Question 1

In verifying accumulated depreciation, the credits to accumulated depreciation are verified as part of the audit of depreciation expense, whereas the debits are normally tested as a part of the audit of:

Accepted Answer

The debits to accumulated depreciation are normally tested as a part of the audit of disposal of assets since the disposal of an asset triggers a reduction in the accumulated depreciation related to that asset. Therefore, it is essential to verify whether the accumulated depreciation recorded for the disposed asset was correctly reduced and whether any gain or loss on disposal was appropriately recognized. Testing the debits to accumulated depreciation as a part of the audit of disposal of assets also ensures that the company is not overstating the carrying value of its assets on the balance sheet.

Question 2

A major consideration in verifying the ending balance in permanent assets is the possibility of existing legal encumbrances.Tests to identify possible legal encumbrances would satisfy which audit objective?

Accepted Answer

The audit objective of disclosure involves ensuring that all significant information is disclosed in the financial statements, including any legal or contractual obligations that may affect the company's permanent assets. Therefore, tests to identify possible legal encumbrances would satisfy the disclosure audit objective.

Question 3

The starting point for the verification of current year acquisitions of property, plant, and equipment is normally:

Accepted Answer

The schedule obtained from the client of all acquisitions recorded in the general ledger during the year is the best starting point for verifying current year acquisitions of property, plant, and equipment. This schedule will provide a comprehensive list of all assets acquired during the year and can be used to trace to supporting documentation such as purchase orders, invoices, and receipts. The other options (acquisitions journal, purchase requisitions file, and property, plant, and equipment account in the general ledger) may also provide useful information, but the schedule of acquisitions is the most reliable and complete source of information.

Question 4

The most important objective for depreciation is accuracy.One aspect of this objective is the consistency of depreciation policy.The four considerations in determining this do NOT include:

Accepted Answer

The most important considerations in determining the consistency of depreciation policy include the method of depreciation, the policy of depreciating assets in the year of acquisition and disposition, and the estimated residual value. What accounting standards must be used is not a consideration for the consistency of depreciation policy itself but rather a framework within which the policy is developed and applied.

Question 5

The two most important audit procedures for prepayments are:

Accepted Answer

The two most important audit procedures for prepayments are tests for reasonableness or plausible relationships using analytical procedures and recalculation. This is because prepayments involve determining whether expenses have been paid in advance and are therefore recorded as assets, and whether the amounts recorded are reasonable and accurate. Analytical procedures help auditors identify any unusual or unexpected patterns or trends in the data, while recalculation involves verifying the arithmetic accuracy of the amounts recorded. Tests of controls and tests of details of balances are also important audit procedures, but they are not specifically tailored to the unique characteristics of prepayments.

Question 6

Which one of the following ratio and trend analysis procedures might identify a possible misstatement of expensing amounts that should be capital items?

Accepted Answer

Option B compares expenses like repairs and maintenance, supplies expense with previous years, which can identify a possible misstatement of expensing amounts that should be capital items. These expenses should decrease or remain constant with time, but if they increase, it may indicate that some capital items are being expensed. The other options are not suitable for identifying possible misstatements in expensing amounts that should be capital items.

Question 7

The failure to capitalise a permanent asset, or the recording of an asset acquisition at the improper amount, affects the balance sheet:

Accepted Answer

The failure to capitalize a permanent asset or recording it at an improper amount affects the balance sheet until the firm disposes of the asset. This is because the incorrect asset value will continue to impact the balance sheet's accuracy until the asset is no longer part of the company's accounts.

Question 8

The test of details of balances procedure to 'foot the acquisitions schedule' is done to satisfy which audit objective?

Accepted Answer

The test of details of balances procedure to 'foot the acquisitions schedule' is done to satisfy the audit objective of detail tie-in. This objective ensures that the amounts reflected in the client's accounting records are consistent with the underlying source documents, such as the acquisitions schedule. By "footing" the schedule, the auditor is verifying that the total amount on the schedule agrees with the balance in the client's general ledger.

Question 9

The auditor must know the client's capitalisation policies to determine whether acquisitions are treated:

Accepted Answer

Knowing the client's capitalization policies is important for the auditor to determine whether acquisitions are treated in accordance with accounting standards, as well as consistently with those of the preceding year. Therefore, both options A and B are correct. Option D can be eliminated as it is not correct.

Question 10

Which one of the following is NOT a characteristic of the capital acquisition and repayment cycle?

Accepted Answer

The capital acquisition and repayment cycle typically involves transactions that are highly material in amount, and the exclusion of even a few transactions can be material due to their size and impact on the financial statements. This makes choice B incorrect as it suggests the opposite.

Question 11

If the client fails to record disposals of property, plant, and equipment, both the original cost of the asset account and the net book value will be incorrect.

Accepted Answer

If a client fails to record disposals of property, plant, and equipment, the original cost of the asset will remain on the books, leading to an overstatement. The net book value will also be overstated until the asset is fully depreciated, after which it would correctly drop to zero if no disposal is recorded.

Question 12

The periodic payments of interest and principal are normally tested as a part of the:

Accepted Answer

The answer of The periodic payments of interest and principal...

Question 13

Depreciation expense is one of the few expense accounts that is NOT verified as a part of:

Accepted Answer

Depreciation expense is typically verified through analytical procedures rather than substantive tests of transactions or tests of controls, as it involves estimates and judgment rather than direct transactions or control processes.

Question 14

The auditor's starting point for verifying disposals of property, plant, and equipment is the:

Accepted Answer

The client's schedule of recorded disposals is the starting point for verifying disposals of property, plant, and equipment because it should list all disposals during the year, including the date, description of the item, sale price, and any gain or loss on the disposal. The auditor can then trace this information to supporting documentation, such as sales invoice or purchase agreement, to ensure the disposals were correctly recorded and accounted for. The other options may be used in conjunction with the schedule of recorded disposals but are not the primary starting point.

Question 15

One typical difference between the asset prepaid expenses and other assets, such as accounts receivable and inventory, is the immateriality of the former in many audits.Because of this immateriality, frequently the only audit procedure necessary to perform is:

Accepted Answer

Since prepaid expenses are typically immaterial assets, the only audit procedure necessary to perform is usually analytical procedures. This involves analyzing trends and relationships in financial data to identify possible anomalies or errors. Tests of transactions, tests of control, and tests of details of balances are likely to be unnecessary or insufficient in detecting material misstatements for prepaid expenses in many audits.

Question 16

In deciding on the reasonableness of the useful lives assigned to newly acquired assets, the auditor must consider which of the following factors?

Accepted Answer

The auditor must consider all the listed factors: the expected life of the asset, policies on trading in equipment, and the actual physical life of the asset, to decide on the reasonableness of the useful lives assigned to newly acquired assets. These factors help in assessing how long the asset is expected to be used in the business and its potential resale or trade-in value, which are critical for accurate depreciation calculations and financial reporting.

Question 17

The tests of details of balances procedure which requires the auditor to review transactions near the balance sheet date for the proper period satisfies which audit objective?

Accepted Answer

The "tests of details of balances procedure" performed by the auditor is used to address the cutoff objective. This is because it involves reviewing transactions near the balance sheet date to ensure they are recorded in the correct period, which is problematic if they are recorded in the wrong period. Thus, by performing this procedure, the auditor can ensure that transactions are posted in the correct period, which satisfies the cutoff objective. None of the other audit objectives are directly related to reviewing transactions near the balance sheet date.

Question 18

The failure to capitalise a permanent asset, or the recording of an asset acquisition at the improper amount, affects the income statement:

Accepted Answer

The incorrect capitalization or improper valuation of an asset affects the income statement for the depreciable life of the asset due to the impact on depreciation expense.

Question 19

Estimated unpaid obligations for services or benefits that have been received prior to the balance sheet date are classified as:

Accepted Answer

Accrued liabilities are obligations that have been incurred but not yet paid, such as wages or interest. Therefore, estimated unpaid obligations for services or benefits that have been received prior to the balance sheet date should be classified as accrued liabilities. Accounts payable are obligations for goods or services that have been ordered but not yet received, while miscellaneous assets and deferred charges are unrelated to accrued liabilities.

Question 20

The most important objective for depreciation expense is:

Accepted Answer

The most important objective for depreciation expense is accuracy, as it is essential to ensure that the recorded depreciation expense is an accurate representation of the decrease in value of the asset over its useful life. This is important for financial reporting and decision-making purposes. While classification, cutoff, and disclosure are also important considerations in accounting, they are not the primary objective for depreciation expense.

Quiz 16: Audit of transaction cycles and financial statement balances II