Question 1

Inherent risk for prepaid expenses would generally be assessed as low because these accounts do not usually include complex transactions.

Accepted Answer

Prepaid expenses typically involve simple transactions, such as paying in advance for rent or insurance. Therefore, the inherent risk for prepaid expenses would generally be assessed as low.

Question 2

Which of the following questions would an auditor least likely include on an internal control questionnaire concerning the initiation and execution of equipment transactions?

Accepted Answer

The question about monitoring and properly restricting access to equipment is less about the initiation and execution of equipment transactions and more about the physical security and access control of the equipment. The other options directly relate to the approval and authorization processes for equipment transactions.

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 does not evaluate the adequacy of replacement funds while examining property, plant, and equipment. The auditor's focus is on determining the adequacy of controls, the extent of property abandoned, retired, or sold during the year, and the reasonableness of the depreciation.

Question 4

The auditor may conclude that depreciation charges are insufficient by noting:

Accepted Answer

Excessive recurring losses on assets retired may indicate that the depreciation charges are insufficient, as the assets may be carrying a higher value on the books than their actual worth.

Question 5

The property, plant, and equipment records function should be segregated from the custodial function.

Accepted Answer

Segregating the property, plant, and equipment records function from the custodial function helps ensure the accuracy and reliability of the financial statements by preventing errors or fraud in either of these functions from affecting the other.

Question 6

If the auditor has detected misstatements in prior audits, the assessment of inherent risk for the property management process will usually be set higher.

Accepted Answer

Misstatements detected in prior audits suggest weaknesses in the property management process and the likelihood of errors, leading to an increased inherent risk assessment for the process in future audits.

Question 7

An example of a prepaid account is prepaid interest.

Accepted Answer

Prepaid interest is an advance payment for interest due on a loan or mortgage. It is considered a prepaid account because the interest is paid in advance of when it is due.

Question 8

Assets no longer used in operations are accounted for in essentially the same manner as those used in operations.

Accepted Answer

Assets no longer used in operations, such as those held for sale, are accounted for differently, often measured at the lower of their carrying amount or fair value less costs to sell, rather than being depreciated or amortized as operational assets are.

Question 9

Which of the following policies constitutes a 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 10

Reviewing capital budgets and comparing the amounts spent with amounts budgeted is an example of a substantive analytical procedure for auditing prepaid accounts.

Accepted Answer

Substantive analytical procedures involve evaluating financial information through analysis of plausible relationships among both financial and non-financial data. Reviewing capital budgets and comparing amounts spent with amounts budgeted is more related to compliance or operational auditing, focusing on adherence to policies or efficiency, rather than directly testing the balances of prepaid accounts as would be typical in substantive procedures for those accounts.

Question 11

Disposition of capital assets through sale, exchange, retirement, or abandonment are transactions that occur in the property management process.

Accepted Answer

Disposition of capital assets through sale, exchange, retirement, or abandonment are indeed transactions that occur in the property management process.

Question 12

Substantive analytical procedures should not be used in the audit of property, plant, and equipment.

Accepted Answer

Substantive analytical procedures can be used in the audit of property, plant, and equipment to provide assurance on the reasonableness and accuracy of the related account balances, such as depreciation expenses and accumulated depreciation balances. Some common substantive analytical procedures include comparing current-year balances with prior-year balances, comparing financial statements ratios with industry benchmarks, and trend analysis. However, these procedures should be used in conjunction with other substantive audit procedures, such as physical inspections and confirmations. Therefore, the given statement is false.

Question 13

An auditor typically sets inherent risk for intangible assets at this level:

Accepted Answer

Intangible assets are difficult to value and there is a higher risk of misstatement or fraud associated with them. Therefore, the auditor typically sets inherent risk for intangible assets at a high level.

Question 14

Substantive analytical procedures are commonly used to test prepaid accounts.

Accepted Answer

Substantive analytical procedures can be used to test prepaid accounts. These procedures involve analyzing trends, ratios, and other relationships between financial data to identify any potential discrepancies or anomalies. Examples of substantive analytical procedures that could be used to test prepaid accounts include comparing prepaid expenses to prior periods, benchmarking against industry standards, or analyzing the relationship between prepaid expenses and other financial metrics like revenue or net income.

Question 15

Inquiry of entity personnel and a review of lease transactions for the same period can provide evidence on proper cutoff for leases.

Accepted Answer

Inquiry of entity personnel and a review of lease transactions for the same period are procedures that can provide evidence of proper cutoff for leases. These procedures can help ensure that lease transactions are recorded in the correct accounting period and that the financial statements reflect accurate lease information.

Question 16

If a periodic physical inventory of property, plant, and equipment is taken, the individual responsible for the inventory should be independent of the custodial and record-keeping functions.

Accepted Answer

The individual responsible for the inventory should be independent to ensure accuracy and reliability of the inventory counts. This helps to prevent errors or discrepancies in the records and deter fraud or theft.

Question 17

The auditor is most likely to seek information from the plant manager with respect to the:

Accepted Answer

The plant manager would have direct knowledge about the machinery and its condition, making them a suitable source for information on obsolete machinery.

Question 18

Prepaid expenses provide economic benefit for longer than a year.

Accepted Answer

Prepaid expenses typically provide economic benefits for less than one year as they are expenses paid in advance for goods or services to be received in the near future.

Question 19

The purchase of capital assets should be consistent with the authorization table used by the entity to approve such transactions. However, no such table is normally used for lease transactions.

Accepted Answer

Lease transactions, especially those classified as finance leases, often involve significant long-term commitments and can impact an entity's balance sheet in a manner similar to capital asset purchases. Therefore, they typically require a similar level of authorization and oversight, which may involve an authorization table or similar control mechanism to ensure proper review and approval.

Question 20

Generally, auditors rely on controls when auditing the property management function and therefore less substantive testing is used.

Accepted Answer

The answer of Generally, auditors rely on controls when auditing...

Quiz 14: Auditing the Financinginvesting Process: Prepaid Expenses, Intangible Assets, and Property, Plant, and Equipment