Question 1

When performing preliminary analytical procedures related to long-lived assets, which of the following should the auditor compare the unaudited financial statements with?

Accepted Answer

When performing preliminary analytical procedures related to long-lived assets, the auditor should compare the unaudited financial statements with past results and industry trends. This will help the auditor to identify any unusual fluctuations in the financial statements and assess the reasonableness of the amounts recorded for long-lived assets. Future company projections are not relevant to the preliminary analytical procedures as they are based on assumptions and estimates that may not be accurate. Therefore, both A and B are the best choices for comparing the unaudited financial statements with.

Question 2

The auditor performs substantive procedures related to property, plant and equipment to determine if the assets have been pledged as collateral or title has transferred. What is the primary assertion the auditor is testing?

Accepted Answer

The auditor is primarily testing the assertion of rights, which ensures that the entity has legal ownership or the right to use the property, plant, and equipment. The auditor is checking for any liens or pledges on the assets, which could impact the entity's ownership rights or ability to use the assets. Valuation, completeness, and existence are also important assertions to consider when auditing property, plant, and equipment, but they are not the primary focus of this specific testing procedure.

Question 3

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

Accepted Answer

The primary assertion tested when obtaining evidence regarding impairment is Valuation. This involves assessing whether assets are recorded at appropriate values and if any impairments to those values have been accurately accounted for in the financial statements.

Question 4

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?

Accepted Answer

During a tour of the manufacturing facility, the auditor is verifying that the long-lived assets exist and are in use as reported in the financial statements. This satisfies the existence assertion. The other assertions such as completeness, rights, and presentation and disclosure are not specifically related to the physical inspection of the assets in the facility.

Question 5

Which of the following assertions are usually the two most relevant assertions related to long-lived assets?

Accepted Answer

The two most relevant assertions related to long-lived assets are usually Existence and Valuation. Existence confirms that the assets actually exist and Valuation deals with whether the assets are recorded at their correct value. Completeness and Presentation are usually more relevant to other areas of the financial statements such as liabilities and equity.

Question 6

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 steps primarily tests which of the following assertions for the equipment account?

Accepted Answer

This audit step primarily tests the valuation assertion for the equipment account. By recomputing gain or loss on the disposal and examining the sales documentation, the auditor is verifying that the disposal was recorded at the correct amount, which relates to the valuation of the asset.

Question 7

A client has implemented a policy requiring the establishment and enforcement of property management training for all personnel involved in the use, stewardship, and management of equipment. Which of the following is not a test that could be used in testing the control?

Accepted Answer

Reviewing financial statements is not a relevant test in this scenario as it relates more to financial controls rather than property management training. The other three tests (Inquiry, Observation, and Inspection of documentation) are all relevant in testing the implementation and enforcement of the property management training policy.

Question 8

If the auditor is testing the reasonableness of depreciation expense for the year, which assertion is being tested?

Accepted Answer

The assertion being tested is Valuation as the auditor is checking whether the depreciation expense is correctly calculated and recorded in the financial statements. The valuation assertion relates to the accuracy of the accounting amounts or measurements of the financial statement items. Completeness, Rights and Obligations, and Existence assertions are different from Valuation and are not directly relevant to testing the reasonableness of depreciation expense.

Question 9

Which of the following procedures is a substantive procedure that relates to the rights and obligations assertion?

Accepted Answer

Examining documents of title is a substantive procedure that relates to the rights and obligations assertion as it confirms the client's legal ownership and rights to use assets as reflected in the financial statements. The other choices are also substantive procedures but relate to other assertions. Assessing management's impairment estimates relates to the valuation assertion, recalculating amortization expense relates to the completeness and accuracy assertion, and inquiring management about assets that are idle relates to the existence and occurrence assertion.

Question 10

If the auditor is performing substantive procedure to determine whether the long-lived asset balance is reflected on the balance sheet in the noncurrent section, which of the following assertions is being tested?

Accepted Answer

The assertion being tested is Presentation and Disclosure, as the auditor is verifying that the long-lived asset is correctly classified in the noncurrent section of the balance sheet.

Question 11

For intangible assets, controls should be designed to do which of the following?

Accepted Answer

Controls for intangible assets should cover all of these areas - identifying and accounting for impairments, developing amortization schedules, and ensuring that decisions about capitalizing or expensing R&D expenditures are made appropriately. All three are important for properly accounting for intangible assets and providing accurate financial statements.

Question 12

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

Accepted Answer

The review of repair expenses to identify capital expenditures is related to the completeness assertion, ensuring that all capital expenditures are recorded and not understated as expenses.

Question 13

Which of the following information should be included in management's documentation regarding intangible assets?

Accepted Answer

Management's documentation regarding intangible assets should include all of the above information: manner of acquisition, basis for the capitalized amount, and expected period of benefit. This documentation helps to support the valuation of the intangible asset and ensures consistent treatment in financial reporting.

Question 14

If the auditor is testing long-lived asset account balances to see if they include all relevant transactions that have taken place during the period, what is the primary assertion being tested?

Accepted Answer

The primary assertion being tested when verifying long-lived asset account balances is completeness, which ensures that all relevant transactions have been recorded and that no significant transactions have been omitted from the financial statements. The auditor is checking to see if all assets that should be included in the account balance are indeed included.

Question 15

Which of the following is a term used to describe management's recognition that a significant portion of fixed assets is no longer as productive as had originally been expected?

Accepted Answer

Asset impairment is the term used to describe management's recognition that a significant portion of fixed assets is no longer as productive as had originally been expected. This can lead to a write-down of the asset to reflect its lower value. Asset depreciation refers to the systematic allocation of the cost of an asset over its useful life, while asset amortization is the same concept applied to intangible assets. Asset disposal refers to the process of getting rid of an asset, whether through selling, scrapping, or otherwise.

Question 16

Reconciling the physical asset inventory with the property ledger on a periodic basis is a control related to which management assertion?

Accepted Answer

Reconciling the physical asset inventory with the property ledger ensures that the assets actually exist, therefore it is a control related to the management assertion of existence.

Question 17

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

Accepted Answer

Oil reserves are not subject to depreciation, as they are not physical assets that wear out over time. Instead, the depletion method is used to allocate the cost of oil reserves over the amount of oil extracted. Therefore, there is not a probable relationship between oil reserves and depreciation.

Question 18

Audit procedures should be proportional to which of the following?

Accepted Answer

Audit procedures should be proportional to the assessed risks. This means that the more risk there is in a particular area or aspect of the client's financial statements, the more audit procedures should be performed in that area. The size of the client or firm and the assessed misstatements may be factors to consider, but they are not as important as the assessed risks in determining the appropriate level of audit procedures.

Question 19

Which of the following is not a technique that auditors can use when performing preliminary analytical procedures related to long-lived assets?

Accepted Answer

All of the listed techniques are appropriate for auditors to use when performing preliminary analytical procedures related to long-lived assets.

Question 20

Which of the following procedures is not a procedure used by an auditor in searching for unrecorded disposals of long-lived assets?

Accepted Answer

Sending confirmations to insurance agents would not be a procedure used by an auditor in searching for unrecorded disposals of long-lived assets. The other options all relate to methods an auditor might use to look for unrecorded disposals, such as inquiring with the client, examining property tax records, and checking scrap sales accounts.

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