CHAPTER 19



Chapter 19

Multiple-Choice Questions

|1. |Which of the following accounts is associated with a transaction cycle other than acquisition and payment? |

|easy | |

|a |a. Common stock. |

| |b. Property, plant and equipment. |

| |c. Accrued property taxes. |

| |d. Income tax expense. |

| | |

|2. |Property, plant, and equipment are assets that: |

|easy |a. have expected lives of more than one year. |

|d |b. are used in the business. |

| |c. are not acquired for resale. |

| |d. meet all of the requirements stated above. |

| | |

|3. |Which of the following expenses is not typically evaluated as part of the audit of the acquisition and payment cycle?|

|easy | |

|c |a. Depreciation expense. |

| |b. Insurance expense. |

| |c. Bad debts expense. |

| |d. Property tax expense. |

| | |

|4. |Debits to manufacturing equipment arise from which cycle(s)? |

|easy |a. Sales and collection |

|c |b. Payroll |

| |c. Acquisition and disbursement |

| |d. Inventory and warehousing |

| | |

|5. |It should ordinarily be unnecessary to examine supporting documentation for each addition to property, plant, and |

|easy |equipment, but it is customary to verify: |

|d |a. all large transactions. |

| |b. all unusual transactions. |

| |c. a representative sample of typical additions. |

| |d. all three of the above. |

| | |

|6. |The auditor must know the client’s capitalization policies to determine whether acquisitions are: |

|easy | |

|d | |

| | |Recorded in accordance with | |Treated consistently with those of | |Necessary |

| | |GAAP | |the preceding year | | |

| |a. |Yes | |Yes | |Yes |

| |b. |Yes | |No | |No |

| |c. |No | |No | |No |

| |d. |Yes | |Yes | |No |

| | |

|7. |To be capitalized as part of property, plant and equipment, assets must: |

|easy |a. have expected useful lives of more than one year. |

|d |b. not be acquired for resale. |

| |c. be useful in multiple productive capacities within the organization. |

| |d. a and b, but not c. |

| | |

|8. |The primary accounting record for manufacturing equipment and other fixed assets is the: |

|easy |a. depreciation ledger. |

|b |b. fixed asset master file. |

| |c. asset inventory. |

| |d. equipment roster. |

| | |

|9. |Which of the following statements about the audit of fixed assets is not correct? |

|easy |a. The primary accounting record for manufacturing equipment and other property, plant and equipment is generally a |

|b |fixed asset master file. |

| |b. Manufacturing equipment and current assets are normally audited in the same fashion regardless of the 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 is fully |

| |depreciated. |

| | |

|10. |During the audit of prepaid insurance, the auditor should keep in mind that the amount in insurance expense is based |

|easy |on: |

|d |a. the beginning balance in prepaid insurance. |

| |b. the payment of premiums during the year. |

| |c. the ending balance in prepaid insurance. |

| |d. all three of the above. |

| | |

|11. |Which of the following is not a category of tests commonly associated with the audit of manufacturing equipment? |

|easy | |

|d |a. Verification of depreciation expense. |

| |b. Analytical procedures. |

| |c. Verification of current-period disposals. |

| |d. Verification of the beginning balance in accumulated depreciation. |

| | |

|12. |The audit procedure that requires an auditor to “foot the acquisition schedule” relates to which balance-related |

|easy |audit objective? |

|b |a. Classification. |

| |b. Detail tie-in. |

| |c. Existence. |

| |d. Cut-off. |

| | |

|13. |Which of the following audit objectives is not typically a major objective in the audit of current year fixed asset |

|easy |additions? |

|c |a. Classification. |

| |b. Completeness. |

| |c. Existence. |

| |d. Accuracy. |

| | |

|14. |The extent to which auditors verify current period acquisitions of property, plant and equipment normally depends |

|easy |upon: |

|c |a. assessed control risk for acquisitions. |

| |b. tolerable misstatement. |

| |c. Both a and b. |

| |d. Neither a nor b. |

| | |

|15. |Inadequate controls and misstatements discovered through tests of controls and substantive tests of transactions are |

|easy |an indication of the likelihood of misstatements in: |

|d |a. the balance sheet. |

| |b. the income statement. |

| |c. the cash flow statement. |

| |d. both the income statement and the balance sheet. |

| | |

|16. |Failure to capitalize a fixed asset at the correct amount affects __________ until the company disposes of the asset.|

|medium | |

|d |a. the balance sheet only |

| |b. the income statement only |

| |c. the cash flow statement only |

| |d. both the income statement and the balance sheet |

| | |

|17. |Which of the following tests are typically not necessary when auditing a client’s schedule of recorded disposals? |

|medium | |

|d |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. |

| | |

|18. |Which of the following is not likely to be a test related to the audit of manufacturing equipment? |

|medium |a. Verify current year additions. |

|b |b. Observe current year disposals. |

| |c. Verify depreciation expense. |

| |d. Perform analytical procedures. |

| | |

|19. |A set of records for each piece of equipment that includes descriptive information, date of acquisition, original |

|medium |cost, current year depreciation, and accumulated depreciation is the: |

|c |a. acquisitions journal. |

| |b. depreciation schedule. |

| |c. fixed asset master file. |

| |d. file of purchase requisitions. |

| | |

|20. |In the audit of property, plant, and equipment, it is helpful to separate the tests into all but which one of the |

|medium |following categories? |

|a |a. Verification of the beginning balance. |

| |b. Verification of current year acquisitions. |

| |c. Verification of current year disposals. |

| |d. Verification of the ending balance. |

| | |

|21. |Methods used to determine if there are legal encumbrances related to fixed assets include all but which of the |

|medium |following? |

|d |a. Reading terms of loan and credit agreements. |

| |b. Reviewing loan confirmations received from banks. |

| |c. Inquiring of the client regarding possible legal encumbrances. |

| |d. All of the above may be used to identify legal encumbrances. |

| | |

|22. |The test of details of balances procedure which requires a “recalculation of investment credit” satisfies the audit |

|medium |objective of: |

|d |a. classification. |

| |b. detail tie-in. |

| |c. existence. |

| |d. accuracy. |

| | |

|23. |The test of details of balances procedure to “examine vendors’ invoices of closely related accounts such as repairs |

|medium |to uncover items that should be property, plant, and equipment” satisfies the audit objective of: |

|a | |

| |a. classification. |

| |b. detail tie-in. |

| |c. cutoff. |

| |d. existence. |

| | |

|24. |The auditor’s starting point for verifying disposals of property, plant, and equipment is the: |

|medium |a. equipment account in the general ledger. |

|c |b. file of shipping documents. |

| |c. client’s schedule of recorded disposals. |

| |d. equipment subsidiary ledger. |

| | |

|25. |Failure to capitalize a fixed asset at the correct amount will affect ___________ until the asset is fully |

|medium |depreciated. |

|d |a. the balance sheet |

| |b. the income statement |

| |c. the cash flow statement |

| |d. both the income statement and the balance sheet |

| | |

|26. |Because the failure to record disposals of property, plant, and equipment can significantly affect the financial |

|medium |statements, the search for unrecorded disposals is essential. Which of the following is not a procedure used to |

|c |verify disposals? |

| |a. Make inquiries of management and production personnel about the possibility of the disposal of assets. |

| |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. |

| | |

|27. |In rare cases, the auditor may believe it is necessary that a complete physical inventory of fixed assets be taken to|

|medium |make sure they actually exist. If an inventory is taken, the auditor normally: |

|c |a. takes the inventory. |

| |b. requires client to take the inventory and provide documentation to the auditor. |

| |c. observes the count. |

| |d. requires that it be done by an outside, independent third party. |

| | |

|28. |A major consideration in verifying the ending balance in fixed assets is the possibility of existing legal |

|medium |encumbrances. Tests to identify possible legal encumbrances would satisfy the audit objective of: |

|b | |

| |a. existence. |

| |b. presentation and disclosure. |

| |c. detail tie-in. |

| |d. classification. |

| | |

|29. |When auditing depreciation expense, the two major concerns related to the accuracy audit objective are: |

|medium | |

|c |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. |

| | |

|30. |Which type of audit procedure is often sufficient for purposes of auditing prepaid expenses and deferred charges? |

|medium | |

|d |a. Tests of controls. |

| |b. Tests of transactions. |

| |c. Tests of details of balances. |

| |d. Analytical procedures. |

| | |

|31. |Depreciation expense is one of the few expense accounts that is not verified as a part of: |

|medium |a. tests of controls. |

|d |b. tests of transactions. |

| |c. test of details of balances. |

| |d. a and b, but not c. |

| | |

|32. |Changing circumstances may require a change in the useful life of an asset. When this occurs, it involves a change |

|medium |in: |

|a |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. |

| | |

|33. |The auditor ___________ to test the accuracy or classification of fixed assets recorded in prior periods. |

|medium | |

|c |a. normally needs |

| |b. never needs |

| |c. normally does not need |

| |d. is required |

| | |

|34. |The auditor normally does not need to test the accuracy or classification of fixed assets recorded in prior periods |

|medium |because: |

|c |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. |

| | |

|35. |Internal controls for prepaid insurance are typically categorized into all but which of the following? |

|medium | |

|d |a. Controls over the acquisition and recording of insurance. |

| |b. Controls over the insurance register. |

| |c. Controls over the charge-off of insurance expense. |

| |d. All of the above. |

| | |

|36. |A record of insurance policies in force and the due date of each policy is contained in the: |

|medium |a. voucher register. |

|b |b. insurance register. |

| |c. insurance expense account. |

| |d. prepaid insurance account. |

| | |

|37. |Insurance expense for the period is a function of which of the following? |

|medium |a. The beginning prepaid balance, current premium payments and the ending prepaid balance. |

|a |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. |

| | |

|38. |Expense accounts analysis is closely related to tests of controls and substantive tests of transactions. The major |

|medium |difference is: |

|b |a. the difference in the types of underlying documentation which is examined. |

| |b. the degree of concentration on an individual account. |

| |c. the use or nonuse of cutoff tests. |

| |d. that one emphasizes transactions and the other emphasizes amounts. |

| | |

|39. |In connection with a review of the prepaid insurance account, auditors would typically not perform which of the |

|medium |following procedures? |

|c |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. |

| | |

|40. |Which of the following audit procedures would be least likely to lead the auditor to find an unrecorded fixed asset |

|medium |disposal? |

|b |a. Examination of insurance policies. |

| |b. Review of repairs and maintenance expense. |

| |c. Review of property tax files. |

| |d. Scanning of invoices for fixed asset additions. |

| | |

|41. |To achieve effective internal accounting control over fixed asset additions, a company should establish procedures |

|medium |that require: |

|a |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. |

| | |

|42. |Which of the following is a customary audit procedure for the verification of the legal ownership of real property? |

|medium | |

|d |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. |

| | |

|43. |Once the initial audit of a newly constructed industrial plant has been performed, with respect to consistency, which|

|medium |of the following is of least concern to the continuing auditor in the following year? |

|b | |

| |a. Prior years’ capitalization policy. |

| |b. Prior years’ capitalization costs. |

| |c. Prior years’ depreciation methods. |

| |d. Prior years’ depreciable life. |

| | |

|44. |Controls over the acquisition and recording of insurance are a part of the ________. |

|medium |a. inventory and warehousing cycle |

|d |b. capitalization cycle |

| |c. treasury cycle |

| |d. acquisition and payment cycle |

| | |

|45. |The approach used to verify manufacturing equipment is different than the one used to verify: |

|challenging |a. current assets. |

|a |b. patents. |

| |c. copyrights. |

| |d. all other types of property, plant, and equipment. |

| | |

|46. |Which balance-related audit objective is not relevant to an audit of prepaid expenses? |

|challenging |a. Rights. |

|d |b. Accuracy. |

| |c. Detail tie-in. |

| |d. Realizable value. |

| | |

|47. |The failure to capitalize a permanent asset, or the recording of an asset acquisition at the improper amount, affects|

|challenging |the balance sheet: |

|d |a. forever. |

| |b. for the current period. |

| |c. for the depreciable life of the asset. |

| |d. until the firm disposes of the asset. |

| | |

|48. |The failure to capitalize a permanent asset, or the recording of an asset acquisition at the improper amount, affects|

|challenging |the income statement: |

|b |a. for the current period. |

| |b. for the depreciable life of the asset. |

| |c. until the firm disposes of the asset. |

| |d. forever. |

| | |

|49. |____________ both have the effect of simultaneously verifying balance sheet and income statement accounts. |

|challenging | |

|b |a. Analytical procedures and substantive tests of transactions |

| |b. Tests of controls and substantive tests of transactions |

| |c. Tests of details of balances and substantive tests of transactions |

| |d. Tests of controls and analytical procedures |

| | |

|50. |The tests of details of balances procedure for fixed assets which require the auditor to examine vendors’ invoices of|

|challenging |closely related accounts such as repairs and maintenance to uncover items that should be fixed assets would satisfy |

|d |the audit objective of: |

| |a. accuracy. |

| |b. existence. |

| |c. detail tie-in. |

| |d. completeness. |

|51. |The erroneous inclusion of transactions that should properly be recorded as assets into accounts such as repairs |

|challenging |expense, lease expense, or supplies is a common client error. The auditor should evaluate the likelihood of these |

|a |types of misclassifications in conjunction with: |

| |a. obtaining an understanding of internal control. |

| |b. the test of controls. |

| |c. the tests of transactions. |

| |d. the tests of details of balances. |

| | |

|52. |If the client fails to record disposals of property, plant, and equipment, both the original cost of the asset |

|challenging |account and the net book value will be incorrect. |

|b |a. Both will be overstated indefinitely. |

| |b. The original cost will be overstated indefinitely, and the net book value will be overstated until the asset is |

| |fully depreciated. |

| |c. The original cost will be overstated indefinitely, and the net book value will be understated indefinitely. |

| |d. The original cost will be overstated indefinitely, and the net book value will be understated until the asset is |

| |fully depreciated. |

| | |

|53. |Income statement accounts resulting from allocations are typically verified as a part of: |

|challenging |a. tests of controls. |

|c |b. substantive tests of transactions. |

| |c. analytical procedures. |

| |d. planning. |

| | |

|54. |Which of the following explanations might satisfy an auditor who discovers significant debits to an accumulated |

|challenging |depreciation account? |

|a |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. |

| | |

|55. |An auditor would be least likely to use confirmations in connection with the examination of: |

|challenging |a. inventories. |

|c |b. long-term debt. |

| |c. property, plant, and equipment. |

| |d. stockholders’ equity. |

| | |

|56. |Which of the following is the most important internal control procedure over acquisitions of property, plant, and |

|challenging |equipment? |

|b |d. Requiring acquisitions to be made by user departments. |

| |b. Using a budget to forecast and control acquisitions and retirements. |

| |c. Analyzing monthly variances between authorized expenditures and actual costs. |

| |a. Establishing a written company policy distinguishing between capital and revenue expenditures. |

| | |

|57. |The auditor interviews the plant manager. The auditor is most likely to rely upon this interview as primary support |

|challenging |for an audit conclusion on: |

|c |a. capitalization vs. expensing policy. |

| |b. allocation of fixed and variable cost. |

| |c. the necessity to record a provision for deferred maintenance costs. |

| |d. the adequacy of the depreciation expense. |

| | |

|58. |The audit procedures used to verify accrued liabilities differ from those employed for the verification of accounts |

|challenging |payable because: |

|d |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 payable is readily |

| |available. |

| |d. accrued liabilities usually pertain to services of a continuing nature, whereas accounts payable are the result of|

| |completed transactions. |

| | |

Essay Questions

|59. |Which type of audit procedure (tests of controls, tests of transactions, tests of details, or analytical procedures) |

|easy |is most often sufficient for the audit of prepaid expenses? |

| |Answer: |

| |Analytical procedures are often sufficient. |

| | |

|60. |Why does the auditor not normally test the accuracy or classification of fixed assets recorded in prior periods? |

|easy | |

| |Answer: |

| |They are presumed to have been verified in prior years’ audits. |

| | |

|61. |Auditors should be aware that the life of certain fixed assets might be reduced due to various circumstances. What |

|easy |circumstances might give rise to a reduction in the useful life of a fixed asset? |

| |Answer: |

| |The useful life a of fixed asset may be reduced by: |

| |a reduction in customer demand for products or services, |

| |unexpected physical deterioration of the asset, or |

| |a modification in operations. |

| | |

|62. |Describe the types of information that should be included in the schedule of prepaid insurance that is used by the |

|easy |auditor as the basis for auditing prepaid insurance. |

| |Answer: |

| |The schedule should include each insurance policy in force, policy number, insurance coverage for each policy, |

| |premium amount, premium period, insurance expense for the year, and prepaid insurance at the end of the year. |

| | |

|63. |Describe two ways the verification of existence and tests for omissions of the client’s insurance policies in force |

|easy |can be performed. |

| |Answer: |

| |The verification of existence and tests for omissions of the insurance policies can be tested in one of two ways: by |

| |examining insurance invoices and policies in force or by obtaining a confirmation of insurance information from the |

| |company’s insurance agent. |

| | |

|64. |What are several analytical procedures used in the audit of prepaid insurance and insurance expense? |

|medium | |

| |Answer: |

| |Compare total prepaid insurance and insurance expense with previous years. |

| |Compute the ratio of prepaid insurance to insurance expense and compare with previous years. |

| |Compare the individual insurance policy coverage on the schedule of insurance obtained from the client with the |

| |preceding year’s schedule as a test of elimination of certain policies or a change in insurance coverage. |

| |Compare the computed prepaid insurance balance for the current year on a policy-by-policy basis with that of the |

| |preceding year as a test of an error in the calculation. |

| | |

|65. |A major issue in verifying the ending balance in property, plant and equipment is the possibility of legal |

|medium |encumbrances. Describe the procedures that auditors may perform to obtain evidence about existing legal encumbrances.|

| |Answer: |

| |Auditors may obtain evidence about existing legal encumbrances by: |

| |reading the terms of loan and credit agreements, |

| |mailing loan confirmation requests to banks and other lending institutions, |

| |inquiring of the client, and |

| |sending letters of inquiry to the client’s legal counsel. |

| | |

|66. |Describe the audit procedures used to verify the accuracy and detail tie-in objectives for prepaid insurance. |

|medium | |

| |Answer: |

| |The accuracy objective is tested by verifying the total amount of the insurance premium, the length of the policy |

| |period, and the allocation of the premium to unexpired insurance. The amount of the premium for a given policy and |

| |its time period can be verified simultaneously by examining the premium invoice or the confirmation from an insurance|

| |agent. Once these two have been verified, the client’s calculations of unexpired insurance can be tested by |

| |recalculation. The schedule of prepaid insurance can then be footed and the totals traced to the general ledger to |

| |complete the detail tie-in tests. |

| | |

|67. |What are the auditor’s two main objectives in the audit of the ending balance in accumulated depreciation? |

|medium | |

| |Answer: |

| |Accumulated depreciation as stated in the property master file must agree with the general ledger. This objective can|

| |be satisfied by test footing the accumulated depreciation or the property master file and tracing the total to the |

| |general ledger. |

| |Accumulated depreciation in the master file must be correct. |

| | |

|68. |Explain allocation and why it is important to have accurate allocation within the financial statements. |

|medium | |

| |Answer: |

| |Allocation is the process of assigning a portion of the cost of an asset to a product or a period. For example, |

| |calculating and then recording depreciation expense is an allocation process. It is important to determine when an |

| |expenditure is an asset or a current period expense so that the financial statements are fairly stated. |

| | |

|69. |Property, plant, and equipment is normally audited in a different manner than current asset accounts. State three |

|challenging |reasons why this is so, and discuss the differences in how property, plant, and equipment is audited compared to |

| |current assets. |

| |Answer: |

| |There are usually fewer current period acquisitions of property, plant, and equipment than current assets. |

| |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 the verification of|

| |current period acquisitions rather than on the balance in the account carried forward from the preceding year. In |

| |addition, the expected life of assets over one year requires depreciation and accumulated depreciation accounts, |

| |which are verified as a part of the audit of the assets. |

| | |

|70. |State each of the seven specific balance-related audit objectives for property, plant, and equipment additions and, |

|challenging |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 total agrees |

| |with the general ledger (detail tie-in). Foot the acquisitions schedule. |

| |Current-year acquisitions as listed exist (existence). Physically examine assets. |

| |Existing acquisitions are recorded (completeness). Examine vendors’ invoices of closely related accounts such as |

| |repairs and maintenance to uncover items that should be property, plant, and equipment. |

| |Current-year acquisitions as listed are accurate (accuracy). Examine vendors’ invoices. |

| |Current-year acquisitions as listed are properly classified (classification). Examine rent and lease expense for |

| |capitalizable leases. |

| |Current-year acquisitions are recorded in the proper period (cutoff). Review transactions near the balance sheet date|

| |for proper period. |

| |The client has rights to current-year acquisitions (rights and obligations). Examine vendors’ invoices. |

| | |

|71. |Discuss the key internal controls related to the disposal of property, plant, and equipment. |

|challenging | |

| |Answer: |

| |The most important internal control over the disposal of property, plant, and equipment is the existence of a formal |

| |method to inform management of the sale, trade-in, abandonment, or theft of recorded machinery and equipment. Another|

| |important control to protect assets from unauthorized disposal 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 are correctly removed from the accounting records. |

| | |

|72. |When auditing disposals of property, plant, and equipment, the search for unrecorded disposals is essential. State |

|challenging |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 the disposal of assets.|

| |Review plant modifications and changes in product lines, taxes, or insurance coverage for indications of deletions of|

| |equipment. |

| |Make inquiries of management and production personnel about the possibility of the disposal of assets. |

| | |

|73. |Discuss the key internal controls over existing fixed assets that affect the auditor’s extent of testing of fixed |

|challenging |assets acquired in prior years. |

| |Answer: |

| |Important controls include the use of a master file for individual fixed assets, adequate physical controls over |

| |assets that are easily movable, assignment of identification numbers to each plant asset, and periodic physical count|

| |of fixed assets and their reconciliation by accounting personnel. A formal method of informing the accounting |

| |department of all disposals of fixed assets is also an important control over the balance of assets carried forward |

| |into the current year. |

| | |

|74. |Discuss the key internal controls for prepaid insurance that affect the auditor’s extent of testing of the prepaid |

|challenging |insurance account. |

| |Answer: |

| |Important controls include proper authorization for new insurance policies and payment of insurance premiums |

| |consistent with the client’s payment procedures. A record of insurance policies in force and the due date of each |

| |policy is an essential control to make sure that the company has adequate insurance at all times. The control should |

| |include a provision for periodic review of the adequacy of the insurance coverage by an independent qualified person.|

| |The detailed records of the information in the insurance register should be verified by someone independent of the |

| |person preparing them. A closely related control is the use of monthly standard journal entries for insurance |

| |expense. |

Other Objective Answer Format Questions

|75. |When an audit is a first-year engagement, some additional risk is involved and more audit work is required than in |

|easy |subsequent years. |

|a |a. True |

| |b. False |

|76. |One of the auditor’s primary objectives when auditing manufacturing equipment is accuracy. |

|easy |a. True |

|b |b. False |

|77. |Completeness and existence are the auditor’s primary objectives in auditing manufacturing equipment. |

|easy |a. True |

|a |b. False |

|78. |Wages expense is normally considered to be associated with the acquisition and payment cycle. |

|easy |a. True |

|b |b. False |

|79. |The primary characteristic that distinguishes property, plant, and equipment from inventory, prepaid expenses, and |

|easy |investments is the intention to use property, plant, and equipment as a part of the operations of the client’s |

|b |business and their expected life of approximately one year. |

| |a. True |

| |b. False |

|80. |The emphasis in auditing manufacturing equipment is on the verification of current-period disposals. |

|easy |a. True |

|b |b. False |

|81. |The auditor should keep in mind that the amount in insurance expense is a residual amount. |

|easy |a. True |

|a |b. False |

|82. |The realizable value audit objective is not applicable when auditing prepaid insurance or insurance expense. |

|easy |a. True |

|a |b. False |

|83. |The starting point for the verification of current-year acquisitions of property, plant, and equipment is normally a |

|medium |client-prepared schedule of all acquisitions recorded in the general ledger during the year. |

|a |a. True |

| |b. False |

|84. |The least common audit test to verify current period acquisitions of property, plant, and equipment is examining |

|medium |vendors’ invoices and receiving reports. |

|b |a. True |

| |b. False |

|85. |Depreciation expense is normally verified as a part of tests of details of balances rather than as part of tests of |

|medium |controls or substantive tests of transactions. |

|a |a. True |

| |b. False |

|86. |The most important audit objective for depreciation expense is accuracy. |

|medium |a. True |

|a |b. False |

|87. |The audit of insurance expense is normally limited to analytical procedures and a brief test of whether charges to |

|medium |insurance expense arose from credits to prepaid insurance. |

|a |a. True |

| |b. False |

|88. |Tests of the cutoff objective for prepaid insurance are rarely performed by auditors. |

|medium |a. True |

|a |b. False |

|89. |In auditing the current year acquisitions of property, plant and equipment, all balance-related audit objectives |

|medium |except realizable value and disclosure are used as a frame of reference. |

|a |a. True |

| |b. False |

|90. |While analytical procedures are commonly used when auditing balance sheet accounts, they are rarely used when |

|medium |auditing income statement accounts. |

|b |a. True |

| |b. False |

|91. |Tests of controls provide an indication of the likelihood of misstatements in both the income statement and the |

|medium |balance sheet, simultaneously. |

|a |a. True |

| |b. False |

|92. |The auditor’s review of current year acquisition’s cutoff is normally done as part of accounts payable cutoff tests. |

|medium |a. True |

|a |b. False |

|93. |The auditor’s tests for proper cutoff of current year acquisitions of property, plant, and equipment are usually done|

|medium |as part of accounts payable cutoff tests. |

|a |a. True |

| |b. False |

|94. |In deciding the useful life of an asset, the company’s policy is relatively unimportant. |

|medium |a. True |

|b |b. False |

|95. |The audit procedure “foot the schedule of fixed assets acquisitions and trace the total to the general ledger” |

|medium |relates most closely to the accuracy objective for fixed assets acquisitions. |

|b |a. True |

| |b. False |

|96. |Confirmations are commonly used to verify additions of property, plant, and equipment. |

|medium |a. True |

|b |b. False |

|97. |When auditing insurance expense, auditors normally rely on analytical procedures and limited testing of the debits to|

|medium |ensure that they arose from credits to prepaid insurance. |

|a |a. True |

| |b. False |

|98. |One very useful method of auditing depreciation is to use an analytical procedure to test for reasonableness. |

|medium |a. True |

|a |b. False |

|99. |The approach to auditing patents and copyrights is more similar to that used for current assets than the approach |

|challenging |used for property, plant, and equipment accounts. |

|b |a. True |

| |b. False |

|100. |Recording an acquisition of a fixed asset at an improper amount affects the balance sheet until the company disposes |

|challenging |of the asset, but the income statement is not affected. |

|b |a. True |

| |b. False |

|101. |Ordinarily, it is unnecessary to test the accuracy objective or the classification objective for fixed assets |

|challenging |acquired in prior years. |

|a |a. True |

| |b. False |

|102. |In the audit of accrued property taxes, the two most important balance-related audit objectives are completeness and |

|challenging |accuracy. |

|a |a. True |

| |b. False |

|103. |Typically, analytical procedures are the primary means of verifying income statement accounts resulting from |

|challenging |allocations. |

|a |a. True |

| |b. False |

|104. |When auditing acquisitions of property, plant, and equipment, the auditor’s review of lease and rental agreements |

|challenging |most closely relates to the cutoff objective. |

|b |a. True |

| |b. False |

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