Equipment considered idle on a permanent basis should not be classified as plant and equipment.

journal article

The Accounting Review

Vol. 15, No. 4 (Dec., 1940)

, pp. 469-473 (5 pages)

Published By: American Accounting Association

https://www.jstor.org/stable/240628

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Journal Information

The Accounting Review is the premier journal for publishing articles reporting the results of accounting research and explaining and illustrating related research methodology. The scope of acceptable articles embraces any research methodology and any accounting-related subject. The primary criterion for publication in The Accounting Review is the significance of the contribution an article makes to the literature.

Publisher Information

The American Accounting Association is the world's largest association of accounting and business educators, researchers, and interested practitioners. A worldwide organization, the AAA promotes education, research, service, and interaction between education and practice. Formed in 1916 as the American Association of University Instructors in Accounting, the association began publishing the first of its ten journals, The Accounting Review, in 1925. Ten years later, in 1935, the association changed its name to become the American Accounting Association. The AAA now extends far beyond accounting, with 14 Sections addressing such issues as Information Systems, Artificial Intelligence/Expert Systems, Public Interest, Auditing, taxation (the American Taxation Association is a Section of the AAA), International Accounting, and Teaching and Curriculum. About 30% of AAA members live and work outside the United States.

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Terms in this set (25)

Which of the following policies is an internal control weakness related to the acquisition of factory equipment?

a) Acquisitions are made through and approved by the department in need of the equipment.
b) Advance executive approvals are required for equipment acquisitions.
c) Variances between authorized equipment expenditures and actual costs are to be immediately reported to management.
d) Depreciation policies are reviewed only once a year.

a) Acquisitions are made through and approved by the department in need of the equipment.

T/F: Evidence of continued ownership of property is obtained by vouching payments for property taxes.

True

T/F: The auditors' approach to the audit of property, plant, and equipment largely results from the fact that many transactions occur.

False

T/F: Material purchases of assets from an affiliated company should be disclosed in the financial statements.

True

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 auditors of vendor invoices and canceled checks for property acquisitions.

a) Investigation of variances within a formal budgeting system.

The audit procedure of analyzing the repairs and maintenance accounts is primarily designed to provide evidence in support of the audit proposition that all

a) Expenditures for fixed assets have been recorded in the proper period.
b) Capital expenditures have been properly authorized.
c) Noncapitalizable expenditures have been properly expensed.
d) Expenditures for fixed assets have been capitalized.

d) Expenditures for fixed assets have been capitalized.

A plant manager would be most likely to provide information on which of the following?

a)Adequacy of the provision for uncollectible accounts.
b) Appropriateness of physical inventory valuation techniques.
c) Existence of obsolete production equipment.
d) Deferral of certain purchases of office supplies.

c) Existence of obsolete production equipment.

T/F: Equipment considered idle on a permanent basis should not be classified as plant and equipment.

True

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

a) Review of the purchase returns and allowances account.
b) Review of depreciation.
c) Analysis of the debits to the accumulated depreciation account.
d) Review of insurance policy riders.

a) Review of the purchase returns and allowances account.

T/F: A typical procedure in the audit of property is examination of public records to verify the ownership of the property.

False

In testing for unrecorded retirements of equipment, an auditor might:

a) Analyze miscellaneous revenue.
b) Compare depreciation expense with the prior year's depreciation expense.
c) Trace equipment items observed during the plant tour to the equipment subsidiary ledger.
d) Scan the general journal for unusual equipment retirements.

a) Analyze miscellaneous revenue.

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?

a) Repairs have been capitalized to equipment to keep it in normal working order.
b) Interest has been capitalized for self-constructed assets.
c) Assets have been acquired from affiliated corporations with the related transactions recorded and described in the financial statements.
d) The cost of freight-in on an acquisition has been capitalized.

a) Repairs have been capitalized to equipment to keep it in normal working order.

When there are numerous property and equipment transactions during the year, an auditor planning to assess the risk of material misstatement at a low risk level must perform.

a) Tests of controls and extensive tests of property and equipment balances at the end of the year.
b) Extensive tests of current year property and equipment transactions.
c) Tests of controls and limited tests of current year property and equipment transactions.
d) Analytical procedures for property and equipment balances at the end of the year.

c) Tests of controls and limited tests of current year property and equipment transactions.

Which of the following is not one of the auditors' objectives in auditing depreciation?

a) Establishing the reasonableness of the client's replacement policy.
b) Establishing that the methods used are appropriate.
c) Establishing that the methods are consistently applied.
d) Establishing the reasonableness of depreciation computations.

a) Establishing the reasonableness of the client's replacement policy.

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

a) Discussing capitalization policies with Miller's controller.
b) Examining maintenance expense accounts.
c) Observing, during the physical inventory observation, that the warehouse had been painted.
d) Examining the construction work orders supporting items capitalized during the year.

d) Examining the construction work orders supporting items capitalized during the year.

An auditor would be least likely to use confirmations in connection with the examination of

a) Inventories.
b) Long-term debt.
c) Property, plant, and equipment.
d) Stockholders' equity.

c) Property, plant, and equipment.

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

a) Extent of the control risk.
b) Extent of property abandoned during the year.
c) Adequacy of replacement funds.
d) Reasonableness of the depreciation

c) Adequacy of replacement funds.

Which of the following accounts should be reviewed by the auditor to gain reasonable assurance that additions to property, plant, and equipment are not understated?

a) Depreciation.
b) Accounts payable.
c) Cash.
d) Repairs and maintenance.

d) Repairs and maintenance.

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

a) Service Revenue.
b) Sales.
c) Repairs and maintenance expense.
d) Sales salaries expense.

c) Repairs and maintenance expense.

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:

a) More audit time.
b) Less audit time.
c) Approximately the same amount of audit time.
d) Similar confirmation procedures.

a) More audit time.

To strengthen internal 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.

b) Inspection of equipment and reconciliation with accounting records.

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

d) Examination of deeds and title guaranty policies on hand.

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

a) Verify the mathematical accuracy of the amounts charged to income as a result of depreciation expense.
b) Determine the method for computing depreciation expense and ascertain that is in accordance with generally accepted accounting principles.
c) Reconcile the amount of depreciation expense to those amounts credited to accumulated depreciation accounts.
d) Establish the basis for depreciable assets and verify the depreciation expense.

d) Establish the basis for depreciable assets and verify the depreciation expense.

An auditor has identified numerous debits to accumulated depreciation of equipment. Which of the following is most likely?

a) The estimated remaining useful lives of equipment were increased.
b) Plant assets were retired during the year.
c) The prior year's depreciation expense was erroneously understated.
d) Overhead allocations were revised at year-end.

b) Plant assets were retired during the year.

Which of the following best describes the auditors' typical observation of plant and equipment?

a) The auditors observe a physical inventory of plant and equipment annually.
b) The auditors observe all additions to plant and equipment made during the year.
c) The auditors observe all major plant and equipment items in the clients' accounts each year.
d) The auditors observe major additions to plant and equipment made during the year.

d) The auditors observe major additions to plant and equipment made during the year.

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