Question 1

The auditors may expect a proper debit to goodwill due to:

Accepted Answer

Goodwill is a result of a business combination, such as a merger or acquisition. In such cases, the purchase price of the acquired company is allocated to its assets and liabilities. If the purchase price exceeds the fair value of the identifiable assets and liabilities, the excess amount is recorded as goodwill. Therefore, a proper debit to goodwill may be expected in a business combination.

Question 2

When performing an audit of the property, plant, and equipment accounts, an auditor should expect which of the following to be most likely to indicate a departure from generally accepted accounting principles?

Accepted Answer

Capitalizing repairs that do not extend the useful life or improve the asset is not in accordance with generally accepted accounting principles, which require such costs to be expensed.

Question 3

In the examination of property, plant, and equipment, the auditor tries to determine all of the following except the:

Accepted Answer

The auditor's role in examining property, plant, and equipment primarily involves assessing control risks, identifying property abandonment, and evaluating the reasonableness of depreciation methods and calculations. The adequacy of replacement funds, however, falls outside the typical scope of an auditor's responsibilities, as it pertains more to the company's financial planning and management decisions rather than the accuracy or integrity of financial records.

Question 4

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

Accepted Answer

The independent auditors' approach to obtaining satisfaction concerning depreciation expense in the income statement is to establish the basis for depreciable assets and verify the depreciation expense. This involves examining the company's depreciation policies, procedures, and estimates, testing and verifying depreciation calculations, comparing the depreciation expense to prior periods, and ensuring that the depreciation amounts are properly recorded in the financial statements. Option A is focused only on mathematical accuracy, while option B is focused only on conformity to GAAP. Option C is focused on reconciling the amounts, but does not necessarily ensure accuracy or completeness. Therefore, option D is the best choice.

Question 5

A continuing audit client's property, plant, and equipment and accounts receivable accounts have approximately the same year-end balance. In this circumstance, when compared to property, plant and equipment, one would normally expect the audit of accounts receivable to require:

Accepted Answer

Accounts receivable is typically considered to be a higher risk area than property, plant, and equipment. This is because accounts receivable involve judgments about collectability and have a greater risk of misstatement due to potential errors or fraud. Therefore, the audit of accounts receivable would normally require more audit time in comparison to property, plant and equipment.

Question 6

During the audit of Zing Company, Bill Jones, a staff member on the audit, identified a number of items that have been included as additions to property, plant, and equipment. Jones has indicated to you that he believes the following items should not be capitalized. Indicate with an "X" whether you believe the item should be capitalized or expensed.

Accepted Answer

The answer of During the audit of Zing Company, Bill...

Question 7

Which of the following is the most important control procedure over acquisitions of property, plant, and equipment?

Accepted Answer

Using a budget to forecast and control acquisitions and retirements is the most important control procedure over acquisitions of property, plant, and equipment. It helps to ensure that the company does not overspend on these assets and also allows for effective planning and management of financial resources. A, C, and D are also important control procedures, but not as crucial as using a budget.

Question 8

Which of the following is a customary audit procedure for the verification of the legal ownership of real property?

Accepted Answer

The answer of Which of the following is a customary...

Question 9

For which of the following accounts is it most likely that most of the audit work can be performed in advance of the balance sheet date?

Accepted Answer

The answer of For which of the following accounts is...

Question 10

For which of the following ledger accounts would the auditor be most likely to analyze the details to identify understatements of equipment acquisitions?

Accepted Answer

Repairs and maintenance expense is an expense account that includes expenditures for repairs and maintenance of equipment. Analyzing detailed records can identify any equipment acquisitions that were improperly expensed as repairs and maintenance expenses, leading to an understatement of equipment value. The other accounts listed are not related to equipment acquisitions.

Question 11

Property acquisitions that are misclassified as maintenance expense would most likely be detected by an internal control system that provides for:

Accepted Answer

The answer of Property acquisitions that are misclassified as maintenance...

Question 12

Which of the following is used to obtain evidence that the client's equipment accounts are not understated?

Accepted Answer

Analyzing repairs and maintenance expense accounts can provide evidence of the amount of maintenance required on the client's equipment, which can then be compared to the amount of equipment recorded in the equipment accounts. If the expense accounts are higher than expected, it may indicate that more equipment is being used than what is recorded in the accounts, suggesting that the accounts are understated. Vouching purchases of plant and equipment and recomputing depreciation expense would not provide specific evidence that the equipment accounts are not understated. Analyzing the miscellaneous revenue account is also not relevant to this objective.

Question 13

Auditors should obtain evidence that there are no significant amounts of unrecorded retirements of property, plant, and equipment.
a. Describe two ways that the auditors obtain evidence that there are no significant amounts of unrecorded retirements of property (land).
b. Describe three ways that the auditors obtain evidence that there are no significant amounts of unrecorded retirements of equipment.

Accepted Answer

The answer of Auditors should obtain evidence that there are...

Question 14

The most likely technique for the current year audit of goodwill which was acquired three years ago by a continuing audit client:

Accepted Answer

The most likely technique for the current year audit of goodwill is recomputation. Goodwill is an intangible asset that is measured at fair value at the time of acquisition. However, goodwill is not amortized but it is tested annually for impairment. Impairment testing involves comparing the carrying value of goodwill against its fair value. Given that the client acquired goodwill three years ago, the most appropriate technique for the current year audit would be recomputation, which involves recalculating the goodwill impairment testing for the current year. This technique ensures that the carrying value of goodwill is not overstated on the balance sheet. Confirmation, observation, and inquiry are not relevant to the audit of goodwill impairment testing.

Question 15

The auditors are least likely to learn of retirements of equipment through which of the following?

Accepted Answer

Review of the purchase returns and allowances account is least likely to inform auditors about retirements of equipment because this account primarily deals with returns and allowances related to purchases, not the disposal or retirement of fixed assets like equipment.

Question 16

When comparing an initial audit with a subsequent year audit for a particular client, the scope of audit procedures for which of the following accounts would be expected to decrease the most?

Accepted Answer

The scope of audit procedures for property, plant, and equipment would be expected to decrease the most between an initial audit and a subsequent year audit as the auditor typically conducts a thorough review of these assets during the initial audit to gain a better understanding of the client's operations and controls. In subsequent years, the focus may shift to changes in these assets or any impairments instead of a comprehensive review. Accounts receivable, cash, and marketable securities will still require a significant amount of testing in subsequent year audits to ensure accuracy and existence.

Question 17

Which of the following is not a test primarily used to test property, plant and equipment accounts for overstatement?

Accepted Answer

The answer of Which of the following is not a...

Question 18

In violation of company policy, Lowell Company erroneously capitalized the cost of painting its warehouse. The auditors examining Lowell's financial statements would most likely detect this when:

Accepted Answer

Examining the construction work orders supporting items capitalized during the year would reveal the erroneous capitalization of painting costs, as these documents would detail the nature of the capitalized expenses.

Question 19

Plant and equipment are not as inherently risky as are other assets, such as inventories and accounts receivable. However, a company should still endeavor to maintain effective internal control over plant and equipment.
a. Describe the principal purpose of internal controls relating to plant and equipment.
b. List and describe four major controls applicable to plant and equipment.

Accepted Answer

The answer of Plant and equipment are not as inherently...

Quiz 13: Property, Plant, and Equipment: Depreciation and Depletion