Question 1

Which of the following accounts would most likely be reviewed by the auditor to gain reasonable assurance that additions to property, plant, and equipment are not understated?

Accepted Answer

The answer of Which of the following accounts would most...

Question 2

In verifying the amount of goodwill recorded by an entity, the most convincing evidence that an auditor can obtain is by comparing the recorded value of assets acquired with the

Accepted Answer

The most convincing evidence of the value of goodwill is the appraised value, which is determined by an independent appraiser. This is likely to be more reliable than the seller's book value, which may not accurately reflect the fair value of the assets, or other values such as tax or insurance values, which may be based on different criteria. Therefore, an auditor should rely on appraisals to verify the amount of goodwill recorded by an entity.

Question 3

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. This is because if the assets are not being depreciated sufficiently, they may become fully depreciated and retired earlier than expected, leading to recurring losses. The other options do not necessarily indicate insufficient depreciation charges.

Question 4

Testing depreciation calculations for a sample of property, plant, and equipment tests the assertion of

Accepted Answer

Testing depreciation calculations for a sample of property, plant, and equipment tests the assertion of valuation and allocation, as it ensures that the asset is recorded at its appropriate value and that the cost is accurately allocated over its useful life.

Question 5

Which of the following situations has the best chance of being detected when a CPA compares revenues and expenses reported for the year being audited (current year) with the prior year and investigates all changes exceeding a fixed percentage?

Accepted Answer

The answer of Which of the following situations has the...

Question 6

Equipment acquisitions that are misclassified as maintenance expenses most likely would be detected by a control activity that provides for

Accepted Answer

Investigation of variances within a formal budgeting system would help detect misclassified expenses by identifying discrepancies between budgeted and actual expenses, prompting further review.

Question 7

Recomputing the unexpired portion of insurance policies in effect tests which of the following assertions for prepaid insurance?

Accepted Answer

Recomputing the unexpired portion of insurance policies in effect is a valuation test for prepaid insurance, as it determines the value of the remaining portion of the insurance that has not yet been used. This ensures that the balance sheet accurately reflects the value of the prepaid insurance asset.

Question 8

To achieve effective control over fixed asset additions, a company should establish activities that require

Accepted Answer

Authorization and approval of major fixed asset additions is the best practice to achieve effective control over fixed asset additions. This ensures that any significant investments in fixed assets are carefully evaluated and approved by appropriate personnel, reducing the risk of wasteful or unnecessary spending on fixed assets. Option A only addresses a specific dollar amount and may not capture all major additions, while options B and C do not directly address control over fixed asset additions.

Question 9

To improve accountability for fixed asset retirements, management most likely would implement a system of internal control that includes

Accepted Answer

Continuous utilization of sequentially numbered retirement work orders would provide a more systematic and accountable process for retiring assets. This would ensure that all retirements are documented and accounted for, and that no unauthorized retirements occur. Option A is not directly related to tracking retirements, while option B may not be a reliable or effective method of identifying all retirements. Option D is also not directly related to retirements.

Question 10

In auditing intangible assets, an auditor most likely would review or recompute amortization and determine whether the amortization period is reasonable in support of management's financial statement assertion of

Accepted Answer

In auditing intangible assets, an auditor most likely would review or recompute amortization and determine whether the amortization period is reasonable in support of management's financial statement assertion of valuation and allocation. The valuation and allocation assertion refers to whether the recorded value of the intangible assets is accurate and allocated to the appropriate accounting periods. The auditor needs to ensure that the amortization period used by management is appropriate based on the nature of the asset and its estimated useful life.

Question 11

Which of the following constitutes a control weakness related to factory equipment?

Accepted Answer

The answer of Which of the following constitutes a control...

Question 12

The cutoff assertion for prepaid insurance

Accepted Answer

The cutoff assertion for prepaid insurance is best tested by recomputing the unexpired portion of insurance policies in effect. This ensures that the prepaid insurance account accurately reflects the amount of insurance that has not yet been used. Sending confirmations to vendors may provide additional evidence, but it is not the best or exclusive way to test this assertion. Property and equipment purchasing is a separate assertion and should be tested separately. The materiality of prepaid insurance amounts should be determined on a case-by-case basis and does not preclude testing of this assertion. Therefore, option A is incorrect.

Question 13

In testing plant and equipment balances, an auditor examines new additions listed on an analysis of plant and equipment. This procedure most likely obtains evidence concerning management's assertion of

Accepted Answer

When examining new additions listed on an analysis of plant and equipment, the auditor is obtaining evidence concerning management's assertion of occurrence, i.e., whether the additions actually exist and were acquired by the company during the period under review. Completeness would be tested by examining whether all existing plant and equipment has been included in the analysis, classification would be tested by examining whether items are appropriately categorized according to their useful lives and depreciation methods, and accuracy would be tested through verification of the dollar amounts associated with each item.

Question 14

Tennessee Company violated company policy by erroneously capitalizing the cost of painting its warehouse. The CPA examining Tennessee's financial statements would most likely learn of this error by

Accepted Answer

The answer of Tennessee Company violated company policy by erroneously...

Question 15

The auditor is least likely to learn of retirement of equipment through which of the following?

Accepted Answer

Reviewing the purchase return and allowance account is least likely to inform an auditor about the retirement 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 16

Which of the following is likely the most effective audit procedure for the verification of the legal ownership of real property?

Accepted Answer

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

Question 17

A normal audit procedure is to analyze the current year's repairs and maintenance accounts to provide evidence in support of the audit proposition that

Accepted Answer

The answer of A normal audit procedure is to analyze...

Question 18

When there are numerous property and equipment transactions during the year, an auditor planning to set control risk at low usually plans to obtain an understanding of internal control and to perform

Accepted Answer

When there are numerous property and equipment transactions during the year and the auditor plans to set control risk at low, the auditor should obtain an understanding of internal control and perform tests of controls to determine if the controls are operating effectively. In addition, the auditor should perform limited tests of current year property and equipment transactions to ensure that the transactions have been accurately recorded and classified. This approach will allow the auditor to provide reasonable assurance that the financial statements are free of material misstatement. Extensive tests of property and equipment balances at the end of the year or analytical procedures alone would not be sufficient to achieve this level of assurance.

Question 19

Complex accounting issues for property, plant, and equipment include all of the following except

Accepted Answer

Goodwill is not considered a property, plant, or equipment asset, so it is not a complex accounting issue in this category. The other options can all pose challenges in accounting for property, plant, and equipment. Lease accounting has undergone significant changes in recent years, while capitalized interest and self-constructed assets require careful consideration of costs and allocation.

Question 20

Which of the following accounts would most likely be reviewed by the auditor to gain reasonable assurance that additions to the equipment account are not understated?

Accepted Answer

A review of repairs and maintenance expense would provide insight into the level of activity in the equipment account. If there are a significant number of repairs and maintenance expenses, it may indicate that equipment is being added or improved upon rather than being replaced or disposed of. This increases the risk of understated additions to the equipment account. Depreciation expense, gain on disposal of equipment, and accounts payable are not as directly related to additions to the equipment account.

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