Question 1

Due to a weakness observed in internal control over recording retirements of equipment, the auditor may decide to:

Accepted Answer

The auditor would select items from the accounting records and locate them in the plant to verify that equipment recorded in the books actually exists and is still in use, addressing the weakness in recording retirements.

Question 2

For each analytical procedure listed below, identify a potential misstatement in the property management accounts it could help find.
a. Compute the ratio of depreciation expense to the related property, plant, and equipment accounts and compare to prior years' ratios.
b. Compare monthly or annual repairs and maintenance with previous years.
c. Compute ratio of insurance expense to the related property, plant, and equipment accounts and compare to prior years' ratios.

Accepted Answer

The answer of For each analytical procedure listed below, identify...

Question 3

Which of the following explanations might satisfy an auditor who discovers significant debits to an accumulated depreciation account?

Accepted Answer

Significant debits to an accumulated depreciation account can be caused by the retirement of fully depreciated assets during the year. This is a normal and expected use of the account.

Question 4

There are a number of important disclosure items to consider when auditing the property management process. List two. Where in the financial statements can some of the disclosures relating to property, plant, and equipment be found?

Accepted Answer

The answer of There are a number of important disclosure...

Question 5

What tests do auditors typically perform on a lead schedule for property, plant, and equipment and what assertion are they testing?

Accepted Answer

The answer of What tests do auditors typically perform on...

Question 6

If the ratio of insurance expense to related property, plant, and equipment is higher than expected, which of the following is a plausible explanation?

Accepted Answer

Including product liability insurance expense as part of PP&E insurance expense would artificially inflate the ratio of insurance expense to related PP&E.

Question 7

Testing a sample of repairs and maintenance items to ensure that they were properly classified as repairs as opposed to property, plant, and equipment tests which of the following assertions for the property, plant, and equipment account?

Accepted Answer

Testing repairs and maintenance items ensures that all expenses that should be capitalized as property, plant, and equipment are not omitted, thus addressing the completeness assertion.

Question 8

Determining that proper amounts of depreciation are expensed provides assurance about management's assertions of presentation and disclosure and:

Accepted Answer

Proper amounts of depreciation are necessary for accurate valuation and allocation of assets. This helps to ensure that management's presentations and disclosures are accurate and complete. Depreciation expense also affects the completeness of financial statements, as it directly impacts the calculation of net income. However, depreciation expense does not provide direct assurance about rights and obligations or the existence of assets.

Question 9

Testing a sample of repairs and maintenance expense items to ensure that they were properly classified as repairs as opposed to property, plant, and equipment tests which of the following assertions?

Accepted Answer

Testing the classification of repairs and maintenance expense items ensures that they are appropriately classified as repairs, which relates to the assertion of classification. The other assertions (completeness, cutoff, and authorization) are not directly relevant to this type of testing.

Question 10

If the ratio of repairs and maintenance expense to property, plant, and equipment is higher than expected, which of the following is a plausible explanation?

Accepted Answer

Charging an addition to a building to repairs and maintenance expense, instead of capitalizing it as part of the property, plant, and equipment, would inappropriately inflate the repairs and maintenance expense, leading to a higher than expected ratio.

Question 11

Auditors can usually gather sufficient, competent evidence on prepaid insurance by performing substantive analytical procedures. Why is this?

Accepted Answer

The answer of Auditors can usually gather sufficient, competent evidence...

Question 12

Describe the types of information that should be included in the insurance register that is used by the auditor for auditing prepaid insurance.

Accepted Answer

The answer of Describe the types of information that should...

Question 13

Which of the following best describes the independent auditor's approach to obtaining satisfaction concerning depreciation expense in the income statement?

Accepted Answer

The independent auditor's approach to obtaining satisfaction concerning depreciation expense in the income statement primarily involves establishing the reasonableness of useful lives and depreciation methods for depreciable assets and recomputing the depreciation expense. This ensures that the financial statements fairly present the company's financial position and results of operations in accordance with generally accepted accounting principles. Verifying mathematical accuracy and reconciling amounts are important considerations, but they are secondary to ensuring the reasonableness of the underlying assumptions and methods used to calculate depreciation expense. Therefore, option D is the best choice.

Question 14

For each of the following tests, state whether it is a test of details of account balances or a test of details of transactions. Then note for which property management assertion the test provides evidence.
1. Test depreciation calculations for a sample of capital assets
2. For assets written off, test amounts charged against income and accumulated depreciation
3. Physically examine the capital asset additions
4. Vouch transactions included in repairs and maintenance for items that should be capitalized
5. Vouch significant additions and dispositions to vendor invoices or other supporting documentation
6. Examine or confirm deeds or title documents for proof of ownership

Accepted Answer

The answer of For each of the following tests, state...

Question 15

List two ways an auditor can test the existence and completeness of insurance policies.

Accepted Answer

The answer of List two ways an auditor can test...

Question 16

Property, plant, and equipment is often a significant portion of a company's assets. Describe the inherent risk factors that can affect the audit of this account.

Accepted Answer

The answer of Property, plant, and equipment is often a...

Question 17

In testing plant and equipment balances, an auditor may inspect new additions listed on the analysis of plant and equipment. This procedure is designed to obtain evidence concerning management's assertion(s)about:

Accepted Answer

Inspecting new additions to plant and equipment primarily provides evidence regarding the existence assertion, as it helps verify that these assets actually exist at the time of the audit.

Question 18

By selecting a sample of additions to property, plant, and equipment and then examining the related vendor invoices, the auditor is testing which of the following assertions for property, plant, and equipment?

Accepted Answer

By examining the vendor invoices, the auditor is testing whether the additions to property, plant, and equipment actually occurred (i.e., the assets were acquired and put to use). This is testing the occurrence assertion.

Question 19

In an interview with the plant manager regarding operations, the auditor is most likely to obtain evidence that raises concerns regarding:

Accepted Answer

During an interview with the plant manager, the auditor is more likely to uncover concerns about the need to write off equipment that has become obsolete. This is because plant managers are directly involved with the day-to-day operations and are more likely to be aware of the current status and usability of the equipment, including which items are no longer useful or have become obsolete.

Question 20

Auditors will examine the insurance register primarily to:

Accepted Answer

Auditors will examine the insurance register primarily to verify that the policy expiration dates are recorded properly and prepaid insurance is accurately stated in financial statements. This is done to ensure that insurance coverage is accurately represented and to avoid any over or under-statements of prepaid expenses. The other options (A, C, and D) may also be considerations in examining an insurance register, but are not the primary objectives.

Quiz 14: Auditing the Financinginvesting Process: Prepaid Expenses, Intangible Assets, and Property, Plant, and Equipment