Question 1

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.

Accepted Answer

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Question 2

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

Accepted Answer

One of the auditor's primary objectives when auditing manufacturing equipment is to make sure that all equipment is accounted for and there are no unrecorded or missing assets. This falls under the completeness assertion, which is one of the five main audit assertions that auditors use to evaluate the accuracy and completeness of financial statements.

Question 3

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.

Accepted Answer

Significant debits to an accumulated depreciation account might occur due to extraordinary repairs that have lengthened the life of an asset. This would result in an increase in the total accumulated depreciation of the asset.

Question 4

Depreciation amounts are determined by exchange transactions with outside parties.

Accepted Answer

Depreciation amounts are not determined by exchange transactions with outside parties. Depreciation is an accounting concept that allocates the cost of a long-term asset over its useful life. It is based on estimates of the asset's useful life, salvage value, and cost, and is not related to any specific exchange transactions.

Question 5

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?

Accepted Answer

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Question 6

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.

Accepted Answer

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Question 7

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

Accepted Answer

The transportation and installation costs for a piece of equipment should be capitalized as part of the asset's cost, not expensed immediately.

Question 8

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.

Accepted Answer

Property, plant, and equipment are tangible long-term assets expected to be used in the client's business operations, whereas inventory, prepaid expenses, and investments are short-term assets held for the purpose of generating revenue or earning a return on investment.

Question 9

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.

Accepted Answer

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Question 10

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.

Accepted Answer

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Question 11

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.

Accepted Answer

This is correct. The client-prepared schedule of all acquisitions recorded in the general ledger during the year is the starting point for verifying current-year acquisitions of property, plant, and equipment. This schedule should detail the date of acquisition, description of the asset, cost, and other relevant information.

Question 12

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

Accepted Answer

In auditing manufacturing equipment, the emphasis is indeed on verifying the accuracy and completeness of records related to current-period disposals and acquisitions to ensure that the financial statements accurately reflect the company's assets and any changes to them during the period.

Question 13

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?

Accepted Answer

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Question 14

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

Accepted Answer

The most important audit objective for depreciation expense is accuracy, as it ensures the depreciation calculations are correct and in accordance with the relevant accounting standards. Detail tie-in is more concerned with verifying that details in the accounting records match the details in the supporting documentation.

Question 15

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.

Accepted Answer

The proper cutoff of current year acquisitions of property, plant, and equipment is usually checked as part of the accounts payable cutoff tests because most acquisitions are paid through accounts payable. Therefore, it is important to ensure that the transactions are recorded in the correct accounting period.

Question 16

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

Accepted Answer

The primary objective of auditing manufacturing equipment is to ensure that all equipment is accounted for (completeness) and actually exists (existence).

Question 17

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.

Accepted Answer

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Question 18

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

Accepted Answer

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Question 19

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

Accepted Answer

A material acquisition is one that is significant enough to impact the financial statements, and therefore requires more scrutiny from auditors. Current assets, such as inventory or accounts receivable, are typically smaller and less significant in comparison.

Question 20

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.

Accepted Answer

Depreciation expense is an account that relates to the balance sheet and is verified through tests of details of balances, which involves examining the ending account balances and verifying the amounts recorded in the financial statements. It is not typically tested through tests of controls, which assess the effectiveness of the entity's internal controls, or substantive tests of transactions, which test individual transactions for completeness and accuracy.

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