CHAP 13-TB

Question 1

The auditors’ approach to the audit of property, plant, and equipment is influenced by the
large number of transactions that occur.

Answer 1

FALSE

Question 2

A major control procedure related to plant and equipment is a budget for acquisitions and
disposition.

Answer 2

TRUE

Question 3

Evidence of continued ownership of property is obtained by vouching payments for property
taxes

Answer 3

TRUE

Question 4

The auditors typically observe all major items of property, plant, and equipment every year.

Answer 4

FALSE

Question 5

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

Answer 5

TRUE

Question 6

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

Answer 6

TRUE

Question 7

The primary purpose of internal control over plant and equipment is to safeguard the assets
from theft.

Answer 7

FALSE

Question 8

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

Answer 8

FALSE

Question 9

Even when internal control is weak, a significant portion of the audit work on property, plant,
and equipment may be performed at an interim date.

Answer 9

TRUE

Question 10

During an audit of depletion the auditors must often rely on the work of specialists

Answer 10

TRUE

Question 11

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.

Answer 11

B

Question 12

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.

Answer 12

A

Question 13

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.

Answer 13

C

Question 14

Which of the following would be least likely to address control over the initiation and
execution of equipment transactions?
A) Requests for major repairs are approved by a higher level than the department
initiating the request.
B) Prenumbered purchase orders are used for equipment and periodically accounted for.
C) Requests for purchases of equipment are reviewed for consideration of soliciting
competitive bids.
D) Procedures exist to restrict access to equipment.

Answer 14

D

Question 15

When there are numerous property and equipment transactions during the year, an auditor
who plans to assess control risk at a low level usually performs:
A) Tests of controls and extensive tests of property and equipment balances at the end of
the year.
B) Analytical procedures for 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.

Answer 15

C

Question 16

Which of the following best describes the auditors’ approach to the audit of the ending
balance of property, plant, and equipment for a continuing nonpublic client?
A) Direct audit of the ending balance.
B) Agreement of the beginning balance to prior year’s working papers and audit of
significant changes in the accounts.
C) Audit of changes in the accounts since inception of the company.
D) Audit of selected purchases and retirements for the last few years.

Answer 16

B

Question 17

Which of the following is not a control that should be established for purchases of
equipment?
A) Establishing a budget for capital acquisitions.
B) Requiring that the department that ordered the equipment is the same that requested
the equipment.
C) Requiring that the receiving department receive the equipment.
D) Establishing an accounting policy regarding the minimum dollar amount of purchase
that will be considered for capitalization.

Answer 17

B

Question 18

Which of the following is not one of the auditors’ objectives in auditing depreciation?
A) Establishing that the methods used are appropriate.
B) Establishing that the methods are consistently applied.
C) Establishing the cash outflows due to depreciation.
D) Establishing the reasonableness of depreciation computations.

Answer 18

C

Question 19

Which of the following is the best evidence of continuous ownership of property?
A) Examination of the deed.
B) Examination of the client’s property tax bills.
C) Examination of the title policy.
D) Examination of canceled check in payment for the property.

Answer 19

B

Question 20

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.

Answer 20

D

Question 21

Which of the following is used to obtain evidence that the client’s equipment accounts are not
understated?
A) Analyzing repairs and maintenance expense accounts.
B) Vouching purchases of plant and equipment.
C) Recomputing depreciation expense.
D) Analyzing the miscellaneous revenue account.

Answer 21

A

Question 22

Which of the following is not a test primarily used to test property, plant and equipment
accounts for overstatement?
A) Investigation of reductions in insurance coverage.
B) Review of property tax bills.
C) Examination of retirement work orders prepared during the year.
D) Vouching retirements of plant and equipment.

Answer 22

D

Question 23

A continuing audit client’s property, plant, and equipment and accounts payable 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 payable to
require:
A) More audit time.
B) Less audit time.
C) Approximately the same amount of audit time.
D) Similar confirmation procedures.

Answer 23

A

Question 24

When comparing an initial audit with a subsequent year audit for a client, the scope of audit
procedures for which of the following accounts would be expected to decrease the most?
A) Accounts receivable.
B) Cash.
C) Marketable securities.
D) Property, plant, and equipment.

Answer 24

D

Question 25

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.

Answer 25

A

Question 26

The most likely technique for the current year audit of goodwill which was acquired three
years ago by a continuing audit client:
A) Confirmation.
B) Observation.
C) Recomputation.
D) Inquiry

Answer 26

C

Question 27

For which of the following accounts is it most likely that much of the audit work can be
performed in advance of the balance sheet date?
A) Accounts receivable.
B) Cash.
C) Current marketable securities.
D) Property, plant, and equipment.

Answer 27

D

Question 28

The auditors may expect a proper debit to goodwill due to:
A) Purchase of a trademark.
B) Establishment of an extraordinarily profitable product.
C) A business combination.
D) Capitalization of human resources.

Answer 28

C

Question 29

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.

Answer 29

D

Question 30

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, that the warehouse had been painted.
D) Examining the construction work orders supporting items capitalized during the year

Answer 30

D

Question 31

Which of the following best describes the independent auditors’ approach of depreciation
expense on 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.

Answer 31

D

Question 32

) 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.

Answer 32

A

Question 33

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.

Answer 33

C

Question 34

Which of the following is the most important control procedure over acquisitions of property,
plant, and equipment?
A) Establishing a written company policy distinguishing between capital and revenue
expenditures.
B) Using a budget to forecast and control acquisitions and retirements.
C) Analyzing monthly variances between authorized expenditures and actual costs.
D) Requiring acquisitions to be made by user departments.

Answer 34

B

Question 35

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.

Answer 35

C

Question 36

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.

Answer 36

A

Question 37

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.

Answer 37

C

Question 38

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.

Answer 38

B

Question 39

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.

Answer 39

A

Question 40

The audit procedure of analyzing the repairs and maintenance accounts is primarily designed
to provide evidence 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.

Answer 40

D

Question 41

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.

Answer 41

D

Question 42

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.

Answer 42

C

Question 43

The auditors may use data analytics to help test repairs and maintenance expense for
overstatement by:
A) Vouching large repair and maintenance expenditures.
B) Identifying expenditures with characteristics that indicate they are capital
expenditures.
C) Identifying capital expenditures that should have been expensed.
D) Identifying expenditures for repairs and maintenance that were not performed.

Answer 43

B

Question 44

To obtain assurance that the client’s equipment acquisitions during the year are not
overstated?
A) Analyzing repairs and maintenance expense accounts.
B) Vouching purchases of plant and equipment.
C) Recomputing depreciation expense.
D) Analyzing the miscellaneous revenue account.

Answer 44

B

Question 45

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 of equipment have been recorded in repairs and maintenance expense.
B) Interest has been capitalized for self-constructed assets.
C) Freight-in on an acquisition is capitalized rather than expensed.
D) An acquisition’s cost is at the asset’s replacement cost, with the difference between
that amount and actual cost credited to repairs and maintenance.

Answer 45

D

Question 46

An overstatement of repairs and maintenance expense may be due to:
A) An overstatement of accounts receivable.
B) An understatement of property, plant, and equipment.
C) An understatement of accounts payable.
D) An overstatement of intangible assets.

Answer 46

B

Question 47

Which of the following policies is an internal control weakness related to the acquisition of
factory equipment?
A) The department in need of the equipment is contacted concerning necessary attributes
of the equipment to be purchased.
B) Approvals for acquisitions are made by the purchasing department.
C) The lowest approved vendor’s bid is sometimes not accepted.
D) Depreciation is calculated only quarterly (first 3 quarters) and year-end.

Answer 47

C

Question 48

The auditors may conclude that depreciation charges are relatively accurate when:
A) Insured values exceed book values by significant amounts.
B) Goodwill for the company increases.
C) There are many trade-ins for new assets.
D) There is little activity in plant assets accounts and the amount of depreciation is
similar to the prior year. There are few gains or losses on disposals of assets retired.

Answer 48

D

Question 49

Auditors are most likely to identify which of the following when examining credit entries in
the miscellaneous revenue account?
A) Refunds to customers.
B) Cash proceeds from the sale of used equipment.
C) Disbursement of cash for small cost purchases.
D) Purchases from related parties.

Answer 49

B

Question 50

An auditor’s analysis of a recorded intangible asset for which of the following is most likely
to reveal a misstatement?
A) Franchises.
B) Goodwill.
C) Research and development.
D) Trademarks.

Answer 50

C

Question 51

Audit tests of intangible asset impairment relate most directly to which assertion?
A) Completeness.
B) Existence.
C) Rights.
D) Valuation.

Answer 51

D

Question 52

Auditors should consider whether cryptoassets are properly valued at cost less:
A) Amortization.
B) Depreciation.
C) Fair value.
D) Impairment

Answer 52

D

Question 53

) If tests of control reveal that controls over an assertion related to property, plant and
equipment are less effective than expected, this will affect audit scope by requiring a lower
specification of
A) Audit risk.
B) Control risk.
C) Detection risk.
D) Inherent risk.

Answer 53

C

Question 54

Which of the following is least likely to be a basic approach to the auditor’s evaluation of the
reasonableness of depreciation expense?
A) Independently develop an estimate of the amount.
B) Review and test management’s process of developing an estimate.
C) Review subsequent events bearing on the asset and its depreciation.
D) Vouch depreciation expenditures during the period being audited.

Answer 54

D

Question 55

Which of the following is an assertion that is particularly difficult to audit for a cryptoasset?
A) Valuation.
B) Rights.
C) Existence.
D) Presentation.

Answer 55

B

Question 56

If a client accepts Bitcoins as payment for services, and uses the services of a brokerage firm
to control the transactions and maintain custody of the Bitcoins, which of the following best
describes the auditors’ approach to auditing the transactions and assets?
A) Observation of assets and testing of controls.
B) Inspection of reports and observation of assets.
C) Confirmation and review of a SOC report.
D) Vouching of transactions and observation of assets.

Answer 56

C

Question 57

Plant and equipment are not as inherently risky as are other assets, such as inventories and
accounts receivable. However, a company should still endeavor to maintain effective internal
control over plant and equipment.
a. Describe the principal purpose of internal controls relating to plant and equipment.
b. List and describe four major controls applicable to plant and equipment.

Question 58

Auditors should obtain evidence that there are no significant amounts of unrecorded
retirements of property, plant, and equipment.
a. Describe two ways that the auditors obtain evidence that there are no significant amounts
of unrecorded retirements of property (land).
b. Describe three ways that the auditors obtain evidence that there are no significant
amounts of unrecorded retirements of equipment.