Question 1

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

Accepted Answer

The segregation of duties in this context is important to prevent fraud, errors, or other irregularities. By separating the responsibilities of record keeping (property, plant, and equipment records function) and physical custody (custodial function), it becomes more difficult for any one individual to manipulate the records or misappropriate the assets.

Question 2

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 3

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

Accepted Answer

Prepaid expenses involve simple transactions and are typically easy to verify, therefore the inherent risk is generally low.

Question 4

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 the appropriate person to provide information on the existence of obsolete machinery.

Question 5

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 answer of Which of the following questions would an...

Question 6

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 as they provide useful information about the reasonableness and accuracy of the account balance. Examples include analyzing trends in depreciation expense and comparing historical cost to current replacement costs. However, these procedures should be supplemented with other substantive procedures such as physical inspection, confirmation of title or ownership, and testing of the valuation, completeness, and existence of assets.

Question 7

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

Accepted Answer

In the examination of property, plant, and equipment, the auditor seeks to determine the adequacy of controls, the extent of property abandoned, retired, or sold during the year, and the reasonableness of depreciation. However, the auditor does not have to assess the adequacy of replacement funds, as this is not relevant to the examination of property, plant, and equipment.

Question 8

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

Accepted Answer

Inquiry of entity personnel can provide understanding of the lease transactions and their proper recording, while a review of the lease transactions themselves can confirm that they have been recorded in the proper period, ensuring proper cutoff for capital leases.

Question 9

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 10

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 11

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...

Question 12

If an entity has few capital asset purchases, it will generally not have a formal control system over such transactions.

Accepted Answer

The answer of If an entity has few capital asset...

Question 13

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

The detection of misstatements in prior audits indicates weaknesses in the property management process and increases the likelihood of material misstatements occurring in the future, leading to a higher inherent risk assessment.

Question 14

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 15

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

Accepted Answer

Intangible assets, such as patents and trademarks, can be difficult to value and are often subjective in nature. Therefore, inherent risk for intangible assets is typically set at a high level due to the possibility of the assets being overvalued, undervalued, or difficult to account for.

Question 16

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 17

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 18

Substantive analytical procedures are commonly used to test prepaid accounts.

Accepted Answer

Prepaid accounts involve prepayment for goods or services that will be received in the future. Substantive analytical procedures involve analyzing account balances and transactions for unusual or unexpected patterns, such as large increases or decreases in prepaid expenses. This helps to identify potential misstatements or errors in the prepaid accounts.

Question 19

An example of a prepaid account is prepaid interest.

Accepted Answer

Prepaid interest is an example of a prepaid account, where the borrower pays the interest expense in advance and it is recorded as a prepaid asset until it is recognized as an expense over time.

Question 20

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

This is a basic internal control principle to ensure accuracy and prevent fraud or errors. By having an independent person conduct the physical inventory, it reduces the risk of manipulation or misstatement of asset values in the records.

Quiz 14: Auditing the Financing Investing Process: Prepaid Expenses Intangible Assets and Property Plant and Equipment