Question 1

Which of the following best describes the independent auditors' approach to obtaining satisfaction concerning depreciation expense in the income statement?

Accepted Answer

The independent auditors' approach to obtaining satisfaction concerning depreciation expense in the income statement is to establish the basis for depreciable assets and verify the depreciation expense. This means the auditors will ensure that the assets being depreciated should be depreciable under GAAP, and the amount of depreciation expense charged to income should be accurate and appropriate based on the assets' useful lives and depreciation method. Option A refers to verifying the mathematical accuracy of the amounts charged to income, which is part of the auditors' procedure for all items on the income statement, not just depreciation expense. Option B refers to determining the method used to compute depreciation, which is important but not the only factor in verifying the appropriateness of depreciation expense. Option C refers to reconciling the amount of depreciation expense to the amounts credited to accumulated depreciation accounts, which is also an important step in the audit, but not the only one for verifying the appropriateness of depreciation expense. Therefore, Option D is the best choice.

Question 2

The audit procedure of analyzing the repairs and maintenance accounts is primarily designed to provide evidence in support of the audit proposition that all

Accepted Answer

The answer of The audit procedure of analyzing the repairs...

Question 3

In the examination of property,plant,and equipment,the auditor tries to determine all of the following except the:

Accepted Answer

The auditor's role in examining property, plant, and equipment primarily involves assessing control risks, identifying property abandonment, and evaluating the reasonableness of depreciation methods and calculations. The adequacy of replacement funds, however, falls outside the typical scope of an auditor's responsibilities, as it pertains more to the company's financial planning and management decisions rather than the accuracy or integrity of financial records.

Question 4

Which of the following policies is an internal control weakness related to the acquisition of factory equipment?

Accepted Answer

Requiring acquisitions to be made through and approved by the department in need of the equipment can lead to a lack of independent oversight, increasing the risk of unnecessary or fraudulent purchases.

Question 5

When comparing an initial audit with a subsequent year audit for a particular client,the scope of audit procedures for which of the following accounts would be expected to decrease the most?

Accepted Answer

Property, plant, and equipment are audited to ensure that they are accurately recorded on the financial statements because they often represent a significant investment for a company. Once the initial audit is completed and the assets are established on the books, the subsequent year's audit will likely involve fewer procedures for this account. Accounts receivable, cash, and marketable securities are all accounts that require ongoing monitoring and testing, so their scope of audit procedures would likely be similar between the initial audit and subsequent year audits.

Question 6

A continuing audit client's property,plant,and equipment and accounts receivable accounts have approximately the same year-end balance.In this circumstance,when compared to property,plant and equipment,one would normally expect the audit of accounts receivable to require:

Accepted Answer

Accounts receivable is a high-risk account with a higher likelihood of misstatement due to the subjective nature of estimates such as bad debts, credit terms, and allowances for returns. Therefore, it typically requires more audit time to gather sufficient evidence to support the existence and valuation of the accounts. On the other hand, property, plant, and equipment are usually lower-risk accounts with more objective and verifiable transactions, making the audit process smoother than accounts receivable.

Question 7

When there are numerous property and equipment transactions during the year,an auditor planning to assess the risk of material misstatement at a low risk level must perform.

Accepted Answer

To assess the risk of material misstatement at a low risk level with numerous property and equipment transactions during the year, the auditor should perform tests of controls to ensure the effectiveness of the internal controls over property and equipment transactions. Additionally, the auditor should perform limited tests of current year property and equipment transactions to ensure accuracy and completeness of these transactions. Extensive tests of property and equipment balances at the end of the year may not be necessary as these balances can be substantiated through analytical procedures. Therefore, choice C of performing tests of controls and limited tests of current year property and equipment transactions is the best option to assess the risk of material misstatement at a low risk level.

Question 8

For which of the following ledger accounts would the auditor be most likely to analyze the details to identify understatements of equipment acquisitions?

Accepted Answer

The repairs and maintenance expense account would not include equipment acquisitions, so the auditor would need to analyze the details within this account to identify any understatements of equipment acquisitions. Service revenue, sales, and sales salaries expense accounts are not relevant to identifying equipment acquisitions.

Question 9

Which of the following is used to obtain evidence that the client's equipment accounts are not understated?

Accepted Answer

Analyzing repairs and maintenance expense accounts can provide evidence of the amount of maintenance required on the client's equipment, which can then be compared to the amount of equipment recorded in the equipment accounts. If the expense accounts are higher than expected, it may indicate that more equipment is being used than what is recorded in the accounts, suggesting that the accounts are understated. Vouching purchases of plant and equipment and recomputing depreciation expense would not provide specific evidence that the equipment accounts are not understated. Analyzing the miscellaneous revenue account is also not relevant to this objective.

Question 10

When performing an audit of the property,plant,and equipment accounts,an auditor should expect which of the following to be most likely to indicate a departure from generally accepted accounting principles?

Accepted Answer

Capitalizing repairs to equipment is a departure from generally accepted accounting principles, as repairs are generally considered to be maintenance expenses that should be expensed as incurred. Capitalizing repairs can artificially inflate the value of the assets and lead to overstatement of net income and assets. B is a common practice when constructing assets, C is a standard business practice, and D is an appropriate capitalization of costs related to the acquisition of an asset.

Question 11

In violation of company policy,Miller Company erroneously capitalized the cost of painting its warehouse.The auditors examining Miller's financial statements would most likely detect this when:

Accepted Answer

Examining the construction work orders would reveal the nature of the costs capitalized, allowing auditors to identify inappropriate capitalization such as painting costs.

Question 12

To strengthen internal control over the custody of heavy mobile equipment,the client would most likely institute a policy requiring a periodic

Accepted Answer

Inspecting the equipment and reconciling it with accounting records will help ensure that all equipment is accounted for and in the proper location. This will help detect any discrepancies and prevent equipment from being lost or stolen. A periodic increase in insurance coverage or verification of liens, pledges, and collateralizations would not necessarily strengthen internal control over custody of equipment, and accounting for work orders is only one aspect of internal control.

Question 13

The auditors are least likely to learn of retirements of equipment through which of the following?

Accepted Answer

Review of the purchase returns and allowances account is least likely to inform auditors about retirements of equipment because this account primarily deals with returns and allowances related to purchases, not the disposal or retirement of fixed assets like equipment.

Question 14

Property acquisitions that are misclassified as maintenance expense would most likely be detected by an internal control system that provides for:

Accepted Answer

The answer of Property acquisitions that are misclassified as maintenance...

Question 15

The auditors may expect a proper debit to goodwill due to:

Accepted Answer

Goodwill is typically created in a business combination when the consideration paid exceeds the fair value of the identifiable net assets acquired. As such, the auditors may expect a proper debit to goodwill in this situation. Choices A, B, and D are not typically associated with the creation or impairment of goodwill.

Question 16

For which of the following accounts is it most likely that most of the audit work can be performed in advance of the balance sheet date?

Accepted Answer

Property, plant, and equipment are typically long-term assets with less frequent transactions, allowing auditors to perform much of the audit work before the balance sheet date.

Question 17

The most likely technique for the current year audit of goodwill which was acquired three years ago by a continuing audit client:

Accepted Answer

The most likely technique for the current year audit of goodwill acquired three years ago is recomputation. This technique involves rechecking the calculation of the goodwill value, including comparing the recorded amount to the underlying assets and liabilities, to ensure that the goodwill recorded on the balance sheet is still accurate and fairly stated. This is in contrast to techniques such as confirmation, observation, or inquiry, which are more applicable to verifying the existence or accuracy of specific transactions or balances.

Question 18

Which of the following is a customary audit procedure for the verification of the legal ownership of real property?

Accepted Answer

The answer of Which of the following is a customary...

Question 19

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

Accepted Answer

The answer of Which of the following is the most...

Question 20

Which of the following is not a test primarily used to test property,plant and equipment accounts for overstatement?

Accepted Answer

The answer of Which of the following is not a...

Quiz 13: Property,plant,and Equipment: Depreciation and Depletion