Question 1

When a company decides to dispose of a particular line of operation by selling it to another company,the related assets should

Accepted Answer

When a company plans to sell a line of operation, it should consider any potential loss on disposal and write down the related assets accordingly. This is in line with the principles of conservatism, which dictate that potential losses should be recognized immediately, whereas gains should only be recognized when realized. Therefore, option D is the best choice.

Question 2

Auditors test management's estimates of impaired value through reference to which of the following?

Accepted Answer

Auditors test management's estimates of impaired value by considering economic plans, evidence of fair market value, and estimated cash flow. By doing so, auditors can assess whether management's estimates seem reasonable and consistent with market conditions and other relevant information. This helps ensure that financial statements accurately reflect the value of assets and identify any potential impairments. Therefore, all of the above choices are relevant for testing management's estimates of impaired value.

Question 3

Analytical estimation of depreciation by the auditor is an important audit test because it does which of the following?

Accepted Answer

Analytical estimation of depreciation by the auditor can provide a starting point for determining additional procedures to test the accuracy of the depreciation expense recorded in the financial statements. It allows the auditor to assess whether the depreciation expense is reasonable and consistent with prior periods. It does not signal which additions will be vouched, yield statistical precision in sampling, or indicate impaired balances.

Question 4

When testing fixed assets for the reasonableness of the client's estimated useful lives,the audit team should do which of the following?

Accepted Answer

The audit team should understand the economics of the client's business when testing fixed assets for the reasonableness of the client's estimated useful lives. This is because the useful life of an asset depends on various factors that are specific to the client's business and may differ from those of other clients in different industries. Consulting the IRS code for regulated lives may not be applicable in all cases, and making the decision for the client upon purchase is not the auditor's responsibility. Comparing them with other clients in different industries may not provide useful information. Therefore, understanding the economics of the client's business is the best approach.

Question 5

Which of the following is the best example of a fixed asset that will be physically inspected by the auditor in the period under audit?

Accepted Answer

An office building constructed in the current period is a fixed asset that would likely require a physical inspection by the auditor to verify its existence and valuation. The adding machine (A) is a small asset that may not require physical inspection as its value is relatively small, while the warehouse purchased three years previously (B) may not require a physical inspection if it has been previously verified and there have been no changes to its condition. Desktop computers purchased in the previous period (D) may also not require a physical inspection if they have been verified in a prior period and there have been no changes to their condition or value.

Question 6

All of the following represent risks associated with fixed assets and related expenses except

Accepted Answer

All of the options listed represent risks associated with fixed assets and related expenses. Incomplete recording of asset disposals can result in overstated asset values and understated expenses. Environmental liabilities or claims related to violations of safety and protection regulations can result in financial and reputational damages. Failure to properly recognize impairment in value can result in overstated asset values and understated expenses, leading to inaccurate financial reporting. Therefore, all options represent risks that need to be evaluated and managed.

Question 7

In testing property,plant and equipment the scope and extent of testing can vary based on the complexity of assets utilized,the difficulty of estimating useful life,and the risk associated with the client.

Accepted Answer

The scope and extent of testing for property, plant and equipment depends on factors such as complexity, useful life estimate and client risk. Therefore, the statement is true.

Question 8

Asset losses or impairment are recognized when they occur,while asset gains are not recognized until realized.

Accepted Answer

This statement is true as per the accounting principle of conservatism, which requires that potential losses be recognized as soon as they become known or reasonably estimated, while potential gains are only recognized when they are realized. This helps to ensure that financial statements present a more accurate and conservative picture of a company's financial position and performance.

Question 9

The tour of the manufacturing plant may best assist the auditor in identifying which of the following?

Accepted Answer

The tour of the manufacturing plant may help the auditor in identifying the machinery or equipment that is inoperative in the production cycle. This information is essential for assessing the valuation and existence of the fixed assets as well as estimating the depreciation expense accurately. The tour of the plant may not be directly helpful in identifying the authorization of purchases or management's impairment strategy.

Question 10

Intangible assets are amortized over the remaining legal life of patents or copyrights associated with the asset or their useful life.

Accepted Answer

Intangible assets such as patents or copyrights are subject to amortization over their remaining legal or useful life.

Question 11

If the audit team notes the client has made a significant change in its product line which requires that new equipment be purchased,that may be an indication of

Accepted Answer

A significant change in the product line requiring new equipment may indicate that the existing equipment's value is impaired, as it may no longer be useful or generate future economic benefits for the company.

Question 12

Property,plant and equipment is written down when its value becomes impaired and may be written back up if its value go up at a later date.

Accepted Answer

Under most accounting standards, once an asset is written down due to impairment, it cannot be written back up, even if its value increases later.

Question 13

Which method might an auditor utilize in testing depletion expense?

Accepted Answer

The auditor may utilize analytical procedures to test depletion expense, such as comparing the amount of depletion expense with the amount of natural resources extracted or examining trends in depletion expense over time. Observation of the physical count may be more applicable to inventory testing, obtaining management representation may be more applicable to financial statement assertions, and estimating the useful life of the natural resource may be more applicable to testing depreciation expense.

Question 14

If the auditor determines that beginning balances of fixed assets have not changed from previously audited amounts,much of the testing for existence can be accomplished by which of the following?

Accepted Answer

Vouching current period additions allows the auditor to test whether any new fixed assets have been correctly recorded and exist. Since the beginning balances have not changed, there is no need to retest the existence of those assets. Sampling receiving reports or inquiring of management would not provide sufficient evidence of existence, and recomputing depreciation would not be relevant to testing existence.

Question 15

Which one of the following is not a risk associated with property,plant,and equipment.

Accepted Answer

Sum-of-years digits depreciation is a legitimate and commonly used method of calculating depreciation for property, plant, and equipment. It is not a risk associated with these assets. Obsolescence of assets, impairment of assets, and incomplete recording of disposals are all risks that need to be considered when accounting for property, plant, and equipment.

Question 16

The first-time audit of a company with property,plant,and equipment may cause the auditor to do which of the following?

Accepted Answer

A complete physical inventory is necessary in the first-time audit of property, plant, and equipment to ensure that all assets are properly recorded and accounted for. It provides evidence to support the existence and completeness assertions for the account.

Question 17

Management may determine that an asset is impaired through the use of which of the following?

Accepted Answer

Impairment is typically determined through discounted cash flows, which involve estimating the future cash flows expected to be generated by the asset and then discounting them back to their present value. This allows management to determine whether the current carrying value of the asset is greater than its recoverable amount, which is the higher of its fair value less costs to sell or its value in use. Internal rate of return and Black Scholes modeling are typically used to evaluate investment opportunities, while the acid test ratio is a liquidity ratio used to measure a company's ability to pay its short-term liabilities with its most liquid assets.

Question 18

Which one of the following procedures is most appropriate for testing proper authorization for major capital projects?

Accepted Answer

The examination of board of directors minutes is most appropriate for testing proper authorization for major capital projects as they show the approval of the project and the authorization of funds for it. The other options are not directly related to authorization for capital projects.

Question 19

The auditor should be aware of the possibility that management may be manipulating earnings by inappropriately expensing capital items or inappropriately capitalizing expense items.

Accepted Answer

This is true. The auditor should be alert to the possibility that management may manipulate earnings by incorrectly expensing capital items or incorrectly capitalizing expense items. This is particularly common with companies that are under pressure to meet analyst expectations or other performance measures. The auditor should carefully evaluate the accounting policies related to capitalization and expense recognition to ensure that they are properly applied and supported by appropriate documentation.

Question 20

Which one of the following procedures would provide the best evidence about the original cost of a piece of equipment?

Accepted Answer

The purchase invoice provides a detailed breakdown of the cost of the equipment, including any applicable taxes or discounts. This is the most direct and reliable source of information about the original cost of the equipment. The fixed asset schedule, receiving report, and inquiry of the purchasing agent may provide additional information, but they are not as reliable or specific as the purchase invoice.

Quiz 13: Audit of Long-Lived Assets and Related Expense Accounts