When auditing prepaid insurance, an auditor discovers that the original insurance policy on plant equipment is not available for inspection. The policy's absence most likely indicates the possibility of a (an):

Question

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Choice "C" is correct. If an auditor discovers that the original insurance policy on plant equipment is not available for inspection, this most likely indicates that there is a lien on the plant equipment, since the original policy would likely be in the possession of the lien holder. Choices "A", "B", and "D" are incorrect. The absence of the original policy does not necessarily indicate that there is an insurance premium due but not recorded, that there is a deficiency in the coinsurance provision, or that insurance expense is understated, since the policy must be reviewed before any of these conclusions can be drawn.

When Auditing Prepaid Insurance, an Auditor Discovers That the Original