Question 1

Which of the following is a term used to describe management's recognition that a significant portion of long-lived assets is no longer as productive as originally expected?
A)Asset depreciation.
B)Asset amortization.
C)Asset impairment.
D)Asset disposal.

Accepted Answer

Asset impairment is the term used to describe management's recognition that a significant portion of long-lived assets is no longer as productive as originally expected. Asset depreciation refers to the systematic allocation of the historical cost of tangible assets over their useful lives. Asset amortization refers to the systematic allocation of the historical cost of intangible assets over their useful lives. Asset disposal refers to the sale or disposal of a long-lived asset before its useful life has ended.

Question 2

Which of the following is not a technique that auditors can use when performing planning analytical procedures related to long-lived assets?
A)Perform an overall estimate of depreciation expense.
B)Review and analyze gains/losses on disposals of equipment.
C)Compare depreciable lives used by the client for various asset categories with those of the industry.
D)All the above are techniques that auditors can use.

Accepted Answer

All of the techniques listed (performing an overall estimate of depreciation expense, reviewing and analyzing gains/losses on disposals of equipment, and comparing depreciable lives used by the client for various asset categories with those of the industry) are appropriate for auditors to use when performing planning analytical procedures related to long-lived assets.

Question 3

Which one of the following does not constitute a probable relationship between accounts?
A)Equipment and depreciation.
B)Patent and amortization.
C)Assets under capital leases and amortization.
D)Oil reserves and depreciation.

Accepted Answer

Oil reserves are not subject to depreciation since these assets do not wear out and can be replenished naturally or through exploration and development. Instead, oil reserves are subject to depletion accounting to reflect the reduction in the amount of recoverable oil over time.

Question 4

When performing planning analytical procedures related to long-lived assets,which of the following should the auditor compare the unaudited financial statements with?
A)Past results.
B)Industry trends.
C)Future company projections.
D)Both A and B.

Accepted Answer

When performing planning analytical procedures related to long-lived assets, the auditor should compare the unaudited financial statements with past results and industry trends. By comparing past performance, the auditor can identify any significant changes or anomalies in the company's financial position. Industry trends can provide a benchmark for comparison and help identify any potential issues or areas for concern. Comparing future company projections is not appropriate as these are unaudited and cannot be verified by the auditor. Therefore, the best choice is D, both A and B.

Question 5

Which of the following information should be included in management's documentation regarding intangible assets?
A)Manner of acquisition.
B)Basis for the capitalized amount
C)Expected period of benefit.
D)All the above should be included.

Accepted Answer

All of the listed information should be included in management's documentation regarding intangible assets. The manner of acquisition provides information on how the asset was obtained, the basis for the capitalized amount outlines the cost that was incurred in obtaining the asset, and the expected period of benefit sets the time frame for when the benefits of the asset will be realized. Including all of this information in the documentation will ensure that the company has a clear record of the intangible assets, which may be useful for financial reporting and decision-making purposes.

Question 6

An auditor's review of the repair expense to identify any capital expenditures is a test related to which management assertion?
A)Existence.
B)Completion.
C)Valuation.
D)Rights and obligations.

Accepted Answer

The answer of An auditor's review of the repair expense...

Question 7

Which of the following controls is not a typical control that affects multiple assertions for long-lived assets?
A)Reviewing insurance policies for adequate replacement coverage of assets.
B)Formal budgeting process with appropriate follow-up variance analysis.
C)Periodic comparison of physical assets to subsidiary records with the general ledger.
D)Periodic reconciliations of subsidiary records with the general ledger.

Accepted Answer

Reviewing insurance policies for adequate replacement coverage of assets is not a typical control that affects multiple assertions for long-lived assets. It is a control related to the insurance coverage of assets and does not address the completeness, existence, or valuation assertions for long-lived assets. The other three controls (B, C, and D) are typical controls that affect multiple assertions for long-lived assets.

Question 8

If the auditor is testing the reasonableness of depreciation expense for the year,which assertion is being tested?
A)Completeness.
B)Rights and obligations.
C)Existence.
D)Valuation.

Accepted Answer

The assertion being tested when the auditor is evaluating the reasonableness of depreciation expense is Valuation, which ensures that assets and related expenses are appropriately recorded at their estimated values.

Question 9

Which of the following long-lived assets presents the most difficulty in determining its cost?
A)Equipment.
B)Inventory.
C)Patent.
D)All the above are equally difficult in determining cost.

Accepted Answer

Unlike equipment and inventory, the cost of a patent includes research and development expenses, legal fees, registration fees, and other associated costs that are not easily identifiable. Therefore, determining the cost of a patent can be more challenging.

Question 10

Which statement is true?
A)Management is always reluctant to write down asset values.
B)Intangible assets do not require effective controls because they have low inherent risk.
C)Complex ownership structures may create challenges in the recording of assets.
D)The incomplete recording of asset disposals understates the asset balance.

Accepted Answer

Complex ownership structures can create challenges in identifying and recording assets, especially if ownership is unclear or disputed between multiple parties.

Answer: D 
 Incomplete recording of asset disposals leads to the overstatement of asset balances, as disposed assets are still included in the balance sheet.

Question 11

Which of the following actions is not a potential fraud scheme related to long-lived assets?
A)Impairment losses on long-lived assets are not recognized.
B)Costs that should have been expenses are improperly capitalized.
C)Amortization of intangible assets is miscalculated.
D)All the above are potential fraud schemes.

Accepted Answer

All of the listed actions are potential fraud schemes related to long-lived assets. Impairment losses on long-lived assets should be recognized, costs that should have been expenses should not be capitalized, and accurate amortization of intangible assets is important for proper financial reporting. Any manipulation or misrepresentation of these items can lead to fraudulent reporting.

Question 12

Which of the following controls related to management's asset impairment judgments does the auditor need to understand?
A)A systematic process to identify assets that are not currently in use.
B)Projections of future cash flows that is based on management's strategic plans and economic conditions.
C)Systematic development of current market values of similar assets prepared by the client.
D)All of the above.

Accepted Answer

Understanding controls related to management's asset impairment judgments involves knowing how assets not in use are identified, how future cash flows are projected based on strategic plans and economic conditions, and how current market values of similar assets are systematically developed by the client. These processes help ensure that asset impairments are identified and measured accurately.

Question 13

Which is the primary assertion tested in conjunction with obtaining evidence regarding impairment?
A)Valuation.
B)Cutoff.
C)Existence.
D)Rights.

Accepted Answer

The primary assertion tested when obtaining evidence regarding impairment is Valuation. This involves assessing whether assets are recorded at appropriate values and if any impairments to those values have been accurately accounted for in the financial statements.

Question 14

Which of the following is not a circumstance indicating potential impairment of intangible assets?
A)A change in circumstances,such as the legal environment or business climate,that could affect the asset's value.
B)An accumulation of costs that are significantly in excess of the amount originally expected to be needed to acquire or construct the asset.
C)The asset generates just as much cash flow as in the past.
D)Losses or projections indicating continuing losses associated with an asset used to generate revenue.

Accepted Answer

If an intangible asset is generating just as much cash flow as in the past, it indicates that the asset is still contributing to the company's revenue and is not impaired. The other options indicate circumstances that may indicate potential impairment of intangible assets.

Question 15

The auditor selects a sample of asset disposals and examines the sales documentation evidencing disposal of the equipment and recomputes gain or loss on the disposal.This audit procedure primarily tests which of the following assertions for the equipment account?
A)Existence.
B)Presentation and disclosure.
C)Rights.
D)Valuation.

Accepted Answer

This audit procedure primarily tests the valuation assertion for the equipment account by recomputing gain or loss on disposal. This ensures that the equipment was recorded at its correct value at the time of disposal.

Question 16

For intangible assets,controls should be designed to do which of the following?
A)Identify and account for intangible asset impairments.
B)Develop amortization schedules that reflect the remaining useful life of patents or copyrights associated with the asset.
C)Provide reasonable assurance that decisions are appropriately made as to when to capitalize or expense research and development expenditures.
D)All of the above.

Accepted Answer

Controls should be designed to identify and account for intangible asset impairments, develop amortization schedules that reflect the remaining useful life of patents or copyrights associated with the asset, and provide reasonable assurance that decisions are appropriately made as to when to capitalize or expense research and development expenditures. Therefore, option D, "All of the above," is the best choice.

Question 17

In a tour of a client's manufacturing facility,the auditor is most likely attempting to satisfy which of the following management assertions related to long-lived assets?
A)Completeness.
B)Existence.
C)Rights.
D)Presentation and disclosure.

Accepted Answer

The auditor is most likely attempting to satisfy the existence assertion related to long-lived assets by observing the physical presence of assets in the manufacturing facility. Completeness and rights assertions are related to ownership and the inclusion of all relevant assets and liabilities in the financial statements, which are typically verified through other procedures. Presentation and disclosure assertion is related to the accurate and adequate disclosure of information in the financial statements, which is also typically verified through other procedures.

Question 18

Audit procedures should be proportional to which of the following?
A)Size of the client.
B)Size of the firm.
C)The assessed risks.
D)The assessed misstatements.

Accepted Answer

Audit procedures should be proportional to the assessed risks. This means that the auditor should allocate more resources and perform more extensive procedures in areas where there are higher risks of material misstatement. The size of the client and firm may be factors to consider when assessing risks, but they are not the only ones. Similarly, the assessed misstatements are a result of the audit procedures, not a determinant of them.

Question 19

Which of the following expense accounts is associated with intangible assets with a definite life?
A)Depletion expense.
B)Depreciation expense.
C)Amortization expense.
D)None of the above.

Accepted Answer

Amortization expense is associated with intangible assets with a definite life, such as patents, trademarks, and copyrights. Depletion expense is associated with natural resources, and depreciation expense is associated with tangible assets.

Question 20

Which of the following expense accounts is associated with natural resources?
A)Depreciation expense.
B)Amortization expense.
C)Depletion expense.
D)Capitalization expense.

Accepted Answer

Depletion expense is specifically associated with the allocation of the cost of natural resources over their useful life.

Quiz 12: Auditing Long-Lived Assets: Acquisition, Use, Impairment, and Disposal

Which of the following is a term used to describe management's recognition that a significant portion of long-lived assets is no longer as productive as originally expected?

Which of the following is not a technique that auditors can use when performing planning analytical procedures related to long-lived assets?

Which one of the following does not constitute a probable relationship between accounts?

When performing planning analytical procedures related to long-lived assets,which of the following should the auditor compare the unaudited financial statements with?

Which of the following information should be included in management's documentation regarding intangible assets?

An auditor's review of the repair expense to identify any capital expenditures is a test related to which management assertion?

Which of the following controls is not a typical control that affects multiple assertions for long-lived assets?

If the auditor is testing the reasonableness of depreciation expense for the year,which assertion is being tested?

Which of the following long-lived assets presents the most difficulty in determining its cost?

Which statement is true?

Which of the following actions is not a potential fraud scheme related to long-lived assets?

Which of the following controls related to management's asset impairment judgments does the auditor need to understand?

Which is the primary assertion tested in conjunction with obtaining evidence regarding impairment?

Which of the following is not a circumstance indicating potential impairment of intangible assets?

The auditor selects a sample of asset disposals and examines the sales documentation evidencing disposal of the equipment and recomputes gain or loss on the disposal.This audit procedure primarily tests which of the following assertions for the equipment account?

For intangible assets,controls should be designed to do which of the following?

In a tour of a client's manufacturing facility,the auditor is most likely attempting to satisfy which of the following management assertions related to long-lived assets?

Audit procedures should be proportional to which of the following?

Which of the following expense accounts is associated with intangible assets with a definite life?

Which of the following expense accounts is associated with natural resources?