The auditor must know the clients capitalization policies to determine whether acquisitions are

ToTodownloaddownloadmoremoreebooks,ebooks,slides,slides,SMSMandandTBTBvisit:visit:http://downloadslide.blogspot.comhttp://downloadslide.blogspot.comAuditing and Assurance Services, 14e (Arens)Chapter 19 Completing the Tests in the Acquisition and Payment Cycle: Verificationof Selected AccountsLearning Objective 19-11) Which of the following accounts is not associated with the acquisition and payment cycle?A) Common stockB) Property, plant and equipmentC) Accrued property taxesD) Income tax expenseAnswer: ATerms: Acquisition and payment cycleDiff: EasyObjective: LO 19-1AACSB: Reflective thinking skills2) Discuss the key internal controls related to the disposal of property, plant, and equipment.Answer: The most important internal control over the disposal of property, plant, and equipment is theexistence of a formal method to inform management of the sale, trade-in, abandonment, or theft ofrecorded machinery and equipment. Another important control to protect assets from unauthorizeddisposal is a provision for authorization for the sale or other disposal of property, plant, and equipment.Finally, there should be adequate internal verification of recorded disposals to make sure that assets arecorrectly removed from the accounting records.Terms: Acquisition and payment cycleDiff: EasyObjective: LO 19-1AACSB: Reflective thinking skills3) The auditor should keep in mind that the amount in insurance expense is a residual amount.A) TrueB) FalseAnswer: ATerms: Acquisition and payment cycleDiff: EasyObjective: LO 19-1AACSB: Reflective thinking skills1Copyright © 2012 Pearson Education, Inc. publishing as Prentice HallToTodownloaddownloadmoremoreebooks,ebooks,slides,slides,SMSMandandTBTBvisit:visit:http://downloadslide.blogspot.comhttp://downloadslide.blogspot.comLearning Objective 19-21) You are auditing the acquisition and payment cycle and the presence of excessive recurring losses onretired assets. You may conclude that:A) insured values are greater than book values.B) there are a large number of fully depreciated assets.C) depreciation charges may by insuffient.D) company has a policy of selling relatively new assets.Answer: CTerms: Acquisition and payment cycle; Excessive recurring losses on retired assetsDiff: EasyObjective: LO 19-2AACSB: Reflective thinking skills2) Which of the following expenses is not typically evaluated as part of the audit of the acquisition andpayment cycle?A) Depreciation expenseB) Insurance expenseC) Estimated Liability for WarrantiesD) Property tax expenseAnswer: CTerms: Acquisition and payment cycleDiff: EasyObjective: LO 19-2AACSB: Reflective thinking skills3) Which of the following would generally not be a component of the audit of the acquisition andpayment cycle?A) Adequacy of controls over acquisitions of long-lived assetsB) Tracing disposals of long-lived assets to the Fixed Asset Master FileC) Determining the adequacy of the funds available for capital expendituresD) Reperformance of recorded depreciation expenseAnswer: CTerms: Acquisition and payment cycleDiff: EasyObjective: LO 19-2AACSB: Reflective thinking skills4) Normally it may be unnecessary to examine supporting documentation for each addition to property,plant, and equipment, but it would be customary to verify:A) all large transactions.B) all unusual transactions.C) a representative sample of typical additions.D) all three of the above.Answer: DTerms: Property, plant, and equipment documentationDiff: EasyObjective: LO 19-2AACSB: Reflective thinking skills2Copyright © 2012 Pearson Education, Inc. publishing as Prentice HallToTodownloaddownloadmoremoreebooks,ebooks,slides,slides,SMSMandandTBTBvisit:visit:http://downloadslide.blogspot.comhttp://downloadslide.blogspot.com5) The auditor must know the client's capitalization policies to determine whether acquisitions are:A)Recorded in accordance with Treated consistently withGAAPthose of the preceding yearNecessaryYesYesYesB)Recorded in accordance with Treated consistently withGAAPthose of the preceding yearYesNoNecessaryNoC)Recorded in accordance with Treated consistently withGAAPthose of the preceding yearNoNoNecessaryNoD)Recorded in accordance with Treated consistently withGAAPthose of the preceding yearYesYesNecessaryNoAnswer: DTerms: Acquisitions; Capitalization policyDiff: EasyObjective: LO 19-2AACSB: Reflective thinking skills6) To be capitalized as part of property, plant and equipment, assets must:A) have expected useful lives of more than one year.B) not be acquired for resale.C) be useful in multiple productive capacities within the organization.D) A and B, but not C.Answer: DTerms: Property, plant, and equipment; CapitalizedDiff: EasyObjective: LO 19-2AACSB: Reflective thinking skills7) The primary accounting record for manufacturing equipment and other fixed assets is the:A) depreciation ledger.B) fixed asset master file.C) asset inventory.D) equipment roster.Answer: BTerms: Primary accounting record for equipmentDiff: EasyObjective: LO 19-2AACSB: Reflective thinking skills3Copyright © 2012 Pearson Education, Inc. publishing as Prentice HallToTodownloaddownloadmoremoreebooks,ebooks,slides,slides,SMSMandandTBTBvisit:visit:http://downloadslide.blogspot.comhttp://downloadslide.blogspot.com8) Which of the following statements about the audit of fixed assets is the least correct?A) The primary accounting record for manufacturing equipment and other property, plant andequipment is generally a fixed asset master file.B) Manufacturing equipment and current assets are normally audited in the same fashion regardless ofthe activity within a particular account.C) The emphasis on auditing fixed assets is on verification of current-period acquisitions.D) Failure to record the acquisition of a fixed asset affects the income statement until the assets are fullydepreciated.Answer: BTerms: Audit of fixed assetsDiff: EasyObjective: LO 19-2AACSB: Reflective thinking skills9) You are the in-charge auditor for a long-term client. Which of the following is not a category of testscommonly associated with the audit of manufacturing equipment?A) Verification of depreciation expense.B) Analytical procedures.C) Verification of current-period disposals.D) Verification of the beginning balance in accumulated depreciation.Answer: DTerms: Audit of manufacturing equipment; Category of testsDiff: EasyObjective: LO 19-2AACSB: Reflective thinking skills10) The audit procedure that requires an auditor to "foot the acquisition schedule" relates to whichbalance-related audit objective?A) ClassificationB) Detail tie-inC) ExistenceD) Cut-offAnswer: BTerms: Audit procedure; Balance-related audit objective; Foot acquisition scheduleDiff: EasyObjective: LO 19-2AACSB: Reflective thinking skills11) You are auditing Manufacturing Company and testing the audit related objective of completeness forthe equipment accounts. Which of the following audit procedures is most likely to achieve yourobjective?A) Examine vendor invoices and receiving reportsB) Physically examine assetsC) Examine vendor invoices of closely related accounts such as repairs and maintenanceD) Trace individual acquisitions to the fixed asset master fileAnswer: CTerms: Testing audit related objective of completeness for equipment accountsDiff: ModerateObjective: LO 19-2AACSB: Reflective thinking skills4Copyright © 2012 Pearson Education, Inc. publishing as Prentice HallToTodownloaddownloadmoremoreebooks,ebooks,slides,slides,SMSMandandTBTBvisit:visit:http://downloadslide.blogspot.comhttp://downloadslide.blogspot.com12) Which of the following audit procedures would be the most correct in determining the audit objectiveof existence for the equipment account in the fixed asset master file?A) Examine vendor invoices and receiving reportsB) Review transactions near the balance sheet dateC) Recalculate vendor invoicesD) Examine vendor invoices for correct accounting treatmentAnswer: ATerms: Audit objective of existence for equipment account; Fixed asset master fileDiff: ModerateObjective: LO 19-2AACSB: Reflective thinking skills13) Inadequate controls and misstatements discovered through tests of controls and substantive tests oftransactions are an indication of the likelihood of misstatements in:A) the balance sheet.B) the income statement.C) the cash flow statement.D) both the income statement and the balance sheet.Answer: DTerms: Inadequate controls and misstatements; Tests of controls and substantive tests of transactionsDiff: EasyObjective: LO 19-2AACSB: Reflective thinking skills14) Failure to capitalize a fixed asset at the correct amount would impact which financial statements untilthe company disposes of the asset?A) The balance sheet onlyB) The income statement onlyC) The cash flow statement onlyD) Both the income statement and the balance sheetAnswer: DTerms: Failure to capitalize a fixed asset; Financial statementsDiff: ModerateObjective: LO 19-2AACSB: Reflective thinking skills15) Which of the following tests are typically not necessary when auditing a client's schedule of recordeddisposals?A) Footing the schedule.B) Tracing schedule totals to the general ledger.C) Tracing cost and accumulated depreciation of the disposals to the property master file.D) All of the above are necessary.Answer: DTerms: Tests when auditing schedule of recorded disposalsDiff: ModerateObjective: LO 19-2AACSB: Reflective thinking skills5Copyright © 2012 Pearson Education, Inc. publishing as Prentice HallToTodownloaddownloadmoremoreebooks,ebooks,slides,slides,SMSMandandTBTBvisit:visit:http://downloadslide.blogspot.comhttp://downloadslide.blogspot.com16) Which of the following would indicate a deficiency in internal controls in the acquisition and paymentcycle?A) Repairs and maintenance accounts are reviewed for unusual entries each quarterB) Acquisitions are made and approved by the department that will use the equipmentC) Acquisitions of equipment greater than $1,000 are to be capitalizedD) Acquisitions of equipment less than $1,000 are to be expensed as incurredAnswer: BTerms: Deficiency in internal controls in the acquisition and payment cycleDiff: ModerateObjective: LO 19-2AACSB: Reflective thinking skills17) A set of records for each piece of equipment that includes descriptive information, date of acquisition,original cost, current year depreciation, and accumulated depreciation is the:A) acquisitions journal.B) depreciation schedule.C) fixed asset master file.D) file of purchase requisitions.Answer: CTerms: Set of records for each piece of equipmentDiff: EasyObjective: LO 19-2AACSB: Reflective thinking skills18) In testing acquisitions the auditor needs to understand the appropriate accounting guidance related toacquisition accounting. Which of the following is NOT an accounting consideration for the auditor asregards to acquisition cost?A) Inclusion of material transportation and installation costsB) Recording of trade-in costsC) Allocating costs when building and equipment are purchased at one priceD) Verifying that purchased equipment amounts correspond to the budgeted amountAnswer: DTerms: Appropriate accounting guidance related to acquisition accountingDiff: ModerateObjective: LO 19-2AACSB: Reflective thinking skills19) Methods used to determine if there are legal encumbrances related to fixed assets include all butwhich of the following?A) Reading terms of loan and credit agreementsB) Reviewing loan confirmations received from banksC) Having discussions with the client or sending letters to legal counselD) All of the above may be used to identify legal encumbrancesAnswer: DTerms: Methods to determine legal encumbrances related to fixed assetsDiff: ModerateObjective: LO 19-2AACSB: Reflective thinking skills6Copyright © 2012 Pearson Education, Inc. publishing as Prentice HallToTodownloaddownloadmoremoreebooks,ebooks,slides,slides,SMSMandandTBTBvisit:visit:http://downloadslide.blogspot.comhttp://downloadslide.blogspot.com20) The test of details of balances procedure which requires a "recalculation of investment credit" satisfiesthe audit objective of:A) classification.B) detail tie-in.C) existence.D) accuracy.Answer: DTerms: Test of details of balancesDiff: ChallengingObjective: LO 19-2AACSB: Analytic skills21) The test of details of balances procedure to "examine vendors' invoices of closely related accountssuch as repairs to uncover items that should be property, plant, and equipment" satisfies the auditobjective of:A) completeness.B) detail tie-in.C) cutoff.D) existence.Answer: ATerms: Test of details of balances; Audit objectiveDiff: ModerateObjective: LO 19-2AACSB: Reflective thinking skills22) The auditor's starting point for verifying disposals of property, plant, and equipment is the:A) equipment account in the general ledger.B) file of shipping documents.C) client's schedule of recorded disposals.D) equipment subsidiary ledger.Answer: CTerms: Disposals of property, plant, and equipmentDiff: ModerateObjective: LO 19-2AACSB: Reflective thinking skills23) Improperly classifying a fixed asset by recording the amount in the repairs and maintenance expenseaccount will have an effect on which of the following financial statements until the asset would normallyhave been depreciated?A) The balance sheetB) The income statementC) The cash flow statementD) Both the income statement and the balance sheetAnswer: DTerms: Failure to capitalize a fixed assetDiff: ModerateObjective: LO 19-2AACSB: Reflective thinking skills7Copyright © 2012 Pearson Education, Inc. publishing as Prentice HallToTodownloaddownloadmoremoreebooks,ebooks,slides,slides,SMSMandandTBTBvisit:visit:http://downloadslide.blogspot.comhttp://downloadslide.blogspot.com24) Because the failure to record disposals of property, plant, and equipment can significantly affect thefinancial statements, the search for unrecorded disposals is essential. Which of the following is not aprocedure used to verify disposals?A) Make inquiries of management and production personnel about the possibility of the disposal ofassets.B) Review whether newly acquired assets replace existing assets.C) Test the valuation of fixed assets recorded in prior periods.D) Review plant modifications and changes in product line, taxes, or insurance coverage.Answer: CTerms: Unrecorded disposals of property, plant, and equipmentDiff: ModerateObjective: LO 19-2AACSB: Reflective thinking skills25) When the auditor is determining appropriate depreciation calculations for the classifications in theclient's fixed asset master file she is testing the audit objective of:A) completeness.B) existence.C) classification.D) valuation and allocation.Answer: DTerms: Determining appropriate depreciation calculations; Testing audit objectiveDiff: ModerateObjective: LO 19-2AACSB: Reflective thinking skills26) A major consideration in verifying the ending balance in fixed assets is the possibility of existing legalencumbrances. Tests to identify possible legal encumbrances would satisfy the audit objective of:A) existence.B) presentation and disclosure.C) detail tie-in.D) classification.Answer: BTerms: Tests to identify legal encumbrancesDiff: ModerateObjective: LO 19-2AACSB: Reflective thinking skills27) When auditing depreciation expense, the two major concerns related to the accuracy audit objectiveare:A) consistent application of depreciation method and useful lives.B) consistent application of depreciation method and classification of assets.C) correctness of calculations and consistent application of depreciation method.D) cost of the fixed asset and useful lives.Answer: CTerms: Auditing depreciation expenseDiff: ModerateObjective: LO 19-2AACSB: Reflective thinking skills8Copyright © 2012 Pearson Education, Inc. publishing as Prentice HallToTodownloaddownloadmoremoreebooks,ebooks,slides,slides,SMSMandandTBTBvisit:visit:http://downloadslide.blogspot.comhttp://downloadslide.blogspot.com28) The auditor needs to gain reasonable assurance that the equipment accounts in the fixed asset masterfile are not understated. Which of the following accounts would most likely be reviewed in making thatdetermination?A) Depreciation expenseB) Repairs and maintenance expenseC) Gains/losses on sales and retirementsD) CashAnswer: BTerms: Reasonable assurance that equipment accounts in the fixed asset master file are not understatedDiff: ModerateObjective: LO 19-2AACSB: Reflective thinking skills29) Changing circumstances may require a change in the useful life of an asset. When this occurs, itinvolves a change in:A) accounting estimate rather than a change in accounting principle.B) accounting principle rather than a change in accounting estimate.C) both accounting principle and accounting estimate.D) neither accounting principle nor accounting estimate.Answer: ATerms: Change in useful life of an assetDiff: ModerateObjective: LO 19-2AACSB: Reflective thinking skills30) The auditor normally does not need to test the accuracy or classification of fixed assets recorded inprior periods if they are the continuing auditor because:A) they are rarely material to the audit.B) they rarely contain misstatements.C) they are verified in previous audits.D) they don't affect the balance sheet.Answer: CTerms: Test accuracy or classification of fixed assets recorded in prior periodsDiff: ModerateObjective: LO 19-2AACSB: Reflective thinking skills31) The auditor is examining the accounting entries made to the accumulated depreciation accountduring the year and notices a significant amount of debits to the account. Which of the followingprovides the most logical explanation?A) Large number of asset retirementsB) Salvage values were revised downwardC) Useful lives were revised downwardD) Allocation of fixed overhead were revisedAnswer: ATerms: Accounting entries (debits) made to accumulated depreciation accountDiff: ModerateObjective: LO 19-2AACSB: Reflective thinking skills9Copyright © 2012 Pearson Education, Inc. publishing as Prentice HallToTodownloaddownloadmoremoreebooks,ebooks,slides,slides,SMSMandandTBTBvisit:visit:http://downloadslide.blogspot.comhttp://downloadslide.blogspot.com32) In determining the reasonableness of the client's amount for depreciation expense the auditor isprimarily concerned that the client has followed a consistent policy and the calculations are correct.Which of the following audit objectives best addresses the above concerns?A) ExistenceB) AccuracyC) ValuationD) AllocationAnswer: BTerms: Depreciation expense; Consistency policy and calculations are correctDiff: ModerateObjective: LO 19-2AACSB: Reflective thinking skills33) Which of the following audit procedures would be least likely to lead the auditor to find anunrecorded fixed asset disposal?A) Examination of insurance policiesB) Review of repairs and maintenance expenseC) Review of property tax filesD) Scanning of invoices for fixed asset additionsAnswer: BTerms: Unrecorded fixed asset disposalDiff: ModerateObjective: LO 19-2AACSB: Reflective thinking skills34) To achieve effective internal accounting control over fixed asset additions, a company shouldestablish procedures that require:A) authorization and approval of major fixed asset additions.B) capitalization of the cost of fixed asset additions in excess of a specific dollar amount.C) classification, as investments, of those fixed asset additions that are not used in the business.D) performance of recurring fixed asset maintenance work solely by maintenance department employees.Answer: ATerms: Effective internal control over fixed asset additionsDiff: ModerateObjective: LO 19-2AACSB: Reflective thinking skills35) The auditor is testing for unrecorded retirements/disposals of equipment. Which of the followingaudit procedures would the auditor most likely use?A) Select items from the fixed asset master file and then physically locate them.B) Examine the repairs and maintenance amount for large debits.C) Compare current years depreciation expense with the previous year's depreciation expense.D) Trace acquisition documents to the fixed asset master file.Answer: ATerms: Testing for unrecorded retirements/disposals of equipmentDiff: ChallengingObjective: LO 19-2AACSB: Analytic skills10Copyright © 2012 Pearson Education, Inc. publishing as Prentice HallToTodownloaddownloadmoremoreebooks,ebooks,slides,slides,SMSMandandTBTBvisit:visit:http://downloadslide.blogspot.comhttp://downloadslide.blogspot.com36) The failure to capitalize a permanent asset, or the recording of an asset acquisition at the improperamount, affects the balance sheet:A) forever.B) for the current period.C) for the depreciable life of the asset.D) until the firm disposes of the asset.Answer: DTerms: Failure to capitalize a permanent asset; Recording of an asset acquisition at improper amountDiff: ChallengingObjective: LO 19-2AACSB: Analytic skills37) One of the primary objectives in examining the repairs and maintenance accounts is to obtainevidence that:A) expenditures of equipment have not been charged to expense.B) the actual amount recorded is the same as the budgeted amount.C) expenditures for equipment have been recorded in the proper period.D) revenue expenditures made on behalf of equipment have been recorded in the proper period.Answer: ATerms: Primary objective in examining repairs and maintenance accountsDiff: ChallengingObjective: LO 19-2AACSB: Reflective thinking skills38) If the client fails to record disposals of property, plant, and equipment, both the original cost of theasset account and the net book value will be incorrect. What will the effect be of this misstatement on theoriginal cost and the book value?A) Both will be overstated indefinitely.B) The original cost will be overstated indefinitely, and the net book value will be overstated until theasset is fully depreciated.C) The original cost will be overstated indefinitely, and the net book value will be understatedindefinitely.D) The original cost will be overstated indefinitely, and the net book value will be understated until theasset is fully depreciated.Answer: BTerms: Client fails to record disposals of property, plant, and equipmentDiff: ChallengingObjective: LO 19-2AACSB: Analytic skills11Copyright © 2012 Pearson Education, Inc. publishing as Prentice HallToTodownloaddownloadmoremoreebooks,ebooks,slides,slides,SMSMandandTBTBvisit:visit:http://downloadslide.blogspot.comhttp://downloadslide.blogspot.com39) Which of the following explanations might satisfy an auditor who discovers significant debits to anaccumulated depreciation account?A) Extraordinary repairs have lengthened the life of an asset.B) Prior years' depreciation charges were erroneously understated.C) A reserve for possible loss on retirement has been recorded.D) An asset has been recorded at its fair value.Answer: ATerms: Significant debits to accumulated depreciation accountDiff: ChallengingObjective: LO 19-2AACSB: Analytic skills40) The primary accounting record for property, plant, and equipment accounts is the fixed asset masterfile. What is included for each fixed asset in the master file?Answer: Description of the assetDate of AcquisitionAcquisition (original) costCurrent year depreciationAccumulated depreciation for the assetTerms: Included for each fixed asset in the master fileDiff: EasyObjective: LO 19-2AACSB: Reflective thinking skills41) The auditor receives the client's schedule of recorded disposals and then performs detail tie-in tests ofthe recorded disposals schedule. What procedures does the auditor perform on the client's schedule ofrecorded disposals?Answer: Footing the scheduleTracing the totals on the schedule to the recorded disposals in the general ledgerTracing the cost and accumulated depreciation of the disposals to the property master fileTerms: Procedures performed on client's schedule of recorded disposalsDiff: EasyObjective: LO 19-2AACSB: Reflective thinking skills42) In auditing depreciation expense one the auditors concerns is on determining that the client'scalculations are correct. In determining that the auditor must weigh which four considerations?Answer: The useful life of current period acquisitionsThe method of depreciationThe estimated salvage valueThe policy of depreciating assets in the year of acquisition and dispositionTerms: Auditing depreciation expense; Determining client calculations are correctDiff: EasyObjective: LO 19-2AACSB: Reflective thinking skills12Copyright © 2012 Pearson Education, Inc. publishing as Prentice HallToTodownloaddownloadmoremoreebooks,ebooks,slides,slides,SMSMandandTBTBvisit:visit:http://downloadslide.blogspot.comhttp://downloadslide.blogspot.com43) In testing acquisitions, the auditor must understand the relevant accounting standards to insure theclient adheres to accepted accounting practices for property, plant, and equipment. Describe below theauditor concerns in this area.Answer: (Answers may vary.)Inclusion of material transportation and installation cost as part of the asset's acquisition costFailure to properly record the trade-in of existing equipmentClient's capitalization policy to determine whether acquisitions are treated consistently with those of thepreceding yearExamine whether the client has the right to record the equipment as an asset (Capitalization of leasedequipment or classification of the equipment as an operating lease)Correct classification among various equipment accounts Improper inclusion of transactions that shouldbe recorded as assets in repairs and maintenance expense, lease expense, supplies, small tools, andsimilar accountsTerms: Acquisition and payment cycleDiff: ModerateObjective: LO 19-2AACSB: Reflective thinking skills44) Property, plant, and equipment is normally audited in a different manner than current asset accounts.State three reasons why this is so, and discuss the differences in how property, plant, and equipment isaudited compared to current assets.Answer:• There are usually fewer current period acquisitions of property, plant, and equipment than currentassets.• The amount of any given acquisition is often material.• The equipment is likely to be kept and maintained in the accounting records for several years.Because of these three differences, the emphasis in auditing property, plant, and equipment is on theverification of current period acquisitions rather than on the balance in the account carried forward fromthe preceding year. In addition, the expected life of assets over one year requires depreciation expenseand accumulated depreciation accounts, which are verified as a part of the audit of the assets.Terms: Audit of property, plant, and equipmentDiff: ChallengingObjective: LO 19-2AACSB: Reflective thinking skills13Copyright © 2012 Pearson Education, Inc. publishing as Prentice HallToTodownloaddownloadmoremoreebooks,ebooks,slides,slides,SMSMandandTBTBvisit:visit:http://downloadslide.blogspot.comhttp://downloadslide.blogspot.com45) State four of the seven specific balance-related audit objectives for property, plant, and equipmentadditions and, for each objective, describe one common test of details of balances.Answer:• Current-year acquisitions in the acquisitions schedule agree with related master file amounts, and the totalagrees with the general ledger (detail tie-in). Foot the acquisitions schedule, trace the individual acquisitionsto the master file for amounts and descriptions, and trace the total to the general ledger.• Current-year acquisitions as listed exist (existence). Examine vendors' invoices and receiving reports andphysically examine assets.• Existing acquisitions are recorded (completeness). Examine vendors' invoices of closely related accountssuch as repairs and maintenance to uncover items that should be recorded as equipment, and reviewlease and rental agreements.• Current-year acquisitions as listed are accurate (accuracy). Examine vendors' invoices.• Current-year acquisitions as listed are correctly classified (classification). Examine vendors' invoices invarious equipment accounts to uncover items that should be classified as manufacturing or officeequipment, part of buildings, or repairs, examine vendors' invoices of closely related accounts such asrepairs to uncover items that should be recorded as equipment, and examine rent and lease expense forcapitalizable leases.• Current-year acquisitions are recorded in the correct period (cutoff). Review transactions near the balancesheet date for correct period.• The client has rights to current-year acquisitions (rights). Examine vendors' invoices.Terms: Balance-related audit objectives for property, plant, and equipment; Testof details of balancesDiff: ChallengingObjective: LO 19-2AACSB: Reflective thinking skills46) When auditing disposals of property, plant, and equipment, the search for unrecorded disposals isessential. State the four audit procedures frequently used for verifying disposals.Answer:• Review whether newly acquired assets replace existing assets.• Analyze gains and losses on the disposal of assets and miscellaneous income for receipts from thedisposal of assets.• Review plant modifications and changes in product lines, changes in major costly computer-relatedequipment, property taxes, or insurance coverage for indications of deletions of equipment.• Make inquiries of management and production personnel about the possibility of the disposal ofassets.Terms: Audit procedures for verifying disposalsDiff: ChallengingObjective: LO 19-2AACSB: Reflective thinking skills47) One of the auditor's primary objectives when auditing manufacturing equipment is completeness.A) TrueB) FalseAnswer: ATerms: Primary objective in auditing equipment; CompletenessDiff: EasyObjective: LO 19-2AACSB: Reflective thinking skills14Copyright © 2012 Pearson Education, Inc. publishing as Prentice HallToTodownloaddownloadmoremoreebooks,ebooks,slides,slides,SMSMandandTBTBvisit:visit:http://downloadslide.blogspot.comhttp://downloadslide.blogspot.com48) Completeness and existence are the auditor's primary objectives in auditing manufacturingequipment.A) TrueB) FalseAnswer: ATerms: Completeness and existence; Primary objectives in auditing equipmentDiff: EasyObjective: LO 19-2AACSB: Reflective thinking skills49) Accrued payroll taxes are normally considered to be associated with the acquisition and paymentcycle.A) TrueB) FalseAnswer: ATerms: Accrued payroll taxesDiff: EasyObjective: LO 19-2AACSB: Reflective thinking skills50) The primary characteristic that distinguishes property, plant, and equipment from inventory, prepaidexpenses, and investments is the intention to use property, plant, and equipment as a part of theoperations of the client's business over their expected life.A) TrueB) FalseAnswer: ATerms: Primary characteristic of property, plant, and equipmentDiff: EasyObjective: LO 19-2AACSB: Reflective thinking skills51) The emphasis in auditing manufacturing equipment is on the verification of current-period disposalsand acquisitions.A) TrueB) FalseAnswer: ATerms: Auditing equipment; Current-period disposals and acquisitionsDiff: EasyObjective: LO 19-2AACSB: Reflective thinking skills52) The starting point for the verification of current-year acquisitions of property, plant, and equipment isnormally a client-prepared schedule of all acquisitions recorded in the general ledger during the year.A) TrueB) FalseAnswer: ATerms: Verification of acquisitions; Client-prepared schedule of acquisitionsDiff: ModerateObjective: LO 19-2AACSB: Reflective thinking skills15Copyright © 2012 Pearson Education, Inc. publishing as Prentice HallToTodownloaddownloadmoremoreebooks,ebooks,slides,slides,SMSMandandTBTBvisit:visit:http://downloadslide.blogspot.comhttp://downloadslide.blogspot.com53) The least helpful common audit test to verify current period acquisitions of property, plant, andequipment is examining vendors' invoices and receiving reports.A) TrueB) FalseAnswer: BTerms: Audit tests to verify current period acquisitionsDiff: ModerateObjective: LO 19-2AACSB: Reflective thinking skills54) Depreciation expense is normally verified as a part of tests of details of balances rather than as part oftests of controls or substantive tests of transactions.A) TrueB) FalseAnswer: ATerms: Depreciation expense; Tests of details of balances; Tests of controls or substantive tests of transactionsDiff: ModerateObjective: LO 19-2AACSB: Reflective thinking skills55) The most important audit objective for depreciation expense is detail tie-in.A) TrueB) FalseAnswer: BTerms: Audit objective for depreciation expenseDiff: ModerateObjective: LO 19-2AACSB: Reflective thinking skills56) In auditing the current year acquisitions of property, plant, and equipment, all balance-related auditobjectives except realizable value and disclosure are used as a framework for subsequent audit testing.A) TrueB) FalseAnswer: ATerms: Auditing current year acquisitions; Balance-related audit objectivesDiff: ModerateObjective: LO 19-2AACSB: Reflective thinking skills57) The auditor's review of current year acquisition's cutoff is normally done as part of accounts payablecutoff tests.A) TrueB) FalseAnswer: ATerms: Review of acquisition's cutoff; Accounts payable cutoff testsDiff: ModerateObjective: LO 19-2AACSB: Reflective thinking skills16Copyright © 2012 Pearson Education, Inc. publishing as Prentice HallToTodownloaddownloadmoremoreebooks,ebooks,slides,slides,SMSMandandTBTBvisit:visit:http://downloadslide.blogspot.comhttp://downloadslide.blogspot.com58) The auditor's tests for proper cutoff of current year acquisitions of property, plant, and equipment areusually done as part of accounts payable cutoff tests.A) TrueB) FalseAnswer: ATerms: Cutoff of acquisitions; Accounts payable cutoff testsDiff: ModerateObjective: LO 19-2AACSB: Reflective thinking skills59) The company's choices for fixed asset on the assets useful life and residual value impact the amountof depreciation recorded.A) TrueB) FalseAnswer: ATerms: Asset's useful lige and residual value; Impact depreciation recordedDiff: ModerateObjective: LO 19-2AACSB: Reflective thinking skills60) The audit procedure "foot the schedule of fixed assets acquisitions and trace the total to the generalledger" relates most closely to the completeness objective for fixed assets acquisitions.A) TrueB) FalseAnswer: ATerms: Audit procedure for completeness objectiveDiff: ModerateObjective: LO 19-2AACSB: Reflective thinking skills61) Confirmations are commonly used to verify additions of property, plant, and equipment.A) TrueB) FalseAnswer: BTerms: Confirmations to verify additionsDiff: ModerateObjective: LO 19-2AACSB: Reflective thinking skills62) One very useful method of auditing depreciation is to use an analytical procedure to test forreasonableness.A) TrueB) FalseAnswer: ATerms: Auditing depreciation; Analytical procedures to test for reasonablenessDiff: ModerateObjective: LO 19-2AACSB: Reflective thinking skills17Copyright © 2012 Pearson Education, Inc. publishing as Prentice HallToTodownloaddownloadmoremoreebooks,ebooks,slides,slides,SMSMandandTBTBvisit:visit:http://downloadslide.blogspot.comhttp://downloadslide.blogspot.com63) The approach to auditing patents and copyrights is similar to that used for property, plant, andequipment accounts.A) TrueB) FalseAnswer: ATerms: Auditing patents and copyrightsDiff: ChallengingObjective: LO 19-2AACSB: Reflective thinking skills64) Recording an acquisition of a fixed asset at an improper amount affects the balance sheet until thecompany disposes of the asset, but the income statement is not affected.A) TrueB) FalseAnswer: BTerms: Recording acquisition at improper amountDiff: ChallengingObjective: LO 19-2AACSB: Reflective thinking skills65) Ordinarily, if you are auditing a continuing client, it is unnecessary to test the accuracy objective orthe classification objective for fixed assets acquired in prior years.A) TrueB) FalseAnswer: ATerms: Accuracy objective; Classification objective; Fixed assets in prior yearsDiff: ChallengingObjective: LO 19-2AACSB: Reflective thinking skills66) When auditing acquisitions of property, plant, and equipment, the auditor's review of lease and rentalagreements most closely relate to the cutoff objective.A) TrueB) FalseAnswer: BTerms: Auditing acquisitions; Lease and rental agreements; Cutoff objectiveDiff: ChallengingObjective: LO 19-2AACSB: Reflective thinking skills18Copyright © 2012 Pearson Education, Inc. publishing as Prentice HallToTodownloaddownloadmoremoreebooks,ebooks,slides,slides,SMSMandandTBTBvisit:visit:http://downloadslide.blogspot.comhttp://downloadslide.blogspot.comLearning Objective 19-31) Which of the following accounts would normally not be a part of the acquisition and payment cycle ofPrepaid Insurance?A) CashB) Insurance PayableC) Insurance ExpenseD) Prepaid InsuranceAnswer: BTerms: Acquisition and payment cycle; Prepaid insuranceDiff: EasyObjective: LO 19-3AACSB: Reflective thinking skills2) Which type of audit procedure would normally be sufficient for purposes of auditing prepaid expensesand deferred charges?A) Tests of controls.B) Tests of transactions.C) Tests of details of balances.D) Analytical procedures.Answer: DTerms: Audit procedure for auditing prepaid expenses and deferred chargesDiff: ModerateObjective: LO 19-3AACSB: Reflective thinking skills3) When the auditor recomputes the unexpired portion of prepaid insurance, she is satisfying which auditobjective?A) CompletenessB) ExistenceC) Accuracy and detail tie-inD) RightsAnswer: CTerms: Audit objective; Recompute unexpired portion of prepaid insuranceDiff: ModerateObjective: LO 19-3AACSB: Reflective thinking skills4) A record of insurance policies in force and the due date of each policy is contained in the:A) voucher register.B) insurance register.C) insurance expense account.D) prepaid insurance account.Answer: BTerms: Record of insurance policiesDiff: EasyObjective: LO 19-3AACSB: Reflective thinking skills19Copyright © 2012 Pearson Education, Inc. publishing as Prentice HallToTodownloaddownloadmoremoreebooks,ebooks,slides,slides,SMSMandandTBTBvisit:visit:http://downloadslide.blogspot.comhttp://downloadslide.blogspot.com5) Insurance expense for the period is a function of which of the following?A) The beginning prepaid balance, current premium payments and the ending prepaid balance.B) The beginning prepaid balance and the current period premium payments.C) The current period premium payments.D) The current period premium payments and the ending prepaid balance.Answer: ATerms: Insurance expense if a function ofDiff: ModerateObjective: LO 19-3AACSB: Reflective thinking skills6) In connection with a review of the prepaid insurance account, which of the following audit procedureswould you be least likely to use?A) Recompute the portion of the premium that expired during the year.B) Prepare excerpts of insurance policies for audit working papers.C) Confirm premium rates with an independent insurance broker.D) Examine support for premium payments.Answer: CTerms: Prepaid insurance; Audit proceduresDiff: ModerateObjective: LO 19-3AACSB: Reflective thinking skills7) Controls over the acquisition and recording of insurance are a part of which of the followingtransaction cycles?A) Inventory and warehousing cycleB) Capitalization cycleC) Treasury cycleD) Acquisition and payment cycleAnswer: DTerms: Acquisition and recording of insurance; Transaction cyclesDiff: ModerateObjective: LO 19-3AACSB: Reflective thinking skills8) Which balance-related audit objective is not relevant to an audit of prepaid expenses?A) RightsB) AccuracyC) Detail tie-inD) Realizable valueAnswer: DTerms: Balance-related audit objective for audit of prepaid expensesDiff: ChallengingObjective: LO 19-3AACSB: Reflective thinking skills20Copyright © 2012 Pearson Education, Inc. publishing as Prentice HallToTodownloaddownloadmoremoreebooks,ebooks,slides,slides,SMSMandandTBTBvisit:visit:http://downloadslide.blogspot.comhttp://downloadslide.blogspot.com9) Describe two ways the verification of existence and tests for omissions of the client's insurance policiesin force can be performed.Answer: The verification of existence and tests for omissions of the insurance policies can be tested inone of two ways: by examining a sample of insurance invoices and policies in force for comparison to theschedule, or by obtaining a confirmation of insurance information from the company's insurance agent.Terms: Verification of existence and tests for omissions of insurance policiesDiff: EasyObjective: LO 19-3AACSB: Reflective thinking skills10) What are several analytical procedures used in the audit of prepaid insurance and insurance expense?Answer:1. Compare total prepaid insurance and insurance expense with previous years.2. Compute the ratio of prepaid insurance to insurance expense and compare it with previous years.3. Compare the individual insurance policy coverage on the schedule of insurance obtained from theclient with the preceding year's schedule as a test of elimination of certain policies or a change ininsurance coverage.4. Compare the computed prepaid insurance balance for the current year on a policy-by-policy basiswith that of the preceding year as a test of an error in the calculation.5. Review the insurance coverage listed on the prepaid insurance schedule with an appropriate clientofficial or insurance broker for adequacy of coverage.Terms: Analytical procedures in the audit of prepaid insurance and insurance expenseDiff: ModerateObjective: LO 19-3AACSB: Reflective thinking skills11) Describe the audit procedures used to verify the accuracy and detail tie-in objectives for prepaidinsurance.Answer: The accuracy objective is tested by verifying the amount of the insurance premium, the lengthof the policy period, and the allocation of the premium to unexpired insurance. The amount of thepremium for a given policy and its time period can be verified at the same time by examining thepremium invoice or the confirmation from an insurance agent. After these two have been verified, theclient's calculations of unexpired insurance can be tested by recalculation. The schedule of prepaidinsurance can then be footed and the totals traced to the general ledger to complete the detail tie-in tests.Terms: Audit procedures to verify accuracy and detail tie-in objectives for prepaid insuranceDiff: ModerateObjective: LO 19-3AACSB: Reflective thinking skills21Copyright © 2012 Pearson Education, Inc. publishing as Prentice HallToTodownloaddownloadmoremoreebooks,ebooks,slides,slides,SMSMandandTBTBvisit:visit:http://downloadslide.blogspot.comhttp://downloadslide.blogspot.com12) Discuss the key internal controls for prepaid insurance that affect the auditor's extent of testing of theprepaid insurance account.Answer: Internal controls for prepaid insurance and insurance expense can be conveniently divided intothree categories: controls over the acquisition and recording of insurance, controls over the insuranceregister, and controls over the charge-off of insurance expense. Controls over the acquisition andrecording of insurance are a part of the acquisition and payment cycle and include proper authorizationfor new insurance policies and payment of insurance premiums. An insurance register, which is a recordof insurance policies in force and the expiration date of each policy, is an essential control to make surethat the company has adequate insurance at all times. The control should include a provision for periodicreview of the adequacy of the insurance coverage by an independent qualified person. The detailedrecords of the information in the insurance register should be verified by someone independent of theperson preparing them. Companies often have a closely related control which is to have a standardmonthly journal entry to reclassify prepaid insurance as insurance expense.Terms: Key internal controls for prepaid insuranceDiff: ChallengingObjective: LO 19-3AACSB: Reflective thinking skills13) The realizable value audit objective is not applicable when auditing prepaid insurance or insuranceexpense.A) TrueB) FalseAnswer: ATerms: Auditing prepaid insurance and insurance expense; Realizable valueDiff: EasyObjective: LO 19-3AACSB: Reflective thinking skills14) The audit of insurance expense is normally limited to analytical procedures and a brief test of whethercharges to insurance expense arose from credits to prepaid insurance.A) TrueB) FalseAnswer: ATerms: Audit of insurance expense; Analytical proceduresDiff: ModerateObjective: LO 19-3AACSB: Reflective thinking skills15) Tests of the cutoff objective for prepaid insurance is normally not performed by auditors.A) TrueB) FalseAnswer: ATerms: Tests of cutoff objective for prepaid insuranceDiff: ModerateObjective: LO 19-3AACSB: Reflective thinking skills22Copyright © 2012 Pearson Education, Inc. publishing as Prentice HallToTodownloaddownloadmoremoreebooks,ebooks,slides,slides,SMSMandandTBTBvisit:visit:http://downloadslide.blogspot.comhttp://downloadslide.blogspot.com16) When auditing insurance expense, auditors normally rely on analytical procedures and limited testingof the debits to ensure that they arose from credits to prepaid insurance.A) TrueB) FalseAnswer: ATerms: Auditing insurance expense; Analytical proceduresDiff: ModerateObjective: LO 19-3AACSB: Reflective thinking skillsLearning Objective 19-41) Which of the following is a customary audit procedure for the verification of the legal ownership ofreal property?A) Examination of correspondence with the corporate counsel concerning acquisition matters.B) Examination of ownership documents registered and on file at a public hall of records.C) Examination of corporate minutes and resolutions concerning the approval to acquire property, plant,and equipment.D) Examination of deeds and title guaranty policies on hand.Answer: DTerms: Audit procedure for verification of legal ownership of propertyDiff: ModerateObjective: LO 19-4AACSB: Reflective thinking skills2) Which of the following would offer the best evidence of owning real estate as of the balance sheet date?A) Property insurance policiesB) Paid real estate tax billsC) Acquisition documentsD) Cash disbursements registerAnswer: BTerms: Evidence of owning real estateDiff: ModerateObjective: LO 19-4AACSB: Reflective thinking skills3) When auditors verify accrued property taxes two audit objectives are especially significant. These are:A) completeness and accuracy.B) completeness and net realizable value.C) detail tie-in and completeness.D) accuracy and classification.Answer: ATerms: Accrued property taxes; Audit objectivesDiff: ChallengingObjective: LO 19-4AACSB: Reflective thinking skills23Copyright © 2012 Pearson Education, Inc. publishing as Prentice HallToTodownloaddownloadmoremoreebooks,ebooks,slides,slides,SMSMandandTBTBvisit:visit:http://downloadslide.blogspot.comhttp://downloadslide.blogspot.com4) The balance in the property tax expense account is most similar to:A) depreciation expense.B) insurance expense.C) compensation expense.D) utilities expense.Answer: BTerms: Property tax expenseDiff: ChallengingObjective: LO 19-4AACSB: Reflective thinking skills5) The audit procedures used to verify accrued liabilities differ from those employed for the verificationof accounts payable because:A) accrued liability balances are less material than accounts payable balances.B) accrued liabilities at year end will become accounts payable during the following year.C) evidence supporting accrued liabilities is non-existent, whereas evidence supporting accounts payableis readily available.D) accrued liabilities usually pertain to services of a continuing nature, whereas accounts payable are theresult of completed transactions.Answer: DTerms: Audit procedures to verify accrued liabilitiesDiff: ChallengingObjective: LO 19-4AACSB: Analytic skills6) Explain the allocation audit objective and explain why it is important to have accurate allocation withinthe financial statements, in relationship to Property, Plant, and EquipmentAnswer:1. Verify the accruals at the same time as the audit of the current year property tax payments.2. Compare accruals with previous years, noting any adjustments to property obtained/disposed fromthe fixed asset master fileTerms: Accrued property tax liability test for completenessDiff: ModerateObjective: LO 19-4AACSB: Analytic skills7) In the audit of accrued property taxes, the two most important balance-related audit objectives arecompleteness and accuracy.A) TrueB) FalseAnswer: ATerms: Audit of accrued property taxes; Balance-related audit objectives of completeness and accuracyDiff: ChallengingObjective: LO 19-4AACSB: Reflective thinking skills24Copyright © 2012 Pearson Education, Inc. publishing as Prentice HallToTodownloaddownloadmoremoreebooks,ebooks,slides,slides,SMSMandandTBTBvisit:visit:http://downloadslide.blogspot.comhttp://downloadslide.blogspot.comLearning Objective 19-51) Which of the following audit tests both have the effect of simultaneously verifying balance sheet andincome statement accounts?A) Analytical procedures and substantive tests of transactionsB) Tests of controls and substantive tests of transactionsC) Tests of details of balances and substantive tests of transactionsD) Tests of controls and analytical proceduresAnswer: BTerms: Audit tests that have effect simultaneously verifying balance sheet and income statement accountsDiff: ChallengingObjective: LO 19-5AACSB: Analytic skills2) The most effective and efficient audit approach in the examination of the income statement would bewhich of the following?A) Examination of income statement accounts concurrently with the related balance sheet accounts.B) Compare company's components of net income to other businesses in the same industry.C) Compare company's components of net income to the previous two years.D) Examine changes in all balance sheet accounts.Answer: ATerms: Effective and efficient audit approach in examination of the income statementDiff: ChallengingObjective: LO 19-5AACSB: Reflective thinking skills3) The erroneous inclusion of transactions that should properly be recorded as assets into accounts suchas repairs expense, lease expense, or supplies is a common client error. The auditor is most lkely toevaluate the likelihood of these types of misclassifications in conjunction with:A) obtaining an understanding of internal control.B) the tests of controls.C) the tests of transactions.D) the tests of details of balances.Answer: ATerms: Erroneous inclusion of transactions that should be properly recorded as assets in expense accountsDiff: ChallengingObjective: LO 19-5AACSB: Analytic skills4) Income statement accounts resulting from allocations are typically verified as a part of:A) tests of controls.B) substantive tests of transactions.C) analytical procedures.D) planning.Answer: CTerms: Income statement accounts resulting from allocationsDiff: ChallengingObjective: LO 19-5AACSB: Reflective thinking skills25Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall