Question 1

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

Accepted Answer

False

Question 2

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

Accepted Answer

Long-lived assets, such as property, plant, and equipment, can often make up a significant portion of an organization's total assets.

Question 3

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

Accepted Answer

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.

Accepted Answer

The answer of The auditor would be most likely to...

Question 5

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

Accepted Answer

The auditor's procedures should include a determination of the reasonableness of the estimated useful lives of tangible assets to ensure that they are not being depreciated too slowly or too quickly.

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.

Accepted Answer

The auditor should first assess the risk of material misstatement and design appropriate substantive procedures, which may include testing the existence of additions, but it does not have to be immediate.

Question 7

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

Accepted Answer

Long-lived assets can include both tangible assets (such as property, equipment, and vehicles) and intangible assets (such as patents, trademarks, and copyrights).

Question 8

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

Accepted Answer

The client should have methods in place to identify and account for intangible-asset impairments, as per accounting standards.

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.

Accepted Answer

The answer of An auditor is required to gain an...

Question 10

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

Accepted Answer

Long-lived assets often have a significant lifespan, which means that their valuation requires management to make estimates about future cash flows, useful life, and other factors that can impact the asset's value. Therefore, the risk associated with long-lived assets is largely influenced by the accuracy and reliability of management estimates.

Question 11

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

Accepted Answer

Internal controls over fixed assets should include procedures for authorization of purchases and verification of the value of assets acquired. This helps to prevent unauthorized purchases and ensures that assets are being recorded at their proper value on the company's balance sheet.

Question 12

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

Accepted Answer

The auditor should physically inspect material asset additions irrespective of their location to ensure their existence, completeness, and accuracy. This helps in preventing the risk of overstatement or understatement of assets in the financial statements.

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.

Accepted Answer

The auditor would review the depreciation policy and test depreciation calculations to ensure that the long-lived assets are accurately valued on the financial statements.

Question 14

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

Accepted Answer

Gains on the sale of equipment could be due to various reasons such as appreciation in value, sale of unused or outdated assets, etc. It is not necessarily an indication of depreciation lives being 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.

Accepted Answer

This is correct. When the value of a long-lived asset has been impaired, the organization must write down the asset to reflect the decline in economic benefit. This is known as an impairment loss and is recognized on the organization's financial statements.

Question 16

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

Accepted Answer

Unreasonable or unsupportable fair value estimates may suggest that management is manipulating financial statements or engaging in fraudulent activities. Adequate justification and documentation should support fair value estimates.

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.

Accepted Answer

When an organization disposes of a long-lived asset, it should determine and record the gain or loss on the disposal of the asset. This is done to accurately reflect the financial impact of the disposal on the organization. The gain or loss is calculated by comparing the proceeds from the disposal of the asset to the asset's carrying value (i.e. its cost less accumulated depreciation). If the proceeds from the disposal are greater than the carrying value, there is a gain on the disposal. If the proceeds are less than the carrying value, there is a loss on the disposal.

Question 18

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

Accepted Answer

Management may not be interested in writing down the asset value because it can lead to a reduction in reported profits or shareholder value. However, failing to recognize and write down an impaired asset can result in overstatement of the true value of the asset and misrepresentation of the financial position of the company.

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.

Accepted Answer

Knowledge of industry product trends is important in assessing the potential for impairment of assets as changes in the industry can impact the value of the assets being tested for impairment. Therefore, it is important for auditors to consider both accounting rules and industry trends when identifying potential impairment.

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.

Accepted Answer

By touring the facility during operations, the auditor can observe if any of the equipment is not being used or idle, which can affect the depreciation calculations and possible impairment of the assets.

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