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1
Prepaid insurance should be
A)
Amortized over the fiscal period.
B)
Expensed when paid.
C)
Amortized over the period of coverage.
D)
Amortized over the calendar period.
2
In auditing intangible assets and goodwill, an auditor would likely review or recompute amortization expense and/or determine whether the write-off period appears reasonable. This would support management’s assertion of
A)
Valuation and allocation.
B)
Existence.
C)
Completeness.
D)
Rights & obligations.
3
When auditing prepaid insurance, an auditor discovers that the original insurance policy on a key piece of manufacturing equipment is not available for inspection. The policy’s absence most likely indicates the possibility of a(n)
A)
Insurance premium due but not recorded.
B)
Fictitious piece of equipment.
C)
Third-party lien holder with a secured interest in the equipment.
D)
Understatement of insurance expense.
4
Which of the following situations would not support the auditor’s decision to reduce control risk below maximum for the audit of intangible assets?
A)
The entity employs a qualified expert who reviews the value of the intangible assets on an annual basis for impairment.
B)
The auditor documented, tested, and developed an understanding of the acquisition process and found the key controls to be effective.
C)
The IT system that maintains the records for intangible assets has adequate controls to prevent unauthorized access.
D)
The company has made no acquisitions of other companies during the fiscal year under audit.
5
Which of the following control activities would most likely allow for a reduction in the scope of the auditor’s tests of depreciation expense?
A)
Review and approval of the periodic equipment depreciation entry by a supervisor who does not actively participate in its preparation.
B)
Comparison of equipment account balances for the current year with the current-year budget and prior-year actual balances.
C)
Review of the miscellaneous income account for salvage credits and scrap sales of partially depreciated equipment.
D)
Authorization of payment of vendor’s invoices by a designated employee who is independent of the equipment-receiving function.
6
Which of the following internal controls is most likely to justify a reduction of control risk concerning plant and equipment acquisitions?
A)
Periodic physical inspection and reconciliation of plant and equipment to the detailed accounting records by the internal audit staff.
B)
Comparison of current-year plant and equipment account balances with prior-year actual balances.
C)
Review of prenumbered purchase orders to detect unrecorded trade-ins.
D)
Approval of periodic depreciation entries by a supervisor independent of the accounting department.
7
To strengthen control over the custody of heavy mobile equipment, the client would most likely institute a policy requiring a periodic
A)
Increase in insurance coverage.
B)
Inspection of equipment and reconciliation with accounting records.
C)
Verification of liens, pledges, and collateralizations.
D)
Accounting for work orders.
8
Due to a deficiency observed in an entity’s control over recording retirement of equipment, the auditor may decide to
A)
Trace additions to the ‘other assets’ account to search for equipment that is still on hand but no longer being used.
B)
Select certain items of equipment from the accounting records and locate them in the plant.
C)
Inspect certain items of equipment in the plant and trace those items to the accounting records.
D)
Review the subsidiary ledger to ascertain whether depreciation was taken on each item of equipment during the year.
9
Which of the following procedures is most likely to prevent the improper disposition of equipment?
A)
Separation of duties between those authorized to dispose of equipment and those authorized to approve removal work orders.
B)
The use of serial numbers to identify equipment that could be sold.
C)
Periodic comparison of removal work orders to authorizing documentation.
D)
Periodic analysis of the scrap sales and the repairs and maintenance accounts.
10
Property acquisitions that are misclassified as maintenance expense would most likely be detected by an internal control system that provides for
A)
Investigation of variances within a formal budgeting system.
B)
Review and approval of the monthly depreciation entry by the plant supervisor.
C)
Segregation of duties of employees in the accounts payable department.
D)
Examination by the internal auditor of vendor invoices for property acquisitions.
11
Property, plant, and equipment transactions include all of the following, except:
A)
Self-construction of a new office building.
B)
Acquiring capital assets in exchange for stock.
C)
Recording operating leases.
D)
Abandoning capital assets.
12
Which of the following is not a common internal control activity related to the acquisition of property, plant and equipment?
A)
Using a budget to forecast and control acquisitions and retirements.
B)
Analyzing monthly variances between authorized expenditures and actual costs.
C)
Requiring acquisitions to be authorized in relevant departments by the appropriate level of management.
D)
Establishing a written company policy regarding the acquisition of raw material.
13
When there are numerous property and equipment transactions during the year, an auditor who plans to set the control risk at a low level usually performs
A)
Substantive analytical procedures for property and equipment balances at the end of the year.
B)
Tests of controls and extensive tests of property and equipment balances at the end of the year.
C)
Substantive analytical procedures for current-year property and equipment transactions.
D)
Tests of controls and limited tests of current-year property and equipment transactions.
14
Which of the following would be considered an internal control deficiency associated with plant assets?
A)
The estimated useful lives used for financial reporting purposes in some cases are slightly different than the classifications used for tax purposes.
B)
Factory equipment acquisitions are initiated by the department head requesting the item, approved by the divisional manager, and sent to the purchasing department to acquire bids (estimates).
C)
Periodic physical examination of plant assets is made and independently compared to the plant asset subsidiary ledger.
D)
Replacements for plant assets are automatically authorized and processed in the next-to-last year of their estimated useful life.
15
Which of the following is not an example of segregation of duties in the property management process?
A)
The employee responsible for taking a physical inventory of property should be independent of the record-keeping function.
B)
The property records function should be separate from the general ledger function.
C)
The employee who computes depreciation for accounting purposes should be separate from the employee who computes depreciation for tax purposes.
D)
The property records function should be separate from the custodial [handling of assets] function.
16
When there are numerous plant asset transactions during the year, an auditor who plans to assess control risk at a high level for an entity usually performs
A)
Extensive test of controls and limited tests of current year transactions.
B)
Limited or no tests of controls and extensive substantive tests of current year transactions and ending balances.
C)
Primarily substantive analytical procedures on year end balances.
D)
Primarily substantive analytical procedures on current year transactions.
17
In testing plant asset account balances, an auditor decides to physically examine a sample of new additions listed on a client-prepared analysis. The procedure most likely contains evidence concerning management’s assertion of
A)
Valuation.
B)
Existence.
C)
Rights and obligations.
D)
Completeness.
18
In performing a search for unrecorded retirements of plant assets, an auditor most likely would
A)
Analyze the entity’s repairs and maintenance account and then tour the plant facilities.
B)
Tour the facilities and then inspect the entity’s plant asset ledger along with insurance and tax records.
C)
Inspect the entity’s plant asset ledger along with insurance and tax records, and then tour the facilities.
D)
Tour the facilities and then analyze the repairs and maintenance account.
19
An auditor may conclude that depreciation expense charges are insufficient by noting
A)
Excessive recurring losses on the disposal of assets.
B)
Insured values in excess of book values.
C)
Continual trade-ins on relatively new assets.
D)
Large amounts of fully-depreciated assets remain in operation.
20
Information regarding which of the following would normally not be included in an entity’s financial statement disclosures related to plant assets?
A)
Capital leases.
B)
Depreciation expenses for tax purposes.
C)
Major acquisitions/disposals of operating assets.
D)
Depreciation methods and useful lives.
21
Vouching significant PP&E additions and dispositions to vendor invoices or other supporting documentation is used to test
A)
Classification.
B)
Cut-off.
C)
Occurrence.
D)
Completeness.
22
Tracing a sample of purchase requisitions to receiving reports and to the PP&E records is used to test
A)
Classification.
B)
Cut-off.
C)
Occurrence.
D)
Completeness.
23
Reviewing the expenditures included in repairs and maintenance for unusually large items is used to test
A)
Completeness.
B)
Occurrence.
C)
Existence.
D)
Classification.
24
An auditor analyses repairs and maintenance accounts primarily to obtain evidence in support of the assertion that all
A)
Non-capitalizable expenditures for repairs and maintenance have been properly charged to expense.
B)
Expenditures for property and equipment have not been charged to expense.
C)
Non-capitalizable expenditures for repairs and maintenance have been recorded in the proper period.
D)
Expenditures for property and equipment have been recorded in the proper period.
25
Which of the following combinations of procedures would an auditor be most likely to perform to obtain evidence about fixed-asset additions?
A)
Inspecting documents and physically examining assets.
B)
Recomputing calculations and obtaining written management representations.
C)
Observing operating activities and comparing balances to prior-period balances.
D)
Confirming ownership and corroborating transactions through inquiries of company personnel.