Deck 12: Auditing Long-Lived Assets: Acquisition, use, impairment, and Disposal

Question 1

A common technique used to fraudulently misstate financial statements involves the understatement of long-lived assets through undervaluing existing long-lived assets.

Answer 1

False

Question 2

Long-lived assets typically represent the smallest single category of assets in many organizations.

Answer 2

False

Question 3

Asset impairment is not typically assessed by the independent auditor since it is a subjective management estimate.

Answer 3

False

Question 4

The auditor would be most likely to request a schedule of repairs and maintenance expense to satisfy the auditor about the existence of long-lived assets.

Question 5

The auditor's procedures should include a determination as to whether tangible assets have reasonable useful lives.

Question 6

Once the auditor obtains a fixed asset additions schedule from the client,testing of the existence of the additions must immediately ensue to ensure effectiveness of the substantive procedures.

Question 7

Long-lived assets only include the tangible assets of an organization.

Question 8

The client should have methods in place to identify and account for intangible-asset impairments.

Question 9

An auditor is required to gain an overall understanding of internal controls related to long-lived assets for integrated audits,but NOT for financial statement only audits.

Question 10

Much of the inherent risk related to long-lived assets is due to the importance of management estimates.

Question 11

Internal controls over fixed assets should provide reasonable assurance that all purchases are authorized and reasonably valued.

Question 12

The auditor should be aware of material asset additions that are in remote locations and physically inspect such assets.

Question 13

The auditor would be most likely review the depreciation policy and test depreciation calculations to satisfy the auditor about the valuation of long-lived assets.

Question 14

Gains on the sale of equipment usually indicate that the depreciation lives of the assets are too long.

Question 15

When the value of a long-lived asset has been impaired,the organization must write down the asset reflecting the decline in economic benefit of the asset.

Question 16

The existence of fair value estimates that are unreasonable or unsupportable is indicative of a potential fraud scheme.

Question 17

When an organization disposes of a long-lived asset it should determine and record the gain or loss on the disposal of the asset.

Question 18

An inherent risk related to asset impairment is management is not typically interested in writing down the asset value.

Question 19

Knowledge of industry product trends is not crucial to the auditor's identification of the potential for impairment of assets as the auditor must focus attention on the accounting rules.

Question 20

In the audit of the depreciation methods and possible impairment of manufacturing equipment,the auditor can tour the facility during operations to determine if any of the machines are idle.

Question 21

Most natural resource companies use geologists to establish an estimate of the reserves contained in a new discovery.

Question 22

Changes in the depreciable lives of equipment may be identified through a substantive audit procedure that includes analyzing depreciation expense as a percent of assets.

Question 23

If unusual or unexpected relationships related to long-lived assets are identified during preliminary analytical procedures,the planned audit procedures (tests of controls,substantive procedures)would be adjusted to address the risk of material misstatement.

Question 24

Auditors will perform an analysis of leases using FASB's Codified Standards (ASC)criteria to substantiate the accounting treatment.

Question 25

Brown,Inc.obtained a patent for its product five years ago and should expense the entire amount of the unamortized balance if the product is no longer sold.

Question 26

If preliminary analytical procedures identify some unexpected relationships,the auditor would conclude that there is not a heightened risk of material misstatements.

Question 27

Reclamation costs are an inherent risk associated with natural resources.

Question 28

The obsolescence of long-lived assets is an inherent risk that should be considered by the auditor.

Question 29

An inherent risk associated with intangible assets such as a patent is the accounting for research and development costs

Question 30

When planning the audit procedures related to long-lived assets,the auditor is required to perform preliminary analytical procedures.

Question 31

Auditors often recalculate the present value of capital lease agreements to assess whether the relevant criteria for capitalizing the lease have been met.

Question 32

Limited physical access to long-lived assets is a typical internal control that affects multiple assertions for long-lived assets.

Question 33

If a company has only a few long-lived assets of relatively high value,the most efficient approach for an auditor would be to use tests of details for obtaining evidence.

Question 34

It is simple for auditors to test the costs capitalized for discovery of natural resources because only successful efforts may be recorded

Question 35

Auditors do NOT need to know the business and economics of the business in order to perform meaningful preliminary analytical procedures.

Question 36

Natural resource companies cannot reassess the amount of reserves even if more information becomes available during the course of mining,harvesting,or extracting resources.

Question 37

It is not important for an organization to have controls to track the location,quantity,condition,maintenance,and deprecation status of their long-lived assets as the external auditor gathers evidence related to these issues.

Question 38

Audit firms should NOT customize the audit programs based on the assessment of the risk of material misstatement when auditing long-lived assets.

Question 39

Effective internal controls over long-lived assets include the use of identification tags secured to assets for proper tracking.

Question 40

An auditor should compare the unaudited financial statements with both past results and industry trends to gain an indication about the possibility of fraud.

Question 41

Which one of the following approaches does not represent how the auditor will become aware of risks associated with long-lived assets?

A)Obtaining knowledge of the client business.
B)Reviewing the business plan related to major acquisitions.
C)Reviewing the minutes of board of directors' meetings.
D)All represent how the auditor will become aware of risks associated with long-lived assets and related expenses.

Question 42

Which one of the following is not a management assertion relevant to long-lived assets?

A)Existence.
B)Completeness.
C)Valuation.
D)Reporting.

Question 43

For integrated audits,the auditor will test the operating effectiveness of important controls as of the client's year end.

Question 44

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.

Question 45

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

A)Unlimited physical access to 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.

Question 46

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

A)Equipment.
B)Inventory.
C)Patent.
D)All the above are equally difficult in determining cost.

Question 47

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.

Question 48

The tour of the manufacturing plant may best assist the auditor in determining which of the following?

A)Whether all purchases are authorized.
B)Whether any machinery is inoperative in the production cycle.
C)Management's strategy for assessing impairment.
D)Estimates of depreciation expense.

Question 49

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

A)Depreciation expense.
B)Amortization expense.
C)Depletion expense.
D)Capitalization expense.

Question 50

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.

Question 51

Which one of the following factors is not an inherent risk associated with long-lived assets?

A)Obsolescence of assets.
B)Impairment of assets.
C)Incomplete recording of disposals.
D)Lack of physical controls over the long-lived assets.

Question 52

The auditor selects entity-wide controls for testing,but NOT transaction controls specific to long-lived assets.

Question 53

Assume that the audit team notes the client has made a significant change in its product line which requires that new equipment be purchased.Which of the following would be of greatest concern to the auditor?

A)Inappropriate book value of new equipment.
B)Impaired value of new equipment.
C)Impaired value of old equipment.
D)Inappropriate depreciation calculation for new equipment.

Question 54

An inherent risk related to long-lived assets is the incomplete recording of disposals.

Question 55

Which of the following techniques is one of the most common techniques used to fraudulently misstate financial statements for public companies?

A)Overstatement of assets through undervaluing existing assets.
B)Overstatement of assets through overvaluing existing assets.
C)Understatement of assets through undervaluing existing assets.
D)Understatement of assets through overvaluing existing assets.

Question 56

Which of the following statement is true?

A)Intangible assets should be recorded at fair market value.
B)Intangible assets should be recorded at cost.
C)Intangible assets should be recorded at future market value.
D)Intangible assets should not be recorded.

Question 57

Which of the following factors is not an inherent risk factor related to asset impairment?

A)Management is normally not interested in identifying and writing down assets.
B)Sometimes management wants to write down every potentially impaired asset to a minimum realizable value.
C)Determining asset impairment requires a good information system,a systematic process,goods controls,and professional judgment.
D)All of the above are inherent risk factors.

Question 58

The risk of material misstatement related to the existence of long-lived assets at Client A is considered low,while this risk at Client B is considered high.Sufficiency of evidence for testing the existence of equipment would be higher for client
B.

Question 59

If control deficiencies related to long-lived assets are identified,the auditor will automatically assess those deficiencies as significant deficiencies.

Question 60

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.

Question 61

If the auditor is testing whether long-lived assets exist at the balance sheet date,which assertion is being tested?

A)Completeness.
B)Rights and Obligations.
C)Existence.
D)Valuation

Question 62

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

A)Valuation.
B)Cutoff.
C)Existence.
D)Rights.

Question 63

If the auditor is testing long-lived asset account balances to see if they include all relevant transactions that have taken place during the period,what is the primary assertion being tested?

A)Presentation and Disclosure.
B)Existence.
C)Completeness.
D)Valuation.

Question 64

When performing preliminary 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.

Question 65

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.

Question 66

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 steps primarily tests which of the following assertions for the equipment account?

A)Existence.
B)Presentation and disclosure.
C)Rights.
D)Valuation.

Question 67

Which of the following assertions are usually the two most relevant assertions related to long-lived assets?

A)Existence and Presentation.
B)Completeness and Existence.
C)Existence and Valuation.
D)Valuation and Completeness.

Question 68

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.

Question 69

Which of the following procedures is not a procedure used by an auditor in searching for unrecorded disposals of long-lived assets?

A)Inquire clients about disposals.
B)Examine cash receipts journal.
C)Observe inventory count.
D)Examine scrap sales accounts.

Question 70

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.

Question 71

A client has implemented a policy requiring the establishment and enforcement of property management training for all personnel involved in the use,stewardship,and management of equipment.Which of the following is not a test that could be used in testing the control?

A)Inquiry.
B)Observation.
C)Inspection of documentation.
D)Review financial statements.

Question 72

Which of the following would not be used as a substantive analytical procedure related to depreciation expense and accumulated depreciation?

A)Current depreciation as a percentage of previous year assets.
B)Fixed assets as a percentage of previous year assets.
C)Depreciation expense as a percentage of assets each year.
D)Average age of assets.

Question 73

Reconciling the physical asset inventory with the property ledger on a periodic basis is a control related to which management assertion?

A)Completeness.
B)Rights and Obligations.
C)Existence.
D)Valuation

Question 74

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

A)Asset depreciation.
B)Asset amortization.
C)Asset impairment.
D)Asset disposal.

Question 75

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.

Question 76

The auditor performs substantive procedures related to property,plant and equipment to determine if the assets have been pledged as collateral or title has transferred.What is the primary assertion the auditor is testing?

A)Valuation.
B)Rights.
C)Presentation and disclosure.
D)Existence.

Question 77

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

A)Equipment and depreciation.
B)Patent and amortization.
C)Assets under capital leases and amortization.
D)Oil reserves and depreciation.

Question 78

Which of the following procedures is a substantive procedure that relates to the rights and obligations assertion?

A)Assess management's impairment estimates.
B)Examine documents of title.
C)Recalculate amortization expense.
D)Inquire management about assets that are idle.

Question 79

Which of the following is not a technique that auditors can use when performing preliminary 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.

Question 80

If the auditor is performing substantive procedure to determine whether the long-lived asset balance is reflected on the balance sheet in the noncurrent section,which of the following assertions is being tested?

A)Existence.
B)Completeness.
C)Presentation and Disclosure.
D)Rights and Obligations.