Chapter 19

Question 1

Which of the following accounts is associated with a transaction cycle other than acquisition and
payment?
a. Common stock.
b. Property, plant and equipment.
c. Accrued property taxes.
d. Income tax expense.

Answer 1

a. Common stock.

Question 2

Property, plant, and equipment are assets that:

a. have expected lives of more than one year.
b. are used in the business.
c. are not acquired for resale.
d. meet all of the requirements stated above.

Answer 2

d. meet all of the requirements stated above.

Question 3

Which of the following expenses is not typically evaluated as part of the audit of the acquisition
and payment cycle?
a. Depreciation expense.
b. Insurance expense.
c. Bad debts expense.
d. Property tax expense.

Answer 3

c. Bad debts expense.

Question 4

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

a. Sales and collection
b. Payroll
c. Acquisition and disbursement
d. Inventory and warehousing

Answer 4

c. Acquisition and disbursement

Question 5

It should ordinarily be unnecessary to examine supporting documentation for each addition to
property, plant, and equipment, but it is customary to verify:
a. all large transactions.
b. all unusual transactions.
c. a representative sample of typical additions.
d. all three of the above.

Answer 5

d. all three of the above.

Question 6

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

(Recorded in accordance
with GAAP/
Treated consistently with
those of the preceding year/ Necessary)

a. Yes Yes Yes
b. Yes No No
c. No No No
d. Yes Yes No

Answer 6

d. Yes Yes No

Question 7

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

a. have expected useful lives of more than one year.
b. not be acquired for resale.
c. be useful in multiple productive capacities within the organization.
d. a and b, but not c.

Answer 7

d. a and b, but not c.

Question 8

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

a. depreciation ledger.
b. fixed asset master file.
c. asset inventory.
d. equipment roster.

Answer 8

b. fixed asset master file.

Question 9

Which of the following statements about the audit of fixed assets is not correct?
a. The primary accounting record for manufacturing equipment and other property, plant
and equipment is generally a 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.

Answer 9

b. Manufacturing equipment and current assets are normally audited in the same fashion
regardless of the activity within a particular account.

Question 10

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

Answer 10

d. all three of the above.

Question 11

Which of the following is not a category of tests commonly associated with the audit of
manufacturing equipment?
a. Verification of depreciation expense.
b. Analytical procedures.
c. Verification of current-period disposals.
d. Verification of the beginning balance in accumulated depreciation.

Answer 11

d. Verification of the beginning balance in accumulated depreciation.

Question 12

The audit procedure that requires an auditor to “foot the acquisition schedule” relates to which
balance-related audit objective?
a. Classification.
b. Detail tie-in.
c. Existence.
d. Cut-off.

Answer 12

b. Detail tie-in.

Question 13

Which of the following audit objectives is not typically a major objective in the audit of current
year fixed asset additions?
a. Classification.
b. Completeness.
c. Existence.
d. Accuracy.

Answer 13

c. Existence.

Question 14

The extent to which auditors verify current period acquisitions of property, plant and equipment
normally depends upon:
a. assessed control risk for acquisitions.
b. tolerable misstatement.
c. Both a and b.
d. Neither a nor b.

Answer 14

c. Both a and b.

Question 15

Inadequate controls and misstatements discovered through tests of controls and substantive tests
of transactions are an indication of the likelihood of misstatements in:
a. the balance sheet.
b. the income statement.
c. the cash flow statement.
d. both the income statement and the balance sheet.

Answer 15

d. both the income statement and the balance sheet.

Question 16

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

Answer 16

d. both the income statement and the balance sheet

Question 17

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

Answer 17

d. All of the above are necessary.

Question 18

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

a. Verify current year additions.
b. Observe current year disposals.
c. Verify depreciation expense.
d. Perform analytical procedures.

Answer 18

b. Observe current year disposals.

Question 19

A set of records for each piece of equipment that includes descriptive information, date of
acquisition, original cost, current year depreciation, and accumulated depreciation is the:
a. acquisitions journal.
b. depreciation schedule.
c. fixed asset master file.
d. file of purchase requisitions.

Answer 19

c. fixed asset master file.

Question 20

In the audit of property, plant, and equipment, it is helpful to separate the tests into all but which
one of the following categories?
a. Verification of the beginning balance.
b. Verification of current year acquisitions.
c. Verification of current year disposals.
d. Verification of the ending balance.

Answer 20

a. Verification of the beginning balance.

Question 21

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

Answer 21

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

Question 22

The test of details of balances procedure which requires a “recalculation of investment credit”
satisfies the audit objective of:
a. classification.
b. detail tie-in.
c. existence.
d. accuracy.

Answer 22

d. accuracy.

Question 23

The test of details of balances procedure to “examine vendors’ invoices of closely related
accounts such as repairs to uncover items that should be property, plant, and equipment”
satisfies the audit objective of:
a. classification.
b. detail tie-in.
c. cutoff.
d. existence.

Answer 23

a. classification.

Question 24

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

a. equipment account in the general ledger.
b. file of shipping documents.
c. client’s schedule of recorded disposals.
d. equipment subsidiary ledger.

Answer 24

c. client’s schedule of recorded disposals.

Question 25

Failure to capitalize a fixed asset at the correct amount will affect ___________ until the asset is
fully depreciated.
a. the balance sheet
b. the income statement
c. the cash flow statement
d. both the income statement and the balance sheet

Answer 25

d. both the income statement and the balance sheet

Question 26

Because the failure to record disposals of property, plant, and equipment can significantly affect
the financial statements, the search for unrecorded disposals is essential. Which of the following
is not a procedure used to 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.

Answer 26

c. Test the valuation of fixed assets recorded in prior periods.

Question 27

In rare cases, the auditor may believe it is necessary that a complete physical inventory of fixed
assets be taken to make sure they actually exist. If an inventory is taken, the auditor normally:
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.

Answer 27

c. observes the count.

Question 28

A major consideration in verifying the ending balance in fixed assets is the possibility of
existing legal encumbrances. Tests to identify possible legal encumbrances would satisfy the
audit objective of:
a. existence.
b. presentation and disclosure.
c. detail tie-in.
d. classification.

Answer 28

b. presentation and disclosure.

Question 29

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

Answer 29

c. correctness of calculations and consistent application of depreciation method.

Question 30

Which type of audit procedure is often sufficient for purposes of auditing prepaid expenses and
deferred charges?
a. Tests of controls.
b. Tests of transactions.
c. Tests of details of balances.
d. Analytical procedures.

Answer 30

d. Analytical procedures.

Question 31

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

a. tests of controls.
b. tests of transactions.
c. test of details of balances.
d. a and b, but not c.

Answer 31

d. a and b, but not c.

Question 32

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

Answer 32

a. accounting estimate rather than a change in accounting principle.

Question 33

The auditor \_\_\_\_\_\_\_\_\_\_\_ to test the accuracy or classification of fixed assets recorded in prior
periods.
a. normally needs
b. never needs
c. normally does not need
d. is required

Answer 33

c. normally does not need

Question 34

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

Answer 34

c. they are verified in previous audits.

Question 35

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

Answer 35

d. All of the above.

Question 36

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

a. voucher register.
b. insurance register.
c. insurance expense account.
d. prepaid insurance account.

Answer 36

b. insurance register.

Question 37

Insurance expense for the period is a function of which of the following?
a. The beginning prepaid balance, current premium payments and the ending prepaid
balance.
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.

Answer 37

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

Question 38

Expense accounts analysis is closely related to tests of controls and substantive tests of

transactions. The major difference is:
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.

Answer 38

b. the degree of concentration on an individual account.

Question 39

In connection with a review of the prepaid insurance account, auditors would typically not
perform which of the following procedures?
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.

Answer 39

c. Confirm premium rates with an independent insurance broker.

Question 40

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

Answer 40

b. Review of repairs and maintenance expense.

Question 41

To achieve effective internal accounting control over fixed asset additions, a company should
establish procedures that require:
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.

Answer 41

a. authorization and approval of major fixed asset additions.

Question 42

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 42

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

Question 43

Once the initial audit of a newly constructed industrial plant has been performed, with respect to
consistency, which of the following is of least concern to the continuing auditor in the following
year?
a. Prior years’ capitalization policy.
b. Prior years’ capitalization costs.
c. Prior years’ depreciation methods.
d. Prior years’ depreciable life.

Answer 43

b. Prior years’ capitalization costs.

Question 44

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

a. inventory and warehousing cycle
b. capitalization cycle
c. treasury cycle
d. acquisition and payment cycle

Answer 44

d. acquisition and payment cycle

Question 45

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

a. current assets.
b. patents.
c. copyrights.
d. all other types of property, plant, and equipment.

Answer 45

a. current assets.

Question 46

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

a. Rights.
b. Accuracy.
c. Detail tie-in.
d. Realizable value.

Answer 46

d. Realizable value.

Question 47

The failure to capitalize a permanent asset, or the recording of an asset acquisition at the improper amount, affects the balance sheet:

a. forever.
b. for the current period.
c. for the depreciable life of the asset.
d. until the firm disposes of the asset.

Answer 47

d. until the firm disposes of the asset.

Question 48

The failure to capitalize a permanent asset, or the recording of an asset acquisition at the improper amount, affects the income statement:

a. for the current period.
b. for the depreciable life of the asset.
c. until the firm disposes of the asset.
d. forever.

Answer 48

b. for the depreciable life of the asset.

Question 49

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

Answer 49

b. Tests of controls and substantive tests of transactions

Question 50

The tests of details of balances procedure for fixed assets which require the auditor to examine
vendors’ invoices of closely related accounts such as repairs and maintenance to uncover items
that should be fixed assets would satisfy the audit objective of:
a. accuracy.
b. existence.
c. detail tie-in.
d. completeness.

Answer 50

d. completeness.

Question 51

The erroneous inclusion of transactions that should properly be recorded as assets into accounts
such as repairs expense, lease expense, or supplies is a common client error. The auditor should
evaluate the likelihood of these 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.

Answer 51

a. obtaining an understanding of internal control.

Question 52

If the client fails to record disposals of property, plant, and equipment, both the original cost of
the asset account and the net book value will be incorrect.
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.

Answer 52

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

Question 53

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

a. tests of controls.
b. substantive tests of transactions.
c. analytical procedures.
d. planning.

Answer 53

c. analytical procedures.

Question 54

Which of the following explanations might satisfy an auditor who discovers significant debits to
an accumulated depreciation account?
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.

Answer 54

a. Extraordinary repairs have lengthened the life of an asset.

Question 55

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 55

c. property, plant, and equipment.

Question 56

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

Answer 56

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

Question 57

The auditor interviews the plant manager. The auditor is most likely to rely upon this interview
as primary support for an audit conclusion on:
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.

Answer 57

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

Question 58

The audit procedures used to verify accrued liabilities differ from those employed for the
verification of accounts payable because:
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.

Answer 58

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