CH12 TB

Question 1

Long-lived assets include only the tangible assets of an organization.

T or F?

Answer 1

FALSE

Question 2

Long-lived assets typically represent the smallest single category of assets in many organizations.

T or F?

Answer 2

FALSE

Question 3

Much of the inherent risk related to long-lived assets is due to the importance of management estimates.

T or F?

Answer 3

TRUE

Question 3

The auditor’s procedures should include a determination of the reasonableness of management’s estimate of useful lives of tangible assets.

T or F?

Answer 3

TRUE

Question 4

Gains on the sale of equipment usually indicate that the depreciation lives of the assets are too long.

T or F?

Answer 4

FALSE

Gains on the sale of equipment usually indicate that the depreciation lives of the assets are too short.

Question 5

To identify possible impairment of manufacturing equipment, the auditor can tour the facility during operations to determine if any of the machines are idle.

T or F?

Answer 5

TRUE

Question 6

Internal controls over long-lived assets should provide reasonable assurance that all purchases are authorized and properly valued.

T or F?

Answer 6

TRUE

Question 7

An inherent risk related to asset impairment is that management normally does not have incentives to write down asset values.

T or F?

Answer 7

TRUE

Question 8

The client should have methods in place to identify and account for intangible-asset impairments.

T or F?

Answer 8

TRUE

Question 9

A common technique used to fraudulently misstate financial statements involves the undervaluing of existing long- lived assets.

T or F?

Answer 9

FALSE

Question 10

The auditor would be most likely to request a schedule of repairs and maintenance expense to test the existence of long-lived assets.

T or F?

Answer 10

FALSE

Question 11

The auditor would most likely review the depreciation policy and test depreciation calculations to test the valuation of long-lived assets.

T or F?

Answer 11

TRUE

Question 12

The existence of fair value estimates that are unreasonable or unsupportable is indicative of a potential fraud scheme.

T or F?

Answer 12

TRUE

Question 13

The auditor typically makes a physical inspection of most of the material fixed asset acquisitions.

T or F?

Answer 13

FALSE

Question 14

An auditor is required to gain an overall understanding of internal controls related to long-lived assets for integrated audits, but not for financial statement only audits.

T or F?

Answer 14

FALSE

Question 15

Asset impairment is not typically assessed by the auditor since it is a subjective management estimate.

T or F?

Answer 15

FALSE

Question 16

Knowledge of industry product trends is crucial to the auditor’s identification of the potential for the impairment of assets.

T or F?

Answer 16

FALSE

Question 17

When the value of a long-lived asset has been impaired, the organization must write down the asset reflecting the decline in economic benefit of the asset.

T or F?

Answer 17

TRUE

Question 18

When an organization disposes of a long-lived asset, it should determine and record the gain or loss on the disposal of the asset.

T or F?

Answer 18

TRUE

Question 19

Effective internal controls over long-lived assets include the use of identification tags secured to assets for proper tracking.

T or F?

Answer 19

TRUE

Question 20

Estimating the amount of reclamation costs is an inherent risk associated with natural resources.

T or F?

Answer 20

TRUE

Question 21

An inherent risk associated with intangible assets, such as a patent, is the accounting for research and development costs.

T or F?

Answer 21

TRUE

Question 22

Brown, Inc., obtained a patent for its product five years ago and should expense the entire amount of the unamortized balance if the product is no longer sold.

T or F?

Answer 22

TRUE

Question 23

Limited physical access to long-lived assets is a typical internal control that affects multiple assertions for long-lived assets.

T or F?

Answer 23

TRUE

Question 24

It is not important for an organization to have controls to track the location, quantity, condition, maintenance, and depreciation status of long-lived assets because the auditor gathers evidence related to these issues. | T or F?

Answer 24

FALSE

Question 25

Intangible assets are not subject to potential impairment of value because they lack physical substance. | T or F?

Answer 25

FALSE

Question 26

Natural resource companies cannot reassess the amount of reserves even if more information becomes available during the course of mining, harvesting, or extracting resources. | T or F?

Answer 26

FALSE

Question 27

When testing the existence/occurrence assertion for long-lived assets, the focus is typically on disposals of assets that took place during the year. | T or F?

Answer 27

FALSE

Question 28

Auditors must understand the business and economics of the client’s business in order to perform meaningful planning analytical procedures for long-lived assets. | T or F?

Answer 28

TRUE

Question 29

If planning analytical procedures identify some unexpected relationships, the auditor would conclude that there may be a heightened risk of material misstatements. | T or F?

Answer 29

TRUE

Question 30

Audit procedures for leases consist primarily of examining lease documents to determine the substance of the lease transaction and the proper accounting treatment. | T or F?

Answer 30

TRUE

Question 31

The FASB standard on accounting for leases issued in 2016 requires most leases to be reported on the lessee’s balance sheet, which is a significant change from the previous accounting requirements. | T or F?

Answer 31

TRUE

Question 32

If unusual or unexpected relationships related to long-lived assets are identified during planning analytical procedures, (tests of controls and substantive procedures) would be adjusted to address the risk of the planned audit procedures material misstatement. | T or F?

Answer 32

TRUE

Question 33

An auditor should compare the unaudited financial statements with both past results and industry trends to gain an indication about the possibility of fraud. | T or F?

Answer 33

TRUE

Question 34

If control deficiencies related to long-lived assets are identified, the auditor will automatically assess those deficiencies as significant deficiencies. | T or F?

Answer 34

FALSE

Question 35

The obsolescence of long-lived assets is an inherent risk that should be considered by the auditor. | T or F?

Answer 35

TRUE

Question 36

Changes in the depreciable lives of equipment may be identified through a substantive audit procedure that includes analyzing depreciation expense as a percent of assets. | T or F?

Answer 36

TRUE

Question 37

Audit firms that have developed standardized programs for auditing long-lived assets do not need to customize the audit programs based on assessed risk of material misstatement because inherent risks related to long-lived assets are the same for all clients. | T or F?

Answer 37

FALSE

Question 38

If a company has only a few long-lived assets of relatively high value, the most efficient approach for an auditor would be to use tests of details for obtaining evidence. | T or F?

Answer 38

TRUE

Question 39

The risk of material misstatement related to the existence of long-lived assets at Client A is considered low, while this risk at Client B is considered high. Sufficiency of evidence for testing the existence of equipment would be higher for client B. | T or F?

Answer 39

TRUE

Question 40

An inherent risk related to long-lived assets is the incomplete recording of disposals. | T or F?

Answer 40

TRUE

Question 41

For integrated audits, the auditor will test the operating effectiveness of important controls throughout the year with a greater focus on controls as of the client’s year-end. | T or F?

Answer 41

TRUE

Question 42

The auditor selects entity-wide controls for testing, but not transaction controls specific to long-lived assets. | T or F?

Answer 42

FALSE

Question 43

Goodwill is the excess of the purchase price over the fair market values of the acquired company’s tangible assets, identifiable intangible assets, and liabilities. | T or F?

Answer 43

TRUE

Question 44

Because of conservatism considerations, auditors should allow a client to overestimate its reserve for restructuring. | T or F?

Answer 44

FALSE

Question 45

Goodwill has to be evaluated circumstances warrant. | T or F?

Answer 45

TRUE

Question 46

If restructuring charges are not calculated correctly, the charges can be used to fraudulently manipulate income. | T or F?

Answer 46

TRUE

Question 47

In assessing the fair value of Level 1 assets, the auditor can perform an analysis of the volume of trading activity as part of obtaining audit evidence. | T or F?

Answer 47

TRUE

Question 48

When assessing fair value of Level 2 assets, auditors will use information on the sale of identical items in active or inactive markets as a source of audit evidence. | T or F?

Answer 48

FALSE

Question 49

Level 1 assets is a broad category of assets and applies to financial instruments, property, or lower of cost or market considerations for inventory, loans, or receivables. | T or F?

Answer 49

FALSE

Question 50

Audits of Level 3 assets are the most straightforward as they involve an observable, active market. | T or F?

Answer 50

FALSE

Question 51

Under accounting guidance issued by the FASB in 2017, a goodwill impairment loss will be recognized when the fair value of the reporting unit is less than its carrying value even if the difference is attributable to the fair value of other assets in the reporting unit being less than their respective carrying values. | T or F?

Answer 51

TRUE

Question 52

An audit of Level 1 assets is likely to be less challenging than an audit of Level 3 assets. | T or F?

Answer 52

TRUE

Question 53

Which one of the following factors is not an inherent risk associated with long-lived assets? a. Obsolescence of assets. b. Impairment of assets. c. Incomplete recording of disposals. d. Lack of physical controls over the long-lived assets.

Answer 53

D

Question 54

Which one of the following approaches does not represent how the auditor will become aware of risks associated with long-lived assets? a. Obtaining knowledge of the client business. b. Reviewing the business plan related to major acquisitions. c. Reviewing the minutes of board of directors’ meetings. d. All represent how the auditor will become aware of risks associated with long-lived assets and related expenses.

Answer 54

D

Question 55

Assume that the audit team notes the client has made a significant change in its product line which requires that new equipment be purchased. Which of the following would be of greatest concern to the auditor? a. Inappropriate book value of new equipment. b. Impaired value of new equipment. c. Impaired value of old equipment. d. Inappropriate depreciation calculation for new equipment.

Answer 55

C

Question 56

Which of the following factors is not an inherent risk related to asset impairment? a. Management is normally not interested in identifying and writing down assets. b. Sometimes management wants to write down every potentially impaired asset to a minimum realizable value. c. Determining asset impairment requires a good information system, a systematic process, effective controls, and professional judgment. d. All of the above are inherent risk factors.

Answer 56

D

Question 57

The tour of the manufacturing plant may best assist the auditor in determining which of the following? a. Whether all purchases are authorized. b. Whether any machinery is inoperative in the production cycle. c. Management's strategy for assessing impairment. d. Estimates of depreciation expense.

Answer 57

B

Question 58

Which one of the following is not a management assertion relevant to long-lived assets? a. Existence. b. Completeness. c. Valuation. d. Reporting.

Answer 58

D

Question 59

Which of the following statements is true? a. Intangible assets should be recorded at fair market value. b. Intangible assets should be recorded at cost. c. Intangible assets should be recorded at future market value. d. Intangible assets should not be recorded.

Answer 59

B

Question 60

Which of the following is not a circumstance indicating potential impairment of intangible assets? a. A change in circumstances, such as the legal environment or business climate, that could affect the asset’s value. b. An accumulation of costs that are significantly in excess of the amount originally expected to be needed to acquire or construct the asset. c. The asset generates just as much cash flow as in the past. d. Losses or projections indicating continuing losses associated with an asset used to generate revenue.

Answer 60

C

Question 61

Which of the following expense accounts is associated with intangible assets with a definite life? a. Depletion expense. b. Depreciation expense. c. Amortization expense. d. None of the above.

Answer 61

C

Question 62

Which of the following expense accounts is associated with natural resources? a. Depreciation expense. b. Amortization expense. c. Depletion expense. d. Capitalization expense.

Answer 62

C

Question 63

Which of the following long-lived assets presents the most difficulty in determining its cost? a. Equipment. b. Inventory. c. Patent. d. All the above are equally difficult in determining cost.

Answer 63

C

Question 64

Which of the following actions is not a potential fraud scheme related to long-lived assets? a. Impairment losses on long-lived assets are not recognized. b. Costs that should have been expenses are improperly capitalized. c. Amortization of intangible assets is miscalculated. d. All the above are potential fraud schemes.

Answer 64

D

Question 65

Which statement is true? a. Management is always reluctant to write down asset values. b. Intangible assets do not require effective controls because they have low inherent risk. c. Complex ownership structures may create challenges in the recording of assets. d. The incomplete recording of asset disposals understates the asset balance.

Answer 65

C

Question 66

Which of the following controls is not a typical control that affects multiple assertions for long-lived assets? a. Reviewing insurance policies for adequate replacement coverage of assets. b. Formal budgeting process with appropriate follow-up variance analysis. c. Periodic comparison of physical assets to subsidiary records with the general ledger. d. Periodic reconciliations of subsidiary records with the general ledger.

Answer 66

A

Question 67

Which of the following controls related to management’s asset impairment judgments does the auditor need to understand? a. A systematic process to identify assets that are not currently in use. b. Projections of future cash flows that is based on management’s strategic plans and economic conditions. c. Systematic development of current market values of similar assets prepared by the client. d. All of the above.

Answer 67

D

Question 68

For intangible assets, controls should be designed to do which of the following? a. Identify and account for intangible asset impairments. b. Develop amortization schedules that reflect the remaining useful life of patents or copyrights associated with the asset. c. Provide reasonable assurance that decisions are appropriately made as to when to capitalize or expense research and development expenditures. d. All of the above.

Answer 68

D

Question 69

Which of the following is not a technique that auditors can use when performing planning analytical procedures related to long-lived assets? a. Perform an overall estimate of depreciation expense. b. Review and analyze gains/losses on disposals of equipment. c. Compare depreciable lives used by the client for various asset categories with those of the industry. d. All the above are techniques that auditors can use.

Answer 69

D

Question 70

Which of the following information should be included in management’s documentation regarding intangible assets? a. Manner of acquisition. b. Basis for the capitalized amount c. Expected period of benefit. d. All the above should be included.

Answer 70

D

Question 71

When performing planning analytical procedures related to long-lived assets, which of the following should the auditor compare the unaudited financial statements with? a. Past results. b. Industry trends. c. Future company projections. d. Both A and B.

Answer 71

D

Question 72

An auditor’s review of the repair expense to identify any capital expenditures is a test related to which management assertion? a. Existence. b. Completion. c. Valuation. d. Rights and obligations.

Answer 72

B

Question 73

Audit procedures should be proportional to which of the following? a. Size of the client. b. Size of the firm. c. The assessed risks. d. The assessed misstatements.

Answer 73

C

Question 74

Which is the primary assertion tested in conjunction with obtaining evidence regarding impairment? a. Valuation. b. Cutoff. c. Existence. d. Rights.

Answer 74

A

Question 75

If the auditor is testing the reasonableness of depreciation expense for the year, which assertion is being tested? a. Completeness. b. Rights and obligations. c. Existence. d. Valuation.

Answer 75

D

Question 76

Which of the following is a term used to describe management's recognition that a significant portion of long-lived assets is no longer as productive as originally expected? a. Asset depreciation. b. Asset amortization. c. Asset impairment. d. Asset disposal.

Answer 76

C

Question 77

In a tour of a client's manufacturing facility, the auditor is most likely attempting to satisfy which of the following management assertions related to long-lived assets? a. Completeness. b. Existence. c. Rights. d. Presentation and disclosure

Answer 77

B

Question 78

The auditor selects a sample of asset disposals and examines the sales documentation evidencing disposal of the equipment and recomputes gain or loss on the disposal. This audit procedure primarily tests which of the following assertions for the equipment account? a. Existence. b. Presentation and disclosure. c. Rights. d. Valuation.

Answer 78

D

Question 79

Which one of the following does not constitute a probable relationship between accounts? a. Equipment and depreciation. b. Patent and amortization. c. Assets under capital leases and amortization. d. Oil reserves and depreciation.

Answer 79

D

Question 80

Reconciling the physical asset inventory with the property ledger on a periodic basis is a control related to which management assertion? a. Completeness. b. Rights and obligations. c. Existence. d. Valuation.

Answer 80

C

Question 81

If the auditor is performing substantive procedure to determine whether the long-lived asset balance is reflected on the balance sheet in the noncurrent section, which of the following assertions is being tested? a. Existence. b. Completeness. c. Presentation and disclosure. d. Rights and obligations.

Answer 81

C

Question 82

A client has implemented a policy requiring the establishment and enforcement of property management training for all personnel involved in the use, stewardship, and management of equipment. Which of the following is not a test that could be used in testing the control? a. Inquiry. b. Observation. c. Inspection of documentation. d. Review of financial statements.

Answer 82

D

Question 83

The auditor performs substantive procedures related to property, plant, and equipment to determine if the assets have been pledged as collateral or title has transferred. What is the primary assertion the auditor is testing? a. Valuation. b. Rights. c. Completeness. d. Existence.

Answer 83

B

Question 84

Which of the following assertions are usually the two most relevant assertions related to long-lived assets? a. Existence and presentation. b. Completeness and existence. c. Existence and valuation. d. Valuation and completeness.

Answer 84

C

Question 85

If the auditor is testing long-lived asset account balances to see if they include all relevant transactions that have taken place during the period, what is the primary assertion being tested? a. Presentation and disclosure. b. Existence. c. Completeness. d. Valuation.

Answer 85

C

Question 86

Which of the following procedures is not a procedure used by an auditor in searching for unrecorded disposals of long-lived assets? a. Make client inquiries. b. Examine property tax records. c. Send confirmations to insurance agents. d. Examine scrap sales accounts.

Answer 86

C

Question 87

Which of the following procedures is a substantive procedure that relates to the rights and obligations assertion? a. Assess management’s impairment estimates. b. Examine documents of title. c. Recalculate amortization expense. d. Inquire of management about assets that are idle.

Answer 87

B

Question 88

As natural resources are used up, the client has to recognize which of the following types of expense? a. Depreciation expense. b. Depletion expense. c. Amortization expense. d. Reclamation expense.

Answer 88

B

Question 89

After a natural resource such as gas or coal is used up by the client, the client is responsible for restoring the land to its original condition. What is the cost of this restoration called? a. Impairment expense. b. Depletion expense. c. Amortization expense. d. Reclamation expense.

Answer 89

D

Question 90

Which of the following items is not used by natural resource companies to estimate the asset value of natural resources over the life of the resource, e.g., oil or coal? a. Reserves. b. Depletion rate. c. Reclamation expense. d. Restoration rate.

Answer 90

D

Question 91

Which of the following procedures is not a substantive procedure used for testing the valuation of long-lived assets? a. Assess management’s impairment estimates. b. Inquire of management about assets that are idle. c. Develop an independent estimate of amortization expense. d. All of the above are procedures used for testing the valuation assertion.

Answer 91

D

Question 92

Which of the following is not a typical internal control over long-lived assets? a. Reconcile physical asset inventory with the property ledger. b. Periodically reassess the appropriateness of depletion categories. c. Identify obsolete or scrapped equipment and write it down to scrap value. d. Periodically review management strategy and systematically assess the impairment of assets.

Answer 92

B

Question 93

Which of the following is not a. Procedures to provide reasonable assurance that decisions are appropriately made as to when to capitalize or expense research and development expenditures. b. Development of amortization schedules that reflect the remaining useful life of patents or copyrights associated with the assets. c. Procedures to identify and account for intangible asset impairment. d. All of the above are typical controls for intangible assets.

Answer 93

D

Question 94

Which statement is true about a company’s choice of capitalization policy? a. All assets with a useful life of more than one year must be capitalized. b. The company’s policy must meet the minimum capitalization amounts established by GAAP. c. The company’s policy is usually determined relative to materiality. d. The company may elect to capitalize operating expenses which exceed the minimum threshold for asset capitalization.

Answer 94

C

Question 95

Which of the following procedures is not a fraud-related audit procedure used to respond to identified fraud risk factors? a. Physically inspect tangible assets, including major additions, and agree serial numbers with invoices or other supporting documents. b. Use the work of a specialist for asset valuations, including impairments. c. Confirm the terms of significant additions of property or intangibles with other parties involved in the transaction. d. All of the above are fraud-related audit procedures.

Answer 95

D

Question 96

If no control deficiencies are identified, how will the extent of substantive testing required differ from a setting where deficiencies in internal control were identified? a. The extent of testing will be more. b. The extent of testing will be less. c. The extent of testing will be the same in the two settings. d. The extent of testing is not affected by control deficiencies.

Answer 96

B

Question 97

Which of the following is not a. Obtain and read copies of lease agreements and develop a schedule of leases. b. Review relevant expense accounts and determine if there are entries related to leases. c. For all operating leases, determine that the client has recorded assets and lease obligations properly. d. Review the client’s disclosure of lease obligations for compliance with GAAP.

Answer 97

C

Question 98

Which of the following is a true statement about accounting for leases under the FASB standard issued in 2016? a. Fewer leases will be capitalized under the new standard. b. The standard does not require capitalization of any lease embedded in another contract. c. Classification criteria under the new standard apply only to lessees and not to lessors. d. The new standard requires companies to move leased assets and related liabilities out of footnote disclosures and onto the balance sheet.

Answer 98

D

Question 99

Which of the following is not a significant challenge related to valuation issues for audits of merger and acquisition transactions? a. Valuing the assets upon acquisition. b. Valuing the liabilities upon acquisition. c. Measuring restructuring charges. d. Measuring the qualifications of personnel from the acquired company.

Answer 99

D

Question 100

Which one of the following is not an audit procedure used when testing restructuring charges? a. Review current and proposed financial accounting standards to determine if changes have occurred in accounting for restructuring. b. Evaluate the qualifications of management. c. Mathematically test the estimates. d. Review and independently test the estimates by reviewing (a) contracts, (b) appraisals for property or estimates from investment bankers, and (c) severance contracts.

Answer 100

B

Question 101

Which of the following is false regarding the valuation of goodwill? a. U.S. accounting standards require that goodwill be specifically identified with an operating segment or a reporting unit. b. By definition, acquired parts of the business (or goodwill) must be sufficiently identifiable so that they can be managed as a unit or may be separately identified and sold as a unit. c. Goodwill is tested for impairment quarterly. d. Goodwill is the excess of the purchase price over the fair market value of the acquired company’s tangible assets, identifiable intangible assets, and liabilities.

Answer 101

C

Question 102

Which of the following approaches for determining fair value of Level 3 assets is used by the auditor? a. Determining appropriate model and sensitivity of model. b. Reviewing contracts to determine if loss is other than temporary. c. Performing an analysis of volume of trading activity. d. Performing an analysis of trades on similar assets.

Answer 102

A

Question 103

Which of the following is not an audit challenge relevant to fair value estimation of Level 1, 2, and 3 assets? a. Determining identical assets and active markets. b. Assessing client methodology and cash flows to originally estimate value. c. Determining appropriate model and inputs expected cash flows. d. Determining similar assets and relevant markets.

Answer 103

B

Question 104

Which of the following should the client have as part of its process for estimating fair value? a. A systematic process to identify each asset that is subject to realizable value estimation. b. A process to identify relevant historical values. c. An analysis of transactions that have taken place within the client’s organization. d. A realistic process to estimate future cash flows to discount back to a present value.

Answer 104

D

Question 105

In the FASB hierarchy of inputs to consider for assessing fair value, which is associated with Level 1? a. Observable information on similar items. b. Nonexistence of active markets. c. Quoted prices on identical items. d. Relevant economic and industry factors.

Answer 105

C

Question 106

In the audit approach for assessing fair value, which should the auditor determine for Level 2 assets? a. The correspondence of the client’s assets to similar assets in an active market. b. Contingent liabilities. c. Sensitivity of model used for marking to model. d. The performance of tests of controls.

Answer 106

A

Question 107

The FASB has set a hierarchy of inputs to consider in assessing fair value. Which of the following relates to Level 3? a. Quoted prices for identical items in active, liquid, and visible markets. b. Unobservable inputs to be used in illiquid situations. c. Observable information for similar items in active or inactive markets. d. Unobservable inputs to be used in situations where markets do not exist.

Answer 107

D

Question 108

The FASB has set a hierarchy of inputs to consider in assessing fair value. Which of the following valuations are generally viewed as the most a. Level 0. b. Level 1. c. Level 2. d. Level 3.

Answer 108

D

Question 109

Which of the following models is associated with Level 3 in the FASB hierarchy for ascertaining fair value? a. Mark to market model. b. Replacement model. c. Mark to model. d. Historical cost model.

Answer 109

C