Question 1

In performing a search for unrecorded retirements of fixed assets, an auditor most likely would

Accepted Answer

Inspecting the property ledger and the insurance and tax records would provide the auditor with information on the existence and disposition of fixed assets. Touring the entity's facilities would allow the auditor to physically observe the fixed assets and identify any retirements that have not been recorded. Analyzing the repair and maintenance account may provide some information, but it is not as relevant to identifying unrecorded retirements as inspecting the property ledger and touring the facilities. Therefore, choice A is the best option.

Question 2

Which of the following explanations might satisfy an auditor who discovers significant debits to an accumulated depreciation account?

Accepted Answer

If significant debits have been made to the accumulated depreciation account, it could be due to the retirement of fully depreciated assets during the year. This would increase the accumulated depreciation balance as the depreciation expense recognized each year is added to the accumulated depreciation account until the asset is fully depreciated. Once the asset is retired, the accumulated depreciation balance is reduced by the cost of the asset.

Question 3

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

Accepted Answer

The independent auditor's approach would be to establish the reasonableness of useful lives and depreciation methods for depreciable assets and recomputing the depreciation expense to ensure that it is recorded appropriately. Option A is too narrow as it only focuses on the mathematical accuracy of the amounts charged. Option B is also not comprehensive enough as it only focuses on determining the method for computing depreciation expense. Option C is important but not sufficient as reconciling the amount of depreciation expense to those amounts credited to accumulated depreciation accounts does not necessarily ensure that the depreciation expense is recorded correctly.

Question 4

Testing a sample of repairs and maintenance items to ensure that they were properly classified as repairs as opposed to property, plant, and equipment tests which of the following assertions for the property, plant, and equipment account?

Accepted Answer

The answer of Testing a sample of repairs and maintenance...

Question 5

If the ratio of repairs and maintenance expense to property, plant, and equipment is higher than expected, which of the following is a plausible explanation?

Accepted Answer

Charging an addition to a building to repairs and maintenance expense, instead of capitalizing it as part of the property, plant, and equipment, would inappropriately inflate the repairs and maintenance expense, leading to a higher than expected ratio.

Question 6

Auditors will examine the insurance register primarily to

Accepted Answer

Auditors primarily examine the insurance register to verify that prepaid insurance is properly stated through checking the policy expiration dates. This is done to ensure that insurance expenses are recognized in the correct period, in accordance with the matching principle of accounting. While auditors may also consider whether the dollar coverage amounts are adequate, whether insurance agents are related parties, or whether all assets are insured, these are not the primary concerns when examining the insurance register.

Question 7

The controller of Excello Manufacturing, Inc., wants to use ratio analysis to identify the possible existence of idle equipment or the possibility that equipment has been disposed of without having been written off. Which of the following ratios would best accomplish this objective?

Accepted Answer

The answer of The controller of Excello Manufacturing, Inc., wants...

Question 8

Determining that proper amounts of depreciation are expensed provides assurance about management's assertions of presentation and disclosure and

Accepted Answer

Proper amounts of depreciation are necessary for the proper valuation and allocation of assets, which aligns with management's assertions of presentation and disclosure. However, depreciation does not have a direct impact on the completeness, rights and obligations or existence of assets.

Question 9

An auditor analyzes repairs and maintenance accounts primarily to obtain evidence in support of the audit assertion that all

Accepted Answer

The auditor analyzes repairs and maintenance accounts to ensure that expenditures for property and equipment are not incorrectly charged to expenses, which would understate assets and overstate expenses.

Question 10

Which of the following explanations most likely would satisfy an auditor who questions management about significant debits to the accumulated depreciation accounts?

Accepted Answer

The answer of Which of the following explanations most likely...

Question 11

In an interview with the plant manager regarding operations, the auditor is most likely to obtain evidence that raises concerns regarding

Accepted Answer

The plant manager is likely to have insights into the operational status of equipment, including any that may have become obsolete, which would raise concerns about the need for write-offs.

Question 12

Testing a sample of repairs and maintenance expense items to ensure that they were properly classified as repairs as opposed to property, plant, and equipment tests which of the following assertions for the repairs and maintenance expense account?

Accepted Answer

Testing the classification of repairs and maintenance expense items relates to the occurrence assertion, as the audit is verifying that the transactions actually occurred and were properly recorded in the correct account. The completeness assertion relates to ensuring that all repairs and maintenance expenses are recorded, which is not the focus of this specific audit test. The cutoff assertion relates to the timely and accurate recording of transactions at the appropriate fiscal period end, which is also not the focus of this specific audit test. The authorization assertion relates to ensuring that only authorized individuals are able to initiate and approve transactions, which is not the focus of this specific audit test.

Question 13

Which of the following audit procedures would be least likely to lead the auditor to find unrecorded fixed asset disposals?

Accepted Answer

Review of repairs and maintenance expense is least likely to lead the auditor to find unrecorded fixed asset disposals as it only focuses on the expenses incurred for the maintenance of fixed assets and not on their disposals. On the other hand, the examination of insurance policies for evidence of a dropped or cancelled policy, review of property tax files and scanning of invoices for fixed asset additions can all provide clues about fixed asset disposals.

Question 14

Which of the following is the best evidence of real estate ownership at the balance sheet date?

Accepted Answer

Paid real estate tax bills serve as the best evidence of real estate ownership at the balance sheet date as they indicate that the entity is responsible for paying taxes on the property and is therefore the rightful owner. Title insurance policies, duplicate deeds, and closing statements may provide evidence of ownership but do not necessarily prove ownership at the balance sheet date.

Question 15

In testing for unrecorded retirements of equipment, an auditor most likely would

Accepted Answer

The auditor would select items from the accounting records and then locate them during the plant tour to verify that the equipment still exists and has not been retired without being recorded.

Question 16

In testing plant and equipment balances, an auditor may inspect new additions listed on the analysis of plant and equipment. This procedure is designed to obtain evidence concerning management's assertion(s) about

Accepted Answer

Inspecting new additions listed on the analysis of plant and equipment helps the auditor obtain evidence about the existence or occurrence of the assets, i.e., whether they actually exist and whether they belong to the entity as of the balance sheet date. It does not provide evidence about presentation and disclosure, as this is related to how the assets are classified, described, and disclosed in the financial statements. Therefore, the answer is B.

Question 17

Due to a weakness observed in internal control over recording retirements of equipment, the auditor may decide to

Accepted Answer

The auditor would select certain items of equipment from the accounting records and locate them in the plant to verify that the equipment recorded is actually present and in use, addressing the weakness in recording retirements.

Question 18

If the ratio of insurance expense to related property, plant, and equipment is higher than expected, which of the following is a plausible explanation?

Accepted Answer

Including expenses for product liability insurance in the PP&E insurance expense account would increase the ratio of insurance expense to related PP&E.

Question 19

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

Accepted Answer

Using a budget to forecast and control acquisitions and retirements is the most important control activity over acquisitions of property, plant, and equipment. This ensures that purchases are planned and authorized and that there are no unexpected expenditures. A written company policy distinguishing between capital and revenue expenditures is important, but it is not as impactful as having a budget in place. Analyzing monthly variances between authorized expenditures and actual costs is a useful tool but this looks at past performance, rather than controlling future acquisitions. Requiring acquisitions to be made by user departments is also important but is not as critical as having a budget in place to forecast and control acquisitions.

Question 20

By selecting a sample of additions to property, plant, and equipment and then examining the related vendor invoices, the auditor is testing which of the following assertions for property, plant, and equipment?

Accepted Answer

By selecting a sample of additions to property, plant, and equipment and then examining the related vendor invoices, the auditor is testing the occurrence assertion for property, plant, and equipment. This is because the auditor is verifying whether the additions actually occurred and are recorded in the financial statements. By examining the vendor invoices, the auditor can confirm that the recorded additions actually occurred and that there was no misstatement or fraud involved in the process.

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