A common technique used to fraudulently misstate financial statements involves the undervaluing of existing long- lived assets.

Answer 1

False

Question 2

Internal controls over long-lived assets should provide reasonable assurance that all purchases are authorized and properly valued.

Answer 2

True

Question 3

The existence of fair value estimates that are unreasonable or unsupportable is indicative of a potential fraud scheme.

Answer 3

True

Question 4

Asset impairment is not typically assessed by the auditor since it is a subjective management estimate.

Question 5

Gains on the sale of equipment usually indicate that the depreciation lives of the assets are too long.

Question 6

An inherent risk related to asset impairment is that management normally does not have incentives to write down asset values.

Question 7

An auditor is required to gain an overall understanding of internal controls related to long-lived assets for integrated audits,but not for financial statement only audits.

Question 8

Long-lived assets include only the tangible assets of an organization.

Question 9

When the value of a long-lived asset has been impaired,the organization must write down the asset reflecting the decline in economic benefit of the asset.

Question 10

Knowledge of industry product trends is crucial to the auditor's identification of the potential for the impairment of assets.

Question 11

The client should have methods in place to identify and account for intangible-asset impairments.

Question 12

The auditor's procedures should include a determination of the reasonableness of management's estimate of useful lives of tangible assets.

Question 13

Effective internal controls over long-lived assets include the use of identification tags secured to assets for proper tracking.

Question 14

The auditor would most likely review the depreciation policy and test depreciation calculations to test the valuation of long-lived assets.

Question 15

Much of the inherent risk related to long-lived assets is due to the importance of management estimates.

Question 16

The auditor would be most likely to request a schedule of repairs and maintenance expense to test the existence of long-lived assets.

Question 17

Long-lived assets typically represent the smallest single category of assets in many organizations.

Question 18

To identify possible impairment of manufacturing equipment,the auditor can tour the facility during operations to determine if any of the machines are idle.

Question 19

When an organization disposes of a long-lived asset,it should determine and record the gain or loss on the disposal of the asset.

Question 20

The auditor typically makes a physical inspection of most of the material fixed asset acquisitions.

Question 21

When testing the existence/occurrence assertion for long-lived assets,the focus is typically on disposals of assets that took place during the year.

Question 22

If control deficiencies related to long-lived assets are identified,the auditor will automatically assess those deficiencies as significant deficiencies.

Question 23

Brown,Inc. ,obtained a patent for its product five years ago and should expense the entire amount of the unamortized balance if the product is no longer sold.

Question 24

If a company has only a few long-lived assets of relatively high value,the most efficient approach for an auditor would be to use tests of details for obtaining evidence.

Question 25

It is not important for an organization to have controls to track the location,quantity,condition,maintenance,and depreciation status of long-lived assets because the auditor gathers evidence related to these issues.

Question 26

If planning analytical procedures identify some unexpected relationships,the auditor would conclude that there may be a heightened risk of material misstatements.

Question 27

Auditors must understand the business and economics of the client's business in order to perform meaningful planning analytical procedures for long-lived assets.

Question 28

Changes in the depreciable lives of equipment may be identified through a substantive audit procedure that includes analyzing depreciation expense as a percent of assets.

Question 29

Audit procedures for leases consist primarily of examining lease documents to determine the substance of the lease transaction and the proper accounting treatment.

Question 30

The FASB standard on accounting for leases issued in 2016 requires most leases to be reported on the lessee's balance sheet,which is a significant change from the previous accounting requirements.

Question 31

The obsolescence of long-lived assets is an inherent risk that should be considered by the auditor.

Question 32

Audit firms that have developed standardized programs for auditing long-lived assets do not need to customize the audit programs based on assessed risk of material misstatement because inherent risks related to long-lived assets are the same for all clients.

Question 33

Intangible assets are not subject to potential impairment of value because they lack physical substance.

Question 34

An inherent risk associated with intangible assets,such as a patent,is the accounting for research and development costs.

Question 35

Estimating the amount of reclamation costs is an inherent risk associated with natural resources.

Question 36

An auditor should compare the unaudited financial statements with both past results and industry trends to gain an indication about the possibility of fraud.

Question 37

The risk of material misstatement related to the existence of long-lived assets at Client A is considered low,while this risk at Client B is considered high.Sufficiency of evidence for testing the existence of equipment would be higher for client B.

Question 38

If unusual or unexpected relationships related to long-lived assets are identified during planning analytical procedures,the planned audit procedures (tests of controls and substantive procedures)would be adjusted to address the risk of material misstatement.

Question 39

Natural resource companies cannot reassess the amount of reserves even if more information becomes available during the course of mining,harvesting,or extracting resources.

Question 40

Limited physical access to long-lived assets is a typical internal control that affects multiple assertions for long-lived assets.

Question 41

Which one of the following is not a management assertion relevant to long-lived assets?

A)Existence.
B)Completeness.
C)Valuation.
D)Reporting.

Question 42

Audits of Level 3 assets are the most straightforward as they involve an observable,active market.

Question 43

Because of conservatism considerations,auditors should allow a client to overestimate its reserve for restructuring.

Question 44

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 new equipment.
C)Impaired value of old equipment.
D)Inappropriate depreciation calculation for new equipment.

Question 45

Which of the following statements is true?

A)Intangible assets should be recorded at fair market value.
B)Intangible assets should be recorded at cost.
C)Intangible assets should be recorded at future market value.
D)Intangible assets should not be recorded.

Question 46

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.

Question 47

The auditor selects entity-wide controls for testing,but not transaction controls specific to long-lived assets.

Question 48

In assessing the fair value of Level 1 assets,the auditor can perform an analysis of the volume of trading activity as part of obtaining audit evidence.

Question 49

The tour of the manufacturing plant may best assist the auditor in determining which of the following?

A)Whether all purchases are authorized.
B)Whether any machinery is inoperative in the production cycle.
C)Management's strategy for assessing impairment.
D)Estimates of depreciation expense.

Question 50

Which one of the following factors is not an inherent risk associated with long-lived assets?

A)Obsolescence of assets.
B)Impairment of assets.
C)Incomplete recording of disposals.
D)Lack of physical controls over the long-lived assets.

Question 51

If restructuring charges are not calculated correctly,the charges can be used to fraudulently manipulate income.

Question 52

Under accounting guidance issued by the FASB in 2017,a goodwill impairment loss will be recognized when the fair value of the reporting unit is less than its carrying value even if the difference is attributable to the fair value of other assets in the reporting unit being less than their respective carrying values.

Question 53

An inherent risk related to long-lived assets is the incomplete recording of disposals.

Question 54

Goodwill is the excess of the purchase price over the fair market values of the acquired company's tangible assets,identifiable intangible assets,and liabilities.

Question 55

Level 1 assets is a broad category of assets and applies to financial instruments,property,or lower of cost or market considerations for inventory,loans,or receivables.

Question 56

Goodwill has to be evaluated for impairment once a year,as well as on an interim basis at the time events and circumstances warrant.

Question 57

An audit of Level 1 assets is likely to be less challenging than an audit of Level 3 assets.

Question 58

For integrated audits,the auditor will test the operating effectiveness of important controls throughout the year with a greater focus on controls as of the client's year-end.

Question 59

Which one of the following approaches does not represent how the auditor will become aware of risks associated with long-lived assets?

A)Obtaining knowledge of the client business.
B)Reviewing the business plan related to major acquisitions.
C)Reviewing the minutes of board of directors' meetings.
D)All represent how the auditor will become aware of risks associated with long-lived assets and related expenses.

Question 60

When assessing fair value of Level 2 assets,auditors will use information on the sale of identical items in active or inactive markets as a source of audit evidence.

Question 61

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 amortization.
C)Asset impairment.
D)Asset disposal.

Question 62

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.

Question 63

Which one of the following does not constitute a probable relationship between accounts?

A)Equipment and depreciation.
B)Patent and amortization.
C)Assets under capital leases and amortization.
D)Oil reserves and depreciation.

Question 64

When performing planning 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.

Question 65

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.

Question 66

An auditor's review of the repair expense to identify any capital expenditures is a test related to which management assertion?

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

Question 67

Which of the following controls is not a typical control that affects multiple assertions for long-lived assets?

A)Reviewing insurance policies for adequate replacement coverage of assets.
B)Formal budgeting process with appropriate follow-up variance analysis.
C)Periodic comparison of physical assets to subsidiary records with the general ledger.
D)Periodic reconciliations of subsidiary records with the general ledger.

Question 68

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)Existence.
D)Valuation.

Question 69

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.

Question 70

Which statement is true?

A)Management is always reluctant to write down asset values.
B)Intangible assets do not require effective controls because they have low inherent risk.
C)Complex ownership structures may create challenges in the recording of assets.
D)The incomplete recording of asset disposals understates the asset balance.

Question 71

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.

Question 72

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.

Question 73

Which is the primary assertion tested in conjunction with obtaining evidence regarding impairment?

A)Valuation.
B)Cutoff.
C)Existence.
D)Rights.

Question 74

Which of the following is not a circumstance indicating potential impairment of intangible assets?

A)A change in circumstances,such as the legal environment or business climate,that could affect the asset's value.
B)An accumulation of costs that are significantly in excess of the amount originally expected to be needed to acquire or construct the asset.
C)The asset generates just as much cash flow as in the past.
D)Losses or projections indicating continuing losses associated with an asset used to generate revenue.

Question 75

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)Presentation and disclosure.
C)Rights.
D)Valuation.

Question 76

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.

Question 77

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)Existence.
C)Rights.
D)Presentation and disclosure.

Question 78

Audit procedures should be proportional to which of the following?

A)Size of the client.
B)Size of the firm.
C)The assessed risks.
D)The assessed misstatements.

Question 79

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.

Question 80

Which of the following expense accounts is associated with natural resources?

A)Depreciation expense.
B)Amortization expense.
C)Depletion expense.
D)Capitalization expense.